OVERVIEW OF THE FINANCIAL INDUSTRY Flashcards
Financial Instruments
Financial instruments are either debt or equity and are referred to as securities
DEBT INSTRUMENT
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.
FINANCIAL MARKETS
Financial markets are the mediums or locations where financial instruments are traded.
FINANCIAL INTERMEDIARIES
Financial intermediaries in financial markets act as “go betweens” to facilitate the transfer of financial instruments (financial instruments are also called securities).
FINANCIAL INTERMEDIARIES INCLUDE
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.
SECURITIES DEALERS
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.
DEFINE BOUGHT DEAL
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.
SCHEDULE I BANKS
SCHEDULE II BANKS
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.
SCHEDULE III BANKS
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.
BENEFITS OF ALLOWING FOREIGN BANKS
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.
2 OWNERSHIP STRUCTURES OF LIFE COs
Life insurance companies can be owned by policyholders (mutual life insurance companies) or by shareholders (joint stock companies).
DEMUTUALIZATION
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.
FEDERAL LEGISLATION GOVERNING INSURANCE COMPANIES
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.
INVESTMENT RULE THAT GOVERNS INSURANCE COMPANIES
The investment rule which governs insurance companies is called the prudent portfolio approach — previously the legal for life rule.
INSURANCE ACT RESTRICTS _ _ _
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.
REINSURANCE
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.
ASSURIS
In the event of insolvency of a member life insurance company, Assuris guarantees clients minimum protection and continued coverage
ASSURIS - LIFE INS DEATH BENEFIT
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.
ASSURIS - CASH SURRENDER VALUE
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
ASSURIS - NON-REG
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.
ASSURIS - SEG FUNDS
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].
MUTUAL FUNDS
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.
OPEN END FUNDS
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).
CLOSED END FUNDS
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.
OSFI
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.
ACCOUNTS INSURED BY CDIC
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.
CDIC REQUIREMENTS
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.
CDIC LIMITS
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
CDIC LIMIT EXAMPLE
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].
SECURITIES REGULATION
JURISDICTION
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
SECURITIES COMMISSION
DEFINITION & DUTIES
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.
OBJECTIVES OF SECURITIES ACT
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.
CANADIAN SECURITIES ADMINISTRATORS
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.
NOTES
NATIONAL INSTRUMENTS
NATIONAL POLICIES
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).
NOTE ONLY
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.
MAJOR PURPOSE OF SECURITIES ACTS
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.
POWERS OF SECURITIES ADMINSTRATORS
Registration, Disclosure and Investigation and Prosecution.
REGISTRATION
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.
DEALER
Person or company who trades in securities in the capacity of PRINCIPAL OR AGENT
ADVISOR
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
INVESTMENT FUND MANAGER
Persons or companies who manage investment funds, which include pooled funds.
Application for registration are made through the _ _ _ _ _ _ _
NATIONAL REGISTRATION DATABASE (NRD DATABASE)
NRD is owned by _ _ _ _
CANADIAN SECURITIES ADMINISTRATORS
List 4 disclosure documents
- Prospectus
- Trading reports
- Corporate financial reports
- Takeover bid documents
Dual Registration
This is where the registrant may deal in securities and insurance and therefore holds two registrations
CONTINOUS AND TIMELY DISCLOSURE
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.
ISSUER DISCLOSURE SYSTEM
Issuers use a system called SEDAR to make required disclosures.
SEDAR
SEDAR = System for Electronic Document Analysis and Retrival
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: True
All provinces, except PEI, require that any registrant must promptly require that any registrant must confirm to clients the following (list 6)
- 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.
Securities administrators require any company offering securities to the public must first obtain . . . .
. . . approval of prospectuses that provide full, true and plain disclosure about the issue and the issuer.
Filed on an initial public offering
- preliminary prospectus (red herring)
- final prospectus
Preliminary Prospectus
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.
Under the ___________ system an issuer can send required documents to their principal regulator only, and receive approval by the regulators (except Ontario)
Passport System
Effective May 2016 investment dealers are required to deliver ________ .
ANSWER: Fund Facts document
The investor by receiving the Fund Facts documents has the statutory rights of:
- withdrawal - within 2 business days of receipt or deemed receipt of the Fund Facts document
- recission
- action for damages
The fund facts document is divided into two major headings . . .
- first section deals with information about the fund
- second section deals with information about costs, rights and other
Final Prospectus
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.”
