Principles of Securities Regulation

General Principles of Securities Regulation

• Securities legislation is enacted by each province to oversee the primary and secondary distribution of securities
• Legislation also protects security buyers and sellers
• In most provinces, a securities commission administers the applicable Act
• In provinces lacking a commission; an administrator, registrar, or other official manages securities administration
• The term administrator refers to each province’s securities regulatory authority
• Regulators coordinate and harmonize the regulation of Canadian capital markets through the Canadian Securities Administrators (CSA)
• Securities regulators ensure the integrity of financial markets and safeguard investors
• The Ontario Securities Commission (OSC) aims "to protect investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in their integrity.”
• The Canadian Investment Regulatory Organization (CIRO) is the investment industry's self-regulatory organization (SRO)
• CIRO protects investors and builds Canadians’ trust in financial regulation
• Securities acts are based upon three broad principles:
• Disclosure enables reasoned investments
• Registration includes dealers, advisors, and stated categories
• Enforcement consists of securities laws and administrative policies

Disclosure

• Full, true, and plain disclosure is the underlying principle of Canadian securities regulation

• Those offering securities for public sale that have not been publicly distributed must adhere to specific disclosure rules

• A prospectus must be filed containing full, true, and plain disclosure of all material facts relating to the securities offered for sale

• Selling or offering to sell securities is illegal until the administrator deems disclosure satisfactory

• Prospectus: contract between the issuing company and the security purchaser

• Disclosure is made in a prospectus issued by the company and its underwriter, accepted for filing by the administrator

• Sales from a control position are subject to the same disclosure requirements in most provinces

• Secondary trading happens when securities move beyond primary distribution and are bought/sold by investors, often through a stock exchange

• Issuers must meet specific listing requirements to maintain an exchange listing for secondary trading

• Continuous disclosure requirements help investors make informed decisions with rules requiring periodic financial statement filings/ material company changes

• Continuous disclosure requirements apply to:

• Insider trading reports

• Information circular required in a proxy solicitation

• Regular corporate financial reports

• Annual information forms

• Timely disclosure of material changes in the affairs of issuers

• Other shareholder communications

• Public investment professionals, which must be readily available to all market participants, ensure material information is well communicated from issuers

• Registration ensures integrity and financial trustworthiness

Registration

• Administrators register persons and companies selling securities to the public or advising on securities
• Administrators are responsible for proficiency, integrity, and financial compliance
• Administrators can suspend or cancel registration
• Investment dealers underwriting or selling securities must register with the administrator in any province
• All investment dealer partners, directors, officers, and salespersons must register with the administrator
• Investment dealers must be CIRO members and follow CIRO’s rules
• CIRO determines the customer types a dealer member/representatives can serve, and it approves the products they can deal in

Investigation and Prosecution

• Administrators can investigate, prosecute for violations, and impose sanctions

• Attendance of witnesses at a hearing, taking evidence under oath, seizing documents, freezing funds/securities, have powers

• Administrators can suspend, cancel, or revoke registration; levy fines; disgorge monies; cease trading; and deny a person the right to trade securities

• An administrator's actions have serious consequences for the public and the individual

• In certain provinces broader powers give administrators power to prevent a person from becoming a director/officer; administrators can give public reprimands and levy fines

• An administrator can recommend charges against an offending party

• Anyone disagreeing with administrator rulings may appeal to the courts

• Securities legislation prohibits fraudulent activity

• Prohibited: misleading appearance of trading in a security or artificial price for a security

• Prohibited: making misleading/untrue statements affecting the market price of a security

Penalties

• Under the Securities Act (Ontario), penalties are a fine of $5,000,000/imprisonment for a term of not more than five years less a day
• The OSC can order an administrative penalty of up to $1,000,000 and disgorgement of monies obtained as a result of noncompliance with Ontario securities law
• Securities acts have secondary market civil liability provisions, and investors are not required to prove reliance on misleading disclosure when buying or selling stock or other securities
• Provinces can order financial loss repayment resulting from illegal or improper trading

Other Legal Notes

• Determined public officials/exhaustive legislation do not guarantee a lack of financial loss
• Laws prevent blatant fraud and deceit, protecting those lacking investment expertise
• Laws do not replace investor, advisor or evaluation of an investment
• Investors must accept certain risks
• During the client discovery process, Registered Representatives (RRs) should explain/document risks thoroughly so clients make informed decisions

Key Government Players Involved in Securities Regulation

• Securities industry regulation occurs at the federal, provincial, and industry levels

The Federal Government

• Unlike the United States, Canada lacks a formal federal securities regulatory body
• Canadian officials have proposed some type of federal authority
• Certain securities activities are regulated by federal legislation and authorities
• The Canada Business Corporations Act manages proxy solicitations and insider trading for federally incorporated companies
• The federal government owns federally regulated banks that own many large securities dealers in Canada
• Any securities activity that takes place in provincially regulated subsidiaries of the banks is subject to provincial securities regulation
• Securities dealers are subject to the federal Proceeds of Crime (Money Laundering) and Terrorism Financing Act (PCMLTFA).
• The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and the Personal Information Protection and Electronic Documents Act (PIPEDA) help enforce

Integrated Market Enforcement Teams (IMETs)

• Integrated Market Enforcement Teams (IMETs) launched November 2003
• Goal: strengthen the law enforcement community's ability to detect, investigate, and deter capital markets fraud
• IMETs: An initiative of the Royal Canadian Mounted Police (RCMP) and the federal government
• Teams work closely with securities regulators, SROs, exchanges, and other federal and provincial authorities

Joint Serious Offences Team (JSOT)

• The Ontario Securities Commission (OSC) launched it’s Joint Serious Offences Team (JSOT) in May 2013
• An enforcement partnership between the OSC, the RCMP Financial Crime program, and the Ontario Provincial Police Anti-Rackets Branch
• JSOT investigates/prosecutes serious law violations using the Securities Act (Ontario)/the Criminal Code; aims to bring more cases before the courts

Provincial Regulation

• Each province regulates securities activities within its borders through a securities commission or equivalent, and its own securities legislation
• CSA harmonized securities markets through largely harmonized National Instruments (NI) and Multilateral Instruments (MI)
• A National Instrument (NI) has been adopted by all CSA jurisdictions
• A Multilateral Instrument (MI) has not been adopted by one or more CSA jurisdictions
• National Instruments of particular relevance to dealer members include NI 31-103 & NI 81-102

The Canadian Securities Administrators (CSA)

• The CSA: an umbrella organization improving, coordinating/harmonizing the regulation of Canadian capital markets
• Aims to achieve consensus on policy decisions impacting capital markets and their participants and to work cooperatively to deliver regulatory programs across Canada
• Threefold mission:
• Protect investors from unfair, improper, or fraudulent practices
• Foster fair and efficient capital markets
• Reduce risks to the market’s integrity and to investor confidence in the markets
• The CSA functions as an informal body
• The CSA coordinates initiatives on a cross-Canada basis
• Provincial/territorial regulators handle complaints regarding securities violations in their jurisdictions Enforcement of securities regulations is done individually by each province or territory

Client Focused Reforms (CFRs)

• The CSA released it’s final amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations
• Also known as Client Focused Reforms (CFRs)
• The intent of conduct requirements include To:
• Better align the interests of securities advisers, dealers, and representatives (registrants) with the interests of their clients
• Improve outcomes for clients
• Clarify for clients the nature and terms of their relationship with registrants
• The CFR initiative is based on: interests of the client come first

CSA Tools and Processes

• Delivers its mandate via: Passport System, Super Memorandum of Understanding (Super MOU), electronic databases

Passport System

• Passport System reduces filing duplication in multiple jurisdictions and is based on mutual reliance principles
• Securities regulatory authorities rely on the analysis and review provided by another authority
• Passport System is useful when reviewing prospectuses and streamlining registration

Super MOU

• The Super MOU is a memorandum of understanding on marketplace oversight, based on mutual reliance principles
• Each recognized marketplace has a principal regulator responsible for its oversight

Regulators

• The OSC is the principal regulator for the Toronto Stock Exchange (TSX) and CIRO
• The ASC and the BCSC are the principal regulators for the TSX Venture Exchange
• The AMF is the principal regulator for the Montreal Exchange (MX)

Electronic Databases

• The CSA maintains electronic databases to streamline regulatory processes and make information more easily available to the market

SEDAR+

• SEDAR+ is the web-based system market participants use to file, disclose, and search for information in Canada’s capital markets
• July 2023: Consolidated and replaced the System for Electronic Analysis and Retrieval (SEDAR), the national Cease Trading Order (CTO) database, and the Disciplined List (DL) database
• Future phases of SEDAR+ will replace the System for Electronic Disclosure by Insiders (SEDI), the National Registration Database (NRD) and the remaining filings in local systems

SEDI

• SEDI allows insiders to file insider reports with all CSA regulators through a single submission over the internet. The public can access insider reports soon after they are filed

NRD

• NRD: Database allowing dealers, underwriters, advisers, and individuals to submit registration applications, changes, renewals, and fees electronically in a single submission to all regulators

Cease Trading Order (CTO)

• Prohibits trading in a company’s securities
• CTOs are issued by a provincial/territorial securities commission/similar regulatory, against a company failing to meet disclosure requirements or as a result of an enforcement action that involves an investigation of wrongdoing

International Activities

• Globalization blurred lines between international securities markets, creating a need for more collaboration among regulators in different jurisdictions

International Organization of Securities Commissions (IOSCO)

• IOSCO regulates more than 95% of the world’s securities markets

• Objectives:

• Cooperate in developing, implementing, and promoting adherence to international regulation standards, oversight, and enforcement to protect investors, maintain fair markets, and address systemic risks

• Enhance investor protection and promote investor confidence through strengthened information exchange/cooperation

• Exchange information both at global and regional levels to assist market development, strengthen market infrastructure, and implement regulation (IOSCO)

• IOSCO has over 200 members Memberships include OSC, AMF, ASC, BCSC, and CIRO

Financial Stability Board (FSB)

• The Financial Stability Board (FSB) was established April 2009
• Memberships include Bank of Canada/Office of the Superintendent of Financial Institutions (OSFI)
• Objectives:
• Assess and address vulnerabilities affecting the financial system;
• Promote information exchange among authorities responsible for financial stability;
• Monitor and advise on market developments and their implications for regulatory policy;
• Advise on and monitor best practices in meeting regulatory standards;
• Review policy development work of international standard-setting bodies to ensure their work is timely, coordinated, prioritized, and addresses gaps;
• Set guidelines for supporting supervisory colleges; Manage contingency planning for cross-border crisis management;
• Collaborate with the International Monetary Fund (IMF) to conduct early-warning exercises

Self-Regulatory Organization

• SROs are industry organizations regulating their members and are granted regulatory powers and authority by administrators (Typically a recognition order)

• Responsible for enforcing members’ conformity with securities legislation and have the power to prescribe their own rules of conduct and financial requirements

• In Canada, the SRO for investment and mutual fund dealers is CIRO

• Administrations monitor the conduct of the SRO and review the rules

  • Make sure that they uphold the principles of securities legislation and are in the best public interest

• CIRO has powers to investigate possible violations of its rules, take disciplinary action against parties Sanctions might include fines, strict supervision, and the requirement to rewrite qualifying exams

• Serious offences might include loss of registration and substantial fines

SROs

• As of January 1, 2023, in Canada, the 2 SROs were IIROC and MFDA
• IIROC: National SRO overseeing all investment dealers and trading activity on equity/debt marketplaces
• IIROC Enforces rules/regulations regarding sales, business conduct, financial practices, and trading activities of its dealer members/their representatives
• MFDA was the SRO responsible for regulating the distribution of mutual funds by its members
• MFDA did not regulate the mutual funds themselves; this responsibility remains with securities commissions

Canadian Investment Regulatory Organization (CIRO)

• CIRO Is a Self Regulatory Organization
• CIRO oversees all investment dealers, mutual fund dealers and trading activity on Canada’s debt and equity marketplaces, sets and enforces rules/high standards

History of CIRO

• IIROC was created through the consolidation of the Investment Dealers Association of Canada (IDA)  and Market Regulation Services Inc. (RS) in June 2008
• In the 1990s, provincial regulators recognized the IDA as an SRO for investment dealers and their registered employees
• In 2006, the trade association role was eliminated through the creation of a separate and independent trade association known as  the Investment Industry Association of Canada (IIAC)
• Became known as CIRO Jan, 1, 2023 through merger of IIROC/MFDA

IIAC

• The IIAC is a based advocacy association; advances the growth and development of  the Canadian investment industry
• Is not a regulatory body; members firms vary in size, mandate is fourfold: advocacy, industry profile, member support, and market advancement

CIRO Compliance and Surveillance

• CIRO’s compliance teams examine firms

• They work to continually meet high standards with conduct, trading, prudential and operating rules

• Their regulatory work ensures that firms provide continually high standards while providing clients with financial regulatory services and expertise

• CIRO Financial Regulation Responsibilites:

• Conduct minimum financial compliance reviews

• set minimum requirements to ensure that firms have enough capital for high quality business specific nature

• Volume to prevent firms from excessive leveraging/risky business practices

• CIRO also carries out business conduct compliance reviews (Supervision) for member dealings

• Supervision includes advice and transactions, RRs following KYC ,Suitability Rules/customer needs/instruments

• CIRO Also:

• Carries out trading regulation conduct compliance reviews to check trading firms’ procedures/UMIR

• Conducts market surveillance and trading review analysis to ensure that trading is done to UMIR Law

• Manages enforcement to breaches through investigations, discipline with potential termination

• CIRO members is of the Intermarket Surveillance Group (ISG) which promotes effective market surveillance among international exchanges

CIRO

• Evaluating reports of wrongdoing/actions
• Whistleblower service
• Free number/web pages
• Various initiates/Information:
  • Firm Member Status
  • Registration individual status
  • Disciplinary measures and status
  • Definition guide/terminology/development
  • Trend/cybersecurity/regulation
  • Other Regulatory/Sites

Financial Industry Regulatory Authority

• U.S counterpart
• Works with cross-border cooperation with information regarding compliance matters concerning firms/examinations
• Regulatory Authority to
• Protect Investing
• Market Integrity -Industry Regulation
• Write/Execute Law
• Provide Information Utilities

Exchanges and Marketplaces

• Compliant Market/Listed Organization Compliance monitored by exchanges, corrections/suspensions, and terminated listings
• CIRO Regulates Trading, Including TSO/TSX/Alternative Trading Systems
• ATS brings buyers and sellers of securities together and brings together the orders for securities of multiple buyers and sellers
• An ATS is registered as an investment dealer and is subject to CIRO’s supervision; generally speaking An ATS uses established non-discretionary methods under which the orders interact with each other

Designed Stock Exchanges

• Designates exchanges
• Holds securities
• RRSP. TFSA. Registered accounts
• Criteria -Normal exchanges/businesses -Clearing/Settlement -Pricing information that’s transparent. -Listings -Maintenance listing
• Standards: Protection, Governance, Integrity, Regulation
• Experienced/Management Teams: Financial sufficiency, tracking, long term stability
• Various high volumes
• The host has legal taxation trade with good global commercial standing
• Securities framework/Juridical investor protection/rights comparable to those for available to Canadian is granted
• The host recognizes government designation/tax Canadian Tax is viable
• The host does not impose high risk impediments capital of funds
• RR keeps information for listed companies with restrictions
• Company Over-The-Counter policies.

Investor Protection Funds

• Recognized is need to publicly invest and protect
• Maintaining relationships and building client confidence is vital
• Not protected in market losses, but relationships the the financial member collapse
• Canadian Investor Protection Funds
• Cash balance insurance that ensures security,
• Not covered under investment failures
• Covers: Investment fund dealer investment, mutual fund trading categories
• Sponsored firm members under obligations:
  • Regular payment
  • Assessments assessment
  • Provided Information sharing with cooperation
  • Firms operations/customers affairs/directors/agencies permitted by law
  • Reviews permitted/Advisors reviews/Staff/Connection
  • Complying with actions/CIRO to take etc

Payment Obligations

• Monitoring profitability and liquidity under disciplinary action
• Not covered losses caused by market changes
• Non CIFP not allowed coverage/foreign affiliates, CIFP Requirements

Obligations

• Trustees appointed/Insolvency
• Policy’s governance/Board coverage
• Visit website for information
• Registered retirement includes: plans, funds,, accounts/plans,income funds
• Savings and corporation/personal clients.
• Aggregate single accounts under the same client
• The CIPF has a MOU with the Securities Investor Protection Corporation, the equivalent of CIPF and works in event trading

CDIC

• Canada Deposit Insurance established 1967
• Federal coverage deposit
• Covers GICs/Foreign/Canadian in different member institutions at 100,000/person

Provincial Funds

• Credit Unions
• Plans Vary B.C Deposit and Ontario Am Fed.
• Anti money/terrorist financing in securities

Laundering/Financing

• People try to hide where the funds are going to
• Terrorists generate funds, industries prevent it, members limits and report
• Money Laundering
• Converting complex criminal transactions legitimizing illegitimately
• Obscurring resources and suspicious

Stages

• Wash-cycle
• Spin-cycle
• Integration
• Placement disposes cash from illegality.
• Structuring decreasing sums, or, cash deposits
• Businesses mingling/store Bribing personal
• Countries with requirements
• Instrumentation instruments-cheques

Securities

• Less placements
• Transfers/Cheques from various
• Layering creates source
• Transactions
• Sources are concealed wiring in Globes or the market.
• Corporations over finance/fraud
• Terrorism is motivated/ terrorist support
• Difficult financing comes from various resources, charities
• Small attacks come with transactions

Regulations

• Act/Financing goals
• Detect financial terrorism/ crime
• International crime
• Action client report
• Financial report financial activity
• Suspicious cross border activity
• Compliance is enforced
• FINTRAC oversees enforcement and information/reporting etc;
• Financial terrorist intelligence
• National security tax Canada revenue is all reported

Summary

• Regulation occurs through national and provincial institutions
• Conduct enforcement
• Harmony from CSA
• Industry SRO; enforcement,requirements
• Industry Protected firm member against financial firm failures