Canadian Regulatory Environment

Question 1

What is the Regulatory body for Quebec to regulate the financial sector and securities industry and what does the financial sector include?

Answer 1

Autorite des marches financiers and the financial sector includes Life and property insurance firms, providers of deposit insurance and, distributors of financial products, among others.

Question 2

What is OSFI?

Answer 2

Outside of Quebec, the financial sector is regulated separately from the securities industry by the Office of Superintendent of Financial institutions (OSFI)

Question 3

What does Market Integrity entail?

Answer 3

Productive investing takes place
when savings are funneled through the markets into stocks, bonds, and other securities. The issuers of those securities then use the savings to fund various projects. For this process to happen efficiently, investors must feel confident that they will be treated fairly as equal participants in the capital markets. Without the assurance that they stand to benefit from projects that they help to fund, potential investors would not have the confidence to risk
their savings. To protect market integrity, the regulators require that industry employees meet high proficiency standards through
mandatory educational programs. In addition, investor protection funds are in place to protect individual investors in the unlikely event that a firm goes bankrupt.

Question 4

What is the primary role and secondary role of Regulators?

Answer 4

The Primary role is Investor Protection and the secondary role is fostering market integrity.

Question 5

What is an SRO?

Answer 5

A self-regulatory organization (SRO) is a private industry organization to which the provincial regulatory bodies have granted the privilege of regulating their own members. An SRO enforces their members’ conformity with securities legislation. They have the power to prescribe their own rules of conduct and financial requirements.
An SRO is delegated regulatory functions by the provincial regulatory bodies. SRO by-laws and rules are designed to uphold the principles of securities legislation. The CSA monitors the conduct of the SRO and reviews their rules
to ensure that they are in the public’s interest and do not conflict with provincial rules. SRO regulations apply in addition to provincial securities regulations. If an SRO rule differs from a provincial rule, the most stringent rule of the two applies

Question 5

What is CSA?

Answer 5

Canadian Securities Administrator is an umbrella organization for Canada’s 10 provincial and 3 territorial securities regulators designed to improve, coordinate and harmonize regulation of the capital markets. The mission of CSA 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.

Question 6

What is CIRO?

Answer 6

The Canadian Investment Regulatory Organization (CIRO), Canada’s national SRO, oversees all investment dealers, mutual fund dealers, and trading activity on debt and equity marketplaces in Canada. CIRO is committed to
the protection of investors, providing efficient and consistent regulation, and building Canadians’ trust in financial regulation and the people managing their investments.
CIRO carries out its regulatory responsibilities by setting and enforcing rules that affect its dealer members and their registered employees. It enforces the proficiency of dealer members, as well as their business and financial conduct.
CIRO also sets and enforces market integrity rules regarding trading activity on Canadian equity marketplaces.

Question 6

Function of CIRO?

Answer 6

Financial compliance: Monitors dealer members to ensure that they have enough capital to carry out their operations.
Business conduct compliance: Monitors dealer members to ensure that policies and procedures are in place to properly supervise the handling of their client accounts.
Registration: Oversees professional standards and educational programs designed to maintain the competence of industry employees.
Enforcement: Enforces rules and regulations that cover the sales, business, financial practices, and
trading activities of individuals and firms under the regulator’s jurisdiction.
Market surveillance: Surveillance of trading and market-related activities of participants on Canadian equity marketplaces includes the following practices:
* Real-time monitoring of trading activity on stock exchanges, the Natural Gas Exchange Inc., and Alternative Trading Systems across Canada
* Ensuring dealer members comply with the timely disclosure of information by publicly traded companies in Canada.
* Carrying out trading analysis and compliance with trading rules

Question 7

Roles and responsibility of CIRO?

Answer 7

CIRO is also responsible for regulating the distribution and sales of mutual funds by its members in Canada. CIRO has the ability to admit members, audit, enforce rules, and apply penalties.

Question 8

Regulatory body for Mutual Funds in Canada?

Answer 8

CIRO does not regulate the mutual funds themselves; this responsibility remains with the provincial securities administrators.

Question 9

Regulatory body for Mutual Funds in Canada?

Answer 9

AMF or Autorite des marches financiere.

Question 10

SRO of Mutual Funds industry and the insurance industry in Quebec?

Answer 10

The Chambre de la sécurité financière (CSF) is Quebec’s SRO of the mutual fund and insurance industry. The CSF is responsible for setting and monitoring continuing education requirements and for enforcing a code of ethics for licensed representatives

Question 11

What is OSFI?

Answer 11

OSFI is the regulatory body for all federally regulated financial institution, OSFI is an independent agency of the Government of Canada designed to contribute to the safety and soundness of the Canadian financial system. OSFI is responsible for regulating and supervising 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
**OSFI does not regulate the Canadian securities industry.

Question 12

What is Investor Protection Fund?

Answer 12

The securities industry offers the investing public protection against loss as a result of the financial failure of any firm in the self-regulatory system. Account types covered under the various forms of protection include those offered by securities and mutual fund dealers, banks, trust and loan companies, and credit unions.

Question 13

CIPF

Answer 13

Canadian Investor protection Fund. The primary role of CIPF is investor protection and the secondary role is overseeing the Self regulatory system. The secondary role provides a mechanism to help CIPF contain the risk associated with the primary role. CIPF protects eligible customers in the event of insolvency of dealer members. It doesn’t cover client losses that result from changing market values, nor does it insure accounts held at banks, or any other firms that are not members. CIPF is sponsored solely by the CIRO and funded by dealer members.

Question 14

Types of accounts protected by CIPF?

Answer 14

Cash account, margin account, short sale, options, futures, tax free savings account and foreign currency are combined and treated as one general account eligible for the max amount of $1million. RRSP and RRIF are combined and insured for max $1M. Registered education savings plan and trust are insured separately for a max coverage of $1M.

Question 15

What is CDIC?

Answer 15

Canadian Deposit Insurance Corporation is a crown corporation that provides deposit insurance and contributes to the stability of Canada’s financial system. CDIC insures eligible deposits up to a maximum of $100,000 per depositor in each member institution i.e. banks, trust companies & loan companies, and reimburses depositors the amount of any insured deposit if a member institution fails. To e eligible for insurance, the account must be held with a member institution. The $100,000 maximum includes all of the client’s insurable types of deposits with the same CDIC member.
Deposits at different branches of the same member institution are not insured separately

Question 16

Types of account eligible for CDIC insurance?

Answer 16

Nine deposit categories either held in one name or more than one name; Chequing & savings account is combined and insured for max $100,000, RRSP, RRIF, Registered education savings plan, TFSA, trusts and Tax free FHSA and registered disability savings plan.

Question 17

Provincial Insurance Corporation?

Answer 17

Protects deposits of Credit Union Members. The various organizations have names such as deposit insurance corporation, deposit guarantee corporation, stabilization fund,
stabilization corporation, stabilization board, or central credit union. Terms and maximum coverage may vary by province, so it is important to check with your province to determine the specific coverage available.

Question 18

Regulation and Supervision?

Answer 18

In Canada, the provincial securities commissions and CIRO 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.

Question 19

Demutualization?

Answer 19

Refers to a company that was owned by its members converting to a company owned by shareholders.

Question 20

What is corporate governance?

Answer 20

Corporate governance refers to the 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. The extent to which a firm complies with external rules is strongly influenced by the strength of a firm’s internal compliance systems. Ultimately, corporate governance represents a balancing act between the interests of a company’s stakeholders, including senior management, shareholders, customers, government, and the
community.

Question 21

Purpose of Imposing Regulations?

Answer 21

• 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.
• Fairness: Investors must also perceive that the markets are fair, and that no participant has an unfair advantage over them.
  *Economic stability: The efficient flow of capital across the economy is essential for growth and stability, and to prevent disruptions to the economy through market failure.
  *Social objectives : Regulations support the government objective of dissuading criminal activities such as money laundering, for example.

Question 21

Principles-Based Regulatory model?

Answer 21

Under the principles-based approach, the regulators set objectives 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. Objectives may even extend to the adequacy of capital.

Principles-based regulation requires careful analysis and monitoring by each dealer member. If a compliance failure occurs, the firm has no set standards to rely on to prove that its supervision was adequate. To convince the
regulators that the firm exercised due diligence, it must provide documentation of the analyses and decisions that were made during the development, implementation, and operation of the system

Question 21

Difference between Rules based and Principles-Based Regulation?

Answer 21

The Canadian Securities Industry follows the Principles- Based regulatory model, rather than the rules-based model. Unlike a rules-based approach, which imposes detailed rules designed to provide clarity and legal certainty to
market participants, a principles-based approach is clearer, simpler, and less costly to apply. It allows securities dealers to tailor their supervision and compliance functions to fit their business. It also requires good judgment
in comparison to the prescriptive, rules-based approach. However, the guidance to ensure compliance that accompanies principles-based regulations is often detailed enough to be considered a rule. The courts or regulators
often hold securities dealers to this standard.

Question 21

Investment advisors and pre-requisites or licensing requirement?

Answer 21

Investment advisors are employed at investment dealers firm, can trade in securities and provide advice to clients regarding investment decisions. Both Investment advisors and Investment dealers must be registered with CIRO as well as the administrator. New IA’s are required to take the Canadian securities course (CSC) and take basic examination on Conduct and Practices handbook course. New IA’s are supposed to undergo 90 -day training program and required to be supervised for a period of 6 months by his/her supervisor. After becoming licensed as an IA, IA must appear for Wealth management Essentials Course (WME) within 30 days. Participation in the industry’s continuing education program is also a condition of maintaining a license.

Question 21

What is the role of Provincial Securities Act?

Answer 21

Provincial securities acts are designed to regulate the underwriting, distribution, and sale of securities, and to protect buyers and sellers of securities. Formal conferences of provincial administrators are held regularly; informal consultation and co-operation among the various regulatory bodies is continuous.

Question 22

Does Canada have a federal regulatory body for the securities industry?

Answer 22

In Canada, there is no federal regulatory body for the securities industry, unlike in the United States, where the national Securities and Exchange Commission (SEC) has considerable regulatory authority. Many experts in the
Canadian industry argue that provincial and territorial regulations should be streamlined to achieve a uniform set of laws across the country

Question 23

Disclosure

Answer 23

The general principle underlying Canadian securities legislation is full, true, and plain disclosure of all pertinent facts by those offering the securities for sale to the public. Until such facts are disclosed to the satisfaction of
the designated administrator, it is illegal to offer the securities for public sale. Disclosure is normally made in a prospectus issued by the company and accepted for filing by the administrator concerned. The industry also relies on the SRO to ensure that their members comply with legislation.

Question 24

Investment Representative and pre-requisites or licensing requirement?

Answer 24

IR’s are largely employed by Self-directed brokerage firms. IR’s can only trade in the securities industry, they cannot provide advice to the investing public on the securities. The proficiency requirements for IRs are similar to those for IAs, except that the training period is 30 days, rather than 90 days, and the WME education component is not required.

Question 25

National Registration Database (NRD)

Answer 25

The National Registration Database (NRD) is like an online system that investment dealers and their employees use to submit registration forms when they need approval from a stock exchange, the Canadian Securities Administrators (CSA), or the Canadian Investment Regulatory Organization (CIRO). Think of it as a central hub where they can send all their important forms digitally, so they don’t have to send separate forms to each province or territory in Canada. This makes things much easier and faster because one submission can be used for all areas or jurisdictions. Investment advisors, investment representatives and the dealer member are required to notify the SRO
immediately, in writing, of any material changes, such as a change of address, in the original answers to the questions on the NRD application. Each dealer member is also required to immediately report to the administrator
and the SRO the termination of a registrant. If the registrant is dismissed for cause, a statement of the reasons for the dismissal must be reported.

Question 26

THE GATEKEEPER ROLE

Answer 26

The gatekeeper function, long considered an important role of IAs, 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.
Gatekeepers in the securities industry include dealers and all of their employees, particularly front-line and supervisory employees. Investment Advisors who deal with clients directly must take measures to identify
suspicious clients, detect and report suspicious transactions, and prevent illegal activity. To do so, they must comply with the following requirements:
* Collect and record client information that is accurate and complete.
* Monitor activity in client accounts.
* Report any suspicious transactions or proposed transactions in client accounts.
Of particular concern to gatekeepers are illegal activities, including money laundering, terrorist financing, financial fraud, and illegal insider trading

Question 27

Client Focused Reforms

Answer 27

Regulatory amendments that came into force in the year 2021 for registrants in the securities industry. These amendments to national instrument 31-103 and its companion policy are know as CFR’s or client focused reforms.
**The CSA developed the CFRs based on the
concept that the interests of the client must come first in the client-registrant relationship so that registrants who are in an advisory role (i.e., provide investment recommendations to clients) make suitable recommendations to their clients.
**CIRO was involved in the development of the CFR amendments and also amended their rules, policies, and guidance.

Question 28

Amendments under CFR or Client Focused Reforms?

Answer 28

KYC and KYP obligations are foundational pre-conditions to suitability.
**Suitability Determination: Registrants must put client interests first when making a suitability
determination. Along with KYC and KYP, registrants are expected to have appropriate information to determine whether an investment is suitable for a client and puts the client’s interest first.
**KYC: The CFRs set out an expanded list of information registrants must collect to meet their KYC obligations. The basic premise is that if you don’t really know your client, how can you recommend a suitable investment strategy? Registrants must also take reasonable steps to obtain the client’s confirmation of the
accuracy of any information collected. The amendments also have an expectation that client information be reviewed at minimum intervals for currency and updated if the registrant becomes aware of a significant change.
Personal circumstances (not limited to financial circumstances)
* Financial circumstances
* Investment knowledge
* Investment needs and objectives
* Risk profile (guidance clarifies that this includes both the customer’s risk tolerance and their risk capacity)
* Investment time horizon
**The CFRs also change the requirements with respect to confirming KYC accuracy and timeliness. These changes
require registrants to:
* Take reasonable steps to obtain client confirmation that their KYC information is accurate.
* Keep KYC information current by updating it when becoming aware of a significant change.
* Review a client’s KYC information every 36 months even if the registrant hasn’t interacted with the client.
* Update KYC information on initial client contact and annually during your review.

Question 29

Contd. Conflicts of Interest

Answer 29

Came into force on 30th June 2021.
The amended rule requires firms and individuals to address material conflicts of interest in
the best interest of the client. The CFRs outline how these conflicts are expected to be identified, documented, addressed, and disclosed.
**The CFR changes to the conflict provisions introduce several requirements to the existing conflict rules, as noted in
NI 31-103. They can be summarized as follows:
* Both firms and individual registrants acting on behalf of their firms must go through a process to identify material conflicts of interest that currently exist between a client of the firm or an individual acting on behalf of the firm.
* The material conflicts must be addressed in the best interests of the client.
* To the extent that such conflicts cannot be addressed in the best interests of the client, the material conflicts must be avoided.
* The firm must disclose any material conflict of interest that may impact a client at the time of account opening, or in a timely manner if the conflict is identified at a later time.

Question 30

Relationship Disclosure

Answer 30

The CFRs expand the disclosure requirements to include letting clients know about potentially significant items related to investment products being offered, such as costs.

Question 31

Enhanced Suitability determination Obligations.

Answer 31

The CFRs amend the current KYC requirements and create a formal KYP requirement. These changes support what the regulators refer to as enhanced suitability determination obligations.

Question 32

Arbitration

Answer 32

Arbitration is a way to solve disputes outside of court. Instead of going before a judge, an independent arbitrator is chosen to hear both sides of the argument. The arbitrator then decides how to resolve the issue and what, if any, remedies should be given.

Here’s how it works and why it’s used:

CIRO’s Role: The Canadian Investment Regulatory Organization (CIRO) can discipline its member registrants, meaning it can take action against investment dealers if they break rules. However, CIRO cannot order them to pay money back to clients (restitution).

Arbitration as an Option: To help investors who are unhappy with their investment dealer, the SRO offers arbitration as an option instead of going to court. Arbitration is usually cheaper and faster, especially for smaller amounts of money.

Arbitration Brochure: When someone opens an account with an investment dealer, they must receive a brochure explaining arbitration. If the client sends a written complaint, they must get the latest version of this brochure.

Requesting Arbitration: If a client wants to go through arbitration, the investment dealer must agree to the process and accept the arbitrator’s decision. The dispute must meet these criteria to be eligible for arbitration:

*The client has tried to resolve the dispute with the investment dealer first.
*The amount of money involved in the claim is $500,000 or less. Higher amounts can be arbitrated if both sides agree.
Binding Decision: The arbitrator’s decision is final and must be followed. Before arbitration starts, both the client and the dealer sign an agreement that they will not take the dispute to court afterward. This means they agree that the arbitrator’s decision will be the end of the dispute.

In summary, arbitration is a simpler, faster, and often cheaper way for investors to resolve disputes with their investment dealers compared to going to court. It involves an independent arbitrator whose decision is final and binding.

Question 33

Ombudsman for Banking Services and Investments (OBSI).

Answer 33

Another avenue for investors who feel that they have been treated unfairly is the Ombudsman for Banking Services and Investments (OBSI). This organization investigates customer complaints against financial services providers, including some banks and other deposit-taking organizations, investment dealers, mutual fund dealers, and mutual fund companies. OBSI is independent of the financial services industry.
For investors who have been unable to resolve their complaints with their financial services provider, OBSI provides a prompt and impartial resolution. The process is not binding for either the investor or the financial services provider. However, participating firms that do not agree to a recommendation by OBSI are publicly reported.

Question 34

Front Running

Answer 34

Trading in one’s own account before effecting the same trade for the client.

Question 35

National Do Not Call list (DNCL)

Answer 35

The CRTC has established rules that
telemarketers and the organizations that hire them must follow. In particular, all telemarketers must subscribe to the National Do Not Call List (DNCL). The DNCL rules prohibit telemarketers and clients of telemarketers from calling any number that has been registered on the DNCL for more than 31 days. As an advisor, you must follow these rules unless you are making calls that are specifically exempted.
The term Telemarketing is broadly defined to include sales or prospecting calls. Telemarketing firms must remove persons included in the DNCL from their calling lists.