Chapter 3 - The Canadian Regulatory Environment Flashcards
What are the Regulatory Organizations
The Office of the Superintendent of Financial Institutions (OSFI)
Canadian Deposit Insurance Corporation (CDIC)
what does the OSFI do?
Regulates and supervises banks, insurance, trust and loan companies, pension plans
It does not supervise the Canadian securities industry – this is done provincially
what does the CDIC do?
Federal Crown corporations
Insures deposits up to $100k per depositor in each financial institution
You personally can be insured for a total greater amount than $100k – the insurance is for each “account” = bank account; mortgage etc.
However, this insurance is not for mutual funds, stocks, bonds
Why would the Canadian government wish to insure bank deposits but not stocks / shares in Canadian companies?
They want confidence and a solid Canadian Banking system
They want to insure bank deposits
Have trust in banking system
Provincial Regulators
The Canadian securities industry is regulated provincially
Each province has its own securities commission – in Ontario it is the Ontario Securities Commission (OSC)
Efforts have been made to attempt to set up a national securities commission
What is a Self-Regulatory Organization
An organization owned by its members that regulate and police themselves
Ex: TSX, MFDA, IIROC
What is IIROC
IIROC oversees all investment dealer and trading activity in the Canadian debt and equity markets
Monitor member firms for capital adequacy and business conduct
If you dare to commit illegal trading activity as an investor in Canada you are likely to hear from the IIROC
As such, IIROC tries to ensure the integrity of the marketplace and protection of investors
What is Capital Adequacy
It is the amount of money (capital) that firms must set aside when holding back deposits / making loans/ raising capital for corporations
If firms require less capital – their returns on this capital will be greater. However, the greater the risk to these firms and the overall financial system
Why Is IIROC important
The great recession and the financial crisis
what is the great recession / financial crisis
The financial crises brought much criticism upon financial institutions and the organizations that regulate them
Canadian financial institutions were not nearly as affected as US / European companies
More stringent regulation was partly a reason for this
Going forward; there will be much greater scrutiny of financial institutions / regulators to ensure that a similar crisis is avoided
What is Mutual Funds Dealers Association (MFDA)
Created in 1997 as a result of growth and need for regulation in mutual fund industry
Goal of MFDA – establish a fund similar to Canadian Investor Protection Fund (CIPF) to protect mutual fund investors up to $100k per account
Such a fund would be funded by MFDA member firms
What is the Canadian Investor Protection Fund (CIPF)
Protects investors from losses due to bankruptcy of its member firms (most investment dealers and stock exchanges)
Role is to anticipate and solve financial difficulties at member firms before bankruptcy occurs
Provides coverage of up to $1 million related to losses from security holdings and cash balances – if a member firm goes bankrupt
No losses are covered as a result of change market values
Regulation and Investor Protection
Legislation and regulation is designed to protect investors and promote ethical standards
Provincial securities regulators establish these regulations
In the US a national body, the Securities and exchange commission (SEC) does this
The fundamental principle of many regulations is to ensure that full, true and plain disclosure of all material facts relating to the securities offered is provided to investors
What are the 3 basic methods used to protect investors
Registration of securities dealers and advisors;
Disclosure of material facts
Enforcement of the laws and policies
Investment Advisors
= financial advisor = broker
Sellers of securities (usually investment dealers) and investment advisors (IAs) must be registered
New IAs must pass the Canadian Securities Course (CSC) and the Conduct and Practices Handbook for Securities Industry Professionals (CPH)
IAs must also
Complete a 90 day training course
be subject to 6 months of supervision
Complete the CSI’s (Canadian Securities Institute – not the TV show) Wealth Management Essentials course within 30 months of becoming IA
what is Fiduciary Obligation
fiduciary obligation - Work in the best interest of their client
what are the requirements for Investment Advisors
Member firms / IAs must:
Not reveal confidential information
Avoid conflicts of interests
Ensure that all representations to clients are made honestly and in good faith (ex. Tell the truth)
Follow client instructions
who regulates Investment Advisors
If an IA fails in any of the preceding it is a breach of fiduciary duty. Not only are they doing a lousy job, they could also be disciplined
Who dishes out the discipline? The SROs for the member firms / IAs
These include:
The TSX and other exchanges
IIROC
MFDA
what are the 4 main areas of member regulation
Financial compliance
Sales compliance
Registration
Enforcement
what are the 3 areas of market regulation
Market surveillance (tracking whether there is insider trading)
Investigation enforcement; and regulatory / market policy
Where all transactions converge in one location
Ethics of trading
Ethical trading is critical to the proper functioning of capital markets
If the game is rigged – who is going to want to play?
Unethical behavior can be punished by fines, suspensions, criminal charges
what are some examples of unethical trading
Deceiving the public (lying)
Misleading a board of directors
Assuring no risk
Violating statutes
what are companies required to disclose?
Annual and quarterly financial statements
Insider trading reports
Information circulars
Annual information forms
Press releases
Material change reports
Insider Trading Reporting
Insiders are defined as:
Directors or seniors officers (CEO / CFO)
A person or company controlling greater than 10% of the voting securities
a reporting issuer that has acquired any of its own securities (I.e. Buying back its own shares)
A director or senior officer of a company owning greater than 10% of the voting securities of a company
