Canada’s Regulatory Environment and Risks Faced by Investment Dealers 13% Flashcards
What is the primary sources of rules?
In Canada, provincial securities commissions (or equivalent) and SROs are the primary sources of the rules governing the industry. These organizations impose rules and restrictions to ensure market integrity, protect investors, and promote a fair and efficient securities marketplace. Rules are not always consistent among regulators and provincial SROs or across provincial jurisdictions. A basic principle of regulation is that, when two or more regulations conflict, it is the strictest standard that applies.
Laws contained in other federal and provincial statutes also apply to the securities industry. These laws include the Criminal Code and legislation regarding money laundering, terrorist financing, privacy, corporate law, and bankruptcy and insolvency. Principles developed from both criminal and civil case law also apply to the industry.
In comparison to a rule-based approach to regulation (also called prescriptive regulation or an objective standard), the Canadian securities industry leans more toward a principle-based model. Under the principle-based approach, the regulators set objectives for IIROC dealer members but allow the firms themselves to decide how best to meet those objectives. Less costly. Principle-based regulation requires careful analysis and monitoring.
IROC is the national self-regulatory organization overseeing all of its dealer members and all trading activity on equity and debt marketplaces in Canada.
responsible for enforcing the rules regarding sales, business, and financial practices and them trading activities of individuals and dealer members under its jurisdiction. It also interprets existing rules, develops recommendations to amend them, and establishes new rules. IIROC performs market surveillance and regulates dealer member and market compliance (specifically business conduct, financial compliance, and trade review and analysis). Securities commissions can also delegate certain functions to IIROC, including the registration of individuals. However, IIROC and the securities commissions have different mandates. Securities commissions enforce the securities legislation within a particular province or territory and have jurisdiction over any person or entity acting in their jurisdiction. IIROC’s regulation is limited to its own dealer members. In most provinces IIROC has the ability
to enforce the fines, penalties and costs that it imposes through disciplinary hearings directly against registrants whether they continue to be registered with IIROC or not.
What is the UMIR?
UMIR is a standard set of rules that generally apply to equity trading on all Canadian marketplaces to promote
fair and orderly markets. To ensure compliance with UMIR, IIROC monitors real-time trading operations and market- related activities. IIROC also investigates alleged UMIR violations and administers any settlements and hearings arising from such violations.
What isThe Investment Industry Association of Canada (IIAC)?
The Investment Industry Association of Canada (IIAC) is a member-based advocacy association that advances the growth and development of the Canadian investment industry. It is not a regulatory body. IIAC represents the interests of the investment industry for all market participants. Its members range in size from small, regional firms to large organizations that employ thousands of people across the country.
What is the Canadian Investor Protection Fund (CIPF)?
The Canadian Investor Protection Fund (CIPF) compensates clients for losses arising when an IIROC dealer member becomes insolvent and cannot return client cash or securities. It does not cover clients’ losses resulting from changing market values, unsuitable investments, or the default of an issuer of securities.
Although CIPF is not an SRO, it is an important part of the SRO structure. It is funded by IIROC through payments based on quarterly assessments of gross revenues, risk premiums based on capital deficiencies, and an annual contribution from IIROC of the interest allocated to it in the prior year. CIPF also provides policy input on the rules regarding issues such as margin that may affect the capital adequacy of IIROC dealer members.
Clients should be aware that CIPF does not always compensate them for all their losses. Clients of IIROC dealer members are entitled to a maximum coverage of $1,000,000 for each account. A client’s general accounts, such
as cash, margin, short sale, options, futures, and foreign currency, are combined and treated as one account. In addition, the proportionate interest in a client’s account that is held jointly or on a shared-ownership basis is
combined with the client’s general account. Accounts categorized as separate accounts, such as trusts and registered accounts, are treated as if they belong to separate clients, and each separate account is entitled to the maximum coverage. Separate accounts of a similar type are grouped as a single, separate account that qualifies as a whole for the maximum coverage. For example, all registered retirement accounts belonging to a single client through the same or a different trustee are combined and aggregated as a single separate account.
Each province and territory has legislation to regulate the primary and secondary distribution of securities and to protect the buyers and sellers of securities.
The legislation regulates matters such as registration of dealers and individuals, raising capital, issuer disclosure, proxy solicitation, takeover bids, and improper conduct such as insider trading. It also establishes the provincial and territorial securities commissions and provides their decision-making
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and enforcement powers. In most provinces, securities legislation also covers commodity futures. Ontario and Manitoba have separate commodities legislation, and Quebec has separate legislation governing financial planning.
Although there is currently no single federal body in Canada responsible for securities regulation, the commissions,
also known as administrators, from the 10 provinces and three territories have formed a joint panel known as the Canadian Securities Administrators (CSA). The CSA coordinates and harmonizes regulation of the Canadian capital markets. It operates informally through regular meetings of its presiding officers on issues of shared concern, joint technology projects, and policy committees or working groups.
The CSA’s main shared systems are described below:
* The System for Electronic Document Analysis and Retrieval (SEDAR) is used for electronic filings by most public companies and mutual funds.
* The System for Electronic Disclosure by Insiders (SEDI) is an online system for filing and viewing insider trading reports required under provincial securities regulation.
* The National Cease Trade Order (CTO) database provides subscribers with a directory of existing orders and with near-real-time email notification of new CTOs from participating jurisdictions.
* The National Registration Database receives individual registration and IIROC approval applications, notices of termination, and changes of registration information.
CSA’s efforts to harmonize provincial regulations have led to the establishment of two types of instruments:
* National Instruments (NI) have been adopted by all provinces, but they may contain exceptions if one or more provinces retain slight regulatory differences.
* Multilateral Instruments (MI) have been adopted by some provinces only, as identified in the instrument
The corporate affairs of a company in Canada
are primarily regulated by the statute under which the company is incorporated. Companies can be incorporated federally under the Canada Business Corporations Act (CBCA) or provincially under various legislations, such as Alberta’s Business Corporations Act or Nova Scotia’s Companies Act.
IIROC and FINRA
exchange information on compliance and enforcement-related matters and work together on issues related to firm oversight and examinations.
The International Organization of Securities Commissions (IOSCO)
is made up of securities regulators from around the world. It does not implement securities legislation, but rather facilitates international communication and harmonization of securities legislation
Formed in 1919, the North American Securities Administrators’ Association (NASAA)
is an association of securities administrators from the United States, Canada, Mexico, and Puerto Rico. Its mission is to protect investors who purchase securities or receive investment advice and is the voice of the 50 state regulators. NASAA promotes harmonization of state laws, educates the public regarding investment fraud, participates in multi-jurisdictional enforcement actions and information sharing, and implements annual training for member organizations.
The World Federation of Exchanges (WFE)
is a trade organization for regulated securities and derivatives markets worldwide. WFE promotes development and sets business standards for national and international financial markets.
The Financial Action Task Force on Money Laundering (FATF)
was established by the G-7 countries in 1989. It is
an intergovernmental body comprised of over 30 member countries (including Canada) and two international organizations. FATF develops and promotes policies to combat money laundering and terrorist financing. It aims to establish international standards to improve national legal systems and strengthen international cooperation in the fight against money laundering and terrorist financing.
The Financial Stability Board (FSB)
was established in April 2009 as the successor to the Financial Stability Forum. In general terms, the FSB has the following mandate:
* Coordinate at the international level the work of national financial authorities and international standard setting bodies.
* Develop and promote the implementation of effective regulatory, supervisory, and other financial sector policies.
* Promote international financial stability.
Membership in the FSB includes government representatives as well as other international bodies
THE OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS
OSFI is the primary regulator of federally regulated financial institutions. Its scope includes banks, federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies, and federally administered pension plans. It also provides actuarial advice to the Government of Canada and reviews certain provincially chartered financial institutions
THE FINANCIAL TRANSACTIONS AND REPORTS ANALYSIS CENTRE OF CANADA
FINTRAC
is an independent agency at arm’s length from law enforcement agencies. It reports to the federal Minister of Finance. Its mandate is to detect money laundering and terrorist financing activities and to assist law enforcement agencies in deterring them. FINTRAC receives reports filed under PCMLTFA regulations regarding large cash transactions, cross-border movement of funds, and suspicious transactions.
FINTRAC can also conduct audits of financial institutions’ compliance with PCMLTFA regulations, including audits of compliance by dealer members. It can also refer noncompliance to law enforcement agencies for investigation and prosecution. IIROC usually conducts these audits and provides FINTRAC with the results under an MOU.
FINTRAC has legislative authority to issue an administrative monetary penalty of up to $500,000 to reporting entities that are in noncompliance with PCMLTFA.
PIPEDA
PIPEDA applies when personal information crosses provincial borders, except in provinces with “substantially similar” legislation (i.e., Quebec, British Columbia, and Alberta). Dealers must comply with the privacy legislation applicable in the province where the client resides.
Criminal Code provisions that significantly affect securities matters
- Insider trading is a criminal offence subject to a maximum of 10 years imprisonment.
- It is against the law to threaten or retaliate against an employee who informs law enforcement of capital markets fraud or assists an investigation into such a crime. Whistleblower protection requires a maximum penalty of five years in jail for offenders.
In a criminal or Offence Act prosecution
the Crown must prove, beyond a reasonable doubt, that the act occurred and that there was sufficient intent on the part of the defendant to attract criminal liability. This contrasts with administrative proceedings before a regulatory authority. In that case, the standard of proof is on a balance of probabilities and the person can be held liable not only if he or she “knew” about an offence, but also if he or she “ought to have known”.
IIROC rules for retail accounts
also require that an account suitability review be performed when certain trigger events occur. Trigger events include trades when they are accepted, recommendations when they are made, transfers or
deposits into an account, a material change in client circumstances, or any change in the account representative.
Fiduciary duty is imposed by common law, except in Quebec
Required elements for fiduciary duty are trust, confidence, and reliance on skill, knowledge, and advice. Whether a dealer-client relationship or a relationship between a client and a registrant is fiduciary depends on the client’s level of trust in, and reliance on, the dealer or registrant. Some courts have held that there is no fiduciary duty unless all of the elements are present, though duties may arise under contract and tort law.
