Chapter 1B Notes - Updated.docx

Chapter 1 (Supplement) Ethics - values Law / Rules – built from ethics / values Standard Conduct – based on the rules In practice: KYC + KYP suitability of investment recommendation RR’s must follow high standards of conduct behave ethically RR = registered representative, meaning investment advisor...

Chapter 1 (Supplement) Ethics - values Law / Rules – built from ethics / values Standard Conduct – based on the rules In practice: KYC + KYP suitability of investment recommendation RR’s must follow high standards of conduct behave ethically RR = registered representative, meaning investment advisor (IA) Standard of Conduct CIRO’s Investment Dealer and Partially Consolidated (IDPC) Rule section 1402, Standards of Conduct, summarizes CIRO’s expectations regarding its RRs as follows: 1. A Regulated Person: i. in the transaction of business must observe high standards of ethics and conduct and must act openly and fairly and in accordance with just and equitable principles of trade, and ii. must not engage in any business conduct that is unbecoming or detrimental to the public interest. 2. Without limiting the generality of the foregoing, any business conduct that: i. is negligent, ii. fails to comply with a legal, regulatory, contractual or other obligation, including the rules, requirements, and policies of a Regulated Person, iii.displays an unreasonable departure from standards that are expected to be observed by a Regulated Person, or iv. is likely to diminish investor confidence in the integrity of securities, futures or derivatives markets, may be conduct that contravenes one or more of the standards set forth in subsection 1402(1). CIRO’s expectations around the standard of care an RR must provide are set out in the IDPC rules regarding client accounts according to the different services provided, as follows: Rule section 3230: Advisory Accounts Rule section 3240: Order Execution – Only Accounts Rule section 3270: Discretionary Accounts and Managed Accounts According to CIRO, the representative (e.g. investment advisor) of a member of CIRO (i.e. investment dealer) must observe high standards of ethics. The representative should not have: Negligence of duty Failure to comply with legal, regulatory, and contractual obligations, including Rules and regulation of provincial securities commission, e.g. Ontario Securities Commission (OSC) CIRO’s rules, regulations, and policies Internal rules and policy of the firm (i.e. the employer of the representative meaning investment dealer) What is Ethics Ethics: the values (or morals) guiding individual behaviours, e.g. honesty, fairness Registered Representatives must follow: ethics (this is built into industry rules) Industry rules: rules and regulations of IIROC, provincial securities commission and administrators This means RR’s must follow to ensure suitability of investment recommendations for clients Know your client (KYC) – current financial situation, investment objectives, risk tolerance Know your product (KYP) – risk, fees, liquidity Duty of care – honesty, good faith (i.e. good intention), professional knowledge If RR (or IA) has followed the above in making investment recommendation, and client loses money, the client will not win in the complaint to CIRO and the court. If RR does not follow the above, then the RR could subject to disciplinary action by CIRO. How to achieve KYC Interview client – discuss about the investment objective, investment knowledge, risk tolerance NAAF (new account application form) – this has to be updated if material change of the client takes place How to achieve KYP RR has to study the product – e.g. study prospectus for new issue Code of ethics – none published by the securities industry (i.e. all the investment dealers, e.g. BMO Nesbitt Burns, TD Securities, Raymond James) Ethical standards – built into the industry rules and regulations (CIRO, provincial securities commission) Reference Regulation of Canadian securities industry Provincial securities commissions, e.g. OSC Canadian Securities Administrator (CSA) is association of the securities commission of each province, CSA itself does not gave regulatory power, the power comes from the members of CSA Self Regulatory Organization (CIRO) Licensing Both RR and mutual fund deal representative licences are approved by CIRO and OSC Trades by Registered and Approved Individuals Portfolio Manager – can place order to buy or sell securities without getting approval from client, i.e. discretionary power RR is Registered Representative (or IA) – the person can provide advice or make investment recommendation to client, take both solicited orders (RR provide advice in investing) or unsolicited order (client places order to RR without taking advice from RR) to buy or sell IR is investment representative, the person can only take orders (unsolicited orders) from client, he cannot provide investment advice to clients Ethical Decision Making Relationships between Values, Ethics, and the Law Values – what we think are important in our culture and society, e.g. honesty, fairness Ethics – a set of moral principles which control behaviour, act as guidelines of behaviour Laws – common law (based on values and precedents handed previously by courts), statutes (law passed by federal parliament or provincial legislature), regulations (set up by regulatory organizations) Importance of Values to Society Organizations Individuals Ethics – deciding what is right or wrong Ethical relativists do not believe in universal moral principles place personal needs over the community needs Ethical managers believe the goal of their organization is to create profit through ethical actions Ethical Dilemmas facing two or more choices – two or more choices are both right making an ethical decision: no dilemma - if there is only one ethical/right choice e.g. lying to client (this is wrong) dilemma – if there are two or more right choices e.g. recommend client to invest for short term or long term Categories of Ethical Dilemmas Right versus wrong issues – there is no dilemma because one is illegal or not true One choice is illegal, or One choice is not true Right versus right dilemmas – both actions are right Both choices are right, but you have to choose one Types of Dilemmas Truth versus loyalty – honesty vs commitment to your employer You recommend a equity mutual fund to your client, the average performance of equity mutual fund is 8% You work for TD Bank, their equity mutual fund is 10% a year (which is very good) You know that in the market, the Fidelity equity fund gives 12% Truth – you should recommend Fidelity equity mutual fund Loyalty – you should recommend TD equity mutual fund Individual versus group Short term versus long term – as an investor, should you invest for short term or long term Justice versus mercy – if you are the policeman, and if you catch a thief who needs the money for his mother doing an operation in hospital Ethical Decision-Making Process Recognize that there is a moral issue – e.g. client gives you a birthday gift Determine whose moral issue it is – the person who accept the gift Gather the facts – who and why giving you the gift, what is the value of the gift, any condition (bribery), any IIROC or employer’s rules Test for right versus wrong issues Legal test – against law or industry rules Front page test – against reputation Mom test – whether you can tell your mom about what you do Test for right versus right paradigms Truth versus loyalty Individual versus group Short term versus long term Justice versus mercy Apply the resolution principles (to make a decision) End-based ethical thinking: maximize the benefit to maximum people Rule-based ethical thinking Social contact-based ethical thinking – social harmony Personalistic-based ethical thinking – reflect my personal character or objective Make the decision Reflect the process – observe the results and review