Ethics and Duties in Securities Industry

Duty of Care

• Obligation #3 for registered representatives (RRs)
• Requires acting honestly, in good faith, and professionally.
• Includes providing advice with appropriate skills and knowledge.
• Standard of care is not perfection.
• Higher standard than fiduciary duty.
• Two aspects: suitability and fiduciary duty.

Ethics

• Set of values/morals guiding behavior.
• Societal standards of right and wrong.
• Continuous process of examining choices and decisions.
• Needed because rules can't cover all situations.

Fiduciary Duty

• Higher standard than duty of care (imposed by common law).
• Exists when trust is placed in another person's expertise.
• Less common than duty of care.
• Disputes can involve civil litigation.

IIROC

• National self-regulatory organization for the securities industry.
• Oversees registered representatives (RRs).
• Strict rules and regulations, high ethical standards.
• Regulates investment dealers and trading.

IIROC Rule 1402 Standards of Conduct

• Dealer rule summarizing IIROC's expectations for RRs.
• RRs must be regulated persons (high ethics, fair dealings).
• RRs must avoid negligent or illegal conduct.
• Must act to maintain investor confidence.

KYC (Know Your Client)

• Obligation #1 for RRs, understanding client circumstances.
• Understanding client suitability before recommending investments.
• Dealer members record client circumstances and relevant details.
• Companion obligation to KYP.

KYP (Know Your Product)

• Obligation #2 for RRs: understanding the products recommended.
• RR must understand investment products before recommending.
• Must understand product structure, performance, and function.
• Companion obligation to KYC.

Registered Representative (RR)

• Responsible for providing advice on securities.
• Must meet specific certifications and pass tests.
• Required to observe high ethical standards (KYC, KYP, duty of care).
• Avoid conflicts of interest, maintain professional knowledge, and client confidentiality.

Suitability

• Relevant to duty of care, KYC, and KYP.
• Considers client's financial situation, knowledge, objectives, time horizon, and risk tolerance.
• Quality of something being right or appropriate for an individual.

End Values

• Core values driving long-term goals.
• Examples: accomplishment, service, security, peace, recognition.

Ethical Dilemma

• Situations with multiple possible choices.
• Two categories: right vs. wrong, right vs. right.
• Right vs. right dilemmas are harder—core values conflict.

Front Page Test

• Ethical decision making test; consider reputation.
• How would a decision impact the person's image if public?

Legal Test

• Consideration of legal/industry rule/contract compliance.

Means Values

• Daily actions to achieve goals.
• Influence decision-making.
• Examples: ambition, openness, competence.

Mom Test

• Testing the comfort level about revealing a decision to important people.

Morals

• Societal rules of conduct based on perceived right and wrong.
• Principle-based, not changeable by authorities.

Unified Value System

• End values and means values supporting each other.
• Important for companies/individuals to have consistency.
• Values clarification aligns means with ends.

Values

• Measures of worth placed on ideas and behaviors.
• Based on personal knowledge and experience, not facts.
• Influencing life goals and decisions.
• May evolve over time, but usually not drastically.

Laws

• Not synonymous with ethics, but connected to ethical sensibility.

Tone at the Top

• An organization's ethical leadership.
• Fosters a climate of trust and ethical behavior.
• Importance of communicating values and beliefs

Ethical Relativism

• No universal moral principles.
• Everything is relative, situational, and personal.
• Not an ideal ethical system as it prioritizes personal over community needs.

Types of Ethical Dilemmas

• Truth vs. loyalty (honesty vs. integrity).
• Individual vs. group (few vs. many).
• Short-term vs. long-term.
• Justice vs. mercy (fairness vs. compassion).

Ethical Decision Making Process

• 1. Recognize moral issue.
• 2. Determine whose moral issue it is.
• 3. Gather the facts.
• 4. Test for right-versus-wrong issues (Front Page, Legal, Mom).
• 5. Test for right-versus-right paradigms.
• 6. Apply resolution principles.
• 7. Make decision.
• 8. Reflect on the process.

Ethical Dilemma Solutions

• End-based (greatest good for most).
• Rule-based (establish rules).
• Social contract-based (harmonious relationships).
• Personalistic-based (best for self).

Administrator

• Securities regulatory authority in each Canadian province.
• Harmonizes market regulations with other regulators (CSA).
• Registers individuals/companies involved in securities.

CIPF (Canadian Investor Protection Fund)

• Covers client losses from failing dealer members.
• Covers securities losses, not investment performance.

CSA (Canadian Securities Administrators)

• Umbrella organization harmonizing capital markets.
• Protect investors, foster fair markets, reduce integrity risks.
• Using tools: passport system, MOU, databases.

Dealer Member

• Broker buying/selling securities to investors.

Designated Stock Exchange

• Criteria for securities listed in RRSPs, TFSAs, etc.
• Acceptable listings, regulatory framework, and liquidity.

Disclosure

• Underlying principle of securities regulation in Canada.
• Issuers must file a prospectus with complete information to sell new securities.

FINTRAC

• Enforces compliance with money laundering and terrorism financing laws.
• Equivalent to US SEC (closest Canadian equivalent for rules).

IMETs (Integrated Market Enforcement Teams)

• RCMP and federal government to detect/investigate capital market fraud.
• Collaborates with regulators, exchanges, and others.

JSOT (Joint Serious Offences Team)

• OSC, RCMP, and OPP to target fraud and serious misconduct.
• Investigates and prosecutes violations under securities and criminal codes.

Money Laundering

• Process converting crime proceeds to legitimate funds.
• 3 Stages: Placement, Layering, Integration.

MFDA (Mutual Fund Dealers Association)

• SRO regulating mutual fund distributions.
• Does not regulate mutual funds themselves, as securities commissions do.

NI (National Instrument)

• Instruments adopted across CSA jurisdictions.
• Harmonized rules for securities markets.

Passport System

• CSA tool reducing redundant filings in multiple jurisdictions.

Primary Distribution

• Sale of new securities (e.g., IPO).
• Direct funding for the issuing company.

Registrant

• Person maintaining registration requirements.
• Includes you and other people registered.

Secondary Distribution

• Sale of previously issued securities.
• Conducted by securities firms.
• Profits go to the prior investors.

Secondary Trading

• Securities are bought and sold through exchanges.
• Freely traded securities.

SRO (Self-Regulatory Organization)

• Industry bodies regulating members.
• Enforces securities legislation.
• Investigates and punishes violations.

UMIR (Universal Market Integrity Rules)

• Common trading rules for all Canadian markets.
• Designed for fair and orderly markets.

IOSCO (International Organization of Securities Commissions)

• International governing body of over 200 securities bodies.

FSB (Financial Stability Board)

• Successor to FSF, assesses financial vulnerabilities.
• Promotes information exchange, monitors developments, and collaborates.

FINRA

• US counterpart to IIROC.
• Shares information and improves regulatory effectiveness through shared initiatives.

CDIC (Canada Deposit Insurance Corporation)

• Federally backed insurance for deposits in member institutions.
• Covers losses up to a specified limit.

CASL (Canada's Anti-Spam Legislation)

• Governs commercial electronic messages (CEMs).
• Businesses require consent before sending CEMs.

Conflict of Interest

• Inconsistent or divergent interests between client and registrant.

Cybersecurity

• Protecting against cyberattacks in finance and operations.

Discount Broker

• One role investment representatives can play.

NDNCL (National Do Not Call List)

• CRTC-established list for telemarketing calls.

Fit and Proper Test

• Evaluates suitability for IIROC approval or registration.
• Examines integrity, solvency, and competence.

Fund Facts

• Required information for mutual fund sales.
• Plain language document available on the fund’s website.
• Before the investor can buy the mutual fund.

Investment Representative

• Common IIROC registration category.
• Adhere to IIROC rules and provincial securities law.
• Disclose outside activities.

PIPEDA (Personal Information Protection and Electronic Documents Act)

• Governs collection, use, and disclosure of personal information.

Portfolio Manager

• Manages managed accounts.

Unsolicited Order

• Orders directly given to representatives/assistants.

Continuing Education (CE)

• Required for ongoing licensing in the securities industry.
• Maintains proficiency via professional development and compliance courses.

IIROC Note 11-0349

• IIROC notice on using social media (compliance).

Beneficial Owner

• Financially responsible for the account.

Cash Account

• Requires full payment for each purchase transaction.

Client Discovery

• Reviewing client behavior for money laundering risks.
• Identifying red flags.

DAP (Delivery Against Payment)

• Securities purchase with settlement on a payment date.
• Use of financial institutions as agents.

Discretionary Account

• Dealer making investment decisions without constant client consent.
• Renewal required every 12 months.

Insider/Insider Trading

• Person with non-public information to benefit from investments.
• Illegal use of non-public material information about issuer securities.

Managed Account

• Ongoing investment decisions by a dealer member.
• Client agreement outlining objectives and quarterly reviews.

Margin Account

• Partial payment for security purchases.
• Dealer lends unpaid portion at interest.
• Requires initial client margin deposit.

PEP (Politically Exposed Person)

• Prominent public figures and their associates.
• Greater scrutiny for foreign PEPs.

Power of Attorney

• Legal document granting someone authority to act for another person.

PCMLTFA (Proceeds of Crime (Money Laundering) and Terrorist Financing Act)

• RR reporting responsibilities for money laundering/terrorism financing.

Red Flag

• Potential warning signal of improper activities.
• Money laundering or terrorism financing red flags noticed during client discovery.

NAAF (New Account Application Form)

• Document for new account opening.
• Client and RR information, including objectives, risk tolerance, etc.

RAP (Receipt Against Payment)

• Client sells securities, similar to DAP.

Registered Accounts

• Accounts registered with the CRA (RRSPs, RRIFs, etc.).

Pro Account

• Accounts for employees/family members of a dealer member.

Relationship Disclosure Document

• Document describing account relationship and offerings.
• Includes disclosure on various types of products.

Portfolio Record

• Document showing client holdings.

Security Cross-Reference

• Alphabetical list of securities held by clients.

Accredited Investors

• Institutional or wealthy individuals purchasing securities.

Best Efforts Deal

• Dealer selling new securities without guaranteed sales/price.

Bought Deal

• Dealer buying all/part of new securities for distribution.
• Offering with risk to the dealer's own capital.

Crowdfunding

• Method of raising capital for companies.

Early Warning

• Initial threshold indication prior to a takeover bid.

ETFs (Exchange-Traded Funds)

• Similar to mutual funds, tracking an index.

Exempt Market

• Restricted market participation to specific individuals/entities.
• Low risk securities.

Final Prospectus

• Final version of the prospectus with complete disclosure.

IPO (Initial Public Offering)

• First time securities issue by a company into the market.

Institutional Customer

• IIROC customer classification.
• Usually entities with more than $10 million of securities.

Issuer Bid

• Issuer buying back its own shares.

PPNs (Principal-Protected Notes)

• Fixed income securities guaranteeing a minimum initial investment.

Private Placements

• Dealer communications with clients (e.g., mailings, statements).

Prospectus

• Investment contract outlining facts for potential purchasers.

Red Herring Prospectus

• Preliminary prospectus with red ink notice.

Reporting Issuers

• Company issuing additional securities for the market.

Right of Rescission

• Legal right to cancel loan or agreement.

Right of Withdrawal

• Investor right to withdraw within a timeframe of purchase.

Takeover Bid

• Issuer purchasing securities from another issuer.

Underwriting

• Advice to an issuer, helping sell new securities.

Due Diligence

• Essential action for dealer members/RRs to ensure client service.

This quiz explores the concepts of Duty of Care, Ethics, and Fiduciary Duty as they relate to registered representatives in the securities industry. It highlights the obligations and standards of care required by professionals, along with the role of IIROC in ensuring compliance. Test your knowledge on these crucial topics for ethical practice in finance.