Chapter 3 - Canada's Regulatory Environment and Basic Securities Law PDF

SECTION 2 CANADA’S REGULATORY ENVIRONMENT AND RISKS FACED BY INVESTMENT DEALERS 3 Canada’s Regulatory Environment and Basic Securities Law 4 Risks Faced by Investment Dealers © C...

SECTION 2 CANADA’S REGULATORY ENVIRONMENT AND RISKS FACED BY INVESTMENT DEALERS 3 Canada’s Regulatory Environment and Basic Securities Law 4 Risks Faced by Investment Dealers © CANADIAN SECURITIES INSTITUTE  Canada’s Regulatory Environment and Basic 3 Securities Law CONTENT AREAS Overview of the Regulatory Environment Key Legislation and Players in Securities Regulation The Criminal Code of Canada Civil and Common Law Obligations and Liabilities LEARNING OBJECTIVES 1 | Describe the purpose of securities regulation and principle-based compliance. 2 | Identify the key regulatory players in the Canadian and foreign securities industries. 3 | Explain criminal law obligations and areas of potential liability. 4 | Discuss civil law obligations and areas of potential liability. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 3 INTRODUCTION In the previous chapter, we discussed what it means to have a properly working compliance function and department at an investment dealer member of CIRO. We also learned that a formal compliance structure includes roles and responsibilities that are mandated by securities law. In fact, the securities industry is highly regulated, and securities laws and regulations are often complex. As a result, the potential for noncompliance is high and the potential consequences of compliance failures are significant. In this chapter, we take an in-depth look at those securities laws and the regulatory environment under which dealer members operate. We discuss the regulatory administrators and the primary sources of regulatory and compliance obligations. We also discuss the obligations imposed on securities markets by civil and criminal law. Resources for applicable regulations are provided at the end of the chapter. OVERVIEW OF THE REGULATORY ENVIRONMENT 1 | Describe the purpose of securities regulation and principle-based compliance. In Canada, provincial securities commissions (or equivalent) and CIRO are the primary sources of the rules governing the industry. These organizations impose rules and restrictions to ensure market integrity, protect investors, and promote a fair and efficient securities marketplace. Rules are not always consistent among regulators or across provincial jurisdictions. A basic principle of regulation is that, when two or more regulations conflict, it is the strictest standard that applies. Laws contained in other federal and provincial statutes also apply to the securities industry. These laws include the Criminal Code and legislation regarding money laundering, terrorist financing, privacy, corporate law, and bankruptcy and insolvency. Principles developed from both criminal and civil case law also apply to the industry. PURPOSE OF REGULATION The constant evolution of the securities industry presents constant new risks and challenges for the people who work in it. The past three decades have seen significant structural changes, such as the elimination of ownership restrictions and fixed commission rates for dealer members, the demutualization of stock exchanges, and the advent of new trading venues. In addition, dealer members and their representatives are challenged by new products, heightened competition, technological advances, and demographic changes. In this fast-paced environment, inadequate corporate governance at an individual dealer member can have a ripple effect throughout the industry. Rules are necessary to foster an environment of fairness and to protect the integrity of the marketplace. The extent to which a dealer member complies with external rules is strongly influenced by the strength of a firm’s internal compliance systems. EXAMPLE Business failure or loss of reputation at one dealer member can affect the whole industry. For example, rogue trading at an individual dealer member can cause investors to lose confidence in the markets. And when new regulations are developed in response to such scandals, all dealer members must abide by them. © CANADIAN SECURITIES INSTITUTE 3 4 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 EXAMPLE (cont'd) With additional regulatory changes on the horizon, as well as government initiatives on burden reduction, the investment industry will continue to manage significant change, be it through operations, governance, or new product innovation. Given the continued complexity of dealer operations generally, compliance departments and those responsible for them must always examine, both accurately and efficiently, what they are doing and the manner in which they are doing it. At the same time, while technology may drive change, sometimes this change is not necessarily for the good. Dealers must constantly be aware of the challenges posed by cybersecurity issues and must adapt their policies and procedures accordingly. PRINCIPLE-BASED REGULATION In comparison to a rule-based approach to regulation (also called prescriptive regulation or an objective standard), the Canadian securities industry leans more toward a principle-based model. Under the principle-based approach, the regulators set objectives for dealer members but allow the firms themselves to decide how best to meet those objectives. The objectives apply to broad issues such as staff proficiency and integrity, suitability of recommendations, and the gatekeepers’ responsibility to prevent client abuse of the markets. Objectives may even extend to capital adequacy. A principle-based approach is clearer, simpler, and less costly to apply than a rule-based approach because it allows dealer members to tailor their supervision and compliance functions to fit their business. It also requires good judgment in comparison to the prescriptive, rule-based approach. However, compliance guidance that accompanies principle-based regulations is often detailed enough to be considered a rule, and the courts or regulators often hold dealer members to this standard. Principle-based regulation requires careful analysis and monitoring. In the event of a compliance failure, a dealer member has no set standards it can rely on to prove that its supervision was adequate. To convince the regulators that the firm exercised due diligence, it must provide documentation of analyses and decisions that were made in developing, implementing, and operating the system. EXAMPLE Speed limits are sometimes used as an example of rule-based versus principle-based regulation. A rule-based model might have a rule stating that is illegal for anyone to drive faster than 100 kilometres per hour. In contrast, a principle-based rule might state that it is illegal to drive faster than is reasonable and prudent in all circumstances. According to this rule, everyone has full flexibility to assess all relevant factors and behave accordingly. The practical difficulty is that different people would assess precisely the same situation and arrive at very different conclusions. Defending the correctness of such a subjective determination after the fact may be even more problematic. KEY LEGISLATION AND PLAYERS IN SECURITIES REGULATION 2 | Identify the key regulatory players in the Canadian and foreign securities industries. Canada’s securities industry is self-regulated at the industry level and also operates under provincial and federal legislation. A self-regulatory organization creates, administers, and enforces their own rules and by-laws. SRO authority is generally derived from contract, meaning that a dealer member operating under the authority of the SRO agrees to abide by its rules. Some foreign laws and regulations may also apply to Canadian industry participants. In addition, dealer members must regulate themselves through their own policies and procedures. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 5 THE CANADIAN INVESTMENT REGULATORY ORGANIZATION CIRO is the national SRO overseeing all investment dealers and mutual fund dealers and all trading activity on equity and debt marketplaces in Canada. When a firm becomes a member of CIRO, it agrees to abide by CIRO rules. Individuals applying to CIRO for Approved Person status must also agree to its rules. DID YOU KNOW? An Approved Person is an individual approved by CIRO to carry out a function for a dealer member. Individuals in the following roles are considered Approved Persons: Associate portfolio manager Chief compliance officer Chief financial officer Director Executive Investment representative Portfolio manager Registered representative Supervisor Trader Ultimate Designated Person CIRO is responsible for enforcing the rules regarding sales, business, and financial practices and the trading activities of individuals and dealer members under its jurisdiction. It also interprets existing rules, develops recommendations to amend them, and establishes new rules. This organization performs market surveillance and regulates dealer member and market compliance (specifically business conduct, financial compliance, and trade review and analysis). It carries out its regulatory responsibilities by setting and enforcing the rules regarding the proficiency, business, and financial conduct of dealer members and their registered employees. CIRO has detailed requirements regarding the activities of dealer members in its jurisdiction and has extensive powers to investigate possible rule violations. It can also take disciplinary action in response to violations by dealer members and their employees. CIRO is recognized as a self-regulatory organization by the provincial securities commissions. Some of its rules substitute for more general provincial regulations and may be stricter or more detailed than the provincial regulations. Recognition orders impose requirements on CIRO, which may include approval by a provincial or territorial securities administrator of all rule changes and all oversight of CIRO’s operations to ensure that they are effective. Securities commissions can also delegate certain functions to CIRO, including the registration of individuals. However, CIRO and the securities commissions have different mandates. Securities commissions enforce the securities legislation within a particular province or territory and have jurisdiction over any person or entity acting in their jurisdiction. CIRO’s regulation is limited to its own dealer members. In most provinces CIRO has the ability to enforce the fines, penalties, and costs that it imposes through disciplinary hearings directly against registrants whether they continue to be registered with CIRO or not. © CANADIAN SECURITIES INSTITUTE 3 6 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 From a market regulation perspective, CIRO has jurisdiction only over its participants in the marketplaces it regulates through contracts. Each marketplace, in turn, has contracts with its own participants providing that the participant must submit to CIRO’s jurisdiction. Further information can be found on CIRO’s website. UNIVERSAL MARKET INTEGRITY RULES UMIR is a standard set of rules that generally apply to equity trading on all Canadian marketplaces to promote fair and orderly markets. UMIR Policy 7.1 requires dealer members to develop and implement written policies and procedures and appoint a responsible head of trading to supervise compliance with UMIR. Notice 17-0190 sets out guidelines on trading supervision obligations found in this policy. To ensure compliance with UMIR, CIRO monitors real-time trading operations and market-related activities. CIRO also investigates alleged UMIR violations and administers any settlements and hearings arising from such violations. If CIRO identifies trading activity that may be prejudicial to the public or in breach of marketplace rules, it can halt trading, with or without notice to an issuer, until the matter is resolved. An issuer may also ask CIRO to halt trading in its securities pending the issuance of a news release. Furthermore, an exchange may ask CIRO to halt trading in an issuer’s securities if it has concerns regarding the issuer. A trading halt ensures that all investors have the same timely access to material information regarding an issuer. Halts are meant to be temporary (usually a matter of hours) but can be maintained for up to a week. A lengthy trading halt typically results in a suspension of trading, in which case the company must meet additional requirements to resume trading. Dealer members and their representatives cannot trade in the securities of an issuer during a halt or suspension or if they are subject to a cease trade order issued by an administrator. THE INVESTMENT INDUSTRY ASSOCIATION OF CANADA The Investment Industry Association of Canada (IIAC) is a member-based advocacy association that advances the growth and development of the Canadian investment industry. It is not a regulatory body. IIAC represents the interests of the investment industry for all market participants. Its members range in size from small, regional firms to large organizations that employ thousands of people across the country. CANADIAN INVESTOR PROTECTION FUND The Canadian Investor Protection Fund (CIPF) compensates clients for losses arising when a member firm becomes insolvent and cannot return client cash or securities. It does not cover clients’ losses resulting from changing market values, unsuitable investments, or the default of an issuer of securities. Although CIPF is not an SRO, it is an important part of the SRO structure. It is funded by CIRO through payments based on quarterly assessments of gross revenues, risk premiums based on capital deficiencies, and an annual contribution from CIRO of the interest allocated to it in the prior year. CIPF also provides policy input on the rules regarding issues such as margin that may affect the capital adequacy of dealer members. CIPF maintains two segregated funds that provide coverage to eligible customers of its member firms. The investment dealer fund is available to satisfy potential claims for coverage by customers of CIRO members registered in the category of investment dealer or as both investment dealer and mutual fund dealer. The mutual fund dealer fund is available to satisfy potential claims for coverage by customers of CIRO members registered only in the category of mutual fund dealer. Clients should be aware that CIPF does not always compensate them for all their losses. Clients of dealer members are entitled to a maximum coverage of $1,000,000 for each account. A client’s general accounts, such as cash, margin, short sale, options, futures, and foreign currency, are combined and treated as one account. In addition, the proportionate interest in a client’s account that is held jointly or on a shared-ownership basis is combined with the client’s general account. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 7 Accounts categorized as separate accounts, such as trusts and registered accounts, are treated as if they belong to separate clients, and each separate account is entitled to the maximum coverage. Separate accounts of a similar type are grouped as a single, separate account that qualifies as a whole for the maximum coverage. For example, all registered retirement accounts belonging to a single client through the same or a different trustee are combined and aggregated as a single separate account. PROVINCIAL LEGISLATION AND AGENCIES Securities regulation is also managed through provincial and territorial legislation and agencies. Each province and territory has legislation to regulate the primary and secondary distribution of securities and to protect the buyers and sellers of securities. The purpose of this legislation is to promote the integrity of the financial markets and ensure investor protection. The legislation regulates matters such as registration of dealers and individuals, raising capital, issuer disclosure, proxy solicitation, takeover bids, and improper conduct such as insider trading. It also establishes the provincial and territorial securities commissions and provides their decision-making and enforcement powers. In most provinces, securities legislation also covers commodity futures. Ontario and Manitoba have separate commodities legislation, and Quebec has separate legislation governing financial planning. Provincial legislation differs among jurisdictions as to the number of direct requirements imposed. Generally, the requirements applicable to dealers appear in regulations or rules approved by the administrator according to the legislation. Efforts have been made to harmonize regulations; however, differences among jurisdictions remain. Securities administrators may also issue locally applicable interpretive guidance. PROVINCIAL AGENCIES Each provincial securities commission (or equivalent) has jurisdiction within its province or territory to register dealer members and individuals, make regulations governing dealer conduct, and grant exemptions to its regulations. The commissions also have the authority to investigate conduct contrary to the public interest and violations of provincial legislation. Their enforcement powers generally include the authority to compel witnesses to attend hearings, take evidence under oath, seize documents for examination, and freeze funds or securities on deposit. CANADIAN SECURITIES ADMINISTRATORS AND MULTI-JURISDICTIONAL REGULATIONS Although there is currently no single federal body in Canada responsible for securities regulation, the commissions, also known as administrators, from the 10 provinces and three territories have formed a joint panel known as the Canadian Securities Administrators (CSA). The CSA coordinates and harmonizes regulation of the Canadian capital markets. It operates informally through regular meetings of its presiding officers on issues of shared concern, joint technology projects, and policy committees or working groups. The CSA’s main shared systems are described below: 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, SEDAR+ consolidated and replaced three systems: the System for Electronic Document 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 is an online system for filing and viewing insider trading reports required under provincial securities regulation. NRD receives individual registration and CIRO approval applications, notices of termination, and changes of registration information. © CANADIAN SECURITIES INSTITUTE 3 8 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 CSA’s efforts to harmonize provincial regulations have led to the establishment of two types of instruments: National Instruments (NI) have been adopted by all provinces, but they may contain exceptions if one or more provinces retain slight regulatory differences. Multilateral Instruments (MI) have been adopted by some provinces only, as identified in the instrument. Many of these instruments have a companion policy designed to help users understand how the regulatory authorities interpret and apply their provisions. The companion policy explains the purpose of the regulation and provides details regarding its administration, implementation, and compliance expectations, along with guidance from the CSA. The CSA has also adopted standard numbering for regulatory instruments, even those restricted to a single jurisdiction. One of the most important NIs for dealer members is NI 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under this NI, the registration requirement is triggered if a person is in the business of trading (and not simply involved in the act of trading a security). Exempt market dealers are required to register, although several jurisdictions provide local exemption orders. Investment fund managers, UDPs, and CCOs must also register. DID YOU KNOW? As a result of the harmonization efforts of the CSA, securities markets are governed by a number of largely harmonized NIs and MIs. Some of the most important provincial regulation is based on the following NIs: NI 11-201, Electronic Delivery of Documents (regarding the satisfactory delivery of documents by electronic means) NI 14-101, Definitions (for common terms used in the regulations of multiple jurisdictions) NI 23-101, Trading Rules (to prohibit manipulation and fraud, and to define best execution obligations along with detailed audit trail requirements for dealers) NI 23-102, Use of Client Brokerage Commissions (sets out parameters for the use of brokerage commissions in return for goods or services) NI 31-102, National Registration Database (defining requirements for joining and making registration applications through the National Registration Database, including the required forms) NI 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations NI 33-105, Underwriting Conflicts (to protect the integrity of the underwriting process) NI 45-106, Prospectus Exemptions (covering exempt distributions and including a national definition of “accredited investor”) NI 81-105, Mutual Fund Sales Practices For complete information, visit any CSA member’s website. OTHER PROVINCIAL LAWS AND REGULATIONS Many other provincial laws and regulations address the conduct and affairs of a dealer member, its clients, and its employees. These include matters that do not usually affect the CCO, such as labour relations, worker’s compensation schemes, and taxation. Other matters that may occasionally affect the CCO include family maintenance enforcement programs, matrimonial property orders, estates, collection matters, and civil subpoenas relating to a lawsuit. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 9 An order such as a garnishment on the income of a registered person is reportable as an amendment to registration information and can result in special supervision requirements. It may also indicate that the employee is in financial stress, in which case the dealer member may want to apply heightened supervision. Dealer members should carefully assess the fitness for registration of all registrants when extraneous events such as a garnishment occur. For more information on CIRO’s expectations in this regard, see Guidance Note 9200-21-001 IIROC Registration – The Fit and Proper Test for Approved Persons. Many of the issues contemplated within this notice should prompt the dealer member to evaluate whether heightened supervision should be applied to registrants. Dealer members must respond promptly to mandatory court or government orders. Sometimes an employee may have to give evidence in court or swear an affidavit verifying certain information the firm provides. These matters may not fall under the CCO’s direct mandate. Nevertheless, the dealer member must have procedures in place to ensure that they come to the attention of the right person or department, and that the orders are properly administered. CORPORATE LEGISLATION The corporate affairs of a company in Canada are primarily regulated by the statute under which the company is incorporated. Companies can be incorporated federally under the Canada Business Corporations Act (CBCA) or provincially under various legislations, such as Alberta’s Business Corporations Act or Nova Scotia’s Companies Act. These statutes govern the structure of a company and dictate how it can carry on business. They address issues such as proxy solicitations, takeover bids, insider trading, and director conduct. They also provide shareholders and other stakeholders with remedies against a company and its directors and officers, in the event of misconduct (including oppression remedy and derivative action). Some CBCA requirements differ from those of provincial corporate and securities legislation. Responsibility for a dealer member’s compliance with these requirements generally resides elsewhere. Nevertheless, CCOs should be aware of differences that might affect their area of responsibility. For example, some clients or dealers may have inadvertently accumulated positions large enough to trigger takeover or control position provisions of corporate legislation. FOREIGN REGULATORS Dealer members that deal in foreign markets or with offshore clients must be familiar with the relevant regulatory regimes. In addition, Canadian regulators often have reciprocal arrangements for exchanging information and bringing or enforcing actions for violations of foreign rules. For example, Canadian and U.S. regulators have cooperated when unregistered trading has involved dealers in one country and investors in the other. Foreign regulators can also apply pressure through local affiliates or correspondent dealers. Two U.S. statutes deal with federal securities matters: 1. The Securities Act of 1933 requires that investors receive financial and other material information about securities for sale. It also prohibits fraud, misrepresentation, and deceit relating to securities sales. 2. The Securities Exchange Act of 1934 created the U.S. Securities & Exchange Commission (SEC). THE SECURITIES & EXCHANGE COMMISSION The SEC has broad powers to regulate securities matters nationally, including registration and oversight of a dealer member’s transfer agents, SROs, and clearing agents. It also regulates corporate reporting by issuers, proxy solicitations, tender offers, and insider trading. The SEC oversees SROs in the United States, such as the CIRO-comparable Financial Industry Regulatory Authority (FINRA), as well as the various stock exchanges including the New York Stock Exchange and NASDAQ. FINRA also oversees its Over-the- Counter Bulletin Board. © CANADIAN SECURITIES INSTITUTE 3 10 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 Many U.S. laws and SRO rules and by-laws apply to Canadian dealers through registration of subsidiaries in the United States, participation in U.S. marketplaces, or dealings with U.S. residents. These laws, rules, and by-laws include the following items: The Sarbanes-Oxley Act of 2002 (regarding audit committee and corporate governance requirements) The USA Patriot Act (regarding anti-money laundering and anti-terrorist financing) The Gramm-Leach-Bliley Act (regarding federal privacy) State blue sky laws Marketplace trading rules Requirements of the Internal Revenue Service (IRS) if the Canadian firm is a Qualified Intermediary In addition to the federal agencies, each state has its own requirements of advisors who conduct securities business with its residents. The SEC and several Canadian securities administrators have a memorandum of understanding (MOU) that allows joint investigations of securities law violations such as insider trading, fraud, or inadequate disclosure. Canadian administrators have similar arrangements with the regulatory authorities of other foreign jurisdictions. These MOUs are statements of intent and are not legally binding; rather, they facilitate the exchange of information and foster regulatory cooperation in the global capital markets. CIRO and FINRA exchange information on compliance and enforcement-related matters and work together on issues related to firm oversight and examinations. SECURITIES INVESTOR PROTECTION CORPORATION The Securities Investor Protection Corporation (SIPC) is the U.S. equivalent of Canada’s CIPF. Both CIPF and SIPC have an MOU agreeing to collaborate in the event of the insolvency of a brokerage firm doing business in both the United States and Canada. SIPC also executed an accord with a similar entity in the United Kingdom. INTERNATIONAL REGULATORY INITIATIVES The development of international standards and projects that focus on specific problems will likely have a significant, long-term impact on dealers. Chief compliance officers should be aware of these developments, which may ultimately result in regulatory changes or heightened regulatory focus in Canada. EXAMPLE Although Canadian CCOs are typically focused on CIRO’s rules and related changes, compliance departments at CIRO dealer members must also focus on compliance with a host of other laws in different areas. Workplace health and safety (more relevant than ever during the COVID-19 pandemic), privacy, cybersecurity-related issues, and, of course, anti-money laundering are all issues that extend beyond CIRO. Yet, they are very applicable to a dealer member’s daily operations and, more importantly, to its success and stability. All CCOs should participate in industry roundtables and conferences so that they keep abreast of changes in all areas to ensure the success of their dealer member. INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS The International Organization of Securities Commissions (IOSCO) is made up of securities regulators from around the world. It does not implement securities legislation, but rather facilitates international communication and harmonization of securities legislation. IOSCO periodically publishes research reports on issues of interest to international securities regulators such as disclosure and accounting, the regulation of secondary markets and market intermediaries, enforcement, and the exchange of information. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 11 NORTH AMERICAN SECURITIES ADMINISTRATORS’ ASSOCIATION Formed in 1919, the North American Securities Administrators’ Association (NASAA) is an association of securities administrators from the United States, Canada, Mexico, and Puerto Rico. Its mission is to protect investors who purchase securities or receive investment advice and is the voice of the 50 state regulators. NASAA promotes harmonization of state laws, educates the public regarding investment fraud, participates in multi-jurisdictional enforcement actions and information sharing, and implements annual training for member organizations. WORLD FEDERATION OF EXCHANGES The World Federation of Exchanges (WFE) is a trade organization for regulated securities and derivatives markets worldwide. WFE promotes development and sets business standards for national and international financial markets. FINANCIAL ACTION TASK FORCE ON MONEY LAUNDERING The Financial Action Task Force on Money Laundering (FATF) was established by the G-7 countries in 1989. It is an intergovernmental body comprised of over 30 member countries (including Canada) and two international organizations. FATF develops and promotes policies to combat money laundering and terrorist financing. It aims to establish international standards to improve national legal systems and strengthen international cooperation in the fight against money laundering and terrorist financing. Members of FATF recognize that financial crime havens pose an international threat because their weak legal or regulatory regimes make them attractive to money launderers. For that reason, FATF maintains and publishes a list of high-risk and non-cooperative jurisdictions without adequate anti-money laundering regimes. A country might appear on this list because it has no anti-money laundering laws, or because it does not have adequate supervision over its financial institutions to ensure detection of these activities. Furthermore, FATF conducts and publishes evaluations of anti-money laundering systems, including those of member countries. When dealing with foreign financial institutions, Canadian anti-money laundering regulations and CIRO rules on beneficial ownership place the onus on dealer members to assess the anti-money laundering regimes in the countries of financial institutions they deal with. FATF evaluations are a resource for making this assessment. FINANCIAL STABILITY BOARD The Financial Stability Board (FSB) was established in April 2009 as the successor to the Financial Stability Forum. In general terms, the FSB has the following mandate: Coordinate at the international level the work of national financial authorities and international standard setting bodies. Develop and promote the implementation of effective regulatory, supervisory, and other financial sector policies. Promote international financial stability. Membership in the FSB includes government representatives as well as other international bodies, including (from Canada) the Bank of Canada, the Office of the Superintendent of Financial Institutions (OSFI), and the Department of Finance. Other members include representatives from the World Bank, the International Accounting Standards Board, and IOSCO. The FSB brings together national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB’s Secretariat is located in Basel, Switzerland, and is hosted by the Bank for International Settlements. © CANADIAN SECURITIES INSTITUTE 3 12 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 FEDERAL LEGISLATION AND AGENCIES Although there is no federal securities regulation in Canada, the federal statutes and agencies described in this section have provisions and rules that affect CIRO dealer members. FEDERAL LEGISLATION The following federal legislation applies in some respects to the activities of dealer members in the securities industry: The Bank Act Originally passed in 1871, the act receives a statutory review on a regular basis to ensure that it remains current in respect to developments in the financial system. The Bankruptcy and The Bankruptcy and Insolvency Act deals with bankruptcy matters relating to clients, Insolvency Act firm employees, and the firm. The specific area of the act that refers to securities is Part XII – Securities Firm Bankruptcies. The Canada Business The CBCA regulates proxy solicitations and insider trading for federally incorporated Corporations Act companies. The Income Tax Act The Income Tax Act imposes reporting requirements on dealers regarding client transactions that may include document requests or third-party demands for payment of funds from the Canada Revenue Agency. The Criminal Code Canada’s Criminal Code has changed with time to remain current to society’s technological advancements. One area of the act that pertains to financial services is Part X – Fraudulent Transactions Relating to Contracts and Trade. Canada’s Anti-Spam Canada’s Anti-Spam Legislation (CASL) establishes rules for the sending of commercial Legislation electronic messages (CEMs). Businesses must obtain either express “opt-in” or implied consent from recipients of CEM, including emails and certain types of social media messages. In addition, all electronic marketing messages, unless fully exempted from the act, must clearly identify the sender and must include contact information and an unsubscribe mechanism. Organizations that do not comply with CASL risk serious penalties, including criminal charges, civil charges, personal liability for company officers and directors, and penalties up to $10 million. National Do Not The Canadian Radio-television and Telecommunications Commission (CRTC) requires Call List telemarketers to subscribe to the National Do Not Call List (DNCL). Telemarketers and their clients are prohibited from calling telephone numbers that have been registered on the DNCL for more than 31 days. All telemarketers and clients of telemarketers must follow these rules unless they are making calls that are specifically exempted. Telemarketing firms must also remove from their calling lists any persons included in the DNCL. Telemarketing is broadly defined and includes sales or prospecting calls. Detailed information about the DNCL can be found on the CRTC’s website. The Personal PIPEDA regulates the collection, use, and disclosure of personal information by private Information Protection sector organizations, including CIRO dealer members. The Act balances the legitimate and Electronic use of information by these organizations with the individual’s right to privacy in the Documents Act course of their commercial activities. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 13 The Proceeds of Crime The Proceeds of Crime (Money Laundering) and Terrorism Financing Act (PCMLTFA) (Money Laundering) implements measures to detect and deter money laundering and terrorist financing and Terrorism including establishing recordkeeping and client identification requirements and the Financing Act reporting of suspicious transactions. FEDERAL AGENCIES The following federal agencies oversee specific aspects of federal law that apply to all financial institutions and securities dealers, including CIRO dealer members. THE OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS OSFI is the primary regulator of federally regulated financial institutions. Its scope includes banks, federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies, and federally administered pension plans. It also provides actuarial advice to the Government of Canada and reviews certain provincially chartered financial institutions. OSFI administers financial institution reporting under the Regulations Establishing a List of Entities made under the Criminal Code. Although CIRO dealer members report to CIRO, OSFI may examine the operations of bank-owned dealers to assess their enterprise-wide risk management. THE FINANCIAL TRANSACTIONS AND REPORTS ANALYSIS CENTRE OF CANADA FINTRAC is an independent agency at arm’s length from law enforcement agencies. It reports to the federal Minister of Finance. Its mandate is to detect money laundering and terrorist financing activities and to assist law enforcement agencies in deterring them. FINTRAC receives reports filed under PCMLTFA regulations regarding large cash transactions, cross-border movement of funds, and suspicious transactions. FINTRAC can also conduct audits of financial institutions’ compliance with PCMLTFA regulations, including audits of compliance by dealer members. It can also refer noncompliance to law enforcement agencies for investigation and prosecution. CIRO usually conducts these audits and provides FINTRAC with the results under an MOU. FINTRAC has legislative authority to issue an administrative monetary penalty of up to $500,000 to reporting entities that are in noncompliance with PCMLTFA. THE OFFICE OF THE PRIVACY COMMISSIONER The mandate of the Office of the Privacy Commissioner is to oversee PIPEDA. PIPEDA applies when personal information crosses provincial borders, except in provinces with “substantially similar” legislation (i.e., Quebec, British Columbia, and Alberta). Dealers must comply with the privacy legislation applicable in the province where the client resides. When a firm collects personal information from a client, the documentation must include a notification describing the purpose of the collection, its use, and full disclosure of the information. It must also explain that the personal information collected can be disclosed and used by the SRO. More importantly, firms must decline to accept or administer an account in which the account owner does not consent to the collection, use, or disclosure of personal information to the SRO. The Office of the Privacy Commissioner of Canada, or a similar official under provincial privacy legislation, accepts complaints from the public regarding the misuse of personal information and can conduct investigations to determine the validity of the complaint. © CANADIAN SECURITIES INSTITUTE 3 14 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 THE BANK OF CANADA The Bank of Canada regulates the primary distribution of all Government of Canada debt securities and monitors secondary market activity. It has arrangements with CIRO, under which CIRO may collect information on dealer member activity and positions in Government of Canada securities, as outlined in CIRO rules. The Bank of Canada has an MOU with CIRO, under which CIRO audits dealer members for compliance. ROYAL CANADIAN MOUNTED POLICE The Royal Canadian Mounted Police (RCMP) is the primary enforcer of Criminal Code market offences such as market manipulation, fraud, and insider trading. Provincial securities regulators also handle insider trading, in some circumstances. The RCMP established Integrated Market Enforcement Teams (IMET) to more effectively detect, investigate, and deter capital markets fraud, and to restore investor confidence. IMETs investigate and prosecute the most serious market-related crimes. They are composed of police, lawyers, and other investigative experts. They are managed jointly by the RCMP and the federal Department of Justice, and they work closely with provincial securities regulators and self-regulators. The RCMP also participates in the Joint Serious Offences Team, along with the Ontario Securities Commission and the Ontario Provincial Police Anti-Rackets Branch, to investigate and prosecute serious violations of the law. THE CRIMINAL CODE OF CANADA 3 | Explain criminal law obligations and areas of potential liability. Canada's Criminal Code is an act of law defining most, but not all, criminal offences and procedures in Canada. Federal acts covering other criminal offences include the Controlled Drugs and Substances Act, the Customs Act, the Excise Act, and the Competition Act. Offences under these laws carry similar penalties to those defined in the Criminal Code. Criminal law is within federal jurisdiction. Securities and corporate legislation are within provincial jurisdiction, as is the administration of justice. PRINCIPLES OF CRIMINAL LAW The objective of criminal law is to maintain a just, peaceful, and safe society. Criminal law is based on the belief that some acts should be prevented, and the threat of punishment achieves this end. Crime is a wrong against society as well as the victim, and protection of the public is therefore the responsibility of the state. Criminal law is also a system of values, and punishment helps communicate those values to those who do not comply with the law. The two main sentencing principles used to decide on punishment are general deterrence, which means deterring others from doing the same thing, and specific deterrence, which means deterring the offender from reoffending. OFFENCES Offences are classified as indictable or summary conviction; indictable offences are the more serious of the two types. The federal government can create both indictable and summary conviction offences, whereas the provinces may only create summary conviction offences. The maximum penalty varies for these two types of offences, as does the method of trial. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 15 CRIMINAL CODE SECURITIES-RELATED OFFENCES The Criminal Code covers the following securities-related offences in various sections (s.) of the code: Fraud (s. 380) Theft (s. 322) Theft by person holding power of attorney (s. 331) Misappropriation of money under direction (s. 332) False statement or false pretenses (s. 362) Obtaining execution of security by fraud (s. 363) Forgery (s. 366) Uttering a forged document (s. 368) False prospectus (s. 400) Organized crime offences (s. 467.1) Other Criminal Code provisions that significantly affect securities matters are described below: Insider trading is a criminal offence subject to a maximum of 10 years imprisonment. It is against the law to threaten or retaliate against an employee who informs law enforcement of capital markets fraud or assists an investigation into such a crime. Whistleblower protection requires a maximum penalty of five years in jail for offenders. The Criminal Code lists aggravating factors that permit the court to impose harsher sentences. Factors include the extent of economic damage caused and the negative effect on investor confidence, market stability, a person’s status in the community, and any fiduciary capacity. CRIMINAL PROCESS A client who believes that a firm or one of its representatives or employees has committed a criminal offence may file a complaint with a local or provincial police agency, a securities administrator, or the RCMP (typically, the Commercial Crime Section or IMET). These complaints involve serious offences such as fraud, theft, market manipulation, forgery, and Criminal Code offences relating to organized crime. If the police find that sufficient evidence exists to reasonably believe that an offence has been committed, they will initiate criminal charges by completing a charging document sworn before a justice of the peace. The justice will compel the offender to answer the charge in court by either a promise to appear, a summons to appear, or an order to bring the person before the court. British Columbia is one of the few provinces in which Crown approval is required before criminal charges can be laid. In a criminal or Offence Act prosecution, the Crown must prove, beyond a reasonable doubt, that the act occurred and that there was sufficient intent on the part of the defendant to attract criminal liability. This contrasts with administrative proceedings before a regulatory authority. In that case, the standard of proof is on a balance of probabilities and the person can be held liable not only if he or she “knew” about an offence, but also if he or she “ought to have known”. PRODUCTION ORDERS Production orders are used primarily to obtain information from financial institutions and third parties (i.e., persons not under investigation). Production orders can compel custodians of records to produce information under their control within a specified period, including such information as offshore data. © CANADIAN SECURITIES INSTITUTE 3 16 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 Certain breaches of provincial legislation can be prosecuted as criminal offences through the criminal process. For these breaches, a security administrator’s broad compulsion powers cannot be used when gathering evidence because of concerns related to the Canadian Charter of Rights and Freedoms (the Charter). However, several Supreme Court and Court of Appeal decisions have upheld the offence sections in the legislation and dismissed arguments that these powers contravene the Charter’s provisions. The courts have held that those involved in business enterprises have a lesser expectation of privacy, and therefore the powers and remedies available to the administrator in pursuing breaches in the criminal system do not violate the Charter’s provisions. LIABILITY UNDER THE CRIMINAL CODE Courts generally follow criminal sentencing guidelines when determining the appropriate penalties in a criminal proceeding. They can order any or all of imprisonment, fines, or restitution to a party who has suffered a loss because of the defendant’s conduct. The court’s decision can be appealed to the provincial superior court, then to the Court of Appeal, and finally to the Supreme Court of Canada (with permission of that court). Securities-related offences may be subject to the following penalties: Absolute or conditional sentence Fines Imprisonment Parole and probation conditions Restitution orders Forfeiture of property Committal for contempt CIVIL AND COMMON LAW OBLIGATIONS AND LIABILITIES 4 | Discuss civil law obligations and areas of potential liability. Participants in the securities industry have obligations to their clients under common law in most provinces. A breach of these obligations may result in a breach of the industry’s code of ethics, provincial securities laws, SRO rules, and other civil and criminal legislation. It may also result in a breach of the new client account agreement that clients have with their dealer member. In addition to disciplinary and regulatory sanctions, a breach can lead to civil litigation and criminal proceedings against a firm and its representatives. Dealer and registrant liability usually arises under common law principles relating to contract law, duty of care, fiduciary duty, duty to supervise, negligence, and misrepresentation. Actions in Quebec are governed by civil law, rather than common law, though many principles are similar. The party who commences a civil action must prove his or her case on a balance of probabilities, which is defined as more than a 50/50 standard. A criminal prosecution is subject to a much higher standard, defined as “beyond a reasonable doubt”. CONTRACT LAW A dealer member’s relationship with a client is an agency relationship created by contract, often referred to as a bilateral contract. The terms are set out in a client agreement, in particular the new client account agreement. This agreement may be subsequently amended as a result of updates completed and executed by the client and the advisor on behalf of the dealer member. The agreement is also the primary source for determining a firm’s duties, and identifying whether those duties have been breached, based on common law and the existing principles from case law. © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 17 Two duties of a dealer member arise under contract law. First, the firm’s representatives must carry out their clients’ instructions. If representatives fail to do so, they must advise the client so that the client can make alternate arrangements. The second duty concerns the termination of the relationship. Either party can terminate a contract with appropriate notice to the other party. Failure to give appropriate notice may lead to an action for damages if one party suffers a loss as a result. Both of these duties may be modified by contract. One of the cardinal rules of contract interpretation is that the court tries to honour the parties’ intentions. This requirement can be difficult when the parties’ intentions are not explicit in the agreement. In some cases, a term not in the contract may be implied, based on the presumed intentions of the parties. EXAMPLE Because of the fast-paced nature of the relationship between a CIRO dealer member and its clients, it is ill- advised on the part of the dealer member’s registrants to rely on the client’s intentions without having explicit evidence of what those intentions are. A clear and simple example relates to unauthorized trading. Registrants (other than those qualified to provide discretionary services) must seek permission and instructions from their clients with respect to every trade they place. There are no exceptions to this rule in the typical situation. Registrants should never assume they know what the client wants without the client telling them. This is why, in most dealer environments, clients and registrants must speak before a trade is entered. This verbal confirmation verifies the parties’ intention to take a particular course of action and is consistent with the agency relationship between dealer member and client. Most client agreements have the following characteristics: They give the dealer member the right to refuse to accept any client order when the firm deems this necessary for its own protection or for any other reason. They provide that no action taken by the dealer member shall be deemed a waiver of any of its other rights, remedies, or powers (called a no-waiver clause). They can be changed only by written amendment. They can be terminated only on proper notice. Remedies commonly sought for breach of contract include the following actions: Awards for damages for loss suffered Exemplary or punitive damages An order that the contract be completed A declaration that the contract is void and of no effect Litigation costs DUTY OF CARE Dealer members have a duty to provide advice to clients fully, honestly, in good faith, and with skill and knowledge. The standard of care applied by the courts is not a standard of perfection. Persons acting on behalf of the dealer member are not expected to guarantee an investment. However, they must at least show that they reasonably applied the appropriate skill and care under the circumstances. The most common actions against dealers for breach of duty of care involve breaches of rules around suitability, confidentiality, and the requirement to understand a client’s situation, which is known in the industry as the Know Your Client (KYC) rule. KNOW YOUR CLIENT The KYC rule requires that a dealer member must take reasonable steps to learn and remain informed of the essential facts relative to every client, every account, and every order it accepts. To do this, registrants should take ample time © CANADIAN SECURITIES INSTITUTE 3 18 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 with clients to have meaningful discussions regarding their background. All such meetings or telephone conversations should be fully documented by the registrant with client notes and, if possible, with meeting agendas. After the information is gathered, the client should be sent copies. This obligation is primarily the responsibility of RRs and portfolio managers (who are often referred to collectively as investment advisors, or simply advisors). Until an advisor knows a client’s particular situation, he or she cannot make suitable investment recommendations to that client. IMPORTANT NOTE Generally, this course uses the term advisor when discussing registrants who interact with clients and provide suitable investment advice, but it uses specific registration categories to differentiate between proficiencies and capabilities where necessary. Client account documentation on file should reflect all material information gathered in this fashion about a client’s current status to ensure that investment recommendations are suitable. Dealer members must regularly update this information to capture any material changes to a client’s circumstances. As part of this updating process, dealer members should ensure that such changes are clearly documented in a new client account agreement update along with detailed notes taken by the advisor. Maintaining a detailed file with corresponding notes and documentation helps strengthen the client-advisor relationship and helps the advisor to better serve the client. It also serves to protect the advisor in the event that a dispute should arise. SUITABILITY The KYC rule provides a foundation to ensure that registrants have determined the suitability of investment recommendations made to clients. All such recommendations must take into account the client’s personal and financial circumstances and his or her current investment needs and objectives, investment knowledge, risk profile, and time horizon. Dealer members must take reasonable steps to ensure that all information given to their clients is accurate and contains the material information necessary to make informed investment decisions. CIRO rules for retail accounts also require that an account suitability review be performed when certain trigger events occur. Trigger events include the receipt of securities into the client’s account, a change in the representative responsible for the account, and a change in the client’s KYC information. All account suitability reviews must consider, among other things, the client’s KYC information, the impact of the action on the client’s account, and whether the action puts the client’s interest first. In addition, any advisor recommending that a client purchase a security (especially a new or non-traditional product) must first understand how the product is constructed and how it is likely to perform in various market conditions. Without this understanding, it is not possible to assess suitability or explain the product’s features and risks. This requirement is often referred to as the Know Your Product obligation. Even in an institutional setting, registrants must determine that the assessment of new and different products falls within the client’s expertise. CIRO has product due diligence guidelines based on the principle that dealer members and advisors, in order to meet their suitability obligations, must understand the products they sell to clients. CONFIDENTIALITY Dealer members must maintain confidentiality regarding the identities and the personal and financial circumstances of their clients. Persons acting on behalf of the firm must not disclose any information concerning client transactions and their accounts without the client’s permission, except for supervisory purposes or by order of a court or proper regulatory authority. Violations of confidentiality can result in civil penalties, as well as penalties under federal and provincial privacy legislation. FIDUCIARY DUTY Fiduciary duty is imposed by common law, except in Quebec. Required elements for fiduciary duty are trust, confidence, and reliance on skill, knowledge, and advice. Whether a dealer-client relationship or a relationship © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 19 between a client and a registrant is fiduciary depends on the client’s level of trust in, and reliance on, the dealer or registrant. Some courts have held that there is no fiduciary duty unless all of the elements are present, though duties may arise under contract and tort law. A fiduciary relationship requires more than an undertaking to simply provide information, execute orders, or lend money. For this reason, the relationship between a client and a discount broker (or any firm that executes orders but does not provide advice) will not likely be characterized as fiduciary. A dealer member that presents itself as having specialized expertise might be held to a higher standard. When disputes between dealer members and clients are resolved through civil litigation, the courts may hold in some circumstances that the registrant owes a fiduciary duty to the client. If the client relies on advice and recommendations that the registrant provides, a fiduciary duty likely exists. Criteria used to determine whether a fiduciary duty is present in a registrant-client relationship may include the vulnerability of the client and a high degree of reliance on the registrant’s advice. Regardless of whether a fiduciary duty exists, an advisor has a duty under provincial and territorial securities laws to deal fairly, honestly, and in good faith with his or her clients. If a dealer member has breached a fiduciary duty to a client in a particularly egregious way, the dealer may be prevented from relying on commonly available defences such as contributory negligence and ratification. CONTRACT OF MANDATE IN QUEBEC In Quebec, the dealer-client relationship constitutes a contract of mandate, and the dealer member is considered a mandatary. As a mandatary, the dealer must exercise a duty of care similar to that of a fiduciary. However, although Quebec courts acknowledge the similarity between these concepts, fiduciary duty is not part of the civil law framework. EVOLUTION OF FIDUCIARY DUTY Industry experts disagree about whether regulators should impose a fiduciary duty on financial advisors in all client relationships. Those in favour say that many clients, believing that a fiduciary duty already exists, put unwarranted trust in their advisors. Those against argue that current investment suitability requirements and other client protection rules are sufficient. Some problems that have been identified with the current client-advisor relationship are addressed in rule changes associated with the Client Focused Reforms (CFR) project. The CFRs continue the regulatory evolution that also included the Client Relationship Model (CRM) project nearly a decade ago. The CFR amendments are based on the concept that the interests of the client must come first in the client-registrant relationship. DID YOU KNOW? On October 3 2019, the CSA released final amendments to National Instrument 31-103. Known as the Client Focused Reforms, the amendments made changes to the registrant conduct requirements to better align the interests of registrants with the interests of their clients. The initiative aims to improve outcomes for clients and clarify for them the nature and terms of their relationship with registrants. The CFRs resulted in changes to four particular aspects of the client-advisor relationship: Know-your-client obligation Suitability requirement Know-your product obligation Conflicts of interest It is important for all registrants to meet the requirements of these rule changes and to be able to demonstrate their compliance with them. The CFRs are discussed in greater detail further on in the course. © CANADIAN SECURITIES INSTITUTE 3 20 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 DUTY TO SUPERVISE Dealer members have a duty to supervise the conduct of their employees and may be held vicariously liable for contractual and fiduciary breaches of duty. Vicarious liability is a concept in law where the actions of one party or individual may create obligations or liability on another. This situation typically arises in an employment relationship where an employer may be held liable for the actions of his or her employees. NEGLIGENCE Liability for negligence arises out of tort law principles. A client who has suffered a loss as a result of a dealer member’s negligence may, in addition to an action for breach of contract, sue for recovery of damages. Clients do not have to prove that the dealer member intended to cause harm. They need only prove that they suffered a loss as a result of the dealer’s negligence, for which they should be compensated. EXAMPLE A dealer member gives a client inaccurate information about an investment. Another dealer member fails to assess the suitability of a proposed investment based on the client’s stated investment objectives. Both of these firms might be liable for their actions. To avoid liability, the dealer member must show that it reasonably applied appropriate skill and care under the circumstances. MISREPRESENTATION Liability for misrepresentation also arises out of tort law. In an action for damages as a result of a misrepresentation, the client must prove that the dealer member intentionally provided misleading information that caused a loss to the client, when the client relied on that information. Most common are actions for failure to assess suitability and failure by the dealer to disclose all of the facts regarding an investment. The securities acts of Ontario, British Columbia, Manitoba, Alberta, Quebec, New Brunswick, Nova Scotia, and Saskatchewan contain provisions regarding misrepresentation. In those provinces, investors are not required to prove that they relied on misleading disclosure when buying or selling stock or other securities. POTENTIAL CONSEQUENCES OF CIVIL LITIGATION Civil claims are generally used for more serious breaches and large monetary losses. An action may be initiated in small claims court, but there is a limit to the amount of the claim and the issues that can be litigated. Not all courts have jurisdiction to hear all issues. Civil litigation can be time-consuming and expensive. Actions brought for breach of statute are generally governed by the statute. For issues not covered by securities legislation, each province’s Limitations Act sets time limits for commencing actions. Potential remedies or consequences of civil litigation include the following actions: A court order to pay either or both of restitution and damages (including special or punitive damages), or to return property A court order for specific performance (i.e., an order to fulfill the contract) A declaration that the contract is void and of no effect Costs of the litigation Committal for contempt if the terms of the court order are not met © CANADIAN SECURITIES INSTITUTE  CHAPTER 3      CANADA’S REGULATORY ENVIRONMENT AND BASIC SECURITIES LAW 3 21 Any civil judgment involving a dealer member or an advisor must be disclosed to CIRO through the Complaints and Settlement Reporting System (ComSet). The SRO may mandate additional supervision of an advisor if it has concerns about the public’s interests. DID YOU KNOW? ComSet is a web-based system through which CIRO dealer members are required to report client complaints, disciplinary matters, and civil, criminal, or regulatory actions against the dealer member or its current or former registrants. CIRO’s Enforcement and Compliance units both use ComSet in their risk-based approach to Member Regulation. POTENTIAL DEFENCES AGAINST CLAIMS Dealer members evaluate client complaints and liability on the basis of the facts at hand, which can differ from one situation to another, in context of both complaint handling and civil claims. On this basis, and typically on the advice of the legal department (and in some cases outside counsel and insurers), dealer members may put forward defences against complaints and claims made by clients. For example, if a client complains of losses in his or her account, the dealer member will evaluate whether or not the security positions in the account were suitable for the client on the basis of the documented KYC, as well as on the basis of the file maintained by the advisor. If the security positions purchased by the client are considered suitable, the dealer member may refuse to compensate the client for the losses claimed. DIVE DEEPER Securities commission and SRO staff are generally willing to provide help, information, and interpretations, but their time is limited. Chief compliance officers should therefore exhaust other sources of information before contacting them. In addition, individual registrants should contact their CCO or supervisor with any compliance-related questions. The CCO or compliance department generally provides advice about the details of securities-related laws and regulations. A general understanding of some laws and a detailed understanding of critical laws are necessary. New rules, policies, or amendments are generally published for comment. CIRO provides free electronic subscriptions to notices. In addition, industry news services pick up press releases regarding important publications and initiatives of regulators. By keeping informed about proposed changes in legislation and regulations, dealer members and CCOs are in a position to comment or contribute to the comments of industry groups on proposals. This involvement helps to ensure that the rules are effective and efficient. It also helps the dealer member to plan ahead for policy, procedure, and system changes. Attention to international initiatives can sometimes provide an early awareness of regulatory changes to come. Notices of enforcement actions can also help dealer members identify new types of fraud risks, which can serve as a source for conducting due diligence on potential employees or customers. © CANADIAN SECURITIES INSTITUTE 3 22 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 2 SUMMARY In this chapter, we learned that securities regulation in Canada is a principle-based model rather than a prescriptive model based on strict rules. This means that dealer members must regulate themselves to a certain extent through their own policies and procedures. However, it is important to know that CIRO imposes certain rules and restrictions and that the securities industry also operates under provincial and federal legislation. A key point to remember is that some foreign laws and regulations may also apply to Canadian industry participants. This chapter explained aspects of Canada’s Criminal Code, which is an act of law defining most criminal offences and procedures in Canada. It discussed the two main sentencing principles governing securities-related offences and other unlawful acts: general deterrence (deterring others from doing the same thing) and specific deterrence (deterring the offender from reoffending). The chapter touched briefly on some of the dealer member’s obligations to its clients, which we will explore in detail in Chapter 9: Opening and Maintaining Accounts. The chapter discussed that a dealer member’s breach of those obligations may result in a breach of the industry’s code of ethics, provincial securities laws, SRO rules, and other legislation under civil and common law. Finally, we discussed the potential consequences when a civil claim is brought against a dealer member or a representative of the same. In this context, we also discussed the defences that might be available to the dealer member. In the next chapter, you will learn about the risk management processes that a dealer member should have in place to be compliant with securities regulation and avoid the consequences of civil litigation. © CANADIAN SECURITIES INSTITUTE