What action should a firm take if an elective professional client does not meet the required criteria?

When a firm discovers that an elective professional client does not meet the required criteria, the appropriate action is to take steps to address the situation and notify the client. This is critical for several reasons.

First, firms have a regulatory obligation to ensure that clients are classified correctly according to their professional status. This helps protect both the client and the firm, as certain regulatory protections are afforded only to clients that meet specific criteria. If a client is misclassified, they may lack access to necessary protections, which could expose them to greater risks in their investment activities.

Second, informing the client allows them to understand their status concerning the protections they may not be receiving. This transparency is fundamental to maintaining trust and integrity in the client-firm relationship. By communicating the change, the firm can provide the client with the necessary information to make informed decisions regarding their investments or seek suitable alternatives.

Finally, the action aligns with good compliance practices and risk management. It ensures that the firm's records and classifications are up-to-date and accurate, which is essential for regulatory reporting and to uphold the firm’s reputation in the market.

In summary, taking appropriate action and notifying the client is essential for regulatory compliance, client trust, and effective risk management.