Chapter 1 | The Canadian Securities Industry

Question 1

A _ _ _ _ _ _ is an institution such as a bank that borrows money from suppliers of capital and lends it to users of capital.

Answer 1

A financial intermediary is an institution such as a bank that borrows money from suppliers of capital and lends it to users of capital.

Question 2

TRUE OR FALSE?

The Canadian securities industry is mainly regulated by the provinces.

Answer 2

ANSWER
TRUE

Question 3

Canadian provinces have the power to create and enforce their own laws and regulations through _ _ _ _ _ _

Answer 3

Canadian provinces have the power to create and enforce their own laws and regulations through SECURITIES COMMISSIONS.

Question 4

COMPLETE THE SENTENCE:

Securities commissions delegate some of their powers to _ _ _ _ _ _ _ such as the Investment Industry Regulatory Organization of Canada (IIROC).

Answer 4

**ANSWER:

Securities commissions delegate some of their powers to self-regulatory organizations (SRO) such as the Investment Industry Regulatory Organization of Canada (IIROC).**

Question 5

NOTE ONLY /

A Self Regulatory Organizations (SROs) is a non-governmental organization that regulates the operations, standards of practice, and business conduct of its members with a view to promoting the public interest.

The BRITISH COLUMBIA SECURITIES COMMISSION (BCSC) has the statutory power to recognize SROs. The BCSC currently recognizes the Mutual Fund Dealers Association (MFDA), the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Public Accountability Board (CPAB) as SROs.

Answer 5

NOTE ONLY /

A Self Regulatory Organizations (SROs) is a non-governmental organization that regulates the operations, standards of practice, and business conduct of its members with a view to promoting the public interest.

The BRITISH COLUMBIA SECURITIES COMMISSION (BCSC) has the statutory power to recognize SROs. The BCSC currently recognizes the Mutual Fund Dealers Association (MFDA), the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Public Accountability Board (CPAB) as SROs.

Question 6

List 2 Self Regulatory Organizations (SROs)

Answer 6

ANSWER:

Mutual Fund Dealers Association (MFDA), the Investment Industry Regulatory Organization of Canada (IIROC)

Question 7

NOTE ONLY

The BRITISH COLUMBIA SECURITIES COMMISSION (BCSC) is the independent provincial government agency reporting to the Legislature through the minister responsible for the administration of the Securities Act.

Answer 7

NOTE ONLY

The BRITISH COLUMBIA SECURITIES COMMISSION (BCSC) is the independent provincial government agency reporting to the Legislature through the minister responsible for the administration of the Securities Act.

Question 8

The term _ _ _ _ _ _ describes any organization that facilitates the trading or movement of financial instruments that transfer capital between suppliers and users of capital.

Answer 8

ANSWER:

The term FINANCIAL INTERMEDIARY describes any organization that facilitates the trading or movement of financial instruments that transfer capital between suppliers and users of capital.

Question 9

Give 3 examples of financial intermediaries?

Answer 9

ANSWER:

investment dealers, banks, credit unions, trust companies, and insurance companies.

Question 10

_______ is the procedure by which financial trades settle - that is, the correct and timely transfer of funds to the seller and securities to the buyer.

Answer 10

ANSWER:

CLEARING is the procedure by which financial trades settle - that is, the correct and timely transfer of funds to the seller and securities to the buyer.

Question 11

_______ is the irrevocable moment when cash and securities are exchanged.

Answer 11

ANSWER:

Settlement is the irrevocable moment when cash and securities are exchanged.

Question 12

The _ _ _ _ _ Fund and similar organizations provide insurance against dealer insolvency.

Answer 12

ANSWER:

The Canadian Investor Protection Fund and similar organizations provide insurance against dealer insolvency.

Question 13

_____ trading occurs when a brokerage buys securities in the secondary market, holds these securities for a period of time and then sells them.

Answer 13

PRINCIPAL trading occurs when a brokerage buys securities in the secondary market, holds these securities for a period of time and then sells them.

Question 14

Explain Agency Trading?

Answer 14

**ANSWER:

An agency transaction is the other popular method for executing a client’s orders. More complicated than regular principal transactions, these deals involve the search for and transfer of securities between clients of different brokerages.**

Question 15

EXPLAIN WHAT AN INITIAL PUBLIC OFFERING IS?

Answer 15

What is an Initial Public Offering - IPO?

The process of offering shares in a private corporation to the public for the first time is called an initial public offering (IPO).

Growing companies that need capital will frequently use IPOs to raise money, while more established firms may use an IPO to allow the owners to exit some or all their ownership by selling shares to the public.

In an initial public offering, the issuer, or company raising capital, brings in underwriting firms or investment banks to help determine the best type of security to issue, offering price, amount of shares and time frame for the market offering.

Question 16

Retail firms include _ _ _ _ _ and _ _ _ _ _ .

Answer 16

ANSWER:

Retail firms include full-service investment dealers and self-directed brokers (also known as discount brokers).

Question 17

_ _ _ _ _ _ brokers, are considered the do-it-yourself approach to investing. They execute trades for clients at reduced rates, but they do not provide investment advice.

Answer 17

SELF-DIRECTED BROKERS are considered the do-it-yourself approach to investing. They execute trades for clients at reduced rates, but they do not provide investment advice.

Question 18

_ _ _ _ _ _ are investment dealers that serve organizations that trade large volumes of securities.

Answer 18

**ANSWER:

INSTITUTIONAL FIRMS are investment dealers that serve exclusively institutional clients, organizations that trade large volumes of securities.**

Institutional clients include pension funds and mutual funds, and may be domestic or foreign institutional firms.

In Canada, foreign firms account for about one-third of all institutional clients. Foreign firms include affiliates of many of the major U.S. and European securities dealers.

Question 19

_______ firms offer products and services across the industry and participate fully in both the retail and institutional markets.

Answer 19

ANSWER:

INTEGRATED FIRMS offer products and services across the industry and participate fully in both the retail and institutional markets.

Most integrated firms underwrite all types of federal, provincial, and municipal debt, as well as corporate debt and equity issues. They are active in secondary markets, including the money market, as well as on all Canadian stock exchanges and some foreign exchanges.

Question 20

______ performs all staff functions pertaining directly to portfolio management activities.

Functions include Portfolio management
Trading, Sales, and Marketing.

Answer 20

ANSWER:

Front Office

Question 21

_________ performs functions critical to the efficient operation of the firm. Duties include Compliance, Accounting, Audits,
Legal

Answer 21

ANSWER:

MIDDLE OFFICE

Question 22

This area settles the firm’s security transactions.

Answer 22

ANSWER: BACK OFFICE

Question 23

The success of an investment dealer rests largely on profits generated by _ _ _ _ _ _ _

Answer 23

ANSWER:

SALES DEPARTMENT

Question 24

TRUE OR FALSE?

By participating in the secondary market and maintaining an inventory of outstanding securities, investment dealers add liquidity to the market with relative ease by making transactions from their inventory, rather than waiting for simultaneous matching buy-sell orders from other investors.

Answer 24

ANSWER: TRUE

Question 25

COMPLETE THE SENTENCE:

During a trading day, exchange members act as both buyers and sellers of many listed stocks. Rather than each member making a separate settlement with another member on each trade during the course of a trading day, a designated central clearing system handles the daily settlement process between members.

Answer 25

ANSWER:

During a trading day, exchange members act as both buyers and sellers of many listed stocks. Rather than each member making a separate settlement with another member on each trade during the course of a trading day, a designated CENTRAL CLEARING SYSTEM handles the daily settlement process between members.

Question 26

The central clearing system uses a process called ______ to establish and confirm a credit or debit position balance, in the form of cash or security, for each dealer member.

This process compiles each firm’s clearing settlement sheets and informs each member of the securities or funds it must deliver to balance its account.

Answer 26

ANSWER:

The central clearing system uses a process called NETTING to establish and confirm a credit or debit position balance, in the form of cash or security, for each dealer member.

The NETTING PROCESS compiles each firm’s clearing settlement sheets and informs each member of the securities or funds it must deliver to balance its account.

Question 27

_ _ _ _ _ banks are banks that are not a subsidiary of a foreign bank and are considered domestic banks even if they have foreign shareholders.

Answer 27

SCHEDULE I banks are banks that are not a subsidiary of a foreign bank and are considered domestic banks even if they have foreign shareholders.

Question 28

Voting shares of large Schedule I banks must be widely held, with the control of any single shareholder or group of shareholders restricted to no more than ___%

Answer 28

Voting shares of large Schedule I banks must be widely held, with the control of any single shareholder or group of shareholders restricted to no more than 20%

Question 29

NOTE ONLY / SCHEDULE II BANKS

Schedule II banks are incorporated and operate in Canada as federally-regulated foreign bank subsidiaries. The deposits that these banks accept may be eligible for deposit insurance provided by the CDIC. The banks may also engage in all types of business permitted to a Schedule I bank.

Answer 29

NOTE ONLY / SCHEDULE II BANKS

Schedule II banks are incorporated and operate in Canada as federally-regulated foreign bank subsidiaries. The deposits that these banks accept may be eligible for deposit insurance provided by the CDIC. The banks may also engage in all types of business permitted to a Schedule I bank.

Question 30

SCHEDULE III BANKS

Answer 30

Schedule III banks are federally-regulated foreign bank branches of foreign institutions that have been authorized under the Bank Act to do banking business in Canada.

Schedule III banks tend to focus on corporate and institutional finance and investment banking. Examples of Schedule III banks in Canada include Barclays Bank, Comerica Bank, and The Bank of New York Mellon.

Question 31

INSURANCE TWO MAIN LINES OF BUSINESS?

Answer 31

ANSWER:

The insurance industry has two main lines of business: life insurance and property and casualty insurance.

Question 32

_________ is the most important aspect of the insurance business in Canada.

Answer 32

UNDERWRITING is the most important aspect of the insurance business in Canada.

Question 33

TRUE OR FALSE? The Bank Act forbids banks from selling insurance through their branch networks, with the exception of insurance related to loans and mortgages.

Answer 33

ANSWER: TRUE

Question 34

_ _ _ _ _ companies make direct cash loans to consumers, who are usually unable to secure a loan from a bank. These companies typically charge higher rates of interest than banks.

Answer 34

Consumer finance companies make direct cash loans to consumers, who are usually unable to secure a loan from a bank. Consumer finance companies typically charge higher rates of interest than banks.

Question 35

_________companies purchase instalment sales contracts from retailers and dealers at a discount, when items such as new cars, appliances, or home improvements are bought on instalment plans by consumers.

Answer 35

Sales finance companies purchase instalment sales contracts from retailers and dealers at a discount, when items such as new cars, appliances, or home improvements are bought on instalment plans by consumers.

Question 36

Financial technology companies, known collectively as the _____ industry, take advantage of computer technology to support or enable a variety of banking and financial products and services, including online loans, electronic wallets, and automated financial planning software.

Answer 36

Financial technology companies, known collectively as the FINTECH industry, take advantage of computer technology to support or enable a variety of banking and financial products and services, including online loans, electronic wallets, and automated financial planning software.

Question 37

TRUE OR FALSE?

Robo-Advisor portfolios are created using algorithms based on modern portfolio theory and on online client questionnaires.

Answer 37

ANSWER: TRUE

Question 38

TRUE OR FALSE? Robo-Advisors may offer financial planning in varying degrees?

Answer 38

ANSWER: TRUE

Question 39

TRUE OR FALSE? Robo- Advisors portfolios are built primarily with exchange-traded funds.

Answer 39

ANSWER: TRUE

Question 40

A _ _ _ _ _ can raise capital by bringing a new issue of securities to the financial markets.

Answer 40

A FINANCIAL INTERMEDIARY can raise capital by bringing a new issue of securities to the financial markets.

Question 41

COMPLETE THE SENTENCE

For buying equities, the secondary market is commonly referred to as the _ _ _ _ _ This includes the New York Stock Exchange (NYSE), Nasdaq and all major exchanges around the world. The defining characteristic of the secondary market is that investors _ _ _ _ _ _

Answer 41

ANSWER

For buying equities, the secondary market is commonly referred to as the STOCK MARKET . This includes the Toronto Stock Exchange, New York Stock Exchange (NYSE), Nasdaq and all major exchanges around the world. The defining characteristic of the secondary market is that investors TRADE AMONG THEMSELVES.

Question 42

_ _ _ _ _ establish and enforce industry regulations that protect investors and maintain fair, equitable, and ethical practices.

Answer 42

ANSWER:

Self-regulatory organizations (SRO)

Question 43

INSURANCE UNDERWRITING?

Answer 43

INSURANCE UNDERWRITING is the business of evaluating the risk and associated contractual responsibility that the insurance company is willing to accept in exchange for its clients’ insurance premiums.

Question 44

COMPLETE THE SENTENCE

When a private company goes public and issues stocks in the primary market for the very first time, the sale is known as an_____________

Answer 44

ANSWER: When a private company goes public and issues stocks in the primary market for the very first time, the sale is known as an INITIAL PUBLIC OFFERING.

Question 45

COMPLETE THE SENTENCE

Investment dealers act on their clients’ behalf as ______ in the transfer of financial instruments between different investors.

Answer 45

ANSWER:

Investment dealers act on their clients’ behalf as AGENTS in the transfer of financial instruments between different investors.

Question 46

DEMUTUALIZATION?

Answer 46

Demutualization is the process through which a member-owned company becomes shareholder-owned; frequently this is a step toward the initial public offering (IPO) of a company. Insurance companies often have the word “mutual” in their name, when they are mutually owned by their policy holders as a group.

In recent years, however, there has been a strong trend for these companies to demutualize, converting to a shareholder ownership base.

Generally, policy holders are offered either shares or money in exchange for their ownership rights.

Because shares can be traded or sold - in contrast to ownership rights, which can not - demutualization increases the possibility of profit for those involved, and tends also to benefit the economy.

Question 47

EXCHANGE TRADED FUND (ETF)?

Answer 47

An ETF, or exchange-traded fund, is a marketable security that tracks a stock index, a commodity, bonds, or a basket of assets. Although similar in many ways, ETFs differ from mutual funds because shares trade like common stock on an exchange.

Question 48

OPEN END MUTUAL FUND?

Answer 48

An open-end fund is a type of mutual fund that does not have restrictions on the amount of shares the fund can issue.

The majority of mutual funds are open-end, providing investors with a useful and convenient investing vehicle.

Question 49

CLOSED END FUNDS?

Answer 49

Closed-End Investments
A closed-end fund has a fixed number of shares offered by an investment company through an initial public offering (IPO).

Thereafter, closed-end fund shares are traded on an exchange, just like an individual stock. Investors acquire fund shares by purchasing them on the exchange through a brokerage account.

The price of shares in a closed-end fund is more reflective of the market than the net asset value of the fund itself.