Securities Regulation: Principles

General Principles of Securities Regulation

• Canadian provinces have implemented securities regulations to govern the distribution of securities and protect investors
• Most provinces have a securities commission to administer their applicable Act
• Provinces without a securities commission utilize an administrator, registrar, or another official for securities administration
• The term administrator refers to the securities regulatory authority of each province
• Regulators collaborate through the Canadian Securities Administrators (CSA) to harmonize capital market regulation
• Each securities regulator's primary objective is to maintain the integrity of financial markets and protect investors
• The mission of the British Columbia Securities Commission is to ensure a fair, efficient market that warrants public confidence and facilitates investment opportunities
• The Ontario Securities Commission (OSC) aims to protect investors from unfair practices and foster market integrity
• The Canadian Investment Regulatory Organization (CIRO) is committed to investor protection, efficient regulation, and building trust in financial regulation

Principles of Securities Regulation

• Securities acts are based on three principles of regulation: disclosure, registration, and enforcement
• Licensing is required for individuals and firms that want to participate in the securities industry
• Regulators can revoke licenses in certain circumstances
• Regulatory concerns include insider trading, money laundering, and cybersecurity
• Securities regulators address various issues to regulate the industry

Disclosure Requirements

• Full, true, and plain disclosure is the basis for securities regulation in Canada
• Anyone offering securities for public sale that have not been publicly distributed must follow disclosure rules
• A prospectus must be filed with the administrator and delivered to purchasers, containing a full, true, and plain disclosure of all material facts relating to the securities
• Selling or offering securities for sale is illegal until disclosure has been made to the administrator's satisfaction
• A prospectus is a contract between the issuing company and the security purchaser
• Administrators determine and specify the facts that must be disclosed to potential investors
• Normal disclosure occurs via a prospectus issued by the company and its underwriter, accepted by the relevant provincial administrator
• Sales from a control position are subject to disclosure requirements in most provinces
• Secondary trading involves investors that are further buying and selling securities, often through a stock exchange
• Securities traded this way are said to be freely trading
• Issuers must maintain exchange listings by meeting the requirements of applicable acts and any exchange on which securities are traded to allow investors to engage in secondary trading
• Continuous disclosure requirements vary among exchanges
• Rules necessitate periodic filing of financial statements and information about material changes to the company to help investors make informed decisions
• Continuous disclosure applies to: insider trading reports, information circulars, regular corporate financial reports, and annual information forms
• Issuers must provide timely disclosure of material changes affecting investor decisions
• Disclosures should ensure effective communication of material information to the public and investment professionals
• Information flow into the marketplace supports public market integrity

Registration

• Administrators register individuals and companies engaged in directly selling securities or advising on securities
• Registration allows for proficiency, integrity, and financial compliance standards
• Administrators can suspend or cancel registration if it is in the public interest
• Every investment dealer involved in underwriting or selling securities must register with the administrator in each relevant province
• All partners, directors, officers, and salespersons employed by investment dealers must register with the relevant provincial administrator
• Investment dealers must be CIRO members and follow rules, and CIRO also determines customer types and approves products

Investigation and Prosecution

• Administrators can start investigations, prosecute Act violations, and impose sanctions
• The authority to compel witnesses, take evidence, seize documents, freeze funds, and act with court powers are all held by the administrator
• Administrators can suspend, cancel, or revoke registration; levy fines; order trading cessation; and deny trading rights
• Administrator actions can have serious consequences, such as registration cancellation or issuers losing the ability to raise capital
• Administrators have the power to prevent individuals from becoming directors/officers, issue public reprimands, and levy fines in certain provinces
• Administrators can recommend charges for Act violations, leading to fines or imprisonment
• Anyone disagreeing with an administrator ruling can appeal to the courts
• Securities legislation prohibits fraudulent activities and actions that mislead trading or create artificial prices
• Knowingly making misleading statements that significantly affect market price or value is prohibited

Penalties

• For Securities Act (Ontario) offenses, the maximum penalties are a $5,000,000 fine and imprisonment for almost five years
• The OSC can also order administrative penalties up to $1,000,000 and disgorgement of monies obtained through noncompliance with securities law
• Securities acts include secondary market civil liability provisions, and investors do not need proof of reliance on misleading disclosure
• Provinces can order financial loss repayment to the public member resulting from illegal trading
• Public officials and legislation cannot guarantee that individuals that purchase or sell securities will not have a financial loss
• Laws prevent fraud and deceit, and protect investors lacking expertise
• It is necessary for both investors and their advisors to evaluate investments before purchase and periodically through out its duration

Key Government Players Involved in Securities Regulation

• Securities industry regulation in Canada exists at the federal, provincial, and industry levels
• Unlike the U.S., Canada lacks a formal federal securities regulatory body
• The Canada Business Corporations Act regulates proxy solicitations and insider trading for federally incorporated companies
• Banks are federally regulated and have an indirect government interest that own large securities dealers in Canada
• Any security activity that occurs in the provincially regulated subsidiaries of banks are subject to provincial securities regulation
• Securities dealers are subject to the Proceeds of Crime(Money Laundering) and Terrorism Financing Act (PCMLFTA), which is enforced by FINTRAC
• The federal Personal Information Protection and Electronic Documents Act (PIPEDA) also applies to securities dealers

Integrated Market Enforcement Teams (IMETs)

• IMETs were launched in November 2003 to strengthen law enforcement's ability to detect, investigate, and deter capital markets fraud
• IMETs are a joint effort by the RCMP and the federal government
• The teams collaborate closely with securities regulators, SROs, exchanges, and other authorities

Joint Serious Offenses Team (JSOT)

• The Ontario Securities Commission (OSC) launched the Joint Serious Offenses Teams (JSOT) in May 2013 to target fraud and other serious misconduct
• JSOT is collaborative effort between the OSC, the RCMP Financial Crime program and the Ontario Provincial Police anti-Rackets Branch
• JSOT investigates and prosecutes serious violations of law using provisions of the Securities Act (Ontario) and Criminal Code
• Staff work with police agencies and the Ministry of the Attorney General to bring more cases to the courts and to send a strong message to anyone that might want to harm the public

Provincial Regulation

• Each province governs securities activities within its borders using a securities commission or equivalent
• Securities markets across Canada are harmonized with the use of National Instruments (NI) and Multilateral Instruments (MI) as a result of CSA efforts
• NI is an instrument that has been adopted by all CSA jurisdictions
• MI is one that has not been adopted by one or more CSA jurisdictions
• National Instruments include NI 31-103 and NI 81-102

Provincial Governing Bodies and Territories

• Alberta Securities Commission (ASC) for Alberta
• British Columbia Securities Commission (BCSC) for British columbia
• The Manitoba Securities Commission (MSC) for Manitoba
• Financial and Consumer Services Commission(FCNB) for New Brunswick
• Office of the Superintendent of Securities Service for Newfoundland and Labrador
• Office of the Superintendent of Securities for Northwest Territories
• Nova Scotia Securities Commission (NSSC) for Nova Scotia
• Nunavut Securities Office for Nunavut
• Ontario Securities Commission (OSC) for Ontario
• Office of the Superintendent of Securities for Prince Edward Island
• Autorité des marchés financiers (AMF) for Quebec
• Financial and Consumer Affairs Authority of Saskatchewan (FCAA) for Saskatchewan
• Office of the Yukon Superintendent of Securities for Yukon Territory

Canadian Securities Administrators (CSA)

• The CSA aims to improve and harmonize the regulation of Canadian capital markets
• It aims to reach consensus on policy decisions and work collaboratively across Canada through regulatory programs
• The CSA mission is: to protect investors, foster fair and efficient capital markets, and reduce market risks
• As an informal body, the CSA works via meetings, conference calls, and cooperation among regulatory authorities
• Provincial/territorial regulators handle complaints, and enforcement is done individually by each province/territory

Client Focused Reforms (CFRs)

• In 2019, the CSA made final amendments to National Instrument 31-103 known as the Client Focused Reforms (CFRs)
• Changes to the registrant conduct requirements:
  • To better align the interests of the registrant and their clients
  • To improve outcomes for clients
  • To clarify client-registrant relationship

CSA Tools and Processes

• The CSA uses the Passport System, the Super Memorandum of Understanding (Super MOU), and various electronic databases
• The passport system is based on mutual reliance to reduce the duplication of filings made in multiple jurisdictions
• The super MOU provides oversight functions that are based on reciprocity
• Each recognized marketplace has a principal regulator responsible for its oversight
  • OSC is the regulatory oversight for TSX and CIRO
  • AMF is the regulatory for the Montreal Exchange (MX)

CSA Electronic Databases

• SEDAR+ is the web-based system used by all market participants to file, disclose and search for information in Canada's capital markets
• In July 2023, the system replaced SEDAR, the national Cease Trading Order (CTO) database, and the Disciplined List (DL) database
• Future phases of SEDAR+ will replace SEDI, NRD, and other filings in local systems
• SEDI allows insiders to file reports with all CSA regulators through a single submission, and the public can access the insider reports soon after it has been filed
• NRD is a database that allows dealers, underwriters, advisors, and individuals to electronically submit registration applications, changes, renewals, and fees through a single submission

Cease Trading Order (CTO)

• Cease Trading Orders prohibit trading in a company’s securities, and are issued by securities regulators
• CTOs are issued for failure to meet disclosure requirements; a financial statement
• CTOs can result from an enforcement action involving an investigation of wrongdoing

International Organization of Securities Commissions (IOSCO)

• The need for global collaboration came about because the securities industry became more globalized
• IOSCO regulates more than 95% of the world’s securities markets
• IOSCO’s objectives:
  • Cooperate in developing, implementing, and adherence to international standards to protect investors and maintain fair markets
  • To enhance investor protection and cooperation in enforcement
  • Exchange global/regional information to assist development of markets, strengthen infrastructure, and implement regulation

Members of IOSCO

• IOSCO has over 200 members, including the OSC, the AMF, the ASC, the BCSC, and CIRO
• 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 OSFI are members
• FSB's mandate includes assessing affecting the financial system, exchange information, monitor markets, advice on standards, review policy, set guidelines, manage planning and collaborate early warning exercises

Self-Regulatory Organizations (SROs)

• SROs are industry organizations that regulate their own members
• SROs are granted regulatory powers by administrators, and authority is given via a recognition order
• SROs enforce securities legislation and have the power to prescribe conduct and financial rules for their members
• CIRO is the SRO for investment and mutual fund dealers in Canada
• CIRO rules uphold securities legislation, and administrators monitor CIRO’s conduct and review rules
• CIRO rules must be in the public’s interest and set standards equal to or higher than provincial rules
• CIRO can investigate violations and take action against member firms and employees
• Sanctions for less serious offenses include fines, supervision, and rewriting exams
• Serious offences may result in loss of registration and substantial fines

Investment Industry Regulatory Organization of Canada (IIROC)

• Prior to January 1, 2023, there were two SROs in Canada: IIROC, and the Mutual Fund Dealers Association of Canada (MFDA)
• IIROC was the national SRO that oversaw investment dealers and trading activity on equity and debt marketplaces in Canada
• IIROC enforced rules on conduct, financial practices, and trading activity of its dealer members and their representatives
• The MFDA regulated the distribution of mutual funds in Canada
• The MFDA did not regulate the mutual funds themselves, the securities commissions did
• The CSA approved the merger of IIROC and MFDA into a new, single SRO, CIRO, effective in January 1, 2023

CIRO Compliance and Surveillance

• CIRO's compliance teams examine firms for compliance with conduct, trading, operating rules
• They work with firms to meet high standards while providing financial services to their clients
• The compliance function includes business conduct regulation, financial compliance, and trade review and analysis
• CIRO sets minimum capital requirements to ensure they have enough capital for business
• Capital requirements prevent firms from failing by preventing excessive leverage and risky business practices
• CIRO regulated firms must also participate in the Canadian Investor Protection Fund (CIPF) which protects investors
• CIPF protects investors if a firm goes bankrupt
• CIRO also ensures that dealer members have proper supervision procedures, and that client accounts reflect investment needs
• RRs who work with accounts must be familiar with each client’s financial situation and risk tolerance must follow KYC and determine suitability
• CIRO carries out trading conduct compliance reviews to check trading firms' trade desk procedures
• Trade desk procedures must comply with the Universal Market Integrity Rules (UMIR) and securities law
• CIRO will also conduct market surveillance and perform a trading review analysis to ensure trading in accordance with UMIR
• Enforcement staff will investigate possible breaches of CIRO rules/disciplines firms when regulatory misconduct is identified
• Enforcement procedures can include suspensions, fines, and bans for both individuals and firms
• CIRO is an ISG member, which also includes over 50 members worldwide, and the mandate of the ISG is to promote effective market surveillance (ISG)

Other CIRO Initiatives

• CIRO offers a whistle blower service for reporting wrongdoing and takes prompt action on reports
• A toll-free number, and a web page where you can contact whistle blower team
• Team will assess the situation and ensure that prompt and appropriate follow-up is taken
• You can learn about other initiatives along with the following: CIRO firms status, registration status of individuals, Disciplinary information about the dealer members and individuals, A glossary of terms & definitions, Recent regulatory developments, Industry trends, and Links to regulators

CIRO and FINRA

• CIRO and its U.S. counterpart, FINRA cooperate to enhance both organization's effectiveness
• They work together on information sharing on compliance, enforcement, and firm oversight/examinations
• FINRA is the largest independent regulator for all securities firms doing business in the United States
• FINRA's responsibilities:
  • Protecting investors and market integrity through regulation
  • Registering and educating industry participants and examining securities firms
  • Writings and enforcing rules and the federal securities laws
  • Informing and educating the investing public
  • Providing trade reporting and other industry utilities
  • Administering the largest dispute resolution forum for investors and firms

Canada Exchanges and MarketPlaces

• Canadian Marketplace exchanges monitor how companies comply with the terms of the exchange listing agreement and policies
• Where appropriate, an exchange may deny pre-approval of certain transactions, require corrective disclosure, halt or suspend trading, and in egregious circumstance terminate any listings
• CIRO regulates the trading activity on a number of marketplaces, including the TSX, the TSXV, and alternative trading systems (ATS)

Alternative Trading Systems (ATS)

• ATS is registered as an investment dealer and is subject to CIRO's supervision
• An ATS brings securities buyers and sellers together, and it provides a way for orders of the securities to connect buyers and sellers
• Designated exchanges need to meet the following to be considered a designated stock exchange
• The exchange must carry out business trading, settling sales, monitoring trades executed on its system, and providing pricing information in public
• There are standards for new company listings on the exchange, including standards, maintenance, reporting, and ownership responsibilities
• Regulatory compliance framework that meets acceptable standards by IOSCO, the international securities commission
• Have senior management and a history of proven financial viability and experience
• Range of listings with bid-ask spreads that investors can trade/ sell

Designated Stock Exchanges

• Foreign-based exchanges must meet all the required criteria of commercial status, compliance, liquidity, with standards set
• The host country the exchange must provide tax relations agreements
• The host country must be a member in good standing through their membership in international financial bodies
• Regulations must protect remedies and rights to Canadian investors with legal standings
• The exchange is in good standing with its country, has a low risk of restricting liquidation of investments

Canadian Investor Protection Fund (CIPF)

• To protect the investing public against loss is the securities industry has long been recognized
• Protection for the dealer member-client relationship to maintain confidence
• Investors are not protected from market losses, but are protected from losses due to firm collapse
• CIPF has funds to cover cash balance losses resulting from a member firm's insolvency and securities
• CIPF helps when investment performance does not meet the clients expectations
• From the moment an investor has an account with the firm, they have CIPF coverage
• CIPF has two funds, the investment fund to satisfy covered claims and the mutual fund to satisfy claims by CIRO registered members
• CIPF is sponsored and funded by member firms and there are requirements those firms must follow such as; special CIPF assessments, to provide any info to assess the financial condition, acknowledge the disclosure/sharing between CIPF and CIRO
• Firms permit reviews of its operations/fully cooperate in those reviews and that actions needed from CIPF are approved by the firm and taken on its behalf
• CIRO ensures that these conditions have been met and ensures compensation is properly set if needed
• This is to protect investors from any wrong doing and fraud
• CIPF does not cover losses from losses related to market conditions or values of securities, unsuitability, or the default of an issuer of securities
• Member of CFIP is required to receive protection and it those coverage with that firm that CIPF covers the account or when working with a foreign entity a CIPF member firm needs to occur

General Accounts

• Accounts belonging to a single client, including cash, margin, short sale, options, futures, and foreign currency accounts
• Combined and that account is considered one single account, the account is entitled to maximum coverage the client must proportionate interests

Separate Accounts

• If clients have shared accounts, those are considered separate and as individual accounts that are counted
• Accounts that are testamentary includes all: RRSP, RIF, LIF, lira, or lives
• Registered education, savings plans, Trust - inter vivos trusts and account in those funds that are in guardianship
• Personal holding corporations if equity ownership is held by different people Partnerships can have separate accounts or unincorporated that a client can hold

CIPF Regulations

• Regarding retirements accounts for a client through a trustee, they would aggregate all the separate accounts and not combine them unless being held by the same client
• Certain firms that are MFDA members, the MFDA protection corporation (MFDA IPC) it protect two funds
• MFDA also merged and will be a single investor under CIPF and has a relationship with US to work together if there is in solvency with these Firms
• The Canada Deposit Insurance Corporation (CDIC) provides deposits for any insurance in banks loan deposits
• CDIC will insurance limit per person at each member institution
• Insurance plan vary and the credit union that supports provinces, deposit insurance will allow banks to support insurance plan vary

Money Laundering and Terrorist Financing

• Money laundering and Terrorists, when a criminal activity generates substantial proceeds to hide the proceeds
• Organization have motives to generate funds in ways that aren't noticed
• Securities industry is regulated to prevent abuses
• Dealer members can identify suspicious transactions for investigation

Money Laundering Explained

• Money laundering; proceeds of crime is converted into legitimate funds through complex transactions in order to disguise the source
• The source will be move depending upon whether suspicious activity is to take place

Money Laundering: Three Stages

• Placement; proceeds from disposal are deposited by placing the illegal cash into financial system, this will be a common activity
• Cash will be broken up into smaller transactions to lower scrutiny, depositing the funds directly into accounts depending on reported funds
• Bribing personnel is a common, or smuggling large funds that have lax AML programs
• Trading business is not cash based, it may derive into that industry the funds are likely to go through
• Layering; is separation from the illegal financial transacting of creating complex accounts from its sources
• Securities industry is easily converted into different assets with sell side, wired and used to move funds around
• Integration; allows placing the laundered back into the economy
• Often used for corporate entities controlled by launders through which they seek loans themselves and is a front business

Money Laudering: Securities Mechanisms

• Securities industry facilitates diversity and with ease trading can take place, with the borders not being an issue
• To facilitate with crime, borders can blur, or have obstacles that can extend over enforcement
• Inside the sector are activities such as trading and front
• An audit of illicit funds and funds are laundered through sales, the company might be located in a jurisdiction if local laws are created
• Money will go through a shell company so they do no know if their own businesses accounts is not the true person
• Money Lauderers will open to separate dealers and will offset transactions with each broker trading back and fourth

Terrorism and Terrorist Financing

• Money is less of an issue, but if it terrorism acts has been found terrorists support their goals with their support
• Terrorists funding can be difficult, but some funds from charities do not see the link to individual transactions
• Attacks can happen without large sums of money and not always in connection to complexity
• Terrorist Financing Regulations Securities are subject to some statutory requirements
• The PCMLTFA and PCMLTFR were implemented with these goals; to help the organized crime and assist fulfilling with international crime
• Act imposes requirements to implement crime, to detect the financing with these activities and requires procedures in place regarding client’s transaction, record keeping and reporting
• The CIRO must report any suspicious transactions and monetary issues

Ensuring Compliance

• FINTRAC helps follow compliance to deter with this information;
• This has authorization to provide key identification on suspicious transactions to know of a money laundering
• The info will then be used to provide relevant information to those agencies, and the CRA/ Canada if it sees needed to report, there are record keeping that are mandatory