unit 3 | the canadian regulatory environment Flashcards
The Office of the Superintendent of Financial Institutions (OSFI)
- Regulates & supervises banks, insurance, trust & loan companies, pension plans
- Does not supervise the Canadian securities industry → done provincially
Canadian Deposit Insurance Corporation (CDIC)
- Federal Crown corporation
- Insures deposits up to $100k per depositor in each financial institution (for each “account” → bank account, mortgage, etc.)
- Not for mutual funds, stocks, bonds
How is the Canadian securities industry regulated?
Provincially
How was the Canadian securities industry formed and why?
The Canadian Securities Association was formed by all 13 securities commissions to provide a national umbrella group to co-ordinate provincial activities
What is going on with the attempt to set up a national securities commission?
Been resisted by some provincial commissions
Self-Regulatory Organizations (SROs)
An organization owned by its members that regulate & police themselves
Examples of SROs
- TSX, Mutual Funds Dealers Association (MFDA)
- Investment Industry Regulatory Organization of Canada (IIROC)
Main purpose of IIROC
- Oversees all investment dealer & trading activity in the Canadian debt & equity markets
- Monitor member firms for capital adequacy & business conduct (the amount of money (capital) that firms must set aside when holding bank deposits/making loans/raising capital for corporations)
- An extremely important part of a properly functioning Canadian capital environment
What does IIROC do as the securities industry regulator?
- Formulates standards & policies for Canadian debt & equity markets
- Monitor sales & trading activities of member firms
- Monitors illegal trading activities amongst investors
- Ensures integrity of the market place & protection of investors
What did IIROC do during the Great Recession / Financial Crisis
- Canadian financial institutions were not nearly as affected as US/EU
- More stringent regulation was partly a reason
> Greater scrutiny of financial institutions regulators to ensure that a similar crisis to be avoided in the future
Mutual Fund Dealers Association (MFDA)
- Created in 1997 as a result of growth & need for regulation in mutual fund industry
- Goal → establish a fund similar to Canadian Investor Protection Fund (CIPF) to protect mutual fund investors up to $100k per account
- Funded by MFDA member firms
Canadian Investor Protection Fund (CIPF)
- Protects investors from losses due to bankruptcy of its member firms (most investment dealers & stock exchanges)
- Role → to anticipate & solve financial difficulties at member firms before bankruptcy occurs
- Provides coverage of up to $1 million related to losses from security holdings & cash balances
- No losses are covered as a result of change of market values
Why are securities regulations created and by whom?
- Legislation & regulation is designed to protect investors & promote ethical standards
- Provincial securities regulators establish these regulations
What is the fundamental principle of many securities regulations?
The fundamental principle of many regulations is to ensure that full, true, & plain disclosure of all material facts relating to the securities offered is provided to investors
3 basic methods used to protect investors:
- Registration of securities dealers & advisors
- Disclosure of material facts
- Enforcement of laws & policies
Who are the people that must be registered?
Sellers of securities (usually investment dealers) & investment advisors (IAs)
IA requirements
- New IAs must pass the Canadian Securities Course (CSC) & the Conduct & Practices Handbook for Securities Industry Professionals (CPH)
- IAs must also:
> Complete a 90 day training course
> Be subjected to 6 months of supervision
> Complete the CSI’s (Canadian Securities Institute) > Wealth Management Essentials course within 30 months of becoming an IA
What obligation does IAs & member firms have towards clients?
IAs & member firms have a fiduciary obligation to their clients
- Must operate in the best interests of their clients & not self-interest (ex. Sell a mutual fund to a client that gives big fee to an IA but is not suitable to that client)
IAs & member firm duties
- Not reveal confidential information
- Avoid conflict of interests
- Ensure all representations to clients are made honestly & in good faith
- Follow client instructions
What happens if an IA fails in any of their duties? (breach of fiduciary duty)
- May be disciplined
- SROs for the member firms/IAs dishes out the discipline
> TSX & other exchanges
> IIROC
> MFDA
4 main areas of member/IA regulation
- Financial compliance
- Sales compliance
- Registration
- Enforcement
3 areas of market regulation
- Market surveillance (tracking insider trading)
- Investigation enforcement; & regulatory/market policy
- Where all transactions converge in one location
How does IIROC provide investor protection?
IIROC provide investor protection by administering & enforcing a common set of trading rules (the Universal Market Integrity Rules) across all markets in Canada
Is ethical trading critical to the proper functioning of capital markets?
Yes
