Chapter 3

Mutual Fund Dealers Association Investor Protection Corporation (MFDA IPC)

Provide protection for eligible customers of insolvent MFDA member firms - IPC does not cover losses that result from changing market values, unsuitable investments or default of an issuer of securities - Customer accounts are covered either part of a general or separate account (each eligible up to $1MM in coverage)

Chambre de la Securitie Financiere (CSF)

QC's SRO of the mutual fund and insurance industry. Responsible for setting & monitoring continuing education requirements and for enforcing a code of ethics for licensed representatives

Investment Protection Funds offer

The Investing public protection against loss as a result of the financial failure of any firm in the self-regulatory system

Provincial Securities Acts

Designed to regulate the underwriting, distribution, and sale of securities and to protect buyers and sellers of securities

Disclosure normally made in a....

Prospectus issued by a company and accepted for filing by the administrators concerned

Regulators have 4 primary objectives in imposing regulation

- Consumer Protection: without reassurance of protection from fraud and abusive and manipulative practices, investors would be reluctant to risk taking part of the capital markets - Fairness: Investors must also perceive that the markets are fair, and that no participant has an unfair advantage over them - Economic Stability: Efficient flow of capital across the economy is essential for growth and stability and to prevent disruption to the economy through market failure - Social Objectives: Regulations support government objectives of dissuading criminal activities such as money laundering

OSFI is responsible for regulating and supervising the following FIs

- Deposit Taking Institutions including banks, trust and loan companies, and coop credit associations - Insurance Companies including life insurance, fraternal benefits and property & casualty insurance companies - Foreign Bank Represenative offices that are chartered, licensed or registered by the federal government - Federally regulated pension plans OSFI does not regulate the securities industry

7 Deposit categories the CDIC Covers Separately up to $100,000 and include:

- Deposits held in one name, more than one name - Registered Savings Plan - Registered Retirement Income Fund - Tax-free Savings Plan -Trusts - Deposits held for the purposes of paying property tax

IIROC performs the following functions

- Financial Compliance: dealer members ae monitored to ensure they have enough capital to carry out their operations - Business Conduct Compliance: Dealer members are monitored to ensure that policies and procedures are in place to properly supervise the handling of their client accounts - Registration: IIROC oversees professional standards and educational programs designed to maintain the competence of industry employees - Enforcement: IIROC enforces rules and regulations that cover the sales, business, financial practices and trading activities of individuals and firms under IIROC's jurisdictions - Market Surveillance: IIROC's surveillance of trading and market-related activities of participants on Canadian equity marketplaces

Under IIROC, all customer accounts are covered either part of the customer's general account or separate account

- General Account (max coverage of $1MM): cash, margin, short sales, options, futures and FX - Separate Account (mac coverage of $1MM): registered accounts & trusts (unless they are combined with other separate accounts)

IAs must comply with

- collecting and recording client information that is accurate and complete - monitor activity in client accounts - report any suspicious transactions or proposed transactions in client accounts

Conflict Interest Management must be addressed through 3 means

1) Avoiding the Conflict: avoid any potential or existing material conflict of interest between the advisor or firm and client, unless the conflict can be addressed in a fair, equitable and transparent manner in the best interest of the client 2) Disclosing the Conflict: disclose any unavoidable potential or existing material conflict to clients in all cases where reasonable for client to expect to be informed 3) Otherwise Controlling the Conflict Situation: only scenario under which an unavoidable material conflict need not be disclosed to a client is if a firm has taken other steps to control the situation and the firm has efficiently ensured that the risk of loss to client has been eliminated

Securities Act use 3 methods to protect investors

1) Registration of securities dealers & advisors 2) Disclosure of facts necessary to make reasoned investment decisions 3) Enforcement of the laws and policies

Arbitration Criteria

1) attempts have been made to resolve dispute with ID 2) claim does not exceed $500,000 - claims of higher amount may be arbitrated if both parties agree to process

Unethical Conduct

Any omission, negotiation, or manner of doing business that is not in the interest of the public or the exchange

Administrator =

Applicable Regulatory Authority

Office of the Superintendent of Financial Institutions (OSFI)

As the regulatory body for all federally regulated financial institutions, an independent agency of the government of Canada designed to contribute to the safety and soundness of the Canadian Financial System

Suitability Assessment

CRM guidelines require to be conducted when - a trade is accepted - a recommendation is made - securities transferred or deposited to account - change in rep or portfolio manager for account - material change to KYC info for client

Who is responsible to notify of any material changes in the original answers to the questions on the NRD application?

Both the IA and the member firm are required to notify the applicable SROs immediately in writing of any material changes in the original answers to the questions on the NRD application. This includes a change of address. Also, each member firm is required to immediately report to the administrators and SROs to which it belongs, the termination of an IA. If the IA is dismissed for cause, a statement of the reasons for the dismissal must be reported.

Client Relationship Model (CRM)

Broader fundamental obligation of IIROC dealer members and their representatives to deal fairly, honestly and in good faith with clients - greater disclosure requirements to enhance standards that advisors must meet when assessing suitable of investments

Registration for Investment Advisor (IA)

Employees of security dealer who are licensed to trade and give advice to its clients in Canada - must be registered with applicable administrator - with IIROC, and IA falls under "Registered Representative"

Canadian Deposit Insurance Corporation (CDIC)

Federal crown corporation that provides deposit insurance and contributes to the stability of Canada's financial system. - Insures eligible deposits up to $100,000 per depositor in each member institution (banks, trust companies, and loan companies), and reimburse depositors for the amount of any insured deposit if a member institution fails - deposits must held with a member institution in CAD ccy and payable in Canada

General principle underlying Canadian Securities Legislation

Full, True, and Plain Disclosure of all pertinent facts by those offering the securities for sale to the public

Rules-based Regulation

Impose detailed rules designed to provide clarity and legal certainty to market participants

Provinces & Territories

In Canada, each province and territory is responsible for creating the legislation and regulation under which a business in the securities industry must operate (Securities Commissions & Securities Administrators)

Provincial Insurance Corporations

In each province, one or more organization exists to protect the deposit the credit union members - names such as deposit insurance corporation, deposit guarantee corporations, stabilization fund/corporations/board or central credit union

Compliance with gatekeeper obligations begin with

KYC, obligations include: - learn the essential facts relative to every client and every order and account accepted - verify that the acceptance of any order for any account if within bounds of good business practice - Verify recommendation made for any account are appropriate for clients investment objectives, personal circumstances and tolerance of risk

Registration for Investment Representative (IR)

Largely employed by self-directed brokerage firms, where clients make their own investment decisions - advisors can trade in, but not provide advice to clients

Gatekeeper

Long considered an important rule for IAs, and is the guarding of markets from possible wrongdoing by unscrupulous clients - IAs must not through act or omission facilitate breaches of securities laws or regulations by clients - gatekeeps include dealers and their employees

Purpose of Regulation

Ongoing evolution of the securities industry presents risks and challenges with significant structural changes: - ownership restrictions were eliminated for securities dealers - fixed commission rales were removed - stock exchanges were demutualized - new trading venues introduced - new products, heightened competition, technological changes, demographic changes

OSFI

Outside of QC, the financial sector is regulated separately from the securities industry by who?

Investment Industry Regulatory Organization of Canada (IIROC)

Oversee all investment dealers and trading activity on debt and equity marketplaces in Canada. Mandate is to set "high quality regulatory and investment industry standards, protect investors and strengthen market integrity" while maintaining competitive capital markets.

National Do Not Call List (DNCL)

Prohibit from calling number's registered on list for more than 31 days

Canadian Investor Protection Funds (CIPF)

Primary Role is investor protection; its secondary role is overseeing the self-regulatory system. The secondary role provides a mechanism to help CIPF contain the risk associated in its primary role. - Protects eligible customers in the event of insolvency of an IIROC dealer member - does not cover client losses that result in changing market values, nor does it insure accounts held at mutual fund companies, banks, or any other firms not regulated by IIROC - Sponsored solely by IIROC and funded by quarterly assessment on IIROC dealer members

Investor Protection

Primary Role of Regulators

Self-Regulatory Organizations (SROs)

Private industry organizations to which the provincial regulatory bodies have granted the privilege of regulating their own members. Enforce their members' conformity with securities legislation. CSA monitors the conduct of SROs. Ex. IIROC and MFDA

Autorite des marches financiers (AMF)

Quebec's regulatory body for both the securities business and QCs financial sector. Includes life and property insurance firms, providers of deposit insurance, and distributors of financial products

Principles-based Regulation

Regulators set objectives for securities dealers and allow the firms themselves to decide how best to meet those objectives. Clear, Simple and less costly to apply Objectives apply to broad issues such as: - proficiency and integrity of staff members - suitability of recommendations - responsibility of preventing client abuse of the markets and can extend to adequacy of capital

An IIROC dealer member must provide all clients with a

Relationship Disclosure Document which includes: - types of products and services offered - terms of account relationship to which client has consented - process used by firm to assess investment suitability and KYC information - date on which suitability will be reviewed - firms complaint handling procedures - description of all reporting that the client will receive

Mutual Fund Dealers Association (MFDA)

SRO responsible for regulating the distribution and sales of mutual fund by members in Canada. Does not regulate the mutual funds themselves, responsibility remains with provincial securities administrators

Rules & Regulation

Set standard of conduct for individual investors and market participants at securities dealers - set and enforced by various government bodies such as provincial securities commissions and SROs

Corporate Governance

System of rules, policies and procedures by which a company is controlled - rules are necessary to foster an environment of fairness and to protect the integrity of the marketplace

Ombudsman for Banking Services and Investments (OBSI)

The organization investigates customer complaints against financial service providers including some banks, and other deposit-taking organizations, ID, mutual fund dealers & companies - independent of the financial service industry - provides prompt and impartial resolution - the process is not binding

Front Running

Trading in one's own account before effecting the same trade for a client

Securities and Exchange Commission (SEC)

US national regulatory body for the securities industry. In Canada, there is no federal regulatory body that has considerable regulatory authority

Canadian Securities Administrators (CSA)

Umbrella Organization of Canada's top 10 provincial and three territorial securities regulators designed to improve, coordinate and harmonize regulation of the Canadian Capital Markets. Mission of CSA is to develop a National Regulatory System.

National Registration Database (NRD)

Web-based system that is used by investment dealers and employees to file registration forms electronically when applying for approval by a stock exchange, the CSA or IIROC - designed to enable single electronic submission to satisfy all jurisdictions in Canada - allows regulators to verify registration status in other jurisdiction

Demutualization

company owned by its members converting to a company owned by shareholders

Arbitration

method of dispute resolution in which an independent arbitrator is chosen to listen to the facts and arguments of both sides. The arbitrator decides how the dispute should be resolved and what remedy to be imposed if any - SROs can only discipline member registrants, they cannot order restitution to be made to clients - offer dissatisfied investors the option of pursuing damages through arbitration, rather than court - cheaper and faster - decision of arbitrator is binding