Investment Ethics and Responsibilities Quiz

Conduct and Practices Handbook (CPH)

• Duty of Care: Registered Representatives (RRs) are obligated to act honestly, in good faith, and professionally, employing appropriate skills and knowledge. The standard is one of professional conduct, not perfection.

• Ethics: A set of values and morals guiding behaviour, continuously evaluated against societal standards of right and wrong. Rules cannot encompass all situations, therefore, ethical principles guide decision-making.

• Fiduciary Duty: A higher standard than duty of care, demanding trust and honesty from those in positions of authority or expertise. This is often litigated in cases where clients have relied on the RR's advice.

• Investment Industry Regulatory Organization of Canada (IIROC): The national self-regulatory organization overseeing the securities industry in Canada, establishing high ethical standards and conduct requirements for RRs.

• IIROC Rule 1402 Standards of Conduct: This IIROC rule outlines the standards of conduct expected of registered representatives, emphasizing ethical behaviour and adherence to legal/regulatory obligations, avoiding actions detrimental to public interest.

• Know Your Client (KYC): Registered representatives must understand their client's financial situation before making any investment recommendations.

• Know Your Product (KYP): RRs need a thorough understanding of the investment products they recommend, considering their construction, likely market performance, and suitability for clients.

• Registered Representative (RR): Persons authorized to offer investment advice on various equities and fixed-income securities, adhering to high standards of ethics, conduct, and client care (KYC and KYP).

• Suitability: Investment recommendations must align with clients' financial situations, knowledge, objectives, timelines, and risk tolerance.

• End Values: Personal values, ideals, and goals that shape decisions.

• Ethical Dilemma: Situations where two or more equally justifiable choices (right vs. right) are available.

• Ethical Decision Making Process: A step-by-step process to determine ethical choices resolving moral issues. Steps include recognising the issue, determining responsibility, factual gathering, appropriate ethical testing analysis, and resolution application.

• Legal Test: Ethical testing for legal implications of a decision.

• Means Values: Daily actions taken to achieve goals. These actions influence decisions.

• Mom Test: Evaluating personal ethical decisions against the values and opinions of trusted individuals.

• Morals: Principles of right and wrong established by society, not authoritative bodies.

• Unified Value System: Harmonizing end values and means values for a consistent ethical framework. Critical when means/end values conflict.

• Values: Individual or cultural measures of worth placed on certain ideas or behaviours. Values guide decisions and life goals.

• Laws: Rules established by authoritative bodies and a reflection of society's ethical sense.

• Tone at the top: Establishing ethical standards and guiding beliefs in an organization to create a strong ethical culture from its leadership down.

Ethical Decision Analysis, Processes and Specific Dilemmas

• Ethical Relativism: No universal moral principles; all morals are relative and situational.

• Types of Ethical Dilemmas: These situations test ethical values including honesty vs. loyalty, individual vs. group, short vs. long term, fairness vs. compassion.

• Ethical Decision-Making Steps: Recognize the issues, determine who's responsible, collect information, test the issues (is it right vs. wrong issue or right vs right issues?), analysis of applicable principles/resolve (Ethical Dilemma Solutions), and decision making.

Additional Key Concepts

• Ethical Dilemmas: Discussion of solutions for ethical dilemmas such as end-based, rule-based, and social contract based ethical thinking.

• Administrator: An official responsible for coordinating/harmonising security regulations in Canada.

• Canadian Investor Protection Fund (CIPF): A fund protecting investors from losses in licensed dealer insolvencies.

• Canadian Securities Administrators (CSA): The governing body for establishing standards within the Canadian securities markets.

• Financial Transactions and Reports Analysis Centre of Canada (FINTRAC): The organization that regulates security dealers, ensuring adherence to laws regarding crimes such as money laundering and terrorist financing.

• Integrated Market Enforcement Teams (IMET): Joint effort for capital market fraud.

• Joint Serious Offences Team (JSOT): OSC, RCMP and OPP combined team investigating fraud and misconduct in market securities.

• Money Laundering: Converting illegal funds to appear legitimate (Placement, Layering, Integration).

• Mutual Fund Dealers Association (MFDA): An organization responsible for regulating the sale of mutual funds in Canada, which does not regulate the mutual funds themselves.

• National Instrument (NI): Instruments harmonising regulations across Canada's provinces by the CSA.

• Passport System: CSA's method for reducing regulatory duplication across jurisdictions.

• Primary Distribution: Issuance of new stocks or bonds (IPO) vs. secondary distribution of existing stock.

• Registrant: Individuals needing registration to perform securities-related tasks.

• Secondary Distribution: Selling existing securities.

• Self-Regulatory Organization (SRO): An organization of members regulating themselves (and their members).

• Universal Market Integrity Rules (UMIR): Applying standardized rules to all Canadian markets. International Organization of Securities Commissions (IOSCO)

• Financial Stability Board (FSB): Regulates and sets standards globally.

• Financial Industry Regulator Authority (FINRA): Supervisory body similar to IIROC in the USA.

• Canada Deposit Insurance Corporation (CDIC): Guaranteeing protection for customer deposits up to a certain limit when a member financial institution fails.

• Canada's Anti-Spam Legislation (CASL): Regulating commercial electronic messages.

• Know Your Client (KYC): Clients' need to be known prior to any business dealings.

• Know Your Product (KYP): RRs should have full knowledge of any product they are recommending.

• Conflict of Interest: Determining when client and RR interests may conflict, or are divergent.

• Cybersecurity: Growing operational compliance issues and risks related to cybersecurity in the financial sector.

• Discount Broker: Role of investment representatives.

• National Do Not Call List (NDNCL): Governing telemarketing regulations.

• Ethical Relativism: No universal moral principle governing behaviour.

• Front Running: Placing one's own orders in front of customer's orders.

• Gatekeeper: Regulators and professionals who stop clients from breaking regulations.

• Grey List: Restricted information list.

• Limit Order: Order to buy or sell securities at a specific price or better.

• Market Order: Order to buy or sell securities at the prevailing market price.

• Material Information: Relevant information materially affecting investment decisions.

• Minimum Quotation Spread: Lowest price difference between a buyer's maximum offer and a seller's minimum ask price.

• Odd Lot: Transactions not in standard trading units (e.g., 100 shares).

• Ask Price, Bid Price: Market prices for securities.

• Short Sale: Selling borrowed securities with the expectation of buying them back later at a lower price

• Stop Loss: Setting a trigger to sell securities if they drop to specific price point.

• Settlement: Transfer of securities and cash following trades.

• Wash Trade: Attempts at creating false trading activity.

• Churning: Excessively trading client accounts to increase commissions.

• Cash Account Rule: Managing cash accounts in securities trading.

• Client Discovery: Processes of observing client behaviour.

• Delivery Against Payment (DAP): Trading with delivery and payment settlement at a later date.

• Discretionary Account: Where investments are made on behalf of the client without their constant permission.

• Insider Trading: Acting on insider information regarding securities.

• Managed Account: Giving full responsibility of account investment decisions to a financial advisor.

• Margin Account: Allowing clients to make partial payments for investments, usually financed by the dealer.

• Margin Agreement: Defining margin requirements imposed upon customers by IIROC.

• Margin Call: Notice for clients to add funds for their margin, if their margin drops below a certain point (usually 50%).

• Margin Rate: The percentage a client must maintain in the account to cover margin loans.

• Margin Account: Paying partial amount to begin investment, and using borrowed funds.

• Reporting Issuers: Companies communicating regularly with the markets or with their shareholders.

• Right of Rescission: Right to cancel part of a loan. The right of purchase.

• Reporting System (ComSet): System for handling complaints about RRs and firms.

• Settlement Date: Date of delivering or paying for securities.

• Take Over Bid: Acquisition of another company's securities.

• Underwriting: Assumed risk of guaranteeing securities issuance sales.

• Due Diligence: Thorough review of investment activities for possible financial misconduct.

• All or None (AON): Order requiring buy order to be completed (or cancelled).

• Fill or Kill (FOK): Order must be immediately completely or completely cancelled.

• Switch Order: Executing one order and using the proceeds to place another order.

• Contingent Order: Order only becomes effective after a primary order is completed.

• Private Placement: Way of selling shares.

Test your knowledge on key concepts related to the responsibilities of Registered Representatives in the investment industry. This quiz covers topics including Duty of Care, ethics, fiduciary duty, and the roles of regulatory bodies. Assess your understanding of standards of conduct and client responsibilities.