Canadian Regulatory Framework

Canadian Regulatory Framework

• Provincial securities legislation dictates securities operations with self-regulatory organizations
• The chapter reviews basic principles of securities regulation.

Principles of Securities Regulation

• Securities legislation protects buyers and sellers via primary and secondary distribution regulation at the provincial level.
• Securities commissions administer the provincial laws, or an administrator/registrar if there is no commission.
• Regulators work together through the Canadian Securities Administrators (CSA) to harmonize capital market regulation.
• Securities regulators ensure financial market integrity and investor protection.
• CIRO protects investors, provides consistent regulation, and builds trust in financial regulation and people managing investments.
• Securities legislation and SRO rules/regulations are crafted to incorporate market integrity and investor protection values.
• Licensing dictates industry access conditions, and the regulator can revoke privileges.
• Key issues include insider trading, anti-money laundering, and cybersecurity can disrupt capital markets.
• Securities acts are based on disclosure of facts, registration of dealers/advisors, and enforcement of laws.
• Full, true, and plain disclosure is the underlying principle of Canadian securities regulation.
• Prospectus which includes material facts relating to the securities offered for sale must be delivered to purchaser
• Illegal to sell securities until disclosure is made to the administrator's satisfaction.
• Secondary trading securities are bought/sold by investors via the secondary market instead of a prospectus.
• Issuers must meet requirements of applicable acts and exchanges for continuous listing.
• Continuous disclosure requirements are in place to inform investors.
• Periodic filing of financial statements and material change information is required of companies.
• Disclosure of material information in issuers' affairs (changes that affect investment decisions) must be timely.
• Other shareholder communications are included in the securities regulation principles.

Registration & Legalities

• Administrators register securities sellers/advisors, ensuring proficiency, integrity, and financial compliance.
• Administrators can suspend or cancel registrations if it is in the public interest.
• Investment dealers selling securities must register with the provincial administrator.
• Investment dealers, partners, officers, directors, and salespersons must also register with the administrator.
• Dealer members must abide by CIRO rules.
• CIRO determines the customer types dealers and representatives can serve and approves products.
• Investment dealer members provide investment products and financial advice.
• Administrators investigate, prosecute violations, and impose sanctions.
• Administrators have authority to compel attendance, take evidence, seize documents, and freeze funds.
• Administrators can suspend/cancel registration, levy fines, cease trading, and deny trading rights.
• Consequences of administrator's powers include loss of livelihood and ability to raise capital.
• Administrators can prevent individuals from becoming company directors/officers, give public reprimands, and levy fines.
• Violating the Act can result in charges, fines, imprisonment, or both.
• Rulings can be appealed to the courts.
• Securities legislation bans fraudulent activity and misleading appearances of trading or artificial pricing.
• Knowingly making misleading/untrue statements affecting market price or value is prohibited.
• Maximum penalties for Securities Act (Ontario) offences include a $5,000,000 fine and imprisonment for a term of not more than five years less a day.
• OSC can order payments of administrative penalties of up to $1,000,000 and disgorgement of noncompliance monies.
• Securities acts includes secondary market civil liability provisions.
• Provinces can order financial loss repayments from illegal/improper trading.
• Investment expertise is required to evaluate investments before buying/selling.

Key Government Players

• Securities industry regulation occurs at the federal, provincial, and industry levels.
• Canada lacks a formal federal securities regulatory body unlike the US Securities and Exchange Commission.
• Federal legislation/authorities regulate certain activities; the Canada Business Corporations Act regulates federally incorporated companies.
• Banks that own securities dealers are federally regulated, but provincial regulations still applies.
• Securities dealers comply with the Proceeds of Crime (Money Laundering) and Terrorism Financing Act (PCMLTFA), overseen by FINTRAC.
• Integrated Market Enforcement Teams (IMETs) were launched in 2003 to combat capital markets fraud.
• IMETs involve RCMP, the federal government, securities regulators, SROs, and exchanges.
• Ontario Securities Commission (OSC) launched Joint Serious Offences Team (JSOT) in May 2013 to target fraud.
• JSOT is an enforcement partnership between the OSC, the RCMP Financial Crime program, and the Ontario Provincial Police Anti-Rackets Branch.
• National Instruments (NI) and Multilateral Instruments (MI) help to harmonize the securities market.
• NI has been adopted by all CSA jurisdictions.
• MI has not been adopted by one or more CSA jurisdictions.
• National Instruments (NI) that are of particular relevance to dealer members include NI 31-103 and NI 81-102.
• Governing bodies exist in each province and territory.
  • Alberta Securities Commission (ASC)
  • British Columbia Securities Commission (BCSC)
  • Manitoba Securities Commission (MSC)
  • Financial and Consumer Services Commission (FCNB) in New Brunswick
  • Office of the Superintendent of Securities Service in Newfoundland and Labrador
  • Office of the Superintendent of Securities in the Northwest Territories
  • Nova Scotia Securities Commission (NSSC)
  • Nunavut Securities Office
  • Ontario Securities Commission (OSC)
  • Office of the Superintendent of Securities in Prince Edward Island
  • Autorité des marchés financiers (AMF) in Quebec
  • Financial and Consumer Affairs Authority of Saskatchewan (FCAA)
  • Office of the Yukon Superintendent of Securities in Yukon Territory

Canadian Securities Administrators (CSA)

• CSA's goal is to harmonize Canadian capital markets regulation.
• The initiatives aim for consensus on policy decisions and collaborative regulatory program delivery.
• CSA's mission is investor protection from unfair practices, promoting fair capital markets and reducing market integrity risks.
• CSA functions informally via meetings and cooperation among securities regulatory authorities.
• Provincial/territorial regulators handle complaints related to securities violations.
• Each province/territory enforces securities regulations individually.
• The CSA released its final amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations in 2019.
• Client Focused Reforms (CFRs) aim to better align interests, improve client outcomes, and clarify relationships.
• The CFR initiative prioritizes client interests.
• CSA's tools include the Passport System, Super Memorandum of Understanding (Super MOU), and electronic databases.
• The Passport System reduces duplication in filing reviews based on mutual reliance.
• Passport system authorities rely on each other's analysis for contexts like prospectuses, enforcement, and registration.
• The Super MOU provides oversight functions based on mutual reliance principles.
• Each recognized marketplace has a principal regulator responsible for oversight.
  • The OSC is the principal regulator for the Toronto Stock Exchange (TSX) and CIRO.
  • The ASC and the BCSC are the principal regulators for the TSX Venture Exchange.
  • The AMF is the principal regulator for the Montreal Exchange (MX).
• More information regarding oversight responsibility can be found on these administrators’ websites.
• CSA maintains electronic databases for easier access to market information.
• SEDAR+ is a web-based system used by market participants to file, disclose and search for information in Canada’s capital markets.
  • In July 2023, it consolidated and replaced the System for Electronic Analysis and Retrieval (SEDAR), the national Cease Trading Order (CTO) database, and the Disciplined List (DL) database.
  • Future phases of SEDAR+ will replace the System for Electronic Disclosure by Insiders (SEDI), the National Registration Database (NRD) and the remaining filings in local systems.
• SEDI allows insiders to file insider reports with all CSA regulators through a single submission over the internet.
  • The public can access insider reports soon after they are filed.
• NRD is a database for dealers, underwriters, advisors, and individuals to submit registration applications, changes, renewals, and fees electronically.
• Cease Trading Order (CTO) prohibits trading in a company's securities due to non-compliance with disclosure requirements.

International Activities

• As the securities industry became more globalized, the lines of separation faded between international securities markets.
• The securities regulators need greater collaboration.
• Global organizations enable securities regulators to pursue efficient capital markets.
• International Organization of Securities Commissions (IOSCO) regulates over 95% of global securities markets.
• IOSCO has three objectives:
  • Cooperating, implementing, and promoting recognized regulation standards
  • Enhancing investor protection through information exchange and cooperation
  • Exchanging information globally to assist market infrastructure and regulation development.
• IOSCO has over 200 members.
• Financial Stability Board (FSB) was stablished in April 2009 at the G20 Leaders’ Summit.
  • The Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) are members

Self-Regulatory Organization (SRO)

• SROs are industry organizations regulating their members, granted powers by administrators.
• SROs enforce conformity with legislation and prescribe rules.
• CIRO is the SRO for investment and mutual fund dealers.
• CIRO's rules uphold securities legislation principles.
• Administrators monitor SRO conduct and review rules for conflicts.
• They also ensure that the SRO acts in the public's best interest and sets high standards.
• CIRO can investigate violations, taking steps against member firms and staff.
• Sanctions include fines, strict supervision, or rewriting exams; serious misconduct results in loss of job and substantial fines.
• The Investment Industry Regulatory Organization of Canada (IIROC) was the SRO overseeing investment dealers and trading on marketplaces.
• The Mutual Fund Dealers Association of Canada (MFDA) regulated mutual fund distribution.
• The CSA approved IIROC and the MFDA to merge into the new, single SRO in 2023
• The new SRO, now known as CIRO, assumed the regulatory responsibilities of the MFDA and IIROC.
• CIRO oversees all investment dealers, mutual fund dealers and trading activity on Canada’s debt and equity marketplaces.
• CIRO sets and enforces rules for the business and financial conduct of Canadian investment and mutual fund firms and their individual registrants across Canada and is subject to high proficiency standards, training and supervision by member firms.

CIRO Compliance & Surveillance

• CIRO's compliance teams monitor firms on conduct, trading, prudential, and operating rules.
• CIRO checks business conduct regulation, financial compliance, and trade review/analysis.
• Reviews ensure enough capital, prevent excessive leverage and risky practices.
• CIRO-regulated firms participate in the Canadian Investor Protection Fund (CIPF).
• CIRO conducts business conduct checks, ensuring members have proper supervision.
• Supervision involves properly handling client accounts, advice, and transactions.
• RRs must comply with the Know Your Client (KYC) and suitability rules.
• Trading conduct compliance reviews check firms' trade desk procedures.
• The trade desk must follow the Universal Market Integrity Rules (UMIR) and provincial securities law.
• Market surveillance and trading reviews ensure UMIR and securities law compliance.
• Enforcement investigates breaches of CIRO rules.
• Staff discipline firms/individuals for misconduct with fines, suspensions, or bans
• CIRO is part of the Intermarket Surveillance Group (ISG) which works to promote effective market surveillance among international exchanges.
• CIRO offers a whistleblower service for systemic wrongdoing reports, taking quick action.
• You can find CIRO info on firm membership, registration status, disciplinary info, regulatory developments, industry trends, and links to other regulators on the organization's website, along with the following information:
  • CIRO firm membership and status
  • The registration status of individuals
  • Disciplinary information about dealer members and individuals
  • A glossary of terms and definitions, which includes registrants’ titles and industry terminology
  • Recent regulatory developments, such as new policies and rule proposals
  • Industry trends that CIRO feels are important for its stakeholders to be aware of (e.g., cybersecurity and business continuity)
  • Links to other regulators, organizations, governments, and investor education sites
• CIRO and U.S. Financial Industry Regulatory Authority (FINRA) share compliance, enforcement, and oversight information.
• FINRA is the largest independent regulator for all US securities firms.
• Canadian exchanges monitor listed company compliance, enforcing agreements and policies.
• Exchanges can deny transactions, require disclosure, halt trading, or terminate listings.
• CIRO regulates marketplaces including TSX, TSXV, and alternative trading systems (ATS).
• An ATS is subject to CIRO's supervision, bringing groups of buyers and sellers and orders together under fixed processes.

Designated Stock Exchanges

• Domestic/foreign exchanges must meet criteria to be designated.
• Designated exchange listed securities are eligible for registered accounts.
• The exchange carries normal processes such as listing, trading, clearing and settlement of exchange listed securities.
• Must have listing standards, acceptable standards for new company listings and maintenance of those listings.
• Must operate within an acceptable regulatory framework for investor protection.
• Must possess an experienced management team with sufficient financial resources.
• Must have a range of lisitngs and adaquate liquidity for investers to buy and sell securities
• Foreign-based exchanges must have commercial, legal, and tax ties with Canada.
• Host country must be in good standing and be a member of the World Trade Organization.
• The framework must provide rights and remedies for investors.
• The host country must be recognized by the host government
• The hose country has low risk or restricitons of funds.
• Pink sheet or over-the-counter stocks should be kept in mind.
• Check with the Department of Finance Canada for a list of Designated Stock Exchanges.

Investor Protection Funds

• The industry protects investors from dealer member financial failure to maintain confidence.
• Investors are only protected, however, from losses related to financial collapse.
• CIPF is used to cover losses that come from firm insolvencies
• CIPF covers accounts from the moment they become member firm clients.
• It has two forms
  • The “investment dealer fund" serves CIRO members registered as investment dealers
  • Designated as the "mutual fund dealer fund" covers CIRO members registered only in the “mutual fund dealer” category
• It is sponsored by CIRO and firms.
• Member firms must pay assessments, provide condition/risk information, and consent to information exchange.
• Member firms permit CIPF operation reviews and comply with actions CIPF directs.
• CIPF also authorizes CIRO to take actions on its behalf.
• CIRO monitors member capital, profitability, and liquidity, which is referred to enforcement for deficiencies.
• Clients are not covered for losses from fluctuations, investments, or issuer defaults.

CIPF Coverage

• Accounts with non CIPF are not entitled to CIPF coverage, however, accounts with foreign affiliates are entitled to CIPF coverage.
• Upon a dealer member's insolvency, CIPF appoints a trustee in bankruptcy and considers claims according to policy.
• Ineligible customers are excluded.
• Maximum coverage for general accounts is $1,000,000 for securities/cash losses.
• Separate accounts each have $1,000,000 coverage unless combined.
• Accounts are combined into one general account with maximum coverage.
• A client's interest in jointly held accounts is combined with the client's general account.
• Clients that share a joint account at an insolvent firm accounts as separate accounts with an individual limit of $1,000,00.
• Accounts such as RSPs. RIFS and LIFs are considered separate accounts that qualify as a whole for the maximum coverage.
• Other types of accounts are: registered retirement, registered education, testamentary trusts, intervivos trusts, personal corporations.
• Retirement accounts with combined with the same or different trustees.
• There may be a MOU with Securities Investor Protection Corporation
• Created in 1967, the Canada Deposit Insurance Corporation (CDIC) is a federal Crown corporation that provides insurance for deposits in eligible Canadian banks and trust and loan companies.
• CDIC insures these deposits to a limit of $100,000 per person at each member institution.
• Deposits in credit unions are insured under provincial insurance plans.

Money Laundering & Terrorist Financing

• Criminals control illicit profits without attention.
• Terrorists need funds to finance activities discreetly.
• Money laundering converts criminal proceeds into legitimate funds through complex transactions.
• It obscures funds' origins, enabling criminals to use them without suspicion.

Three Stages of Money Laundering

• Placement is the disposal/deposit of illegal cash, commonly involving Structuring which breaks large amounts into smaller sums.
• Some methods include:
  • Mingling criminal proceeds with deposits from legitimate cash businesses, stores, bars, restaurants.
  • Bribing bank personnel to accept deposits without reporting.
  • Smuggling cash into countries with lax anti-money laundering requirements.
  • Purchasing a series of monetary instruments, such as certified cheques or money
• Layering separates illicit proceeds by creating complex financial transactions by obscuring the audit trail, which uses Numerous buy-and-sell transactions of various investment instruments.
• Integration places laundered proceeds back into the economy as normal business funds using corporate entities or real estate.
• Securities laundering can occur within or without the industry.
• Activities involve conceal illicit funds and obscure audit trails, which could include insider trading, securities fraud, and market manipulation.
• Illcit funds can be from purchase or sale of liquid securities.
• A shell company is a business without substance or commercial purpose that is incorporated merely to conceal the true beneficial ownership of business accounts and assets owned.
• It is not uncommon for those who launder money open account at different brokerages.

Terrorism and Terrorist Financing

• Terrorist financial needs are due ot political motivation as opposed to profit.
• Terrorist financing can be difficult to detect.
• Charity funds or other legitimate groups can be a source of funding.
• Attacks often don't require large amounts of money.
• Proceeds of Crime (Money Laundering) and Terrorist Financing Act and Regulations:
  • Detects and deters money laundering and terror financing
  • Responds to organized crime
  • Helps in international commitments.
• Requires to deter and detect M/L; there is federal regulation that assist in these functions. Fintrac will assist.

FINTRAC

• The agency ensures compliance and deals with information on PCMLTFA for reported dealing.
• FINTRAC collects, analyzes, assesses, and discloses relevant information to law enforcers.
• Fintrac has monitoring, key compliance and reporting responsabilities.