CSC Chapter 3 - The Canadian Regulatory Environment

Client Relationship Model (CRM)

Is part of a broader fundamental obligation of IIROC members and their representatives to deal fairly, honestly, and in good faith with clients. The objective is: - Increased transparency for investors regarding the fees they pay, - The services they receive, - Potential conflicts of interest, - And the performance of their accounts

Full, True, and Plain Disclosure

Is the general principal underlying Canadian securities legislation. Until such facts are disclosed to the satisfaction of the designated administrator, it is illegal to offer the securities for public sale.

Suitability Assessment

The CRM guidelines require that the suitability of an investment decision be conducted whenever any of the following trigger events occur: § A trade is accepted § A recommendation is made § Securities are transferred or deposited to an account § There is a change of representative or portfolio manager responsible for the account § There is a material change to the KYC information for the account

Relationship Disclosure

- Is to better inform clients of the nature of their account. An IIROC member must provide all clients with a relationship disclosure document that include the following information: § The types of products and services offered by the firm § The terms of the account relationship to which the client has consented § The process used by the firm to assess investment suitability and the clients KYC information § The date on which account suitability will be reviewed § All fees and charges associated with operating, transacting, and holding investments in the account § The firms complaint handling procedures § A description of all the reporting that the client will receive

Four Primary Objectives in Imposing Regulation:

1) Consumer Protection - Without reassurance of protection from fraud and abusive or manipulative practices, investors would be reluctant to risk taking part in the capital markets. 2) Fairness - Investors must also perceive that the markets are fair, and that no participant has an unfair advantage over them. 3) Economic Stability - The efficient flow of capital across the economy is essential for growth and stability, and to prevent disruption s to the economy through market failure. 4) Social Objectives - Regulation support the government objective of dissuading criminal activities such as money laundering.

Type of Canadian SRO's

1) Investment Industry Regulatory Organization of Canada (IIROC) - Oversees all investment dealers and trading activity on debt and equity marketplaces in Canada. Its mandate is to "set high quality regulatory and investment industry standards, protect investors, and strengthen market integrity while maintain efficient and competitive capital markets". It performs the following functions: i) Financial Compliance - Dealer members are monitored to ensure that they have enough capital to carry out their operations. ii) Business Conduct Compliance - Dealer members are monitored to ensure that policies and procedure are in place to properly supervise the handling of their client accounts. iii) Registration - IIROC oversees professional standards and educational programs designed to maintain the competence of industry employees. iv) Enforcement - IIROC enforce rules and regulations that cover the sales, business, financial practices, and trading activities of individuals and firms under IIROC's jurisdiction. v) Market Surveillance - Surveillance of trading and market-related activities of participants on Canadian equity marketplace including: - Real-time monitoring of trading activity on stock exchanges - Ensuring dealer member comply with the timely disclosure of information by publicly-traded companies in Canada - Carrying out trading analysis and compliance with trading rules 2) Mutual Fund Dealers Association (MFDA) - Is the mutual funds industry's SRO responsible for regulating the distribution and saes of mutual funds by its members in Canada. The MFDA has the ability to admit members, audit, enforce rules, and apply penalties. - In Quebec, the mutual fund industry is regulated by the Autorité des Marchés Financiers (AMF) - The Cambre de la Sécurité Financiére (CSF) is Québec's SRO for the mutual fund industry and insurance industry. The CSF is responsible for setting and monitoring continuing education requirements and for enforcing a code of ethics for licensed representatives.

Investor Protection Funds

1). Canadian Investors Protection Fund (CIPF) - Its primary role is investor protection; its secondary role is overseeing the self-regulatory system to help CIPF contain the risk associated with its primary role. The CIPF is funded solely by IIROC and protects eligible customers in the event of insolvency of an IIROC dealer member. All accounts are covered up to a maximum of $1 million. 2). Mutual Fund Dealers Association Investor Protection Corporation (MFDA IPC) - Founded in 2005 to provide protection for eligible customers of insolvent MFDA member firms. Customer are covered for up to $1 million. Does not cover customers in Quebec. 3). Canada Deposit Insurance Corporation (CDIC) - Is a federal crown corporation that provides deposit insurance and contributions to the stability of Canada's financial system. Insures eligible deposits up to $100,000 per depositor in each member institute (banks, trust companies, and loan companies).

Canadian Securities Administrators (CSA)

An umbrella organization of Canada's ten provincial and three territorial securities regulators designed to improve, coordinate and harmonize regulation of Canadian capital markets. This mission is to develop a national regulatory system that fosters fair, efficient, and vibrant capital markets in which investors are protected from unfair, improper, and fraudulent practices.

Remediation Options

Arbitration - Is a method of dispute resolution in which independent arbitrator is chosen to listen to the facts and arguments of both sides in the dispute. The arbitrator then decides how the dispute should be resolved and what remedy should be imposed. Requesting an Arbitration - To be eligible for arbitration, the dispute must meet the following criteria: - Attempts have been made to resolve the dispute with the investment dealer - The claim does not exceed $500,000 - Claims for higher amounts may also be arbitrated, if both parties agree to the process - The decision of the arbitrator is binding. Before the arbitration begins, both parties must sign an agreement to give up the right to further pursue the matter in court. Ombudsman for Banking Services and Investments (OBSI) - This organization investigates customer complaints against financial service providers, including some banks and other deposit-taking organizations, investment dealers, mutual fund dealers, and mutual fund companies. OBSI provides a prompt and impartial resolution. The process is not binding for either the investor or financial services provider.

Know Your Client (KYC) Rule

Compliance with gatekeeper obligations begins with the KYC rule. SROs require that securities dealers and IAs take the following steps to meet their KYC obligations: - Learn the essential facts relative to every client and to every order or account accepted. - Verify that the acceptance of any order for any account is within the bounds of good business practice. - Verify that recommendations made for any account are appropriate for the client's investment objectives, personal circumstances, and tolerance to risk.

Investment Advisors & Investment Representatives

Investment Advisors - Employees of the security dealer who are licensed to trade and give advice to its clients in Canada. As well as ranting registrations, administrators have the power to suspend or cancel registration or otherwise discipline their registrants. A 90-day training period is required. Investment Representatives - Largely employed by self-directed brokerage firms, where clients make their own investment decisions, Advisors in this category can trade in, but not provide advice to clients, on securities. A 30-day training period is required.

National Registration Database (NRD)

Is a web-based system used by investment dealers and employees to file registration forms electronically when applying for approval by a stock exchange, the CSA, or IIROC. Is designed to enable a single electronic submission to satisfy all jurisdictions in Canada, rather than the registrant having to file separate registration forms in each jurisdiction. The NRD also allows regulators to verify registration status in other jurisdictions.

Office of the Superintendent of Financial Institutions (OSFI)

Is an independent agency of the Government of Canada responsible for regulating the following federally registered institutions: - Deposit-taking institutions including banks, trust and loan companies, and co-operative credit associations. - Insurance companies, including life insurance companies, fraternal benefit societies, and property and casualty insurance companies. - Foreign bank representative offices that are chartered, licensed, or registered by the federal government. - Federally regulated pension plans. - OFSI does NOT regulate the Canadian securities industry.

The Gatekeeper

Is the guarding of markets from possible wrongdoing by unscrupulous clients. Gatekeepers in the securities industry include dealers and all of their employees. Particular concerns include money laundering, terrorist financing, financial fraud, and insider trading. Investment advisors must comply with the following requirements: - Collect and record client information that is accurate and complete - Monitor activity in client accounts - Report and suspicious transactions or proposed transactions in client accounts

Autorité des Marchés Financiers (AMF)

Is the regulatory in Québec that regulates both the securities business and Québec's financial sector. That sector includes life and property insurance firms, providers of deposit insurance, and distributors of financial products, among others.

Office of the Superintendent of Financial Institutions (OSFI)

Outside of Quebec, the financial sector is regulated separately from the securities industry by the OSFI.

Self-Regulatory Organization (SRO)

Private industry organizations that have been granted to regulate provincial regulatory bodies. They have the power to prescribe their own rules of conduct and financial requirements. SRO's by-laws and rules are designed to up-hold the principles of securities legislation. The CSA monitors the conduct of the SRO's to ensure that they do not conflict with public interest or provincial rules. Canadian SRO's include:

National Do Not Call List (DNCL)

Prohibit telemarketers and clients of telemarketers from calling any number that has been registered on the DNCL for more than 31 days.

Principle Based Regulation

Regulators set objective for securities dealers and allow the firms themselves to decide how best to meet those objectives. The objectives apply to broad issues such as proficiency and integrity of staff members, suitability of recommendations, and the responsibility of preventing client abuse of the markets. The Canadian securities industry follows this approach as oppose to a Rules-Based Model.

Conflict of Interest Management

Securities dealers must develop and maintain policies and procedures to identify, disclose, and address existing and potential material conflicts involving clients. All conflicts, must be addressed through one of the following three means: 1) Avoiding the Conflict: Avoid any potential or existing material conflict of interest between the advisor or firm and the client, unless conflict can be addressed in a fair, equitable, and transparent manner in the best interests of the client. 2) Disclosing the Conflict: Disclose any unavoidable potential or existing material conflict of interest to clients in all cases where a reasonable client would expect to be informed. 3) Otherwise Controlling the Conflict Situation: If the firm has taken the steps to control the situation, and the firm has effectively ensured, with reasonable confidence, that the risk of loss to the client has been eliminated.

Unethical Practices

§ Deceiving the public, the buyer, or their vendor as to price of any transaction or the value of any security § Creating or attempting to create, a false or misleading appearance of active public trading in a security in an effort to make a profit § Entering, or attempting to enter, into any arrangement to sell and repurchase a security in an effort to manipulate the market § Making a fictitious trade that involves no change in beneficial ownership of a security in an effort to mislead the public § Using high-pressure or otherwise undesirable selling techniques § Violating any statute applicable to the sale of securities § Misleading a client as to the risk involved in purchasing a specific security § Trading in one's own account before effecting the same trade for a client (a practice known as Front Running) § Conducting oneself in a way that would bring the securities business, the exchanges, or IIROC into the disrepute

Measures to Protect Investors

§ Registration of securities dealers and advisors § Disclosure of facts necessary to make reasoned investment decisions § Enforcement of the laws and policies