Securities Regulation Principles

General Principles of Securities Regulation

• Securities legislation exists in each province to regulate the primary and secondary distribution of securities
• The legislation aims to protect both buyers and sellers
• A securities commission administers the applicable Act in most provinces
• The regulatory authority in each province is the administrator
• Regulators coordinate and harmonize capital market regulation through the Canadian Securities Administrators (CSA)
• Each securities regulator's mandate is to ensure market integrity and protect investors
• The Canadian Investment Regulatory Organization (CIRO) is the self-regulatory organization (SRO) for investments

Principles of Securities Regulation

• Securities acts are based on disclosure, registration, and enforcement
• Licensing dictates conditions for industry entry, making participation a privilege, revokable by the regulator
• Securities regulators also regulate issues such as insider trading, anti-money laundering, and cybersecurity
• Disclosure is based on full, true, and plain communication of material facts
• Persons offering securities for public sale must file with the administrator and deliver a prospectus to purchasers
• Failure to disclose material facts could have legal ramifications
• The prospectus resembles a contract ensuring informed decisions for potential investors
• Disclosure normally occurs via a prospectus with administrator filing
• Sales from control positions typically require the same level of disclosure
• Secondary trading occurs when a security is bought and sold by investors after its primary distribution
• Freely trading securities are no longer sold via prospectus but bought/sold directly
• Issuers must meet specific requirements to maintain exchange listings for secondary trading
• Continuous disclosure requirements help investors by mandating periodic financial statement filings and disclosures of material changes
• Continuous disclosure covers insider trading reports, information circulars for proxy solicitations, regular corporate financial reports, and annual information forms
• Continuous disclosure aims to ensure effective communication of material information to the public and investment professionals for informed investment decisions

Registration

• Administrators register individuals/companies directly selling or advising on buying/selling securities
• Registration enables administrators to enforce proficiency, integrity, and financial compliance
• Administrators can suspend or cancel registration if deemed in the public interest
• Investment dealers selling securities must register with the administrator in each province of sale
• All partners, directors, officers, and salespersons employed by investment dealers need to register with the administrator
• Investment dealers must be CIRO members and adhere to its rules
• CIRO determines the customer types a dealer member and its representatives can take on and approves the financial products they can deal in

Investigation and Prosecution

• Administrators can investigate and prosecute Act violations, sanctioning contrary public interest conduct
• Compelling witness attendance, evidence taking, document seizure, fund/security freezing are among the powers granted to administrators
• Administrators can suspend, cancel, or revoke registration, as well as levy fines, and cease trading
• Serious repercussions can come as a result of administrative powers being implemented.
• Registration cancellation means losing the ability to make a living
• Securities trading being ceased makes it harder for the issuer to raise capital
• Administrators can prevent individuals from becoming directors/public company officers, issue public reprimands, and levy fines in certain regions
• Recommendations of charges can also form part of administrator powers for parties violating any Act provision
• Anyone who disagrees with an administrator's ruling has the right to appeal in all provinces
• Securities legislation bans participation in activities that participants are reasonably aware are fraudulent
• Behaviours that mislead securities trading or create artificial security prices are against law.
• Knowingly making misleading or untrue statements affecting market price or value of a security is prohibited in any way

Penalties for Offences

• Securities Act (Ontario) has penalties up to around $5,000,000 fine and prison term of up to almost 5 years
• The OSC can order administrative penalties up to $1,000,000 and disgorgement of monies obtained due to noncompliance
• Securities acts hold secondary market civil liability provisions
• Investors aren't required to prove they relied on misleading disclosure when buying or selling stock or other securities
• Provincial authorities may also order financial loss repayment to a member of public if this results from conduct of illegal or improper trading

Key Government Players Involved in Securities Regulation

• Regulation in the securities industry occurs at the federal, provincial, and industry levels
• Unlike the U.S.'s Securities and Exchange Commission, Canada lacks a formal federal securities regulatory body
• Federal legislation and authorities regulate certain securities activities.
• Canada Business Corporations Act regulates proxy solicitations and insider trading federally for incorporated companies
• Indirect federal regulation occurs to the extent that federally regulated banks own securities dealers
• Federal legislation such as the Proceeds of Crime (Money Laundering) and Terrorism Financing Act (PCMLTFA) also applies
• Enforced by the Personal Information Protection and Electronic Documents Act and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
• Integrated Market Enforcement Teams (IMETs) were launched in 2003 to strengthen the law enforcement community's ability to detect, investigate, and deter capital markets fraud
• A joint initiative with the Royal Canadian Mounted Police (RCMP) and their federal government
• IMETs work closely with securities regulators, the SRO, the exchanges, and other federal and provincial authorities

Regulation at Provincial and Territorial Level

• Provinces regulate securities activities through a securities commission or equivalent
• Securities markets are governed by largely harmonized National Instruments (NI) and Multilateral Instruments (MI) due to CSA's efforts
• A NI is adopted by all CSA jurisdictions, while an Ml has not been
• NI 31-103 and NI 81-102 are particularly relevant to dealer members
• Governing Securities bodies in each province and territory:
• Alberta Securities Commission (ASC)
• British Columbia Securities Commission (BCSC)
• Manitoba: The Manitoba Securities Commission (MSC)
• New Brunswick – Financial and Consumer Services Commission (FCNB)
• Newfoundland and Labrador: Office of the Superintendent of Securities Service
• Northwest Territories: Office of the Superintendent of Securities.
• Nova Scotia Securities Commission (NSSC)
• Nunavut Securities Office
• Ontario Securities Commission (OSC)
• Prince Edward Island: Office of the Superintendent of Securities.
• Quebec: Autorité des marchés financiers (AMF)
• Saskatchewan: Financial and Consumer Affairs Authority of Saskatchewan (FCAA)
• Yukon Territory – Office of the Yukon Superintendent of Securities

Canadian Securities Administrators (CSA)

• The Canadian Securities Administrators (CSA) strives to improve, coordinate, and harmonize the regulation of Canadian capital markets
• CSA aims to achieve consensus on policy decisions affecting capital markets and participants
• The CSA also works collaboratively delivering regulatory programs such as the review of continuous disclosure and prospectus filings
• CSA's mission is threefold:
• Protect investors from unfair, improper, or fraudulent practices
• Foster fair and efficient capital markets
• Reduce risks to market integrity and investor confidence
• CSA functions through meetings, conference calls, and day-to-day cooperation
• Provincial/territorial regulators handle all complaints concerning securities violations in their jurisdictions; enforcement is on an individual basis in each province
• On October 3, 2019, the CSA released it's final amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations as known as Client Focused Reforms (CFRs)
• CFRs seek alignment of interests, improved outcomes, and clarified registrant relationships

CSA Tools and Processes

• It employs the Passport System, the Super Memorandum of Understanding (Super MOU), and electronic databases.
• The Passport System is designed to cut down on the review of filings made in various jurisdictions on a mutual reliance principle
• The Super MOU is a memorandum of understanding about the oversight of marketplaces
• The Super MOU also provides for oversight functions based on mutual reliance principles, where each recognized marketplace has a principal regulator responsible for oversight

Specific Regulators

• The OSC is the principal regulator for the Toronto Stock Exchange (TSX) and CIRO
• The ASC and BCSC are the principal regulators for the TSX Venture Exchange
• The AMF is the principal regulator for the Montreal Exchange (MX)
• CSA has electronic databases that make market information more easily available and reduce the streamlining of regulatory processes

Electronic Databases

• The CSA maintains electronic databases to streamline regulatory processes and make information more easily available to the market.
• SEDAR+ is used by market participants to file, disclose, and search for information in Canada’s capital markets; in July 2023, it replaced SEDAR, CTO database, and DL database, with future phases replacing SEDI and NRD
• SEDI allows insiders to file insider reports with all CSA regulators through a single submission over the internet that the public can access soon after they are filed
• NRD is a database where dealers, underwriters, advisers, and individuals submit registration applications, changes, renewals, and fees electronically in a single submission to all regulators
• The CSA routinely informs constituents through releases and publications

Cease Trading Order (СТО)

• CTOs prohibit trading in a company's securities and may be issued for failure to meet disclosure requirements or as an investigative enforcement action

International activities

• The need for collaboration among regulators in different jurisdictions arose as the markets became more globalized and organizations were created in response to this
• The International Organization of Securities Commissions (IOSCO) regulates over 95% of global markets.
• IOSCO objectives comprise:
• Cooperating on internationally recognized regulatory standards that protect investors
• Enhancing investor protection and promoting confidence in the integrity of securities markets
• Exchanging global and regional information to assist in developing markets
• IOSCO has over 200 members (including the OSC, the AMF, the ASC, the BCSC, and CIRO).

Financial Stability Board (FSB)

• The Financial Stability Board (FSB) was established in April 2009 at the G20 Leaders’ Summit as the successor to the Financial Stability Forum.
• The Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) are members.
• The FSB’s mandate includes a number of objectives:
• Assessing and addressing vulnerabilities to the financial system
• Promoting information exchange on authorities responsible for stability
• Monitoring of best practices in meeting regulatory standards
• Joint reviews of policy development work
• Setting supervisory college guidelines
• Managing contingency planning for cross-border crisis management
• Collaborating with IMF

Self-Regulatory Organization (SRO) Role

• SROs are industry organizations regulating their own members, granted regulatory powers by administrators via recognition orders
• They are responsible for enforcing their members’ conformity with securities legislation
• SROs have power to prescribe rules of conduct and financial requirements for their members
• Investment and mutual fund dealers have CIRO as their SRO in Canada
• CIRO's regulations uphold securities legislation principles
• Administrators monitor CIRO's conduct and review rules for conflicts with provincial regulations
• The rules of the SRO must be in the public’s best interest, setting a standard equal to or higher than provinces
• CIRO can investigate and take action against member firms and their employees when appropriate
• Sanctions include fines, strict supervision, rewriting exams, registration loss, and substantial fines

Prior SROs

• Prior to January 1, 2023, there existed two SROs in Canada, the Investment Industry Regulatory Organization of Canada (IIROC), and the Mutual Fund Dealers Association of Canada (MFDA)
• IIROC was the national SRO regarding all investment dealers and trading activity on the equity and debt marketplaces in Canada
• The MFDA did not regulate the mutual funds themselves; this responsibility remained with the securities commissions
• IIROC enforced rules/regulations on sales, conduct, practices, dealing-member activities

Canadian Investment Regulatory Organization (CIRO)

• Oversees debt and equity markets and dealers/funds, establishing and enforcing business rules as such
• CIRO standards consist of registrants that are subject to high proficiency standards, training and supervision by member firms
• IIROC merged from IDA and Market Regulation Services Inc (RS) in June 2008
• The IDA formed in 1916 by Toronto bond dealers, was one of the first groups to be formed by provincial regulators and the SRO for investment dealers and their registered employees
• Securities legislation required mandatory SRO firm membership
• Formulated IIAC in 2006 in its role as a trade association after that was eliminated
• The CSA approved a new SRO that resulted from the merger of IIROC and MFDA that assumed MFDA and IIROC regulatory responsibilities
• IIAC advances Canadian investment industry growth as an advocacy association by the means of support, profile, support, and advancement

CIRO Compliance and Surveillance

• CIRO's compliance teams watch firms to see that rules around operations and prudence are in place as well as providing conduct, trading, trading, services that are prudent and operational
• Includes business conduct regulation, financial compliance, trade review and analysis.
• CIRO conducts financial compliance reviews setting capital standards, preventing excessive leverage and risky business practices.
• CIRO-regulated firms participate in the Canadian Investor Protection Fund (CIPF)
• CIRO performs reviews of business conduct in order to see if that dealer members procedures of supervisions are in place
• Dealer members have to supervise client accounts to ensure that advice and transactions will correspond appropriately with the instructions, and requirements for their service
• Representatives must follow Know Your Client (KYC) and suitability rules
• CIRO carries out checks that are to do with 'Trade desks" procedures and ensures if trades comply with UMIR
• As an ISG (Intermarket Surveillance Group) member, International exchanges mandate CIRO to promote effective market surveillance amongst exchanges, world-wide

Other CIRO Initiatives

• CIRO has a whistleblower service for reporting wrongdoing, taking prompt action on any reported issues or that might be unethical
• You can learn about initiatives with CIRO from its website containing information on a CIRO of status or firm from status
• Also see their glossary of terms and definitions which may have registrants’ titles and the meaning behind industry terms
• All new rule proposals and trends that CIRO feels are important for its stakeholders to be aware of, for example, cybersecurity and planning for business continuity

CIRO and FINRA

• CIRO and FINRA cooperate to enhance effectiveness through exchanging information and other cross-border assistance via compliance matters linked to enforcement. In addition, information concerning oversight and examinations are shared between CIRO and FINRA
• FINRA is the largest independent regulator for all securities firms doing business in the United States

FINRA Responsibilities

• Protect investors, regulate markets, register and educate industry participants, set rules and provide industry utilities, administer dispute resolution forums
• Exchanges in Canada monitor compliance of companies with listing policies, and have the authority to pre-approve transactions, require appropriate disclosure, as well as to halt or cancel the trading of the company
• TSX(Toronto Stock Exchange), TSXV(TSX venture exchange, and Alternative Trading systems also comes under the trading regulated umbrella that CIRO has formed

ATS

• An ATS brings buyers and sellers of securities together and is subject to supervision, but it uses non discretionary means of doing so

Designated Stock Exchanges

• Domestic and foreign-based exchanges must meet specific criteria to be considered a Designated Stock Exchange by Canadian regulatory authorities. Only securities listed on designated exchanges are eligible for registered accounts

Criteria for Listing

• Meeting standards, and providing information by trading on the market while enforcing monitoring trades, and being transparent in prices
• Maintain consistent standards of listing, and have an experienced management team for operations, and stability over long time frames
• Foreign-based exchanges are also encouraged to meet the criteria for legal exchanges for commercial matters, and hold Canada as a close partner
• Securities regulatory frameworks must ensure they meet certain regulations for investor rights so as to be comparable with Canadian investors As an RR you should make sure to note important details in regulations, and that pink sheer companies aren’t listed in any of the registered documents

Investment Protection Funds

• Securities try to provide public protections from losses due to any failure by any dealer member
• Vital for maintaining the confidence of the public
• Note that investors are not protected from market losses, but rather from losses related to the financial collapse of a dealer member
• The funds and programs discussed below were established for this purpose.

Canadian Investor Protection Fund

• CIPF maintains two funds to cover a client's securities and cash balance losses, but not losses due to poor performance
• The ‘investment dealer fund’ serves potential coverage claims by registered CIRO members that are associated with the financial affairs of dealer members

Obligations

• Paying the fees associated with the assessments of CIRO and/or CIPF
• Giving out all information required to assess the CIRO or CIPF condition for any risk of loss

Acknowledgements and Consents

• The firm's operations its customers' affairs and its partners, directors, officers, shareholders, employees, agents, or any other persons permitted by law is permitted by CIRO to carry out any kind of reviews and completely cooperate

Compensation for Client Losses

• The CIRO has systems to give an overview of a dealer capital position in order to ensure financial health, as well as liquidity when necessary

CIPF (Coverage)

• CIPF does not cover clients' losses due to market value changes, the default of an issuer of securities
• Members that do not have associated CIPF benefits would still be eligible for firms in a CIPF member
• When a dealer member becomes insolvent, the board of governors will appoint a trustee in bankruptcy for any affected customer’s and claims
• Certain persons and entities are not eligible customers and, therefore, not entitled to CIPF protection
• There is a limit on the coverage provided for a client’s general accounts equal to $1000000 for losses

General and Separate Accounts (Description)

• Accounts associated with 1 client would pertain to all accounts being treated as generally covered
• General includes cash, margin, short sales, options, futures and foreign currency accounts and are combined and treated as one general account
• An equal coverage is available for a client when it comes to both accounts

Separate Accounts (Description)

• Includes the most specific clients, and each separate account has the same coverage
• Registered retirement plans, testamentary types of trusts, and any personal holdings with respect to those corporations

Partnerships

• All plans that correspond to the clients needs are usually combined

Canada Deposit Insurance Corporation

• Set up and created in 1967, helps give insurance deposits
• Helps Canadian banks and Trust and Loan companies
• Registered Education Savings Plans and Registered Disability Savings Plans are eligible for separate coverage of $100000 Deposits in provincially regulated credit unions, caisses populaires, and provincially regulated trust and loan companies are covered under provincial deposit insurance plans

Money Laundering and Terrorist Financing

• As a way to make a lot of profits, there is a large part in the business of controlling fund illicitly - in order to avoid crime
• The profits are usually not in that same vein, but will be used to finance activities or other needs to keep things in order

Securities Industry Ideal Laundering Platform

• Regulations help to prevent the criminal abuses such as money laundering for various sectors.
• Members should help prevent terrorism or other actions by means of limiting access to the markets or illegal clientele that may be associated
• This will help to make the appropriate contacts when it comes to what actions should be performed, in the authorities

Money Laundering

• Money laundering converts funds to legitimate transactions which will help criminals if they choose to reintroduce funds into the market and/or economy and claim legitimate sources. There is a higher risk of the market being used for securities or terrorist activity
• Placement: A disposal route of illegal financial sources
• Structuring: breaking funds into smaller portions
• Mingling: Mixing criminal proceeds with normal stores and legitimate businesses
• Payment transfers via money orders, or certified checks and deposited into offshore based banking institutions.
• Much of laundering involves large amounts of volume that could be seen in Layering
• Integration involves placing the laundered proceeds back into the economy such as using business funds or in the case of a shell
• Used to generate funds from the illegitimate sources, and reestablished as legitimate payments when transferred

Other Ways of Laundering

• Through a wide range of methods that need to be considered for a good securities market that can be safe for all individuals involved
• Successful laundering can involve many transactions in multiple jurisdictions or institutions When laundering, be mindful that proceeds could be generated by illegal activities outside or inside of the industry

Illicit Funds in Securities Markets

• Illicit funds are laundered through the sale and the purchased of liquid securities and is achieved through that audit trail of the proceeds
• The use is also similar to the use of having multiple names, for one specific account for those different transactions
• Shell companies can sometimes have owners based offshore, such as accountants, or local lawyers

FTF Meaning?

• Is financial gain ,while at the other hand.
• Acts of terrorism are politically induced.
• Terrorist financial funds are mainly sourced charitably

Regulations on Securities

• All rules are there to help with crimes that are related to a certain action, may that be money, or crimes that are politically related