Unit 1 - Regulation Flashcards
Who is governed by and what are the two types of Privacy Law?
Privacy Act: for gov of canada, cities, crown corps like CBC and CMHC and gov institutions.
PIPEDA: Corps like banks and other financial institutions, partnerships, trusts.
What is FINTRAC?
Set of regulations regarding financial tracking of money laundering operations.
Rules: Report cash trans of 10k or more within 24hr., Collect ID on account open/transaction. Report suspicious activity. If 3rd person is opening the account, collect ID from third person and letter from the account holder.
What is a politically exposed Individual?
Reported to FINTRAC is someone has significant power within another country - leader, judge, head of military, etc.
What is the regulation structure for investments?
Federal Level: CSA - Canadian Securities Commission.
Provincial Level: Provincial Securities commission/Territorial
Self Reg: SRO which includes reps form the distribution side of the investment industry. MFDA - regulates dealers and the advisors in the industry. The IIROC is responsible for regulating dealers and brokers in the investment industry.
What are the details of NI 81-101 Prospectus Disclosure?
Prospectus: Legal document detailing an investment. Must be written before being offered to the public and must be approved.
What are the 3 parts of a mutual fund prospectus?
Simplified Prospectus
Annual Information form - must be delivered to the client on request.
Financial Statements: must be delivered on request.
What is a simplified prospectus?
One of the 3 parts of a MF prospectus.
Part A: Fees, Commissions and other charges, General risks of investing in MF, The mgmt structure of the mutual fund - the company, manager, fund custodians, transfer agent, dealer.
Part B: The organizational structure - corp/trust, special risks of the fund, investment objectives and starts of individual fund.
Must be provided within 2 days of sale. Client has 2 days to pull funds. If not delivered, up to 180 days.
What is an Annual Information Form, Financial Statements and Management Reports of Fund Performance?
Investment Restrictions
Fund Governance - Structure of the Independent Review Committee - oversees the conflicts of interest of the fund managers.
Renumeration of IRC - how that committee is paid.
Financial Statements: Statements of changes in net assets and related notes.
Management Reports: Annual and interim reports of the fund performance including data on MER and past performance.
What are some of the other disclosure documents?
Quarterly portfolio disclosures which describes the investments in the fund, Annual proxy voting record, Material change report - also known as continuous disclosure.
What is the national exemption rule?
Some investments do not need a prospectus. Much more dangerous due to lack of liquidity, disclosure, type - futures, commodities, options, lack of protection.
Only sold by accredited investor, higher then 10k only, Investor is investing more than 150k min.
What is the definition of an Accredited Investor?
Individuals: financial assets over 1m, total assets above 5m, net income over 200k or with spouse over 300k.
Institutions: Canadian financial instuations and Schedule II banks, registered advisors and dealers, registered charities, corps, limited partnerships, trusts and estates over 5m, entities of Accredited Investors.
Funds: Public and private investment funds, Pension funds purchasing as principals.
What is the details of NI 81-102 Mutual Funds?
Deals with the structure. Investments in a single company must not exceed 10% of the shares of a company. No more than 10% of assets in one company.
Deals with Sales Communications: Advertisement of Mutual Funds - newspaper, corporate. Not Gov programs, corp fund managers, business cards.
MUST include: returns aren’t guaranteed, past performance does not reflect future, fees and commissions may apply, info is found in the prospectus and how to get that prospectus.
What are the rules of Performance Data in Sales Communication?
Date of performance data must be quoted, can’t be older than 45 days. For Money market, 7 day yield and effective yield are needed. If not Money Market then use 1,3,5,10 year rates of return. Less than 1 year is not reported.
What are the details of NI 81-103 Registration Requirements and Referal Arrangements?
A referral is anytime a referral fee is paid.
- Must be an agreement between the firm, rep and person making referral - presented to client.
- Must be recorded
- Must get disclosure forms before account is opened.
What is Prescribed Disclosure Document?
Includes: Names of parties, purpose of referral and duties to be preformed, conflicts of interest, calculation of referral fee, type of registration of each party, activities to be preformed, and activities excluded from performance.
What is Registration in terms of mutual funds?
You must be registered the followed: Where you practice, where your clients live, passport system - if you register at home, recognized by other provinces except ON. Registration does not have to be renewed unless you are suspended or termination, must be paid for annually.
What is NI 81-104 Commodity Pools?
Specialized mutual funds that require a special license for selling. Sold under a full prospectus, bus may invest in commodities. Only Accredited investors can invest in commodity pools.
What are the details of NI 81-105 Sales Practices?
Describes how you are allowed to interact with your clients during the sales process. Describes what kind of client freebies are ok and not ok.
What are the details of NI 81-106 Continuous Disclosure?
When a structure is changed, must be reported online. Management reports, quarterly portfolio disclosures and Material change report are all included.
What are the details of NI 81-107 Independent Review Committee?
IRC and its functions overseeing fund mgmt conflict of interests. Issue annual report which also includes information about the conflict within the IRC.
What is the Six Step Investment Planning Process?
- Establish Engagement
- Establish Objectives, gather data.
- Clarify Present status, identify problems and opportunities
- Identify strategies and present plan.
- Implement Plan
- Monitor and update.
What are some considerations for knowing your client?
Age - for contract, horizon, risk tolerance.
Income and Net Worth, Occupation and pay type, objectives of investment - growth, income, safety of capital, tax benefits
Investment knowledge and experience.
Risk Tolerance - increased by long time, strong pension, comfort in investments, required growth.
What are the key benefits of investing in Mutual Funds?
Diversification, professional mgmt, liquidity - usually t+3, or t+1 for money market. Exception - real estate, evaluated every 3 months usually.
What is a closed end fund?
Fund company as a corporation would issue a set number of shares, sold directly from the fund company to investors. After, the company used the investment capital to purchase shares. Could sell shares or buy on secondary stock market based on NAVPS.
What is an open ended fund?
Trust structure. Investor chooses how much to invest, shares are manufactured based on NAVPS at the end of the day.
Shares are redeemed through the MF company only. Called the primary market.
What are the primary differences between open and closed ended funds?
How shares are traded: Bought from fund company, sold to fund company vs. bought and sold of the stock exchange.
Share Price: Based on NAVPS: Assets-Liabilities/Shares vs. Based on the bid/ask of the stock exchange.
What are the two types of buying?
Lump Sum purchases: not good usually, but sometimes good opp.
Dollar cost averaging: Same amount of money, invested int he same time period in the same investment. Cheaper average cost of ownership this way.
What are the selling methods?
Lump sum withdrawal - timing the market, usually dangerous.
Systematic Withdrawal Plans: Danger is always the depletion of capital.
Ratio Withdrawal: certain percentage of shares redeemed on a regular basis.
Fixed Dollar: same amount withdrawn on a regular basis.
Fixed Period: If the fund is designed to be depleted after a certain period of time. Can also be used for life expectancy.
What are the different loads?
Front - end - paid at the start. Commission increases the cost per share - Called the adjusted cost base. NAVPS/1-Com
Back-end/DSC- A decreasing % over time. Can be based on purchase price, or redemption value of the fund. DSC is deducted before value is paid
out.
Also other fees: Trailers to encourage constant service, Short term - account and trading fees.
What are the different Fund Series?
A Series: Advisor funds, sold with a front or back end com. For Investors that make small changes in their funds.
F Series: Fee based funds, sold with no com, but annual fee as a percentage of total fund value - for people that make a lot of changes and don’t need advice.
I Series: For large institutional investors.
T Series: Similar to Ratio withdrawal. T6 means 6%
How are mutual funds taxed?
Taxed on a capital gain or loss calculated by FMV - ACB.
