Chapter 3 | Regulatory Environment Flashcards
TRUE OR FALSE?
In Canada, each province and territory is responsible for creating the legislation and regulation under which a business in the securities industry must operate.
ANSWER: TRUE
Provinces delegate the day to day regulation of the securities industry to _ _ _ _ _ _ _
ANSWER: . . . the securities commission in that province
The _ _ _ _ _ _ _ _ _ is an umbrella organization of Canada’s ten provincial and three territorial securities regulators designed to improve, coordinate and harmonize regulation of the Canadian capital markets.
ANSWER: The Canadian Securities Administrators (CSA) is an umbrella organization of Canada’s ten provincial and three territorial securities regulators designed to improve, coordinate and harmonize regulation of the Canadian capital markets.
Self-regulatory organizations (SRO) are private industry organizations to which the provincial regulatory bodies have granted the privilege of regulating their own members. SROs enforce their members’ conformity with securities legislation. They have the power to prescribe their own rules of conduct and financial requirements.
ANSWER:
Self-regulatory organizations (SRO) are private industry organizations to which the provincial regulatory bodies have granted the privilege of regulating their own members. SROs enforce their members’ conformity with securities legislation. They have the power to prescribe their own rules of conduct and financial requirements.
NOTE ONLY
SROs are delegated regulatory functions by the provincial regulatory bodies. SRO by-laws and rules are designed to uphold the principles of securities legislation.
The Canadian Securities Administrators (CSA) monitors the conduct of the SROs and review 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.
NOTE ONLY
SROs are delegated regulatory functions by the provincial regulatory bodies. SRO by-laws and rules are designed to uphold the principles of securities legislation.
The Canadian Securities Administrators (CSA) monitors the conduct of the SROs and review 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.
Canadian SROs include:
/ LIST 2 /
ANSWER:
Canadian SROs include the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA).
What is the mandate of the Investment Industry Regulatory Organization of Canada (IIROC)?
ANSWER:
IIROC’S mandate is “to set high quality regulatory and investment industry standards, protect investors, and strengthen market integrity while maintaining efficient and competitive capital markets”.
NOTE ONLY:
In its role as regulator, IIROC performs the following functions:
FINANCIAL COMPLIANCE: Dealer members are monitored to ensure that they have enough capital to carry out their operations.
NOTE ONLY:
In its role as regulator, IIROC performs the following functions:
FINANCIAL COMPLIANCE: Dealer members are monitored to ensure that they have enough capital to carry out their operations.
NOTE ONLY:
In its role as regulator, IIROC performs the following functions:
BUSINESS CONDUCT COMPLIANCE: Dealer members are monitored to ensure that policies and conduct procedures are in place to properly supervise the handling of their client accounts.
NOTE ONLY:
In its role as regulator, IIROC performs the following functions:
BUSINESS CONDUCT COMPLIANCE: Dealer members are monitored to ensure that policies and conduct procedures are in place to properly supervise the handling of their client accounts.
NOTE ONLY:
In its role as regulator, IIROC performs the following functions:
ENFORCEMENT: IIROC enforces rules and regulations that cover the sales, business, financial practices, and trading activities of
individuals and firms under IIROC’s jurisdiction.
NOTE ONLY:
In its role as regulator, IIROC performs the following functions:
ENFORCEMENT: IIROC enforces rules and regulations that cover the sales, business, financial practices, and trading activities of
individuals and firms under IIROC’s jurisdiction.
The _ _ _ _ _ _ _ is the mutual fund industry’s SRO responsible for regulating the DISTRIBUTION and SALES of mutual funds by its members in Canada.
ANSWER:
THE MUTUAL FUND DEALERS ASSOCIATION (MFDA)
TRUE OR FALSE?
The MFDA (THE MUTUAL FUND DEALERS ASSOCIATION) does not regulate the mutual funds themselves; this responsibility remains with the provincial securities administrators.
ANSWER: TRUE
This organization is responsible for regulating and supervising the following federally registered institutions:
• Deposit-taking institutions including banks, trust and loan companies
• Insurance companies, including life insurance companies and property and casualty insurance companies
• Federally-regulated pension plans
ANSWER:
THE OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS
What is the primary role of the CIPF (Canadian Investor Protection Fund)? What is the secondary role of the CIPF?
ANSWER:
The primary role of the CIPF is investor protection; its secondary role is overseeing the self-regulatory system.
The secondary role provides a mechanism to help CIPF contain the risk associated with its primary role.
TRUE OR FALSE?
The CIPF does not cover client losses that result from changing market values, nor does it insure accounts held at mutual fund companies, banks, or any other firms that are not members of IIROC.
ANSWER: TRUE
NOTE ONLY:
The CIPF is sponsored solely by IIROC and funded by quarterly assessments on IIROC dealer members.
NOTE ONLY:
The CIPF is sponsored solely by IIROC and funded by quarterly assessments on IIROC dealer members.
What are the CIPF coverage limits?
ANSWER:
CIPF COVERAGE LIMITS:
$1 million for all general accounts combined (such as cash accounts, margin accounts and TFSAs), plus
$1 million for all registered retirement accounts combined (such as RRSPs, RRIFs and LIFs), plus
$1 million for all registered education savings plans (RESPs) combined where the client is the subscriber of the plan.
The _ _ _ _ _ _ _ is a federal Crown Corporation that provides deposit insurance and contributes to the stability of Canada’s financial system.
This organization insures eligible deposits up to $100,000 per depositor in each member institution (banks, trust companies, and loan companies), and reimburses depositors for the amount of any insured deposits if a member institution fails.
ANSWER:
The Canada Deposit Insurance Corporation (CDIC) is a federal Crown Corporation that provides deposit insurance and contributes to the stability of Canada’s financial system.
CDIC insures eligible deposits up to $100,000 per depositor in each member institution (banks, trust companies, and loan companies), and reimburses depositors for the amount of any insured deposits if a member institution fails.
NOTE ONLY:
In Canada, the provincial securities commissions and SROs 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.
NOTE ONLY:
In Canada, the provincial securities commissions and SROs 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.
Rules are not always consistent among regulators and provincial SROs or across provincial jurisdictions.
What happens when two or more rules conflict with each other?
Rules are not always consistent among regulators and provincial SROs or across provincial jurisdictions. A basic principle of regulation is that when two or more regulations conflict, THE STRICTEST STANDARD APPLIES.
TRUE OR FALSE?
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
ANSWER: TRUE
The general principle underlying Canadian securities legislation is ______, ______ AND ______ ________ 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.
ANSWER
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.
The securities acts use three methods to protect investors:
ANSWER:
Registration of securities dealers and advisors
Disclosure of facts necessary to make reasoned investment decisions
Enforcement of the laws and policies
The _ _ _ _ _ _ _ _ _ is a web-based system used by investment dealers and employees to file registration forms electronically when applying for approval by a stock exchange, the CSA, or IIROC.
ANSWER:
The National Registration Database (NRD) is a web-based system used by investment dealers and employees to file registration forms electronically when applying for approval by a stock exchange, the CSA, or IIROC.
The regulators have four primary objectives in imposing regulation:
[LIST 4]
Consumer Protection
Fairness
Economic Stability
Social Objectives
The Canadian securities industry follows a _________ regulatory model, rather than a rules-based model.
ANSWER:
The Canadian securities industry follows a PRINCIPLES BASED regulatory model, rather than a rules-based model.
EXPLAIN PRINCIPLES-BASED APPROACH TO REGULATORY COMPLIANCE?
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.
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.
Disclosure is normally made in a ________
issued by the company and accepted for filing by the administrator concerned.
ANSWER:
Disclosure is normally made in a PROSPECTUS
issued by the company and accepted for filing by the administrator concerned.
All material conflict situations between advisors and their clients, and between the firm and its clients, must be addressed through one of the following three means:
ANSWER:
Avoiding the conflict
Disclosing the conflict
Controlling the conflict
The ________ 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.
ANSWER:
GATEKEEPER
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:
ANSWER:
• 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.
The CRM guidelines require that the suitability of an investment decision be conducted whenever any of the following trigger events occur:
[LIST 3]
ANSWER
• A trade is accepted.
• A recommendation is made.
• Securities are transferred or deposited to an account.
• There is a change of representative or portfolio manager responsible for the account.
• There is a material change to the KYC information for the account.
