Canadian Regulatory Environment Flashcards

Question

Difference between Rules based and Principles-Based Regulation?

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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

Answer 5

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.

Answer 6

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.

Answer 7

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.

Answer 8

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

Answer 9

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.

Answer 10

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.

Answer 11

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.

Answer 12

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

Answer 13

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.

Answer 14

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.

Answer 15

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.

Answer 16

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

Answer 17

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.