OVERVIEW OF THE FINANCIAL INDUSTRY

Question 1

Financial Instruments

Answer 1

Financial instruments are either debt or equity and are referred to as securities

Question 2

DEBT INSTRUMENT

Answer 2

A debt instrument represents a legal obligation of the issuer to pay back the investor the principal amount at the maturity date, along with a specified amount of interest or return.

Question 3

FINANCIAL MARKETS

Answer 3

Financial markets are the mediums or locations where financial instruments are traded.

Question 4

FINANCIAL INTERMEDIARIES

Answer 4

Financial intermediaries in financial markets act as “go betweens” to facilitate the transfer of financial instruments (financial instruments are also called securities).

Question 5

FINANCIAL INTERMEDIARIES INCLUDE

Answer 5

Financial intermediaries include securities dealers, banks, trust companies, insurance companies, credit unions, caisses populaires, mutual fund companies, pension funds, finance and loan companies, and more.

Question 6

SECURITIES DEALERS

Answer 6

Securities dealers, also called dealer members, are intermediaries.

Securities dealers assist clients to buy or sell securities through exchanges or over the counter.

Securities dealers may also buy new issues of securities from governments or corporations (bought deals) which they resell to their clients.

Question 7

DEFINE BOUGHT DEAL

Answer 7

A bought deal is one form of financial arrangement often associated with an Initial Public Offering.

It occurs when an underwriter, such as an investment bank or a syndicate, purchases securities from an issuer before a preliminary prospectus is filed.

Question 8

SCHEDULE I BANKS

Question 9

SCHEDULE II BANKS

Answer 9

Schedule II banks are incorporated and operate in Canada as federally regulated foreign bank subsidiaries. These banks may accept deposits, which may be eligible for deposit insurance provided by the Canada Deposit Insurance Corporation (CDIC).

Examples of Schedule II banks in Canada include the AMEX Bank of Canada, Citibank Canada, and BNP Paribas. Schedule II banks have been able to open branches in Canada with restricted deposit taking since 1999.

Question 10

SCHEDULE III BANKS

Answer 10

Schedule III banks are federally regulated foreign bank branches of foreign institutions that have been authorized under the Bank Act to do banking business in Canada. Examples of Schedule III banks in Canada include HSBC Bank USA, Comerica Bank and the Bank of New York Mellon.

A Schedule II bank may engage in all types of business permitted to a Schedule I bank. In practice, most derive their greatest share of revenue from retail banking and electronic financial services. Schedule III banks, in contrast, tend to focus on corporate and institutional finance and investment banking.

Question 11

BENEFITS OF ALLOWING FOREIGN BANKS

Answer 11

By allowing foreign banks to operate in Canada, the government has facilitated the expansion in the operations of Canadian-owned Schedule I banks abroad. The presence of foreign-owned banks in Canada also provides a conduit for investment of foreign capital in Canada as well as providing Canadian corporate borrowers with alternative sources of borrowed funds.

Question 12

2 OWNERSHIP STRUCTURES OF LIFE COs

Answer 12

Life insurance companies can be owned by policyholders (mutual life insurance companies) or by shareholders (joint stock companies).

Question 13

DEMUTUALIZATION

Answer 13

In Canada we have experienced demutualization, where most mutual life insurance companies have changed into joint stock companies. Demutualization allows insurance companies to have easier access to capital and to compete with other financial institutions that are now competing in the insurance industry (namely banks) and to compete in growing areas of business like securities.

Question 14

FEDERAL LEGISLATION GOVERNING INSURANCE COMPANIES

Answer 14

The federal legislation governing insurance companies is the Insurance Companies Act, adopted in 1992. The legislation permits life insurance companies to own trust and loan companies, and to enter new financial businesses through subsidiaries.

Question 15

INVESTMENT RULE THAT GOVERNS INSURANCE COMPANIES

Answer 15

The investment rule which governs insurance companies is called the prudent portfolio approach — previously the legal for life rule.

Question 16

INSURANCE ACT RESTRICTS _ _ _

Answer 16

The Insurance Act restricts investment exposure and investment selection.

For insurance companies exposure to real estate and equity investments are limited. The long-term nature of life insurance policies necessitates investments that are long term in duration.

Life insurance companies are active in the mortgage market and long term bond market.

Question 17

REINSURANCE

Answer 17

Reinsurance is where one insurance company sells a policy it has underwritten to another insurance company which in turn assumes the liability for all or part of the policy.

Question 18

ASSURIS

Answer 18

In the event of insolvency of a member life insurance company, Assuris guarantees clients minimum protection and continued coverage

Question 19

ASSURIS - LIFE INS DEATH BENEFIT

Answer 19

Life Insurance Death Benefit:

On the first $200,000 of life insurance death benefits, the coverage is the lesser of $200,000 or the amount of the coverage.

For example, if the face amount of the death benefit is $50,000, the coverage is $50,000.

If the death benefit is greater than $200,000, the protection greater of $200,000 or 85% of the promised benefit.

Question 20

ASSURIS - CASH SURRENDER VALUE

Answer 20

Cash Surrender Value:

On the first $60,000 cash value of a life insurance policy, the coverage is the lesser of $60,000 or the cash value of the policy.

For example, if the cash value is $25,000, the cash value covered is $25,000.

If the cash value is greater than $60,000, the coverage is the greater of $60,000 or 85% of the cash value. For example, if the cash value is $100,000, the Assuris coverage is $85,000

Question 21

ASSURIS - NON-REG

Answer 21

Non-Registered Accumulation Plans:

For non-registered accumulation plans, the coverage is the value of the plan up to a maximum of $100,000. For example, if the plan is worth $20,000, the coverage is $20,000. If the plan is worth $300,000, the coverage is $100,000.

Question 22

ASSURIS - SEG FUNDS

Answer 22

For segregated funds, where the guarantee (promised benefit) is $60,000 or less, the insurance coverage is the value of the guarantee (promised benefit) up to a maximum $60,000.

For example, if a segregated fund was purchased for $50,000 and the guarantee is 75% of the original investment, then the guarantee (promised benefit) is $37,500 [$50,000 x 0.75].

The Assuris guarantee would be for $37,500.

If the guarantee (promised benefit) is greater than $60,000, the insurance coverage is the greater of $60,000 or 85% of the guarantee (promised benefit).

If the segregated fund was purchased for $400,000 and if the guarantee (promised benefit) is $300,000 [$400,000 x 75%], the Assuris coverage in case of insolvency is $255,000

[$300,000 x 0.85].

Question 23

MUTUAL FUNDS

Answer 23

Mutual funds are an example of an investment fund.

The money raised by selling units or shares in an investment fund is pooled and invested in a portfolio of securities.

The two types of investment funds are: open-end funds and closed-end funds. Whether open-ended or closed-ended, both fund types benefit from professional management and can invest in a wide variety of securities including, bonds, stocks, etc.

Question 24

OPEN END FUNDS

Answer 24

Open-end funds including mutual funds continuously issue and redeem units or shares on demand directly through the fund itself.

Mutual funds account for the majority of investment fund assets. Investors who choose to purchase or redeem mutual fund units or shares, pay or receive the net book value (break-up value) of what the shares are worth as of the valuation date.

This is called the net asset value per share (NAVPS).

Question 25

CLOSED END FUNDS

Answer 25

Closed-end funds receive money through an initial offering of shares.

The money is then invested in a pool of securities based on the investment objectives of the fund.

The shares then trade in a secondary market (i.e., on a stock exchange) between investors. The shares of a closed-end fund are marketable (saleable). The price of the shares is determined by supply and demand.

Question 26

OSFI

Answer 26

The Office of the Superintendent of Financial Institutions ( OSFI) is a regulatory body for all federally regulated financial institutions. OSFI is responsible for regulating and supervising:

over 150 deposit-taking institutions including banks, trust and loan companies, and cooperative credit associations

over 250 insurance companies, including life insurance companies, fraternal benefit societies and property and casualty insurance companies

over 20 foreign bank representative offices that are chartered, licensed or registered by the federal government

approximately 1,000 federally regulated pension plans.

OSFI does not regulate the Canadian securities industry.

Question 27

ACCOUNTS INSURED BY CDIC

Answer 27

Accounts and products insured by CDIC include:

Savings and chequing accounts

Guaranteed investment certificates (GICs) and other term deposits that mature in five years or less

Money orders, certified cheques, traveller’s cheques and bank drafts

Accounts that hold realty taxes on mortgaged properties.

Question 28

CDIC REQUIREMENTS

Answer 28

These accounts and products must be held at a CDIC member and in Canadian dollars to be eligible for deposit insurance. CDIC does not insure: mutual funds and stocks; GICs and other term deposits that mature in more than five years; bonds and treasury bills; debentures issued by governments, corporations, or chartered banks; and deposits held in a foreign currency.

Question 29

CDIC LIMITS

Answer 29

It is possible to have more than $100,000 in deposits eligible for CDIC coverage, provided the deposits are held in more than one of CDIC’s six deposit insurance categories. These categories include deposits held:

• in one name
• jointly in more than one name
• in a trust account
• in a registered retirement savings plan (RRSP)
• in a registered retirement income fund (RRIF)
• in a mortgage tax account

Question 30

CDIC LIMIT EXAMPLE

Answer 30

Example: Assume that Sandra has the following at ABC Ltd. bank, a Canadian bank, which declares bankruptcy: $90,000 cash on deposit in her own name and $140,000 on deposit in a registered retirement savings plan. CDIC would insure her deposits in the amount of $190,000 [$90,000 fully covered for the cash deposit in her own name and a maximum of $100,000 covered for her registered retirement savings plan].

Question 31

SECURITIES REGULATION
JURISDICTION

Answer 31

Securities regulation in Canada is a provincial and territorial matter. Each province and the three territories have their own Securities Act and securities administrator. In most provinces the securities administrator is a securities commission. For example, the Alberta Securities Commission is the securities administrator in Alberta

Question 32

SECURITIES COMMISSION
DEFINITION & DUTIES

Answer 32

A securities commission is a legal body which has wide sweeping powers. In particular, a securities commission sets conditions of registration pertaining to companies and individuals dealing in securities. Besides establishing initial registration requirements, the securities commission has the power to cancel, revoke or suspend a company’s or an individual’s registration for just cause.

Question 33

OBJECTIVES OF SECURITIES ACT

Answer 33

Each province and the territories has enacted its own Securities Act. The major objectives of these Acts’ are: to protect the investing public against fraud and unscrupulous practices; and to foster capital growth through fair and efficient capital markets.

Question 34

CANADIAN SECURITIES ADMINISTRATORS

Answer 34

Since securities laws are a provincial/territorial matter, variations in regulations towards specific areas may exist between jurisdictions. However in their attempt to provide consistency in securities laws across Canada, the provinces/territories set up the Canadian Securities Administrators (CSA). The CSA is a working cooperative which consists of representatives from the 13 securities administrators from across Canada. The purpose of the CSA is to promote harmony in securities laws and rules and regulations across Canada.

To meet this objective the provincial/territorial regulators have agreed to coordinate their activities where possible under National Instruments (which are legally binding) and National Policies (which are not legally enforceable). For example, National Instrument 81-102 pertains to mutual fund advertising and distribution across Canada.

Question 35

NOTES

NATIONAL INSTRUMENTS

NATIONAL POLICIES

Answer 35

To promote harmony the provincial/territorial regulators have agreed to coordinate their activities where possible under National Instruments (which are legally binding) and National Policies (which are not legally enforceable).

Question 36

NOTE ONLY

Answer 36

While there are various National Instruments and National Policies, different policies and regulations may exist between provinces/territories due to local attitudes, needs and experiences. Therefore, the provinces/territories have in the past enacted local policies which are referred to as Provincial

Policies.

Some policies have also been specifically adopted in the Western provinces and Ontario,

which are referred to as Uniform Policies. In addition if more than one jurisdiction (but not all) adopt an Instrument, this Instrument is legally enforceable and is called a Multi-Lateral Instrument.

Question 37

MAJOR PURPOSE OF SECURITIES ACTS

Answer 37

Provinces have enacted Securities Acts’ to regulate the underwriting, distribution and sale of securities to the public. The major purpose of the Securities Acts’ is to protect the investing public.

The general principle underlying Canadian securities legislation is full, true and plain disclosure of all material facts to the public; not the approval or disapproval of the investment merits of an issue of securities.

Question 38

POWERS OF SECURITIES ADMINSTRATORS

Answer 38

Registration, Disclosure and Investigation and Prosecution.

Question 39

REGISTRATION

Answer 39

The securities administrators register parties that sell securities to the public or advise the public on buying and selling securities. They may suspend, revoke or cancel registrations for just cause. Every firm which underwrites or sells securities must also be registered with the securities administrators.

Question 40

DEALER

Answer 40

Person or company who trades in securities in the capacity of PRINCIPAL OR AGENT

Question 41

ADVISOR

Answer 41

A person or company engaging in the business of advising others with repect to the investing in or buying or selling of securities. The specific registrations are that of a portfolio manager or restricted portfolio manager

Question 42

INVESTMENT FUND MANAGER

Answer 42

Persons or companies who manage investment funds, which include pooled funds.

Question 43

Application for registration are made through the _ _ _ _ _ _ _

Answer 43

NATIONAL REGISTRATION DATABASE (NRD DATABASE)

Question 44

NRD is owned by _ _ _ _

Answer 44

CANADIAN SECURITIES ADMINISTRATORS

Question 45

List 4 disclosure documents

Answer 45

1. Prospectus
2. Trading reports
3. Corporate financial reports
4. Takeover bid documents

Question 46

Dual Registration

Answer 46

This is where the registrant may deal in securities and insurance and therefore holds two registrations

Question 47

CONTINOUS AND TIMELY DISCLOSURE

Answer 47

After bringing out an inital public offering (IPO), the issuer must report its affairs on an ongoing basis to the securities commissions (continous disclosure). For example publicly traded compaines on the TSX must file annual audited financial statements no later than 90 calendar days from year end and unaudited quarterly statements no later than 45 calendar days from their quarter end.

Question 48

ISSUER DISCLOSURE SYSTEM

Answer 48

Issuers use a system called SEDAR to make required disclosures.

Question 49

SEDAR

Answer 49

SEDAR = System for Electronic Document Analysis and Retrival

Question 50

Disclosure Requirements

True of False? Securities Acts require that if a securities firm is acting as a principal in a transaction with their customers, this must be disclosed to customers.

Answer 50

ANSWER: True

Question 51

All provinces, except PEI, require that any registrant must promptly require that any registrant must confirm to clients the following (list 6)

Answer 51

• The security purchased or sold
• Quantity purchased of sold
• Price of the security
• Agent or principal transaction
• Commission
• Name of salesperson
• In Ontario if shares are restricted (as to voting rights) they must be desognated as such.

Question 52

Securities administrators require any company offering securities to the public must first obtain . . . .

Answer 52

. . . approval of prospectuses that provide full, true and plain disclosure about the issue and the issuer.

Question 53

Filed on an initial public offering

Answer 53

• preliminary prospectus (red herring)
• final prospectus

Question 54

Preliminary Prospectus

Answer 54

A preliminary prospectus is a first draft registration statement that a firm files prior to proceeding with an initial public offering (IPO) of their securities.

Question 56

Under the ___________ system an issuer can send required documents to their principal regulator only, and receive approval by the regulators (except Ontario)

Answer 56

Passport System

Question 57

Effective May 2016 investment dealers are required to deliver ________ .

Answer 57

ANSWER: Fund Facts document

Question 58

The investor by receiving the Fund Facts documents has the statutory rights of:

Answer 58

• withdrawal - within 2 business days of receipt or deemed receipt of the Fund Facts document
• recission
• action for damages

Question 59

The fund facts document is divided into two major headings . . .

Answer 59

• first section deals with information about the fund
• second section deals with information about costs, rights and other

Question 60

Final Prospectus

Answer 60

A final prospectus is the final version of a prospectus for a public offering of securities. This document is complete in all details concerning the offering and is referred to as a “statutory prospectus” or “offering circular.”