Chapter 21 - Conduct and Practices (Done) Flashcards
What is bucketing?
Confirmation of a trade where no trade
has actually been executed.
What is a designated options supervisor?
Designated Supervisor approved by
CIRO and qualified to have overall
responsibility for the supervision of
options trading at a firm.
What is frontrunning?
Trading ahead of a client’s order in
the same or related security with
full knowledge of the client’s trading
instructions.
What is the Know Your Client rule?
Requires the IA to determine the
suitability of each and every order he/
she enters, whether it is solicited or
not.
What is per-arranged trading?
Occurs when two market participants
consult in advance and agree to make
a certain trade at a certain price.
The role of CIRO, the Bourse de Montréal, and the Canadian Derivatives Clearing Corporation in the regulation of
options activity
- CIRO is the national SRO for the investment industry.
- CIRO regulates its member firms with regard to the registration of individuals; account opening, approval, and
documentation; and account supervision. - The Bourse de Montréal, is a marketplace and a Quebec SRO under the auspices of the AMF. It lists and provides
the trading environment for all financial derivatives in Canada. - The Bourse regulates the trading of its approved participants and supervises approved participants, primarily
those who are not CIRO member firms. - The Canadian Derivatives Clearing Corporation (CDCC) is the clearinghouse for all financial derivatives in
Canada. - The CDCC regulates its member firms with regard to trade reporting, the payment of option premiums, the
deposit of margin, and option exercise and assignment
The requirements to be registered in the various options-related categories for individuals employed by SRO
member firms
Options-Licensed Investment Advisor
* Requirements include those of a non-options-licensed IA plus successful completion of the Derivatives
Fundamentals Course (DFC) and the Options Licensing Course (OLC), or the Derivatives Fundamentals and
Options Licensing Course (DFOL) that effectively combines both the DFC and the OLC.
Options-Licensed Investment Representatives
* Requirements include those of a non-options-licensed IR plus successful completion of the DFC and the OLC,
or the DFOL.
The Designated Options Supervisor
* Individuals successfully complete the DFC and the OLC (or the DFOL), and the Options Supervisors Course (OPSC).
Options-Qualified Supervisors
* Supervisors designated to directly oversee and manage options-licensed advisors and representatives dealing in
options with retail customers must complete the following:
* The proficiency requirements for a RR;
* The Branch Managers Course (BMC);
* Effective Management Seminar (EMS) within 18 months after beginning to supervise Registered
Representatives;
* The Derivatives Fundamentals Course (DFC);
* The Options Licensing Course (OLC); and
* The Options Supervisors Course (OPSC).
The registrant code of ethics and registrant standard of conduct
- The Code of Ethics establishes norms that incorporate, but are not limited to, strict compliance with the “letter
of the law” but also foster compliance with the “spirit of the law.” - The Code of Ethics is amplified by the Standards of Conduct, which are based in large part on provincial
Securities Acts and SRO rules. - Standard A: Duty of Care encompasses issues such as the Know Your Client (KYC) rule, due diligence and
unsolicited orders. - KYC is paramount to the securities industry and requires registrants to make a diligent and business-like effort
to learn the essential financial and personal circumstances and investments objective of each client. - Due diligence requires IAs to make all recommendations based on a careful analysis of information about the
client and the proposed transaction. - Registrants must provide appropriate cautionary advice with respect to unsolicited orders that appear
unsuitable based on client information. - Standard B: Trustworthiness, Honesty and Fairness encompasses issues such as priority of clients’ interests,
respect for clients’ assets, relaying complete and accurate information to clients and disclosure. - Clients’ interests must be the foremost consideration in all business dealings.
- Clients’ assets are the sole property of clients and are to be used for client purposes only.
- Registrants must take reasonable steps to ensure that all information relayed to clients regarding their
accounts is complete and accurate. - Registrants must disclose all real and potential conflicts of interest in order to ensure fair and objective
dealing with clients. - Standard C: Professionalism encompasses issues such as maintaining a high standard of professional conduct and
continuous education of registrants. - Registrants must ensure that all methods of soliciting and conducting business merits public respect and
confidence - IAs are responsible for upgrading their levels of technical and general knowledge to ensure the accuracy of
their recommendations - Standard D: Conduct in Accordance with Securities Acts and SROs deals with registrants’ requirement to comply
with the Securities Acts and SRO rules. - Registrants must abide by the Securities Acts of the province or provinces in which their registration is held.
- Registrants are also bound by the requirements of all SROs of which their firms are a member.
- If a Securities Act or SRO has conflicting rules on a given topic, registrants are required to observe the most
stringent requirement. - Standard E: Confidentiality requires all registrants to maintain the confidentiality of client information and not to
use any client trading information to effect trades in personal and/or proprietary accounts or in the accounts of
other clients.
Sales and trading practices that are contrary to SRO regulations
- Trading practices that registrants must avoid:
- Any conduct that has the effect of deceiving the public, including making fictitious trades or creating false or
misleading appearances of active public trading or intending to improperly influence prices - Pre-arranged trading
- Frontrunning
- Taking advantage of non-public information
- Sales practices that registrants must avoid:
- Bucketing
- High-pressure selling
- Violation of any statute applicable to the sale of option contracts
- Any advertising or sales literature issued by an SRO member firm or approved participant of the Bourse must
not include: - Untrue statements or omissions of a material fact
- Unjustified promises of specific results
- Unrepresentative or misleading statistics to suggest unwarranted or exaggerated conclusions
- Opinions or forecasts of future events that are not clearly labelled as such
- Statements that fail to present fairly the potential risks to the client
- Statements that are detrimental to the interest of the public, CIRO or its members, or the Bourse or its
approved participants
Regulations covering registrants employed by CIRO member firms and approved participants of the Bourse
de Montréal
- Registrants must adhere to the following specific regulations that govern their conduct:
- Having all accounts over which the registrants have control with the member firm that employs the
registrant, unless the written permission of a partner, director or officer of the firm has been obtained - Priority of client orders
- Advertising and sales literature
- The applicable SRO may impose any of the following penalties on a registrant who fails to comply fully with any
by-law or rule of the SRO: - A reprimand
- A fine
- Suspension
- Revocation of approval
- Prohibition of approval in any capacity for any period of time
- The Bourse has the power to order its approved participants to make restitution to those individuals who have
suffered a loss as a result of the acts or omissions of an individual under the jurisdiction of the Bourse.
Briefly describe the Know Your Client rule and what it means for options-licensed IAs.
The Know Your Client rule states that a diligent and business-like effort must be made to learn the essential
and current financial and personal circumstances and investment objectives of each client. The rule requires an
IA to determine the suitability of each and every order he/she enters, whether it is solicited or not.
Explain what frontrunning is and list the standard(s) of practice it conflicts with.
Frontrunning is the activity of trading ahead of client orders which can reasonably be expected to impact
the market price of the security. Frontrunning violates a number of standards, including: Standard B
(Trustworthiness, Honesty and Fairness), Standard C (Professionalism), Standard D (Conduct in Accordance
with Securities Acts and SROs), and Standard E (Confidentiality)
List and explain three manipulative trading practices that IAs are restricted from engaging in.
Manipulative trading practices include:
* making a fictitious trade in an option account
* entering orders with the knowledge that an opposite order(s) of the same size and price will be entered in
order to create a false or misleading appearance of active trading
* entering buy orders (sell orders) at successively higher prices (lower prices) in order to create a false or
misleading appearance of trading for the purpose of improperly influencing prices
* pre-arranged trading, that is, agreeing in advance to make a certain trade at a certain price
* trading on non-public information concerning imminent transactions
* frontrunning
List four different types of statements that a CIRO member firm or approved participant of the Bourse are to
avoid in their advertising and sales literature.
IAs must avoid using any advertising or sales literature that:
* contains any untrue statement or omission of a material fact that is required to be stated or that is necessary
to make a statement not misleading in light of the circumstances in which it was made
* contains an unjustified promise of specific results
* uses unrepresentative or misleading statistics to suggest unwarranted or exaggerated conclusions
* contains any opinion or forecast of future events that is not clearly labelled as such
* fails to present fairly the potential risks to the client
* is detrimental to the interest of the public, CIRO or its members, or the Bourse and its approved participants
