Canadian Securities Regulation Quiz

Canadian Regulatory Framework

• This chapter discusses the basic principles of securities regulation in Canada
• It examines provincial securities legislation, rules, regulations, and self-regulatory organizations
• Learning objectives include identifying principles of securities regulation, key players, the role of self-regulatory organizations and marketplaces, the Investor Protection Fund, and anti-money laundering and anti-terrorist financing requirements
• Key terms are defined in the glossary and are bolded when first used in the chapter

Learning Objectives

• Identify the principles of securities regulation
• Identify key players in Canadian securities regulation
• Explain the role of self-regulatory organizations, provincial regulators, and marketplaces
• Describe the role of the Canadian Investor Protection Fund and its coverage limits
• Describe anti-money laundering and anti-terrorist financing requirements

Content Areas

• General Principles of Securities Regulation
• Key Government Players Involved in Securities Regulation
• Self-Regulatory Organizations
• Investor Protection Funds
• Money Laundering and Terrorist Financing in the Securities Industry

Key Terms

• administrator
• Canadian Investor Protection Fund
• money laundering
• Mutual Fund Dealers Association
• Canadian Securities Administrators
• dealer member
• Designated Stock Exchange
• disclosure
• Financial Transactions and Reports Analysis Centre of Canada
• Integrated Market Enforcement Teams
• Investment Industry Regulatory Organization of Canada
• Joint Serious Offences Team
• National Instrument
• Passport System
• primary distribution
• registrant
• regulator
• secondary distribution
• secondary trading
• self-regulatory organization
• Universal Market Integrity Rules

Introduction

• Securities industry is heavily regulated to promote fair and efficient marketplaces and protect investors
• Issuers must provide potential buyers with information before selling new securities
• Public companies and insiders must disclose information regularly
• Distributors must follow rules concerning client conduct
• Dealer members must supervise employees carefully and properly handle client assets

General Principles of Securities Regulation

• Securities legislation is passed by each province to regulate the primary and secondary distribution of securities, and to protect buyers and sellers
• A Provincial securities commission or an administrator, registrar, or other official administers the legislation
• Regulators work together to coordinate and harmonize the Canadian capital markets. This is done through the Canadian Securities Administrators (CSA)
• The mandate of each regulator is to ensure the integrity of financial markets and protect investors

Disclosure

• The underlying principle of securities regulation is full, true, and plain disclosure
• Companies offering securities for public sale must file a prospectus with the administrator
• The prospectus contains full disclosure of material facts
• It is illegal to sell securities without full disclosure
• Prospectuses are similar to a contract
• Disclosure requirements cover facts needed for informed investment decisions by investors

Disclosure (continued)

• Secondary trading occurs when securities are bought and sold on an exchange
• Continuous disclosure is required
• Insider trading reports, proxy solicitations, regular corporate reports, and management's discussion and analysis are examples of disclosures required under continuous disclosure
• Timely disclosure of material changes affecting investors is needed
• Material changes affect an investor's decision to buy or sell securities

Registration

• Administrators are responsible for registering persons and companies involved in securities trading
• Investment dealers selling, or underwriting securities need registration
• All partners, directors, officers, and salespersons employed by investment dealers need registration from the administrator

Investigation and Prosecution

• Administrators can begin investigations, prosecute violations of securities legislation, and impose sanctions
• They have the power to compel witnesses and take evidence
• Sanctions can include freezing funds, suspending, cancelling, or revoking registration, fines or disgorgement orders
• Appeal process exists for disagreeing parties

Federal Government

• Canada does not have a formal federal securities regulatory body like the SEC in the US
• Federal legislation regulates certain aspects like proxy solicitations and insider trading for federally-incorporated companies
• Banks are federally regulated and may own securities dealers. Activities of these dealers are subject to provincial securities regulation

The Provinces

• Each province regulates securities activities within its borders through a securities commission or equivalent
• Harmonization efforts by the CSA include creation of National Instruments (NI) and Multilateral Instruments (MI) to create consistency
• Individual provinces have specific securities commissions

Joint Serious Offences Team

• This is a collaborative effort involving Canadian securities commissions, law enforcement agencies to target fraud and serious misconduct
• This partnership uses provisions of existing securities and criminal laws

International Activity

• International cooperation is important in a globalized securities industry
• The International Organization of Securities Commissions (IOSCO) is a global body that regulates more than 95% of the world's securities markets
• IOSCO promotes internationally recognized standards, investor protection, efficient markets, and systemic risk management

Financial Stability Board (FSB)

• The FSB's objectives include assessing, monitoring, and advising on market developments and their implications for regulatory policy
• It promotes information exchange among authorities responsible for financial stability

Self-Regulatory Organizations (SROs)

• Industry organizations that regulate their own members
• These organizations receive regulatory powers from the administrators

Investor Protection Funds

• The Canadian Investor Protection Fund (CIPF) provides protection for clients of insolvent member firms in case of financial failure
• It covers cash and securities losses from insolvency, but not performance losses
• CIPF has two funds; one for investment dealers and the other for mutual fund dealers
• Financial health of member firms is monitored by the SRO (CIRO)

Money Laundering and Terrorism Financing

• Money laundering involves disguising the origin of criminal funds
• The three stages are: placement (disposal of dirty money), layering (complex transactions), and integration (blending proceeds into legitimate money)
• The securities industry has a unique vulnerability due to its global nature and ease of transactions.
• Regulations exist through Acts, specifically PCMLTFA to detect, prevent and deter money laundering and terrorist financing activities

Summary

• The Canadian securities industry is regulated by provincial commissions, SROs, and federal laws
• Disclosure, registration, and enforcement are the basic principles of this regulation
• National instruments and multilateral instruments aim to harmonize provincial rules
• SROs manage member conduct and financial standards
• The Canadian Investor Protection Fund safeguards against losses due to member firm failure