Ethics and Duties in Securities Industry

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Questions and Answers

What is the obligation of a registered representative (RR) according to the CPH?

To act honestly, in good faith, and in a professional manner.

What are the two main types of values?

Financial values and Social values

Personal values and Professional values

Ethical values and Moral values

End values and Means values (correct)

Ethical dilemmas always involve a clear right and wrong choice.

False

Which of these is NOT a step in the ethical decision-making process?

Seek legal advice Signup and view all the answers

What is the main objective of the Canadian Securities Administrators (CSA)?

To improve, coordinate, and harmonize the regulation of the Canadian capital markets. Signup and view all the answers

The Canadian Investor Protection Fund (CIPF) covers losses due to poor investment performance.

False Signup and view all the answers

What is the purpose of the 'Know Your Client' (KYC) rule?

To understand a client's financial situation, investment knowledge, objectives, time horizon, and risk tolerance before making investment recommendations. Signup and view all the answers

What is the meaning of 'disclosure' in the context of securities regulation in Canada?

It refers to the principle that requires companies offering securities for public sale to provide full and true information about the securities being offered. Signup and view all the answers

Define 'money laundering' and explain its three stages.

It is the process of converting the proceeds of crime into seemingly legitimate funds through complex transactions. The three stages are: Placement, Layering, and Integration. Signup and view all the answers

What is the primary role of the Financial Industry Regulatory Authority (FINRA)?

Regulating securities firms doing business in the United States Signup and view all the answers

A 'conflict of interest' occurs when a registrant's interests are aligned with the client's interests.

False Signup and view all the answers

What is the purpose of the 'fit and proper' test?

It evaluates an applicant's integrity, financial solvency, and competence for IIROC approval or registration under securities legislation. Signup and view all the answers

What is the main difference between a 'cash account' and a 'margin account'?

A cash account requires full payment for purchases, while a margin account allows for partial payment with the dealer member lending the remaining portion. Signup and view all the answers

What is the difference between a 'discretionary account' and a 'managed account'?

A discretionary account grants temporary authority to the dealer member to make investment decisions, while a managed account grants ongoing discretionary authority on a permanent basis. Signup and view all the answers

What are the key requirements for a company to be classified as a 'reporting issuer'?

They must be issuing additional securities into the marketplace and typically require a prospectus. Signup and view all the answers

Which of the following is NOT a type of new securities distribution?

Secondary Distribution Signup and view all the answers

What is the main purpose of 'due diligence' in the context of securities trading?

To ensure that dealer members and RRs are providing appropriate services and safeguarding their clients' interests. Signup and view all the answers

Study Notes

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.
1. Determine whose moral issue it is.
1. Gather the facts.
1. Test for right-versus-wrong issues (Front Page, Legal, Mom).
1. Test for right-versus-right paradigms.
1. Apply resolution principles.
1. Make decision.
1. 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.

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Description

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.