DRAFT FOR CONSULTATION PURPOSES ONLY Guideline to Licensees - Sale of Segregated Funds The mandate of the Insurance Council of Manitoba is to act in the public interest to protect Manitoba Consumers of insurance products, and to regulate insurance agents to ensure adequate standards are maintained for public protection. The Life Insurance Council of Manitoba has been reviewing the existing regulatory environment which supports the sale of segregated funds, otherwise known as Individual Variable Investment Insurance Contracts ("IVIC"s) in the province of Manitoba. This regulatory structure does not currently include requirements specific to segregated funds, or identify segregated funds as being distinct and containing elements which extend beyond those of traditional insurance products. Consumers have the right to know the important details of investments they may be purchasing from an agent. Similarly they have the right to assume that the agent is educated and qualified to provide them with advice and recommendation with regard to investments and investing. While the Insurance Council of Manitoba does not currently mandate specific education related to segregated funds beyond that included in the Life Licensing Qualification Program, or have a separate licence distinctly allowing the sale of segregated funds, it strongly recommends education relating to investments and in particular those courses available which are specific to segregated funds. The Insurance Council of Manitoba has developed a broad outline of the basic information that must be known by the agent and the consumer prior to proceeding with investment in segregated funds, and the minimum documentation that should be contained in a client file. This outline is not exhaustive, and may not be the only acceptable practices that apply in any specific situation. Substantiated consumer complaints which demonstrate a lack of the necessary education and/or expertise of the agent and proper information gathering and communication to the client may result in disciplinary action by the Council. The outline is categorized as What the Agent Needs to Know, What the Agent and the Client Need to Know, Documentation/Retention, and Code of Conduct. WHAT THE AGENT NEEDS TO KNOW The agent is in a fiduciary position and as such the client is entitled to assume that the agent has the education and expertise to advise them with regard to the investment of their funds. Selling segregated funds without the requisite knowledge and expertise may put the agent in jeopardy of disciplinary action by the Council. The knowledge required will include the items below. This list is not exhaustive and additional knowledge may be required. About Investing: Principle of Risk and Reward Assessing Risk Profiles Asset Allocation and Diversification Different types of risk Risk measurement tools Regulatory Requirements About Your Client: You cannot make investment recommendations without certain information about the client. Some of the required information may include: Investment Objectives Risk Tolerance Investment Time Frames Investment Knowledge Assets and liabilities Amount available for investment WHAT THE AGENT AND THE CLIENT NEED TO KNOW You cannot make investment recommendations without significant product knowledge. The client cannot make investment decisions unless you educate them on the product. Some of the required information may include: About the Individual Variable Investment Contract: Maturity Guarantees available Death Benefit Options available Other guarantees available (e.g. GMWB) Costs associated with the contract Costs associated with the guarantees Volatility of potential returns Impact of withdrawals on any guarantees Sales charges (e.g. up front, deferred, no load) Resets available What Funds are available within the contract Tax implications associated with the contract Rights if client should decide to rescind the contract (time frames) Costs if contract is surrendered About the Funds Available Within the Contract: Investment Philosophy and Objective of Fund Manager(s) Amount and type of risk in each fund What does the fund invest in (e.g. top 10 holdings) Fund past performance Technical details of fund (e.g. age, size, turnover rate) How Client can get help or additional information: What information is available in the Information Folder Company Website 1-800 phone number Information available in and timing of Fund statements to be received Where to go if there is a dispute DOCUMENTATION/RETENTION Doing a complete and professional job is obviously mandatory. It is also required that certain documentation be retained should it ever become necessary to prove that all the proper steps were taken in making the recommendations. At a minimum the following documentation must be retained in the agent's files: Documentation of consumer contact(s) Documentation of consumer's risk tolerance, time horizon, investment knowledge and objectives Signed consumer acknowledgment of risks involved in leveraging as applicable Proper documentation of transaction instructions and authorization CODE OF CONDUCT The general principles outlined in the Life Insurance and Accident and Sickness Insurance Agent Code of Conduct are applicable to the sale of segregated funds, and in the interest of clarity and guidance to agents, the Council has identified those areas of the Code of Conduct which most directly relate to segregated funds. Section 1 - Interests of the Client Section 2 - Needs of the Client Section 3 - Legitimate Business Interests Section 4 - Professionalism Section 6 - Conflicts of Interest Section 7 - General Information Disclosure and Documentation