Chapter 3 - The Canadian Regulatory Environment Flashcards

1
Q

What are the Regulatory Organizations

A

The Office of the Superintendent of Financial Institutions (OSFI)
Canadian Deposit Insurance Corporation (CDIC)

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2
Q

what does the OSFI do?

A

Regulates and supervises banks, insurance, trust and loan companies, pension plans

It does not supervise the Canadian securities industry – this is done provincially

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3
Q

what does the CDIC do?

A

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

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4
Q

Why would the Canadian government wish to insure bank deposits but not stocks / shares in Canadian companies?

A

They want confidence and a solid Canadian Banking system

They want to insure bank deposits

Have trust in banking system

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5
Q

Provincial Regulators

A

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

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6
Q

What is a Self-Regulatory Organization

A

An organization owned by its members that regulate and police themselves

Ex: TSX, MFDA, IIROC

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7
Q

What is IIROC

A

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

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8
Q

What is Capital Adequacy

A

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

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9
Q

Why Is IIROC important

A

The great recession and the financial crisis

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10
Q

what is the great recession / financial crisis

A

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

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11
Q

What is Mutual Funds Dealers Association (MFDA)

A

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

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12
Q

What is the Canadian Investor Protection Fund (CIPF)

A

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

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13
Q

Regulation and Investor Protection

A

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

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14
Q

What are the 3 basic methods used to protect investors

A

Registration of securities dealers and advisors;

Disclosure of material facts

Enforcement of the laws and policies

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15
Q

Investment Advisors

A

= 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

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16
Q

what is Fiduciary Obligation

A

fiduciary obligation - Work in the best interest of their client

17
Q

what are the requirements for Investment Advisors

A

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

18
Q

who regulates Investment Advisors

A

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

19
Q

what are the 4 main areas of member regulation

A

Financial compliance

Sales compliance

Registration

Enforcement

20
Q

what are the 3 areas of market regulation

A

Market surveillance (tracking whether there is insider trading)

Investigation enforcement; and regulatory / market policy

Where all transactions converge in one location

21
Q

Ethics of trading

A

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

22
Q

what are some examples of unethical trading

A

Deceiving the public (lying)

Misleading a board of directors

Assuring no risk

Violating statutes

23
Q

what are companies required to disclose?

A

Annual and quarterly financial statements

Insider trading reports

Information circulars

Annual information forms

Press releases

Material change reports

24
Q

Insider Trading Reporting

A

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