Canadian Securities Regulation Principles

Canadian Regulatory Framework

• The securities industry is heavily regulated to promote a fair marketplace and protect investors.
• Governmental and industry organizations impose rules and restrictions on market participants.
• The chapter discusses basic principles of securities regulation, provincial securities legislation, and self-regulatory organizations.

General Principles of Securities Regulation

• Securities legislation is enacted by each province to regulate the primary and secondary distribution of securities.
• It also aims to protect buyers and sellers.
• A securities commission administers related acts, or an administrator/registrar if no commission exists.
• Regulators coordinate and harmonize Canadian capital markets regulation through the Canadian Securities Administrators (CSA).
• Each securities regulator's primary mandate is to promote financial market integrity and ensure investor protection.
• The Canadian Investment Regulatory Organization (CIRO) is the investment industry's self-regulatory organization (SRO) committed to investor protection.
• Securities legislation and SRO rules are crafted to incorporate the values of market integrity and investor protection.

Privilege vs. Right

• Licensing is required to enter the securities industry, making participation a privilege, not a right.
• Regulators can revoke licenses in specific circumstances.
• Regulations address insider trading, money laundering, and cybersecurity, to avoid disrupting capital markets and jeopardizing integrity/confidence.

Disclosure

• Securities acts are based on disclosure, registration, and enforcement principles.
• Full, true, and plain disclosure ensures investors make reasoned decisions.
• Registration involves securities dealers, advisors, and stated categories.
• Enforcement includes securities laws and administrative policies.
• Offering securities for public sale that haven't been publicly distributed requires following specific disclosure rules.
• A prospectus delivered to purchasers must contain full disclosure of all material facts.
• Selling or offering to sell securities is illegal until satisfactory disclosure is made to the administrator.
• The prospectus is like a contract between the issuing company and the security purchaser.
• Disclosure is normally made in a prospectus issued by the company and its underwriter, which is accepted for filing by the administrator.
• Secondary trading occurs when a security is further bought and sold by investors, often via a stock exchange.
• Issuers must meet requirements of applicable acts and exchanges, referred to as continuous disclosure, for secondary trading.
• Continuous disclosure requirements include filing financial statements and information on material company changes.
• Continuous disclosure requirements apply to insider trading reports, proxy solicitations, regular corporate financial reports, and annual information forms.
• Material changes significantly affecting investor decisions and other shareholder communications must be disclosed in a timely manner.
• Continuous disclosure ensures material information is effectively communicated to the public and investment professionals.

Registration

• Administrators register those directly selling securities or advising on buying/selling, ensuring proficiency, integrity, and financial compliance.
• They can suspend or cancel registration if it's in the public interest.
• Investment dealers selling/underwriting securities must register with the administrator in any province in which securities are sold.
• Partners, directors, officers, and salespersons employed by investment dealers must be registered.
• Investment dealers must be members of CIRO and follow its rules; CIRO determines customer types and approves products.

Investigation and Prosecution

• Administrators can investigate, prosecute violations, and impose sanctions.
• They can compel witnesses, take evidence, seize documents, freeze funds, and have court-like powers.
• Administrators can suspend, cancel, revoke registration, levy fines, order trading to cease, and deny trading rights.
• Cancelling registration can impact earning abilities, and ceasing trading can affect the issuer's ability to raise capital.
• Administrators have powers to prevent individuals from becoming directors/officers, give public reprimands, and levy fines.
• Administrators can recommend charges for Act violations, leading to fines, imprisonment, or both.
• Anyone disagreeing with the administrator's ruling can appeal to the courts.
• Securities legislation prohibits fraudulent activities and actions that could cause misleading trading appearances or artificial prices.
• Knowingly making false or misleading statements affecting market prices is prohibited.

Penalties

• Under the Securities Act (Ontario), maximum penalties are a $5,000,000 fine and imprisonment of up to five years less a day.
• The OSC can order administrative penalties up to $1,000,000 and disgorgement of monies obtained via noncompliance.
• Securities acts contain secondary market civil liability provisions.
• Investors aren't required to prove reliance on misleading disclosure when trading securities.
• Provinces can order repayment of financial losses resulting from illegal/improper trading.
• Laws aim to prevent blatant fraud and protect investors without investment expertise.
• Investor and advisor evaluation is still needed before and during investment.

Key Government Players in Securities Regulation

• The securities industry in Canada is regulated at the federal, provincial, and industry level.
• Unlike the U.S.'s SEC, Canada lacks a formal federal securities regulatory body.
• Some securities activities are regulated by federal legislation, namely the Canada Business Corporations Act.
• Federally regulated banks owning large securities dealers create an indirect federal interest.
• Provincially regulated subsidiaries of banks are subject to provincial securities regulation.
• Proceeds of Crime (Money Laundering) and Terrorism Financing Act (PCMLTFA) applies to securities dealers.
• The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and the Personal Information Protection and Electronic Documents Act (PIPEDA) enforce this act.

Integrated Market Enforcement Teams (IMETs)

• Integrated Market Enforcement Teams (IMETs) began in November 2003.
• IMETs strengthen law enforcement's ability to address capital markets fraud.
• They are a joint initiative of the RCMP and the federal government.
• The teams collaborate with securities regulators, SROs, exchanges, and other authorities.

Joint Serious Offences Team (JSOT)

• The OSC launched JSOT in May 2013 to combat fraud and misconduct.
• JSOT is an collaboration of the OSC, the RCMP Financial Crime program, and the Ontario Provincial Police Anti-Rackets Branch
• JSOT investigates and prosecutes violations using the Securities Act (Ontario) and Criminal Code.
• Staff collaborate with police and the Attorney General to bring more cases and deter the public from harm.

The Provinces

• Each province regulates securities through its commission/equivalent and legislation.
• Securities markets are largely governed by National Instruments (NI) and Multilateral Instruments (MI) due to the CSA.
• A NI is adopted by all CSA jurisdictions, while an MI has not been adopted by one or more.
• NI 31-103 and NI 81-102 are relevant to dealer members.
• Governing bodies in provinces/territories are listed.

Canadian Securities Administrators (CSA)

• The CSA is an umbrella organization that improves and harmonizes Canadian capital markets regulation.
• CSA seeks consensus on policies affecting capital markets and participants.
• CSA collaborates on regulatory programs, like disclosure/prospectus filings.

CSA mission:

• Protect investors from unfair/fraudulent practices.
• Foster fair/efficient capital markets.
• Decease risks to market integrity and investor confidence.
• As an informal body, the CSA functions through meetings and cooperation.
• Provincial/territorial regulators handle securities violation complaints.
• Enforcement is done individually by each province/territory.

CSA Client Focused Reforms release

• On October 3, 2019, the CSA released final amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
• These reforms, known as the Client Focused Reforms (CFRs), made changes to registrant conduct to better align advisers, improve outcomes, and clarify relationships.
• The CFR initiative prioritizes client interests in client-registrant relationships.

CSA tools & processes:

• Passport System streamlines filings in multiple jurisdictions based on mutual reliance.
• Super MOU is a memorandum of understanding about marketplace oversight based on mutual reliance principles.
• Each recognized marketplace has a principal regulator for oversight.
  • The OSC oversees the Toronto Stock Exchange (TSX) and CIRO.
  • The ASC and BCSC oversee the TSX Venture Exchange.
  • The AMF oversees the Montreal Exchange (MX).
• The CSA maintains electronic databases to streamline regulatory processes and enhance market information access.

CSA Electronic Databases

• SEDAR+ is used by all market participants to file, disclose, and search for information in Canada’s capital markets.
• In July 2023, it replaced SEDAR, the CTO database, and the DL database. Future phases replace SEDI.
• SEDI allows insiders to file insider reports with all regulators via a single online submission.
• The public can access insider reports soon after they are filed.
• NRD is a database for dealers, underwriters, advisers, and individuals.
• It allows them to submit registration applications/changes/renewals/fees to all regulators electronically.
• CSA keeps constituents informed through notices, news releases, and publications.

Cease Trading Order (CTO)

• A CTO prohibits trading in a company's securities.
• Issued by a provincial/territorial securities commission for disclosure failures.
• May be issued for failing to file financial statements or as a result of enforcement actions.

International Activities

• As the industry has globalized, separation has faded between international markets.
• Organizations enable regulators to work toward efficient capital markets.

International Organization of Securities Commissions (IOSCO)

• The International Organization of Securities Commissions (IOSCO) regulates over 95% of world's securities markets.
• IOSCO aims to cooperate in developing/implementing regulation standards that protect investors, maintain fair/transparent markets, and address systemic risks.
• IOSCO enhances investor protection and confidence via information exchange/cooperation in enforcement/supervision.
• It exchanges global/regional information to assist market development, infrastructure strengthening, and regulation.
• IOSCO has over 200 members, including the OSC, the AMF, the ASC, the BCSC, and CIRO.

Financial Stability Board (FSB)

• The FSB was established in 2009 at the G20 Leaders’ Summit.
• It succeeded the Financial Stability Forum.
• The Bank of Canada and the OSFI are members.

FSB's Mandate:

• Assess vulnerabilities affecting the financial system.
• Promote information exchange.
• Monitor market developments.
• Advise on/monitor regulatory standards and best practices.
• Undertake joint strategic policy development reviews.
• Set guidelines for supervisory colleges.
• Manage contingency planning for cross-border crisis management.
• Collaborate with the IMF.

Self-Regulatory Organization (SRO)

• SROs are industry organizations that regulate their members.
• Administrators grant regulatory powers via recognition orders.
• SROs enforce conformity with securities legislation and prescribe their own rules/requirements.
• In Canada, CIRO is the SRO for investment and mutual fund dealers.
• CIRO's rules uphold securities legislation principles.
• Administrators monitor CIRO and review rules for conflicts with provincial laws.
• SRO must be in the public's best interest and have standards as high or higher than provincial regulations.
• CIRO has powers to investigate violations and take action on member firms/employees.
• Sanctions include fines, supervision, rewriting exams, loss of registration, and substantial fines.

Historical Context

• Before January 1, 2023, Canada had IIROC and MFDA as the SROs.
  • IIROC was the national SRO that oversaw all investment dealers and trading activity on equity and debt marketplaces in Canada.
  • MFDA did not regulate the mutual funds themselves; this responsibility remained with the securities commissions.

Canadian Investment Regulatory Organization (CIRO)

• CIRO is the national SRO that oversees investment dealers, mutual fund dealers, and trading activity.
• CIRO sets and enforces rules for Canadian firms and individual registrants.
• IIROC was created from the consolidation of legacy organizations: IDA and Market Regulation Services Inc. (RS) In June 2008.
• Created by Bond Dealers Section of the Toronto Board of Trade (1916)
• Recognized by provincial regulators starting in 1990s
• Mandatory membership began after securities legislation was adopted
• There is a corresponding advocacy association named the Investment Industry Association of Canada (IIAC)
• Effected January 1, 2023, CSA approved the merger of IIROC and the MFDA into a new, single SRO.

CIRO & Compliance:

• Compliance teams oversee firms' conduct, trading, prudential, and operating rules.
• Firms must meet high standards while providing financial services.
• The compliance function includes business conduct regulation, financial compliance, and trade review & analysis.
• CIRO conducts financial compliance reviews and sets minimum requirements to ensure firms have enough capital.
• Requirements prevent failures due to excessive leverage/risky practices.
• CIRO-regulated firms partake in the CIPF.
• CIPF protects investors if a firm goes bankrupt.
• CIRO ensures dealer members supervise client accounts per client needs/instructions.
• Accounts must be handled by RRs familiar with client's financial situation, needs, objectives, experience, and tolerance.
• RRs must follow Know Your Client (KYC) and suitability rules.
• CIRO checks trading firms’ trade desk procedures for compliance with UMIR and securities law.
• CIRO ensures trading follows UMIR and provincial securities law via market surveillance/trading review analysis.
• Enforcement breaches of CIRO rules and disciplines individuals/firms for misconduct.
• This discipline can include fines, suspensions, and bans or termination for individuals and firms.
• CIRO is a member of the Intermarket Surveillance Group (ISG), which promotes surveillance among international exchanges.

Other CIRO Initiatives

• Whistleblower service evaluates systemic wrongdoing reports and takes prompt action.
• They have a toll-free number and webpage to contact their team.
• Other initiatives shared on their site include firm membership, individual registration status, disciplinary data on members/individuals, glossary of terms, regulatory developments, industry trends, and links.
• CIRO and FINRA (its U.S. counterpart) cooperate by exchanging information and providing cross-border assistance.
• FINRA is the largest independent regulator in the U.S. for all securities firms doing business in the United States.
• FINRAs responsibilities include protecting investors, registering participants, writing federal rules, informing the public, and administering dispute resolution.

Exchanges & Marketplaces

• Canadian exchanges monitor compliance of listed companies.
• Exchanges can deny pre-approval, require disclosure, halt trading, and terminate listings.
• CIRO regulates trading on TSX, TSXV, and ATS.

Alternative Trading system (ATS)

• An ATS is registered as an investment dealer subject to CIRO’s supervision that uses established methods for orders that include multiple buyers and sellers.

Designated Stock Exchanges

• Domestic/foreign exchanges must meet criteria to be deemed Designated.
• Only securities listed are eligible to be held in RRSPs, TFSAs, or registered accounts.
  • Must facilitate trading, and settlement, monitor and enforce trades, offer transparent pricing in exchange.
  • Must have acceptable, ongoing, listing standards for both new companies & for maintaining.
  • Must operate with acceptable investor protection, disclosure, governance, and fair market standards (IOSCO).
  • Must have experienced management, success, and adequate long-term resources.
  • Must have range of adequate listings, and liquidity.
• In order to designate a foreign exchange, the government must have commercial/ legal/and tax conventions with the exchange.
• Must in good standing with international community.
• Securities regulatory and juridical framework must provide adequate and similar rights and remedies.
• Must be recognized as an exchange in both host and foreign countries.
• The exchange can not impost restrictions from investments.

Investor Protection Funds.

• It is vital to offer the investing public protection against losses to maintain public confidence.
• Programs and funds were designed for this purpose.
• Investors are not protected from market losses, but rather from losses related to the financial collapse of a dealer member.
• CIPF maintains two funds to cover losses from firm insolvency, not investment performance.
• The CIPF is Sponsored solely by SRO’s, and funded by member firms.
• CIPF must follow obligations:

• Pay assessments, show assessment of financials.
• Agree to cooperate, and consent.
• Follow actions.

Compensation

• CIRO has systems to measure a dealer’s members capital profitability.
• Referred to a team with potential disciplinary consequences.
• The fund designated as the "mutual fund dealer fund" is available to satisfy potential claims for coverage by customers of CIRO members registered only in the "mutual fund dealer" category.

Coverage by CIPF

• CIPF does not cover clients’ losses that result from changing market values, unsuitable investments, or the default of an issuer of securities.
• Non CIPF is not entitled to CIPF coverage
• foreign affiliates is only carried out under CIRO requirements

General Account

• Account belonging to a single client, is treated as one account.

• Combining cash, shortsale, options.

Joint

Clients with a proportionate interest, are also combined

Joint Account

With no individual is held at the limit of $1,000,000 #### Insolvent With appointment, is treated with CIRO to follow protocol.

Separate Account.

• Treated as separate customers

• Similar are grouped . #### The following types are considered separate accounts: >- Registered account >-RSP, RIF, RIF’S >-Inter Vivos trust. >- Holding Corp >-Partnerships >- are organized by what is not incorporated. ### Registered Account Aggregation. - All accounts belong to a single client. ### Separated Accounts - Are not combined unless client hold them.

Examples

>- One Client with two Rif, is treated as one
 >- One person is in trust, is held as two accounts as long as those documents are showed

Mutual Fund Dealer Association (MFDA IPC)

• Is to IIROC dealer members.
• One Protection fund is held with The Canadian Investor Protection fund.

DIVE

• CIPF has an MOU with Securities Investor Protection corp.

CDIC

• FDIC is the federal crown with insurance eligibility with Canadian banks. Deposits include Canadian/Foreign Currencies. GIC are also limited. To $100,000, or if different banks is accounted differently

PROVINCIAL Insurance is also accepted.

• Union trust may are applicable.

Money Laundering

• Way to control funds by not attracting attention with a criminal act

Securities Industry

• Prevents abuse, helps to curb against activities

Money Laundering

• Is a process where proceeds of crime are converted through transaction Obscure the origin of funds, changing, or moving them to a place

Three Stages

##Placement.

• Disposal derived from activity, used to help for, is for:

  • Structuring: breaking Up cash Smaller Sums, where is reported is a deposited
  • Mingling criminal: Deposits where it has a business where deposits is legitimate -Bribing Personel: Bribery of banks -Smuggling cash: to lazx countries
  • Purchasing: Monetary items like checks

Layering

Is the illicit sources from financial process, creating anonymity . Funds can easily, through many execution.

Intergration

• Putting back proceeds back in business, they’re business funds, using repayment funds.

Securities industry is a money source

• Borders are no issues, by taking place with jurisdictions.

Proceeds.

• activities can come and go.

Industry Offers Double

• Funds is earned from profits, and mechanism

Most illicit funds are laundered through liquidation

• Proceeds can include many entities and buy/sale
• Shell company where money doesn’t state its business.

Terrorism And TerroristFinancing

• Motivated by money gain, of political gain.
• They want monetary for their work. difficult to find because some charitable.
• Some cases is no evidence.

Anti-Money Laundering

• With Regulations, Securities are subject to certain statutory requirements.
• To: Detect, to Respond and fulfilling trans national crimes

PCMLTIA

• Requires specific measure for activities. Federal regulation and SRO must have appropriate procedures and reports such as : >- FINTRAC >- Is for compliance with and information.

Summary

• The securities commissions and SROs, federal legislation is a bit smaller, Provincial securities act are based on : Disclosure and Registration and is forced
• Each province are set with attempting to have a formal. It’s been Harmonised, meetings of ISA with reforms.

Point Of View

• Regulation and conduct that SRO have, is responsible for legislative power.
• The securities also ensure and protect investors, while also setting in losses of firms and being managed!