CPH Study Notes PDF

### **Chapter 1 Standards of Conduct and Ethics** **=STANDARDS OF CONDUCT AND ETHICS=** Investment Industry Regulatory Organization of Canada (IROC) is the national self-regulatory organization that oversees the securities industry. Employee standards of conduct: - - The failure to compl...

### **Chapter 1 Standards of Conduct and Ethics** **=STANDARDS OF CONDUCT AND ETHICS=** Investment Industry Regulatory Organization of Canada (IROC) is the national self-regulatory organization that oversees the securities industry. Employee standards of conduct: - - The failure to comply with these standards can lead to fines, suspension or termination of employment, or termination of registration. Ethics and Ethical behavior - **=INTEGRATING ETHICS WITH INDUSTRY RULES=** Ethical behavior is integrated into the lIROC rules by ensuring suitability of investment recommendations to clients. 3 main obligations as an Registered Representative (RR), as follows: - - - [Know Your Client (KYC)] Until you know a client\'s particular situation, you cannot make suitable investment recommendations for that client. Suitability is based on factors that include a client\'s: - - - - - - - - [Discovery Process]- gather information, both initially and throughout the client relationship; fact-gathering exercise is one that never stops; you must remain continually aware of the essential facts about your clients. [Know Your Product (KYP)] - [Under IIROC Rule section 3301, Product Due Diligence:] A Dealer Member must not make securities available to clients unless the Dealer Member has taken reasonable steps to: \(i) assess the relevant aspects of the securities, including the securities' structure, features, risks, initial and ongoing costs and the impact of those costs, \(ii) approve the securities to be made available to clients, and \(iii) monitor the securities for significant changes. [Duty of Care] - - - **=RULES OF THUMB TO GUIDE THE CONDUCT OF REGISTERED REPRESENTATIVES=** 1\. Gather as much information as you can about your clients, so you understand their needs, goals, and risk tolerance. 2\. Learn about the products you sell to ensure that your recommendations suit each client's situation. 3\. Act in an honest, fair, and trustworthy manner in all dealings with clients, employers, colleagues, and the public. 4\. Avoid entering into situations where your interests conflict with those of your clients. 5\. Conduct business in a professional manner that reflects well on yourself, your employer, and your profession, and encourage others to do the same. 6\. Strive to maintain and improve your professional knowledge and that of others in the profession. 7\. Conduct yourself in accordance with applicable securities legislation and industry rules. 8\. Hold client information in the strictest confidence. ### **Chapter 2 Ethical Decision Making** **=OVERVIEW OF ETHICS=** - Ethics as a concept can be defined more specifically in three ways: - - - Morals are the rules and habits of a society's conduct that are established according to perceived standards of right and wrong **=ETHICS VS RULES=** The regulatory environment in which the securities industry operates consists of the rules and requirements of the provincial securities regulators, any self-regulatory organization (SRO) to whose rules a dealer member and approved persons are subject, and, in some cases, the federal government **=THE RELATIONSHIPS BETWEEN VALUES, ETHICS, AND THE LAW=** [Values] Values are the individual or cultural measures of the worth we place on certain ideas and behaviour. [Ethics] Ethics are a set of moral principles that govern our behaviour. Our personal ethical stance is built on our personal values, and the ethics of a society are built on cultural values. [Laws] Laws are not synonymous with ethics, but they are commonly contained within and grow out of society's overall ethical sensibility. **=VALUE AWARENESS=** Integrity, trust, honesty, and competency are all values that are prized by professionals in the securities industry [Nature of Values] values do have several common characteristics: - - - [Values Clarification] - - - - - - - - - - - [Importance of Values to An Organization] - - - - - - [Importance of Values to Individuals] - - - - - [Importance of Values to Society] - - - - - - **=ETHICAL DILEMMAS=** - - - - - [Right vs. Wrong Issues] - - - - - [Right VS Right Dilemmas] Types of Dilemmas - - - - Ethical decision-making is an eight-step process, as follows: 1\. Recognize that there is a moral issue. 2\. Determine whose moral issue it is. 3\. Gather the facts. 4\. Test for right-versus-wrong issues. - - - 5\. Test for right-versus-right paradigms. (Is this a truth vs loyalty dilemma, Is this an individual vs group dilemma, Is this a short term vs long term dilemma,Is this justice vs mercy dilemma) 6\. Apply the resolution principles. (4 modes of problem solving) - - - - 7\. Make the decision. 8\. Reflect on the process. ### **Chapter 3 The Canadian Regulatory Framework** **[=GENERAL PRINCIPALS OF SECURITIES REGULATION=]** - - - - - - - - [Disclosure] - - - - - - - - - - - [Registration] - - - [Investigation and Prosecution] - - - - **=KEY GOVT PLAYERS INVOLVED IN SECURITIES REGULATION=** Regulation of the securities industry in Canada occurs at three levels: federal, provincial, and industry [Federal] - - - - - [Provinces] - - - [The Canadian Securities Administrator] - - - - - - (Client Focused Reforms (CFR) initiative is based on the concept that the interests of the client must come first in the client-registrant relationship. [CSA Tools and Processes (3 primary tools)] - - - - - - - - - [International Activities] INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS (IOSCO) Objectives: - - - FINANCIAL STABILITY BOARD (FSB) - - - - - - - - - - **[=SELF REGULATORY ORGANIZATIONS=]** - - [THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA (IIROC)] - - - - [IIROC COMPLIANCE AND SURVEILLANCE] - - - - - - - - [OTHER IIROC INITIATIVES] - [IIROC AND THE FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)] - - [THE MUTUAL FUND DEALERS ASSOCIATION (MFDA)] - - [THE EXCHANGES AND MARKETPLACES IN CANADA] - - [DESIGNATED STOCK EXCHANGES] - - - - - - - **=INVESTOR PROTECTION FUNDS=** investors are not protected from market losses, but rather from losses related to the financial collapse of a dealer member. [CANADIAN INVESTOR PROTECTION FUND] Under IIROC rules, each dealer member must meet the following obligations: - - - - - - - - [COMPENSATION FOR CLIENT LOSSES] - - - - - [GENERAL ACCOUNTS] - -  [SEPARATE ACCOUNTS] - [CANADA DEPOSIT INSURANCE CORPORATION (CDIC)] - - - - [PROVINCIAL INSURANCE FUNDS FOR DEPOSITORS] - **[=MONEY LAUNDERING AND TERRORIST FINANCING IN THE SECURITIES INDUSTRY=]** [MONEY LAUNDERING] - - [THE THREE STAGES OF MONEY LAUNDERING] - - - - - - - - - - - - - [MONEY LAUNDERING MECHANISMS INVOLVING THE SECURITIES INDUSTRY] - - - - - - ### **Chapter 4 Working With Clients** **=REGISTRATION REQUIREMENTS OF A REGISTERED REPRESENTATIVE=** To trade in securities or to advise on the purchase or sale of securities in Canada you need to be registered with: - - [PROFICIENCY REQUIREMENTS AND CATEGORIES OF REGISTRATION] Registered Representatives - - [REGISTRATION REQUIREMENTS FOR REGISTERED REPRESENTATIVES] 1\. Formal training and proficiencies (CSC and CPH) 2\. 90-day period of restricted client contact. Permitted activities include: - - - 3\. Six-month period of supervision 4\. 30-month requirement 5\. Continuing education (CE) 6\. Additional proficiency - - [PORTFOLIO MANAGERS AND ASSOCIATE PORTFOLIO MANAGERS] - [SALES ASSISTANT] - - [INVESTMENT REPRESENTATIVES AT ORDER EXECUTION ONLY FIRMS] - - [RESTRICTIONS ON NON-REGISTERED STAFF] - - - - - - [IROC REGISTRATION REVIEWS: THE FIT AND PROPER TEST] - - - - [CONTINUING EDUCATION] - - **=COMMUNICATION WITH THE PUBLIC=** The following communications have been specifically prohibited in many provinces: - - - [RULES FOR TELEMARKETING AND THE NATIONAL DO NOT CALL LIST] - [CANADA'S ANTI-SPAM LEGISLATION] - - - [RULES FOR MARKETING MATERIALS] - - - [ELECTRONIC ADVERTISING AND SOCIAL MEDIA USE]  **=GENERAL REGULATIONS AND GUIDELINES FOR SALES LITERATURE=** Dealer members typically provide registrants the following types of material containing information about investments: - - - - [MUTUAL FUND SALES COMMUNICATIONS] A sales communication about a mutual fund must: - - [THE FUND FACTS DOCUMENT] If any performance data is included in a sales communication, the communication must adhere to the following rules: - - - - - - - - - - - **=DEALING WITH CLIENTS=** [CONFLICTS OF INTEREST] - - - - [PERSONAL FINANCIAL DEALINGS WITH CLIENTS] The following types of activities are considered personal financial dealings with clients, and are thus generally prohibited under IIROC rules: - - - - - - [OUTSIDE BUSINESS ACTIVITIES] The following activities could be outside business activities: - - - - - [CARRYING ACCOUNTS AT OTHER DEALER MEMBERS] - - **=PRIVACY AND CYBERSECURITY=** [THE PERSONAL INFORMATION PROTECTION AND ELECTRONIC DOCUMENTS ACT] - - - - [CYBERSECURITY] - - ### **Chapter 5 Client Discovery and Account Opening** **=OPENING ACCOUNTS=** [THE CARDINAL RULE: KNOW YOUR CLIENT] - - - - - - - - - - [OBTAINING INFORMATION AT THE ACCOUNT OPENING STAGE](These stages help to determine whether particular investments are appropriate) - - - - - - - - - [CLIENT IDENTIFICATION REQUIREMENTS: ANTI-MONEY LAUNDERING] - - [ACCOUNT OPENING RED FLAGS] - - - - - - - - - - - - - - [GENERAL ANTI-MONEY LAUNDERING DUE DILIGENCE] - - - - - - - - - - [ACCOUNT UPDATES AND REVIEWS] - - - [ANTI-MONEY LAUNDERING PROCEDURES FOR CORPORATE ACCOUNTS] - - - - [ANTI-MONEY LAUNDERING PROCEDURES FOR NON-RESIDENT ACCOUNTS] - - - [ANTI-MONEY LAUNDERING PROCEDURES FOR INSTITUTIONAL ACCOUNTS] - - - - [PERSONAL IDENTITY DOCUMENTS] - - **= THE ACCOUNT APPLICATION=** - - - - - - - - - - - - - - **=COMPLETING THE ACCOUNT APPLICATION=** There are three general categories of information required on the account application, as follows: - - - [CLIENT INFORMATION] -Includes such basic identifying information as the client's name, address, and marital Status. It also includes basic financial information, including the client's total net worth, level of investment knowledge, investment objectives, and risk profile. - - - - - - - - - - - - - [ACCOUNT TYPES] CASH ACCOUNTS Cash accounts require the client to deposit payment in full for each purchased transaction. For sales, the securities must be in the account or must be delivered to the account by the settlement date of the sale transaction Dealer members do not provide financing to clients who operate cash accounts MARGIN ACCOUNTS - - - - - - - - DELIVERY AGAINST PAYMENT (norm for institutional clients) - - - - RECEIPT AGAINST PAYMENT (norm for institutional clients) - - REGISTERED ACCOUNTS This category includes RRSPs, RRIFs, registered education savings plans (RESPs), tax- free savings accounts (TFSAs), and various locked-in accounts PRO ACCOUNTS all employees of a dealer member or a related company and any of their family members living under the same roof are considered to be non-clients a non-client is a pro account INVESTMENT CLUB ACCOUNTS - - - - DISCRETIONARY ACCOUNTS - - - - - - - - - MANAGED ACCOUNTS - - - - - - - - - - - BENEFICIAL OWNERSHIP - - CURRENCY - - - PAYMENT AND DELIVERY - - - - [REGISTRANT INFORMATION] LICENSING - - SOURCE OF THE CLIENT - - DIRECT OR INDIRECT INTEREST - - - [REGULATORY SECTION] INSIDERS (If a person owns more than a certain percentage of a class of voting or equity shares of an issuer (usually 10%) - - - - - - - - CONTROL PERSONS - - - TRADING AUTHORIZATION AND POWER OF ATTORNEY - - - POWER OF ATTORNEY The following processes can be implemented to reduce such risks: - - - BANKING INFORMATION - [DISCLOSURES] RELATIONSHIP DISCLOSURE - DISCLOSING CONFLICTS OF INTEREST - - - - - - PRE-TRADE DISCLOSURE OF CHARGES - - - - - DISCLOSURE WHEN ACTING AS A PRINCIPAL - - - - - [DISCLOSURE RELATING TO PRODUCTS] Initial public offerings (IPOs) - - Mutual funds - - - Strip bonds and strip coupons - - - - - - Insurance products - Derivatives - [LEVERAGE DISCLOSURE] You do not have to provide such a statement if it has been given to the client within the preceding six months, or if the purchases are made through a margin account that is operated in accordance with IIROC rules ADDITIONAL DOCUMENTATION FOR SPECIAL CIRCUMSTANCES If you or your dealer member engages in certain activities or business structures, you must provide clients with additional documents that disclose the following facts: - - - - - MARGIN AGREEMENT - - CASH AGREEMENT - GUARANTEE FORM - - - - - [TRADING AUTHORIZATION DOCUMENTS] AUTHORIZATION FOR AN INDIVIDUAL'S ACCOUNT - - - AUTHORIZATION FOR A JOINT ACCOUNT WITH RIGHT OF SURVIVORSHIP - - - AUTHORIZATION FOR A CORPORATION, PARTNERSHIP, OR TRUST - - - - - AUTHORIZATION FOR AN ESTATE ACCOUNT - - - [SEPARATE ACCOUNT APPLICATIONS AND SUPPORTING DOCUMENTS] SEPARATE ACCOUNT APPLICATIONS - - - - - - - - - - - - - - - - - - - ELECTRONIC DELIVERY AND SIGNATURES According to the legislation, the document or information in electronic form must meet the following requirements: - - - - - **=CLIENT RECORDS=** ### ### **Chapter 6 - Product Due Diligence, Recommendations, and Advice** **=SUITABILITY OF INVESTMENTS AND INVESTMENT STRATEGIES=** [TRANSACTION CONSIDERATIONS] - - - [RULES REGARDING RECOMMENDATIONS] - - - - - - [SUITABILITY CONSIDERATIONS FOR INSTITUTIONAL ACCOUNTS] IIROC defines an institutional client as follows: 1\. Acceptable counterparties 2\. Acceptable institutions 3\. Regulated entities 4\. Registrants (other than an individual registrant) under securities law 5\. A non-individual with total securities under administration or management exceeding \$10 million - - **=PRODUCT DUE DILIGENCE=** [KNOW YOUR PRODUCT] - - - - - [NEW PRODUCT DUE DILIGENCE] - - - - - - - - - - [LEVERAGED AND INVERSE EXCHANGE-TRADED FUNDS] - - - [ASSESSING SUITABILITY] Registered Representatives must use diligence to ensure that accounts are reviewed for suitability when any of the prescribed triggering events occurs [UNSUITABLE INVESTMENTS] If you receive an unsuitable order from a client, you must, at a minimum, advise the client against proceeding with it. [SUPERVISION] The firm must have written supervisory procedures that impose the following requirements when recommending or accepting orders for leveraged and inverse ETFs: - - - - [SALE OF PRINCIPAL-PROTECTED NOTES BY APPROVED PERSONS] - - - - [DISTRIBUTION OF NON-ARM'S LENGTH INVESTMENT PRODUCTS] - - - - - **=NEW ISSUES AND PROSPECTUS EXEMPTIONS=** [NEW ISSUES] - - - - - - - - - - - - [PRELIMINARY PROSPECTUS] - - - - - - - - [PERMITTED ACTIVITIES DURING THE WAITING PERIOD] - - - - - - - [FINAL PROSPECTUS] - - - - - - - - [PROSPECTUS EXEMPTIONS] - - Issuers of securities in the exempt market do not need to comply with many of the requirements applicable to the public market, including: - - - - - [EXEMPTIONS RELATED TO RAISING CAPITAL] - -  [EXEMPTIONS RELATED TO CROWDFUNDING] - - - - - - - - [RESALE OR FIRST TRADE EXEMPTIONS] - [HOT ISSUES AND PRIVATE PLACEMENTS] - - - - - - - - **=TAKE-OVER AND ISSUER BIDS=** [TAKE-OVER BIDS] - - - - - [EARLY WARNING RULES] - - - - - - [TAKE-OVER BID RULES] - - - - - - [WITHDRAWAL RIGHTS] Any security holder that deposits shares in response to a take-over bid may withdraw those securities in the following circumstances: - - - - - - [ISSUER BIDS] - - - - - - - ### Chapter 7 -- Trading, Settlement and Prohibited Activities **=HOW SECURITIES ARE TRADED=** [STANDARD TRADING UNITS] - - - - [SETTLEMENT PERIOD] - - [MINIMUM QUOTATION SPREADS] - - - [PLACING AN ORDER] - - - - - - - - - - **=TYPES OF ORDERS=** -  - -  -  [Fixed Income Trading] - - - -  **=SALES AND TRADING CONDUCT=** [CLIENT PRIORITY] - - - [BEST EXECUTION] - - - - - - - - - - - - - - - [GATEKEEPER OBLIGATIONS] - - - [ANTI-MONEY LAUNDERING AND SUSPICIOUS TRANSACTION REPORTING] - - - - - - - - **=PROHIBITED ACTIVITIES=** [FRONTRUNNING] - - - - - - - - - - - - - [CHURNING] - - - - - [SALES MADE OUTSIDE OF A JURISDICTION] - - - [SALE OF UNQUALIFIED SECURITIES] - - - - - - - [ILLEGAL REPRESENTATIONS TO EFFECT A TRADE] - - - - - - - - - - - - - - - - - - [MANIPULATIVE TRADING PRACTICES] The following trading practices do not follow the principles of a fair and transparent market and therefore must be avoided: - - - - - - - Misleading or attempting to mislead IIROC on any material point. [UNAUTHORIZED DISCRETIONARY TRADING] - - - - - - [ILLEGAL INSIDER TRADING AND TIPPING] - - - - [WHO ARE INSIDERS?] For the purposes of the reporting provisions of the Acts, insiders are defined to include the following people: - - - [WHAT IS INSIDE INFORMATION?] - - - - [PROHIBITION AGAINST INSIDER TRADING AND TIPPING] - - - - - - - - [FIREWALLS] - - - - - - - - - - - - [INSIDER REPORTING REQUIREMENTS] - - - - - - [THE SYSTEM FOR ELECTRONIC DISCLOSURE BY INSIDERS] - - - - - - - - - **=SETTLEMENTS, TRANSFERS, AND CORRECTIONS=** [THE CLEARING SYSTEM] - - - [ADVANTAGE WITH SECURITIES SOLD] - - - [ACCRUED INTEREST TO SELLER] - - - [TRADING EX-DIVIDENDS AND EX-RIGHTS] - - [CASH TRADES] - - - - - [REDUCING OUTSTANDING ORDERS WHEN SHARES TRADE EX] - - - - - - - [TRANSFER OF SECURITIES] - - - [SIMPLE TRANSFER] - - [TRANSFER INVOLVING LEGAL DOCUMENTATION] - - - - - [CHANGES IN OWNERSHIP] - - - - - - - [FAILURE TO DELIVER LISTED SECURITIES] - - - [DELIVERIES AND PAYMENTS] - - - [ERRORS] - - ### **Chapter 8 -- Maintaining client accounts and relationships** **=ACCOUNTING FOR CLIENT TRANSACTIONS=** - - - - - - - **=MARGIN ACCOUNTS=** - - - - - - - - - - - - - [MARGIN AGREEMENTS] - - - - - - - - - [LONG MARGIN ACCOUNTS] - -  [SECURITIES ELIGIBLE FOR REDUCED MARGIN] - - - - [DEBT SECURITIES] - - - [OPERATING A LONG MARGIN ACCOUNT]  [LOAN VALUE] - - [MARGIN POSITION] - - - - [EQUITY POSITION] - - [LONG MARGIN ACCOUNT: CASE STUDY] - - - - [SHORT MARGIN] -RISK - - - - -CREDIT BALANCES - - - - - -MARGIN REQUIRED - - - - -  [COMBINATION OF SHORT AND LONG POSITIONS IN A MARGIN ACCOUNT] - - - [SPECIAL MARGIN SITUATIONS] - - - - - - [FREE CREDIT BALANCES] - - - - - - - **=CASH ACCOUNTS=** THE CASH ACCOUNT RULE - - - - - - - - - - - [PURCHASE OF SECURITIES] - - - - - [SALE OF SECURITIES] - - - - - [SETTLEMENT RULES FOR CASH ACCOUNTS] - - [DEALING WITH OVERDUE CASH ACCOUNTS] IIROC has a detailed and uniform set of minimum capital requirements that reflect, among other things, the size, type, and volatility of business conducted by dealer members - - - - - The purpose of a capital charge on dealer members is to provide for the risks related to cash accounts that do not settle on the prescribed basis and that are not closed out. This risk is measured by two factors: - - [CASH ACCOUNTS OVERDUE FOR FEWER THAN SIX BUSINESS DAYS] - - - - - [CASH ACCOUNTS OVERDUE FOR SIX OR MORE BUSINESS DAYS] - - - - - - - - [CASH ACCOUNTS DUE FOR 20 OR MORE BUSINESS DAYS] - - - - - [DELIVERY AGAINST PAYMENT/RECEIPT AGAINST PAYMENT ACCOUNTS] - - - - - - **=COMMUNICATING TRADING INFORMATION TO CUSTOMERS=** CONFIRMATION OF TRADES The trade confirmation sent to clients must show at least the following information: - - - - - - [TRADE CONFIRMATION DISCLOSURE OF DEBT SECURITY COMPENSATION] Where a debt security trade is not a primary market transaction, and the client is a retail client, the trade confirmation must include either of the following amounts: - - [DELIVERY OF TRADE CONFIRMATIONS] Four components to electronic delivery must be satisfied in order to constitute a good delivery: - - - - - - - [ACCOUNT STATEMENTS] - - Under IIROC rules, statements must be issued monthly in all of the following circumstances: - - - - - - - - [ENHANCED PERFORMANCE REPORTING] - - - [CLIENT COMPLAINTS AND ACCOUNT TRANSFER REQUESTS]  - - - - [COMPLAINTS AND SETTLEMENT REPORTING SYSTEM] - - [HOW CLIENTS CAN SEEK COMPENSATION] A client wishing to resolve a dispute with an IIROC dealer member can choose any of three avenues beyond the dealer member's internal complaint-handling process: - - - Clients must try to resolve their complaint at the firm level first, before they can access the arbitration or ombudsman programs. However, this means that any delay at the firm level can prevent investors from accessing their other compensation options in a timely manner [ARBITRATION] - - - - - - Arbitration is a method of resolving disputes where an independent arbitrator: - - - - - - [THE OMBUDSMAN FOR BANKING SERVICES AND INVESTMENTS] - - - - - - [CIVIL LITIGATION] - - - Potential remedies or consequences of civil litigation include the following actions: - - - - - [ACCOUNT TRANSFERS] - - - - -