Chapter 3: The Canadian Regulatory Environment

Question 1

The Office of the Superintendent of Financial Institutions (OSFI)

Answer 1

• Regulates and supervises banks, insurance, trust and loan companies, pension plans
• It does not supervise the Canadian securities industry – this is done provincially

Question 2

Canadian Deposit Insurance Corporation (CDIC)

Answer 2

• Federal Crown corporation
• 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

Question 3

What is an SRO (Self-Regulatory Organization)?

Answer 3

An organization owned by its members that regulate and police themselves
Examples: TSX, MFDA, IIROC

Question 4

IIROC

Answer 4

oversees all investment dealer and trading activity in the Canadian debt and equity markets

• Serves as the securities industry regulator
• Formulates standards and policies for Canadian debt and equity markets
• Monitors sales and trading activities of member firms

Question 5

What is capital adequacy?

Answer 5

• It is the amount of money (capital) that firms must set aside when holding bank 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

Question 6

Goal of MFDA

Answer 6

establish a fund similar to Canadian Investor Protection Fund (CIPF) to protect mutual fund investors up to $100k per account

Question 7

Canadian Investor Protection Fund (CIPF)

Answer 7

• 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 of market values

Question 8

3 basic methods are used to protect investors:

Answer 8

• Registration of securities dealers and advisors;
• Disclosure of material facts; and
• Enforcement of the laws and policies

Question 9

Member firms / IAs must…

Answer 9

• Not reveal confidential information
• Avoid conflicts of interests
• Ensure that all representations to clients are made honestly and in good faith (i.e. Tell the truth)
• Follow client instructions

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

Question 10

Who dishes out the discipline?

Answer 10

The SROs for the member firms / IAs.

• The TSX and other exchanges
• IIROC
• MFDA

Question 11

Four main areas of member / IA regulation:

Answer 11

• Financial compliance
• Sales compliance
• Registration
• Enforcement

Question 12

3 areas of market regulation

Answer 12

• Market surveillance (tracking whether there is insider trading);
• Investigation enforcement; and regulatory / market policy
• Where all transactions converge in one location

Question 13

Companies are required to disclose…

Answer 13

• Annual and quarterly financial statements
• Insider trading reports
• Information circulars
• Annual information forms
• Press releases
• Material change reports

Question 14

Insiders are defined as…

Answer 14

• Directors or senior 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