Ch2 Contd Flashcards
To protect investors exchanges can invoke 3 types of temporary withdrawals of trading privileges. These are…
- A delayed opening.
- A Temporary Halt in trading.
3 Suspension of trading.
What allows the exchanges to have considerable self regulation
The securities Acts
What is a delayed opening
Shortly before opening of trading, an exchange can order trading in a security to be delayed. Might arise due to a heavy volume if buy sell orders to allow traders time to sort out the orders.
The exchanges regulate…
Acceptable standards of behavior for member firms and their directors; officers and employees.
They set listing and reporting requirements for listed companies and they assist in screening statements of material fact and exchange offering prospectuses (frequently accepted by exchanges in lieu of standard prospectuses.
What is a halt in trading?
A temporary halt in the trading of a security can be ordered or arranged at any time to allow the dissemination of significant news related to a stock.
What is suspension of trading?
Trading privileges can be suspended for more than one trading session.
Imposed if a companies financial condition doesn’t meet the exchanges requirements or fails to comply with the terms of it’s listing agreement or for some other good cause.
Trading can resume if the problem is satisfactorily rectified in time.
During suspension of trading can the members still execute orders for the suspended security?
Yes on the unlisted market except securities that are suspended from trading on the Vancouver Stock Exchange.
A security can be delisted from the exchange for the following reasons?
It no longer exists. It has been called for redemption or substituted for another security as the result of a merger.
The company is bankrupt of without assets.
The public distribution of the stock is at an unacceptably low level.
The company has failed to comply with the terms of the listing agreement.
Describe what equities are typically listed on the unlisted equities market.
Junior issues.
Conservative industrial companies.
Many are speculative stocks that offer low liquidity
Describe the difference between a dealer market and an over the counter market.
Unlike auction markets where individual buyers orders are entered, a dealers market is a negotiated market where only dealers bid and ask quotations are entered by those dealers acting as market makers.
Describe the mechanics of a dealer (unlisted) equities market.
The market makers hold an inventory of securities in which they have agreed to make a market. The market makers post their bid (highest price they’ll pay) and ask (lowest price they’ll accept) quotations. When an investor wishes to purchase the unlisted stock the broker checks the bid/ask quotations of various market makers to identify the best price and contacts the market maker.
Market makers do have the right to refuse a trade.
What is regulated on the unlisted equities market?
They do not attempt to regulate companies.
They do not set listing requirements
What is COATS
The Canadian Over The Counter Automated Trading system
What is the CDN and what does it do?
The Canadian Dealers Network
Consists of a network of computers And telephones linking hundred if brokers and dealers.
Provides bid/ask prices together with high, low and closing prices and trading volume for the previous days trading.
Facilitates monitoring of trading of over the counter equities to detect abuses.
What can and can’t be listed on CDN
Those OTC ( over the counter) equities and warrants which are not listed on one of the four exchanges may be quoted through CDN provided they have at least one market maker.
Equities and warrants without a market maker can still be traded OTC, but they can’t be quoted on CDN.
What do Market makers do for the over the counter unlisted equities market?
This provides liquidity to the market.
What financial intermediaries are called the “four pillars” of the financial sector?
Banks, trust companies, insurance companies, securities dealers.
Federal legislation effecting financial intermediaries changed in 1992. What did this change do?
Removed barriers between banks, insurance industry, trust companies and securities dealers allowing them to compete more directly with each other.
What is a schedule 1 chartered bank?
A Canadian owned chartered bank
What is a schedule 2 chartered bank?
A foreign owned chartered bank.
They have additional reporting and restrictions imposed on them.
In 1980 what act changed to allow for foreign ownership of banks in Canada?
The Bank Act
What are the ownership criterion for schedule 1 banks?
No investor can hold more than 10% and foreign ownership is limited to 25%.
Can schedule 2 banks engage in all of the same activities as schedule 1 banks?
Yes
Foreign bank subsidiaries tend to focus on commercial loans to companies rather than on retail banking services to individuals. Why?
The loan is limited to the capital base of the subsidiary rather than the parent bank.
They lack the extensive branch system.
Schedule 2 banks are limited to what percent of the assets of the total banking industry? What country is exempt from this ceiling?
12%
USA
Trust companies are the only companies in Canada permitted to do this?
Act as trustee in charge of corporate or individual assets such as property, stocks and bonds.
What investment principal is most important to life insurance companies?
Safety of principal.
What investment principal is very important to chartered banks and what do they tend to invest in?
Liquidity
High yield long term stocks. Mortgage and long term bond markets.
What federal legislation governs insurance companies?
The Insurance Companies Act (1992)
The Insurance Companies Act allows insurance companies to own what types if companies?
Trust and loan companies.
What is a trusteed pension plan?
The employer and employee both contribute and the money’s which are managed by a trustee.
The trustee must register the plan with the appropriate provincial government department and with the federal department of revenue and manage the fund in accordance with the trusts deed.
What is the maximum percentage of a pension plan can be held in foreign investment?
20%
Name 2 government operated pension plans
The Canada Pension Plan and the Quebec Pension Fund.
What legislation governs credit unions?
The Cooperative Credit Associations Act 1992)
Name 2 types of investment funds
Open ended funds or Mutual funds
Closed ended funds
What is the difference between closed ended funds and opened ended or mutual funds?
Closed ended normally issue at start up or other infrequent periods, whereas mutual funds continually issue shares and redeem these on demand.
A buyer must have one of 2 kinds of accounts with a broker, what are they and how is payment made?
A cash account - payment must be made in full within 3 business days from the trade date.
A margin account - a portion of the amount is paid, with the balance borrowed from the broker.
Describe a trade known as a “cross”
Both the seller and the buyer are customers of the same firm. The price of the security is based on the market price. The sale is made first and it is then recorded on the exchange after it is done.
In Canada what is the most common way to underwrite a corporate issue, competitive tender (auction) or negotiated offer to sell the new issue?
Negotiated offer
A firms bond trading department typically trades from where?
There own inventory or the inventory if other firms that specialize in the issue.
A firms stock trading department typically trades from where?
The stock exchanges rather than from the firms own inventory.
What is a “day to day loan”, how is it secured and when is it payable?
A short term loan to a dealer, that is secured against the dealers treasury bill and short term Canada bond inventory. The bank can call upon the dealer for same day repayment
Name 2 types of “call loans” and describe when they are payable.
Special call - must be liquidated within 24 hours after notice is given
Other call or short loans - technically payable whenever called, but they are seldom called.
Which is less volatile, a “special call loan” or a “ other call or short term” loan?
other call it short term”
Does the Office of the Superintendent of Financial Institutions (OSFI)regulate the securities industry?
No
Why, in 1987, was the Financial Institutions Supervisory Committee formed?
To simplify the confidential exchange if information among members on all matters relating to supervising financial institutions.
What does the Canadian Investor Protection Fund cover
Loss due to insolvency of a member of any of the dpi siring self-regulatory organizations (the exchanges plays the investment dealers association of Canada).
What does the Canadian Investor Protection Fund NOT cover
Losses resulting from changing market values and accounts held at mutual fund companies, banks or other firms that are not members of sponsoring self-regulatory organizations
Where does the Canadian Investor Protection Fund get it’s assets?
Through special assessment to member firms ( max 1 % of the aggregate gross revenues of the member firms) plus a line of credit at a major chartered bank)
Describe the maximum Canadian Investor Protection Fund payout
Maximum of $500,000 with a maximum of only 60,000 of that being cash.
Canadian Investor Protection Fund rejects claims if those who…
Are not dealing at Arms length with the insolvent company or those whose dealings contributed to the insolvency.
What is the time limit for filing a claim with the Canadian Investor Protection Fund?
180 days from the bankruptcy.
What is the normal
Procedure that Canadian Investor Protection Fund will take if a member is insolvent?
Petition the court under the Bankruptcy and Insolvency Act to have a trustee appointed.
Transfer the customers accounts to another member firm
Transfer all securities registered to the customer to the customer as long as all money’s owed by the customer have been paid.
Give the customer the net equity of their account.
If the customer owes more than the firm owes him he must pay the trustee
If the claims exceed the fund, then quarterly assessments will be made upon member firms.
What is the IDA and what does it do?
The investment dealers association. They are the only national self-regulatory organization.
It is the Canadian investment dealers trade association and self regulatory organization.
It polices it’s member firms in all parts of the country in both capital adequacy as well as business conduct. The qualifying and registering process of firms is also their responsibility.
Responsible for listening to perspectives nation wide to ensure that policies and rules governing the industry reflect this diversity.
The IDA is made up of how many regional counsels?
10
The IDA does 3 things to promote efficient capital markets. They are?
- Market regulation - they play a key role in formulating standards and practice for the primary debt and equities markets. In particular they are the primary regulator for the fixed income market.
- Public policy advocate - Provide accurate information and intelligence to key provincial and federal government departments.
- International representative - represent Canadian interests when working with foreign securities regulators.
The IDA’s compliance department is responsible for…
Ensuring financial compliance as well as conduct of business compliance.
Who reviews the IDA’s regulatory actions?
The provincial securities commissions.
What does the IDA’s financial Compliance department do?
It audits investment dealers to ensure the firms are maintaining adequate capital in accordance with the nature of the business. If the firm is found lacking they can require action to correct the deficiency or suspend the members trading privileges.
What does the IDA’S’s investigations department do?
Investigates any complaint it receives against a member firm or it’s employee.
They have the authority to prosecute and to exact penalties in the form of fines or suspension rom the industry.
In addition, they screen new investment advisors who are employed by member firms.
What is insolvency?
The inability of a debtor to pay their debt.
What is the Canadian Depository for securities and what does it do?
It is a central clearing system that handles the daily settlement process between members.
It establishes a credit or debit cash balance for each firm and instructs each member what securities it must deliver to balance the account.
What are the 2 goals of the Canadian Securities Institute?
Increase competence of people working in the industry.
Promote a wider knowledge and appreciation of investing among Canadians.
Name 3 forms of business organization.
Sole proprietorship
Partnership
Corporation.
Describe a sole proprietorship and also describe it in regards to taxes and liability
One person running his own business
Taxed on earnings at the personal income tax rate.
Personally liable for all debts, losses and obligations.
Describe a partnership.
2 or more people contributing to the business, whether it be capital or the expertise required to run the business.
Name 2 types of partnership
General partnership and limited partnership.
Describe a general partners role and liability
A general partner is involved in the day to day operation of the business and is personally liable for ALL debts and obligations incurred
Describe a limited partners role and liability
The limited partner is not involved on the daily business activity and his liability is limited to his investment into the business
What are the 2 downsides of both a sole proprietorship and a partnership?
They both have unlimited personal liability and limited ability to grow.
What is unique about corporations.
They are a distinct legal entity separate from the people who own the shares.
