Chapter 3 - v1.3

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Questions and Answers

What must a dealer member demonstrate to avoid liability for negligence?

That they provided the client with all potential investment options.

That the client signed a waiver releasing them from liability.

That they reasonably applied appropriate skill and care under the circumstances. (correct)

That they consistently reviewed the market trends.

Which of the following is NOT a required element in an action for damages due to misrepresentation?

The client had a pre-existing relationship with the dealer member. (correct)

The client relied on misleading information.

The client incurred a financial loss.

The dealer member intentionally provided misleading information.

In civil claims for breaches, which of the following statements is true?

All civil claims require a hearing in a high court.

Civil litigation is always faster and less expensive than criminal cases.

Small claims courts can handle any amount of damages claimed.

Each province's Limitations Act governs the time limits for different actions. (correct)

What is the implication of the securities acts in several Canadian provinces regarding misrepresentation?

Investors are not required to prove reliance on misleading information. Signup and view all the answers

Which of the following actions may lead to civil litigation?

Serious breaches resulting in large monetary losses. Signup and view all the answers

What factor does NOT typically fall under the jurisdiction of civil litigation?

Minor contractual disputes. Signup and view all the answers

What is the primary purpose of regulation in the securities industry?

To protect the integrity of the marketplace and investors Signup and view all the answers

When two or more regulations conflict, what principle applies?

The strictest standard prevails Signup and view all the answers

Which of the following laws may also govern the securities industry?

Various federal and provincial statutes Signup and view all the answers

What can be a consequence of inadequate corporate governance at a dealer member?

It can have a ripple effect throughout the industry Signup and view all the answers

Which factor is most influential to a dealer member's compliance with external rules?

Strength of the firm's internal compliance systems Signup and view all the answers

Which major change has NOT been mentioned as part of the recent evolution in the securities industry?

Introduction of fixed commission rates Signup and view all the answers

What can new regulations developed in response to scandals affect?

All dealer members within the industry Signup and view all the answers

Which of the following challenges is specifically highlighted in the current investment industry?

Constant technological advances Signup and view all the answers

What occurs as a result of rogue trading at an individual dealer member?

Loss of confidence in the investor community Signup and view all the answers

What is the primary responsibility of CIRO in the context of Canadian securities regulation?

To oversee and enforce rules for investment dealers and mutual fund dealers Signup and view all the answers

Which of the following best describes the nature of self-regulatory organizations (SROs) in Canada’s securities industry?

They enforce their own rules derived from contracts with dealer members Signup and view all the answers

What role does an Approved Person typically hold within a dealer member under CIRO?

An investment representative or any executive-level position Signup and view all the answers

What is a significant challenge associated with subjective assessment in the securities industry?

Defending subjective determinations can be difficult after the fact Signup and view all the answers

Which type of organization creates and enforces rules that dealer members must follow in Canada?

Self-regulatory organizations (SROs) Signup and view all the answers

Which of the following roles is NOT typically considered an Approved Person under CIRO?

Compliance analyst Signup and view all the answers

How is the authority of a self-regulatory organization (SRO) primarily established?

Through membership agreements with dealer members Signup and view all the answers

What is primarily required from individuals applying for Approved Person status with CIRO?

Commitment to abide by CIRO rules Signup and view all the answers

What aspect does CIRO NOT cover in its regulatory authority?

Development of ancillary industries Signup and view all the answers

In Canadian securities regulation, what does self-regulation primarily allow dealer members to do?

Regulate themselves through their policies and procedures Signup and view all the answers

What significant change did SEDAR+ implement in July 2023?

Combined the functionality of multiple regulatory systems into one. Signup and view all the answers

Which of the following accurately describes the role of the System for Electronic Disclosure by Insiders (SEDI)?

It is a platform for filing insider trading reports. Signup and view all the answers

What distinguishes National Instruments (NI) from Multilateral Instruments (MI)?

NIs are adopted by all provinces while MIs are only adopted by select provinces. Signup and view all the answers

Under NI 31-103, which entity triggers the registration requirement?

Persons in the business of trading securities. Signup and view all the answers

What is a common feature of companion policies associated with regulatory instruments?

They clarify the interpretation and application of regulations. Signup and view all the answers

What does the acronym CSA stand for in the context of securities regulation?

Canadian Securities Administrators Signup and view all the answers

What is the primary purpose of SEDAR+?

To consolidate and streamline various securities filing systems. Signup and view all the answers

Which entities are required to register under NI 31-103?

Exempt market dealers, investment fund managers, and CCOs. Signup and view all the answers

What is the effect of harmonization efforts by the CSA on securities markets?

Securities markets are governed by a largely consistent set of NIs and MIs. Signup and view all the answers

Which statement is true regarding exemptions for exempt market dealers?

Some jurisdictions provide local exemption orders. Signup and view all the answers

Which of the following is NOT considered a trigger event that necessitates an account suitability review?

Withdrawal of funds from the account Signup and view all the answers

What is the primary responsibility of dealer members regarding the information provided to clients?

To ensure that all information is accurate and contains material information Signup and view all the answers

Which requirement must advisors fulfill before recommending the purchase of a new or non-traditional product?

They must understand how the product is constructed and its market performance Signup and view all the answers

What is the implication of violating client confidentiality for dealer members?

They can face both civil penalties and penalties under privacy legislation Signup and view all the answers

Which statement accurately describes the Know Your Product obligation?

Advisors must understand the products they sell to assess suitability Signup and view all the answers

In which region is fiduciary duty imposed by common law?

Ontario Signup and view all the answers

Which element is NOT required to establish fiduciary duty?

Financial gain for the advisor Signup and view all the answers

What must account suitability reviews consider regarding the client's interests?

Action's impact on the client's account and the client's interests Signup and view all the answers

When can client information be disclosed without their permission?

For supervisory purposes or by court order Signup and view all the answers

What is expected of registrants regarding new and different products in an institutional setting?

They must ensure the product aligns with the client's expertise Signup and view all the answers

Study Notes

Market Integrity and Investor Protection

Organizations impose rules to ensure fair and efficient securities markets.
Rules may vary across jurisdictions, with the strictest standard applying in case of conflicts.
Other relevant laws include Criminal Code, money laundering, terrorist financing, privacy, corporate law, and bankruptcy & insolvency legislation.
Case law principles from criminal and civil jurisdictions also apply.

Importance of Regulation

Evolving securities industry presents new risks and challenges.
Significant market changes like elimination of ownership restrictions, fixed commission rates, demutualization of exchanges, and new trading venues have occurred.
Dealer members face challenges with new products, competition, technology, and demographics.
Inadequate corporate governance can impact the entire industry.
Rules encourage fairness and protect market integrity.
Strong internal compliance systems reinforce external rules.
Examples include rogue trading impacting investor confidence and necessitating new regulations.

Key Regulatory Players

Canada's securities industry is self-regulated at the industry level, governed by provincial and federal legislation.
Self-regulatory organizations (SROs) administer their own rules, derived from agreements with member firms.
Foreign regulations may apply to Canadian market participants.
Dealer members must also adhere to their own internal policies and procedures.

Canadian Investment Regulatory Organization (CIRO)

National SRO overseeing investment dealers, mutual fund dealers, and trading activity on Canadian marketplaces.
CIRO members (including Approved Persons) agree to abide by its rules.
Approved Persons include roles like Associate Portfolio Manager, Chief Compliance Officer, Chief Financial Officer, Director, Executive, Investment Representative, Portfolio Manager, Registered Representative, Supervisor, Trader, and Ultimate Designated Person.
CIRO enforces rules on sales, business, and financial practices, interprets existing rules, recommends amendments, and creates new regulations.

Canadian Securities Administrators (CSA)

National organization that coordinates and harmonizes provincial securities regulation.
Established National Instruments (NIs) and Multilateral Instruments (MIs) to standardize regulations.
Companion policies explain interpretations, administration, implementation, and compliance expectations.

Key Regulatory Instruments

Important NIs for dealer members include NI 31-103, covering registration requirements, exemptions, and ongoing obligations.
Registration is mandatory for those engaging in trading, including exempt market dealers.
Investment fund managers, Ultimate Designated Persons (UDPs), and Chief Compliance Officers (CCOs) must register.

Account Suitability and Know Your Product (KYP)

Dealer members must ensure client information is accurate and includes material facts for informed investment decisions.
Account suitability reviews are required for client accounts, triggered by events such as new securities, change in representative, or KYC information updates.
KYC information, the impact of the action, and prioritizing client interests must be considered during suitability reviews.
Advisers recommending securities, especially new or non-traditional products, must understand product construction, performance in various market conditions, and suitability before recommending.

Confidentiality

Dealer members must maintain client confidentiality regarding identities and financial circumstances.
Disclosure of client information without permission is restricted, except for supervisory purposes or legal orders.
Confidentiality violations can lead to civil penalties and breaches of federal and provincial privacy legislation.

Fiduciary Duty

Fiduciary duty, imposed by common law (except in Quebec), requires trust, confidence, and reliance.
Clients only need to prove losses due to dealer negligence to seek compensation.
Examples of fiduciary duty breaches include providing inaccurate information or neglecting suitability assessment.
To avoid liability, dealers must demonstrate reasonable skill and care.

Misrepresentation

Misrepresentation liability arises from tort law.
Clients must prove intentional misleading information causing loss, relying on the information provided.
Common misrepresentation claims include suitability assessment failures and non-disclosure of essential investment facts.
Specific provinces have legislation addressing misrepresentation, simplifying the process for investors.

Litigation Consequences

Civil claims are common for significant breaches and monetary losses.
Claims can be filed in small claims court, but limitations on amount and issues exist.
Litigation can be time-consuming and expensive.
Actions for breach of statute are governed by relevant legislation.
Provincial Limitations Acts set time limits for legal actions.

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Description

Explore the essential regulations that maintain fairness and efficiency in securities markets. This quiz covers various laws, case principles, and the challenges faced by dealer members amidst evolving market conditions. Test your understanding of market integrity and the impact of regulations on investor protection.