Canadian Regulatory Environment PDF

The Canadian Regulatory Environment 3 CHAPTER OVERVIEW In this chapter, you will learn about the Canadian regulatory environment, including the various regulatory bodies and the pr...

The Canadian Regulatory Environment 3 CHAPTER OVERVIEW In this chapter, you will learn about the Canadian regulatory environment, including the various regulatory bodies and the principles of regulation conducive to fair and open capital markets. In this context, you will learn about the various regulators and self-regulatory organizations, the purpose of regulation, and the meaning of principles-based regulation. You will also learn about the remediation options available to clients who feel they have not been well served. Finally, you will learn about the ethical standards you will be expected to uphold as a participant in the financial services industry. LEARNING OBJECTIVES CONTENT AREAS 1 | Describe the roles played by the agencies and The Regulators legal entities through which the Canadian securities industry is regulated. 2 | Discuss the principles that underlie securities Regulation and Supervision legislation. 3 | Describe the remediation options investors Remediation can access to resolve concerns they have with dealer members. 4 | Identify unethical practices and conduct in Ethical Standards in the Financial Services securities trading. Industry © CANADIAN SECURITIES INSTITUTE (2017) 3 2 CANADIAN SECURITIES COURSE | VOLUME 1 KEY TERMS Key terms are defined in the Glossary and appear in bold text in the chapter. arbitration Mutual Fund Dealers Association Autorité des marchés financiers Mutual Fund Dealers Association Investor Protection Corporation Canada Deposit Insurance Corporation National Do Not Call List Canadian Investor Protection Fund National Registration Database Canadian Securities Administrators Office of the Superintendent of Financial front running Institutions full, true, and plain disclosure Ombudsman for Banking Services and Investments gatekeeper Securities and Exchange Commission investment advisor self-regulatory organization investment representative Investment Industry Regulatory Organization of Canada © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 3 | THE CANADIAN REGULATORY ENVIRONMENT 3 3 INTRODUCTION In the previous chapters, we learned how the financial markets, along with the roles of the financial intermediaries, developed over time to meet the ever-evolving needs of investors. As these components of the securities industry evolved, so did regulation in the industry. In their response to industry developments, regulators maintained a set of rules that protect investors from harm. Investor protection is the primary goal of the regulators. However, it is not the only goal of securities regulation. The various Canadian regulatory bodies also play a key role in fostering market integrity. But what does market integrity entail? As you learned in the previous chapters, productive investing takes place when savings are funnelled through the markets into stocks, bonds, and other securities. The issuers of those securities then use the savings to fund various projects. For this process to happen efficiently, investors must feel confident that they will be treated fairly as equal participants in the capital markets. Without the assurance that they stand to benefit from projects that they help to fund, potential investors would not have the confidence to risk their savings. To protect market integrity, the regulators require that industry employees meet high proficiency standards through mandatory educational programs. In addition, investor protection funds are in place to protect individual investors in the unlikely event that a firm goes bankrupt. The regulatory bodies have the authority to prosecute individuals and firms suspected of wrongdoing. If fault is proven, regulators can impose penalties in the form of reprimands, fines, suspensions, and expulsion. In this chapter, we discuss regulation in the Canadian securities industry and the various regulatory bodies that uphold the rules. We also explore what it means to operate as an investment advisor or other financial services employee in a principles-based regulatory environment. THE REGULATORS 1 | Describe the roles played by the agencies and legal entities through which the Canadian securities industry is regulated. In Canada, each province and territory is responsible for creating the legislation and regulation under which a business in the securities industry must operate. In several provinces, much of the day-to-day securities regulation is delegated to securities commissions. In other provinces, securities administrators are appointed by the province to take on the regulatory function. In Quebec, the regulatory body is the Autorité des marchés financiers, which regulates both the securities business and Quebec’s financial sector. That sector includes life and property insurance firms, providers of deposit insurance, and distributors of financial products, among others. Outside of Quebec, the financial sector is regulated separately from the securities industry by the Office of the Superintendent of Financial Institutions (OSFI). THE CANADIAN SECURITIES ADMINISTRATORS The Canadian Securities Administrators (CSA) is an umbrella organization of Canada’s ten provincial and three territorial securities regulators designed to improve, coordinate and harmonize regulation of the Canadian capital markets. The mission of the CSA is to develop a national regulatory system that fosters fair, efficient, and vibrant capital markets in which investors are protected from unfair, improper, and fraudulent practices. © CANADIAN SECURITIES INSTITUTE (2017) 3 4 CANADIAN SECURITIES COURSE | VOLUME 1 DID YOU KNOW? The CSA has developed a number of national policies representing the regulatory framework that applies in every provincial and territorial jurisdiction. With the increasing involvement in the investment business of federally regulated financial institutions such as banks, trusts, and insurance companies, the number of national policies issued by the CSA has increased. THE SELF-REGULATORY ORGANIZATIONS Self-regulatory organizations (SRO) are private industry organizations to which the provincial regulatory bodies have granted the privilege of regulating their own members. SROs enforce their members’ conformity with securities legislation. They have the power to prescribe their own rules of conduct and financial requirements. SROs are delegated regulatory functions by the provincial regulatory bodies. SRO by-laws and rules are designed to uphold the principles of securities legislation. The CSA monitors the conduct of the SROs and review their rules to ensure that they are in the public’s interest and do not conflict with provincial rules. SRO regulations apply in addition to provincial securities regulations. If an SRO rule differs from a provincial rule, the most stringent rule of the two applies. Canadian SROs include the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA). THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA IIROC oversees all investment dealers and trading activity on debt and equity marketplaces in Canada. Its mandate is “to set high quality regulatory and investment industry standards, protect investors, and strengthen market integrity while maintaining efficient and competitive capital markets”. IIROC carries out its regulatory responsibilities by setting and enforcing rules that affect its dealer members and their registered employees. It enforces the proficiency of dealer members, as well as their business and financial conduct. IIROC also sets and enforces market integrity rules regarding trading activity on Canadian equity marketplaces. In its role as regulator, IIROC performs the following functions: Financial compliance Dealer members are monitored to ensure that they have enough capital to carry out their operations. Business conduct Dealer members are monitored to ensure that policies and procedures are in place to compliance properly supervise the handling of their client accounts. Registration IIROC oversees professional standards and educational programs designed to maintain the competence of industry employees. Enforcement IIROC enforces rules and regulations that cover the sales, business, financial practices, and trading activities of individuals and firms under IIROC’s jurisdiction. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 3 | THE CANADIAN REGULATORY ENVIRONMENT 3 5 Market surveillance IIROC’s surveillance of trading and market-related activities of participants on Canadian equity marketplaces includes the following practices: Real-time monitoring of trading activity on stock exchanges, the Natural Gas Exchange Inc., and Alternative Trading Systems across Canada Ensuring dealer members comply with the timely disclosure of information by publicly-traded companies in Canada Carrying out trading analysis and compliance with trading rules THE MUTUAL FUND DEALERS ASSOCIATION The MFDA is the mutual fund industry’s SRO responsible for regulating the distribution and sales of mutual funds by its members in Canada. The MFDA does not regulate the mutual funds themselves; this responsibility remains with the provincial securities administrators. The MFDA is recognized as an SRO by Alberta, British Columbia, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Prince Edward Island. The MFDA has the ability to admit members, audit, enforce rules, and apply penalties. THE OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS As the regulatory body for all federally regulated financial institution, OSFI is an independent agency of the Government of Canada designed to contribute to the safety and soundness of the Canadian financial system. OSFI is responsible for regulating and supervising the following federally registered institutions: Deposit-taking institutions including banks, trust and loan companies, and co-operative credit associations Insurance companies, including life insurance companies, fraternal benefit societies, and property and casualty insurance companies Foreign bank representative offices that are chartered, licensed, or registered by the federal government Federally-regulated pension plans OSFI does not regulate the Canadian securities industry. DIVE DEEPER To learn more about the OSFI’s regulatory and supervisory powers, visit the OSFI website. http://www. osfi-bsif.gc.ca/Eng/Pages/default.aspx THE CANADIAN REGULATORY ENVIRONMENT What are the roles of the various provincial legislative bodies, SROs, and other agencies that regulate the financial sector in Canada? Complete the online learning activity to assess your knowledge. INVESTOR PROTECTION FUNDS The securities industry offers the investing public protection against loss as a result of the financial failure of any firm in the self-regulatory system. Account types covered under the various forms of protection include those of IIROC dealer members, MFDA members, banks, trust and loan companies, and credit unions. © CANADIAN SECURITIES INSTITUTE (2017) 3 6 CANADIAN SECURITIES COURSE | VOLUME 1 CANADIAN INVESTOR PROTECTION FUND To foster continuing confidence in the relationship between investors and their advisors, the industry created the Canadian Investor Protection Fund (CIPF) in 1969. The primary role of the CIPF is investor protection; its secondary role is overseeing the self-regulatory system. The secondary role provides a mechanism to help CIPF contain the risk associated with its primary role. The CIPF protects eligible customers in the event of the insolvency of an IIROC dealer member. It does not cover client losses that result from changing market values, nor does it insure accounts held at mutual fund companies, banks, or any other firms that are not members of IIROC. The CIPF is sponsored solely by IIROC and funded by quarterly assessments on IIROC dealer members. All customer accounts are covered, either as part of the customer’s general account or as a separate account. Accounts such as cash, margin, short sale, options, futures, and foreign currency are combined and treated as one general account entitled to the maximum coverage of $1 million. Separate accounts, such as registered accounts and trusts, are each entitled to the maximum coverage of $1 million, unless they are combined with other separate accounts. MUTUAL FUND DEALERS ASSOCIATION INVESTOR PROTECTION CORPORATION The Mutual Fund Dealers Association Investor Protection Corporation (MFDA IPC) was created in 2005 to provide protection for eligible customers of insolvent MFDA member firms. This IPC does not cover customers’ losses that result from changing market values, unsuitable investments, or the default of an issuer of a mutual fund. Following the structure of the CIPF, customer accounts are covered either as part of a general account or as a separate account. Each account is eligible for up to $1 million in coverage. The MFDA is not recognized as a self-regulatory organization in the province of Quebec. Consequently, the MFDA IPC coverage is not currently available to customers with accounts held in Quebec. The province of Quebec has its own compensation fund. CANADA DEPOSIT INSURANCE CORPORATION The Canada Deposit Insurance Corporation (CDIC) is a federal Crown Corporation that provides deposit insurance and contributes to the stability of Canada’s financial system. CDIC insures eligible deposits up to $100,000 per depositor in each member institution (banks, trust companies, and loan companies), and reimburses depositors for the amount of any insured deposits if a member institution fails. To be eligible for insurance, deposits must be held with a member institution in Canadian currency and payable in Canada. Term deposits must be repayable no later than five years from the date of deposit. The $100,000 maximum includes all of the client’s insurable types of deposits with the same CDIC member. Deposits at different branches of the same member institution are not insured separately. EXAMPLE Assume that you have $80,000 cash on deposit in your own name, and in the same institution you have $120,000 on deposit in a registered retirement savings plan. If the institution were to fail, CDIC would insure your deposits in the amount of $180,000 ($80,000 fully covered for the cash deposit in your own name and a maximum of $100,000 covered for your registered retirement savings plan). © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 3 | THE CANADIAN REGULATORY ENVIRONMENT 3 7 DIVE DEEPER To learn more about the various forms of investor protection and the terms of their coverage, visit the corporations’ websites: CIPF – http://www.cipf.ca MFDA IPC – http://mfda.ca/mfda-investor-protection-corporation/mfda-ipc-coverage/ CDIC – https://www.cdic.ca/en/Pages/default.aspx PROVINCIAL INSURANCE CORPORATIONS In each province, one or more organizations exist to protect the deposits of credit union members. The various organizations have names such as deposit insurance corporation, deposit guarantee corporation, stabilization fund, stabilization corporation, stabilization board, or central credit union. Terms and maximum coverage may vary by province, so it is important to check with your province to determine the specific coverage available. DIVE DEEPER To learn more about the terms of the coverage provided by the various provincial insurance corporations, visit the website of the Financial Consumer Agency of Canada. http://www.fcac-acfc.gc.ca/Eng/ forConsumers/topics/banking/Pages/Provinci-Assureur.aspx REGULATION AND SUPERVISION 2 | Discuss the principles that underlie securities legislation. In the financial services industry, rules and regulations set standards of conduct for individual investors and market participants at securities dealers. These rules are set and enforced by various government bodies. Failure to comply with them can have significant consequences, not only for the investors and firms, but for the credibility of the whole industry. In Canada, the provincial securities commissions and SROs 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 and provincial SROs or across provincial jurisdictions. A basic principle of regulation is that when two or more regulations conflict, the strictest standard applies. Laws contained in other federal and provincial statutes also apply to the securities industry. These laws include the Criminal Code of Canada 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 ongoing evolution of the securities industry presents new risks and challenges for the people who work in the industry. The past three decades have seen significant structural changes. Ownership restrictions were eliminated for securities dealers, fixed commission rates were removed, stock exchanges were demutualized, and new trading venues were introduced. Securities dealers and their representatives were also challenged by new products, heightened competition, technological advances, and demographic changes. © CANADIAN SECURITIES INSTITUTE (2017) 3 8 CANADIAN SECURITIES COURSE | VOLUME 1 DID YOU KNOW? Demutualization refers to a company that was owned by its members converting to a company owned by shareholders. In this high-pressure environment, inadequate corporate governance at an individual firm can have a ripple effect throughout the industry. Corporate governance refers to the system of rules, policies and procedures by which a company is controlled. Rules are necessary to foster an environment of fairness and to protect the integrity of the marketplace. The extent to which a firm complies with external rules is strongly influenced by the strength of a firm’s internal compliance systems. Ultimately, corporate governance represents a balancing act between the interests of a company’s stakeholders, including senior management, shareholders, customers, government, and the community. DID YOU KNOW? Business failure or loss of reputation at one securities dealer can affect the whole industry. For example, rogue trading at one firm can cause all investors to lose confidence. Therefore, when new regulations are developed in response of a negative incident, all securities dealers must abide by them. Regulators strive to be proactive in protecting the integrity of the capital markets, generally acting where there is a perceived need for new rules and regulations. In some cases, new rules may come about because of a market breakdown. The regulators have four primary objectives in imposing regulation: Consumer protection Without reassurance of protection from fraud and abusive or manipulative practices, investors would be reluctant to risk taking part in the capital markets. Fairness Investors must also perceive that the markets are fair, and that no participant has an unfair advantage over them. Economic stability The efficient flow of capital across the economy is essential for growth and stability, and to prevent disruptions to the economy through market failure. Social objectives Regulations support the government objective of dissuading criminal activities such as money laundering, for example. PRINCIPLES-BASED REGULATION The Canadian securities industry follows a principles-based regulatory model, rather than a rules-based model. Under the principles-based approach, the regulators set objectives for securities dealers and allow the firms themselves to decide how best to meet those objectives. The objectives apply to broad issues such as proficiency and integrity of staff members, suitability of recommendations, and the responsibility of preventing client abuse of the markets. Objectives may even extend to the adequacy of capital. Unlike a rules-based approach, which imposes detailed rules designed to provide clarity and legal certainty to market participants, a principles-based approach is clearer, simpler, and less costly to apply. It allows securities dealers to tailor their supervision and compliance functions to fit their business. It also requires good judgment in comparison to the prescriptive, rules-based approach. However, the guidance to ensure compliance that accompanies principles-based regulations is often detailed enough to be considered a rule. The courts or regulators often hold securities dealers to this standard. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 3 | THE CANADIAN REGULATORY ENVIRONMENT 3 9 Principles-based regulation requires careful analysis and monitoring by each dealer member. If a compliance failure occurs, the firm has no set standards to rely on to prove that its supervision was adequate. To convince the regulators that the firm exercised due diligence, it must provide documentation of the analyses and decisions that were made during the development, implementation, and operation of the system. EXAMPLE Speed limits are sometimes used as an example of rules-based versus principles-based regulation. For example, a rules-based model might state that it is illegal for you to drive faster than 100 kilometres per hour. In contrast, a principle might state that it is illegal for you to drive faster than is reasonable and prudent in all circumstances. According to such a principle, your behaviour would be based on an individual assessment of all relevant factors. The practical difficulty is that different people would assess the same situation and arrive at different conclusions. Defending such subjective decisions after the fact may be even more problematic. SECURITIES REGULATION IN CANADA The securities industry has extensive legislation and regulation to protect investors and ensure high ethical standards. This protection flows from the SROs, as well as from the provincial and territorial regulatory authorities. Provincial securities acts are designed to regulate the underwriting, distribution, and sale of securities, and to protect buyers and sellers of securities. Formal conferences of provincial administrators are held regularly; informal consultation and co-operation among the various regulatory bodies is continuous. In this chapter, we use the term administrator to mean the applicable regulatory authority, whether it is a securities commission or a government entity. In Canada, there is no federal regulatory body for the securities industry, unlike in the United States, where the national Securities and Exchange Commission (SEC) has considerable regulatory authority. Many experts in the Canadian industry argue that provincial and territorial regulations should be streamlined to achieve a uniform set of laws across the country. Recent harmonization efforts to achieve this objective have focused on co-operation among the various regulatory bodies. However, the creation of a single regulator at the federal level has remained under consideration. DISCLOSURE The general principle underlying Canadian securities legislation is full, true, and plain disclosure of all pertinent facts by those offering the securities for sale to the public. Until such facts are disclosed to the satisfaction of the designated administrator, it is illegal to offer the securities for public sale. Disclosure is normally made in a prospectus issued by the company and accepted for filing by the administrator concerned. Generally, the securities acts use three methods to protect investors: Registration of securities dealers and advisors Disclosure of facts necessary to make reasoned investment decisions Enforcement of the laws and policies The industry also relies on the SROs to ensure that their members comply with legislation. The laws are designed to protect against fraud, as far as possible, and to prevent investment service providers from applying deceitful, high-pressure sales tactics on uninformed investors. Nevertheless, no legislation supplants the rule that investors should inform themselves before purchasing an investment. Likewise, advisors should fully investigate a product before they recommend it. © CANADIAN SECURITIES INSTITUTE (2017) 3 10 CANADIAN SECURITIES COURSE | VOLUME 1 DID YOU KNOW? Registration Generally, every securities dealer and all of its Investment Advisors (IAs) must be registered with the applicable administrator. IAs are the employees of the security dealer who are licensed to trade and give advice to its clients in Canada. As well as granting registrations, administrators have the power to suspend or cancel registration or otherwise discipline their registrants. For registration purposes with IIROC, an IA falls under the category of Registered Representative. For purposes of this course, we will make reference to IA or advisor. In the case of IIROC dealer members, all employees who deal with the investing public must register with IIROC as well as with the administrator. Such employees must meet IIROC’s requirements for approval. As a minimum, they must complete the Canadian Securities Course and an examination based on the Conduct and Practices Handbook course, both offered by the Canadian Securities Institute or CSI. To advise and sell securities to the public, new IAs must also complete a 90-day training program. After licensing, the registrant is subject to a six-month period of supervision by his or her supervisor. New registrants must also complete CSI’s Wealth Management Essentials Course (WME) within 30 months of becoming licensed as an IA. Participation in the industry’s continuing education program is also a condition of maintaining a licence. In contrast to IAs, Investment Representatives (IRs) are largely employed by self-directed brokerage firms, where clients make their own investment decisions. Advisors in this category can trade in, but not provide advice to clients, on securities. The proficiency requirements for IRs are similar to those for IAs, except that the training period is 30 days, rather than 90 days, and the WME education component is not required. At fully registered firms, employees have a fair amount of latitude in their dealings with the public. Employees at other firms, such as mutual fund dealers, are subject to limitations on their permitted activities. IAs should be aware of any such restrictions that apply to their firms. THE NATIONAL REGISTRATION DATABASE The National Registration Database (NRD) is a web-based system used by investment dealers and employees to file registration forms electronically when applying for approval by a stock exchange, the CSA, or IIROC. The NRD is designed to enable a single electronic submission to satisfy all jurisdictions in Canada, rather than a registrant having to file separate registration forms in each jurisdiction. The NRD also allows regulators to verify registration status in other jurisdictions. Both the IA and the dealer member are required to notify the applicable SROs immediately, in writing, of any material changes, such as a change of address, in the original answers to the questions on the NRD application. Each dealer member is also required to immediately report to the administrators and SROs to which it belongs the termination of an IA. If the IA is dismissed for cause, a statement of the reasons for the dismissal must be reported. THE GATEKEEPER ROLE The gatekeeper function, long considered an important role of IAs, is the guarding of markets from possible wrongdoing by unscrupulous clients. IAs must not, through act or omission, facilitate breaches of securities laws or regulations by clients. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 3 | THE CANADIAN REGULATORY ENVIRONMENT 3 11 Gatekeepers in the securities industry include dealers and all of their employees, particularly front-line and supervisory employees. Investment Advisors who deal with clients directly must take measures to identify suspicious clients, detect and report suspicious transactions, and prevent illegal activity. To do so, they must comply with the following requirements: Collect and record client information that is accurate and complete. Monitor activity in client accounts. Report any suspicious transactions or proposed transactions in client accounts. Of particular concern to gatekeepers are illegal activities, including money laundering, terrorist financing, financial fraud, and illegal insider trading. KNOW YOUR CLIENT RULE Compliance with gatekeeper obligations begins with the Know Your Client (KYC) rule. The SROs require that securities dealers and their IAs take the following steps to meet their KYC obligations: Learn the essential facts relative to every client and to every order or account accepted. Verify that the acceptance of any order for any account is within the bounds of good business practice. Verify that recommendations made for any account are appropriate for the client’s investment objectives, personal circumstances, and tolerance to risk. As an IA at a securities dealer, your first step in complying with the KYC rule would be to complete a New Account Application Form before you accept any order. A partner, director, officer, or branch manager of the advisor’s firm must approve the application prior to, or promptly after, the first transaction is completed. CLIENT RELATIONSHIP MODEL A series of rule amendments under IIROC’s Client Relationship Model (CRM) project is part of a broader fundamental obligation of IIROC dealer members and their representatives to deal fairly, honestly, and in good faith with clients. These reforms impose greater disclosure requirements to enhance the standards that advisors must meet when assessing the suitability of investments for their clients. The objective is increased transparency for investors regarding the fees they pay, the services they receive, potential conflicts of interest, and the performance of their accounts. RELATIONSHIP DISCLOSURE To better inform clients of the nature of their account, an IIROC dealer member must provide all clients with a relationship disclosure document that includes the following information: The types of products and services offered by the firm The terms of the account relationship to which the client has consented The process used by the firm to assess investment suitability and the client’s KYC information The date on which account suitability will be reviewed All fees and charges associated with operating, transacting, and holding investments in the account The firm’s complaint handling procedures A description of all the reporting that the client will receive, including the date on which account statements and trade confirmations will be sent, as well as a statement describing the firm’s obligations to provide performance information © CANADIAN SECURITIES INSTITUTE (2017) 3 12 CANADIAN SECURITIES COURSE | VOLUME 1 CONFLICT OF INTEREST MANAGEMENT Securities dealers must develop and maintain policies and procedures to identify, disclose, and address existing and potential material conflicts involving clients. All material conflict situations between advisors and their clients, and between the firm and its clients, must be addressed through one of the following three means: Avoiding the conflict Avoid any potential or existing material conflict of interest between the advisor or firm and the client, unless the conflict can be addressed in a fair, equitable, and transparent manner in the best interests of the client. Disclosing the conflict Disclose any unavoidable potential or existing material conflict of interest to clients in all cases where a reasonable client would expect to be informed. Otherwise controlling In general, the only scenario under which an unavoidable material conflict need not be the conflict situation disclosed to a client is if the firm has taken other steps to control the situation, and the firm has effectively ensured, with reasonable confidence, that the risk of loss to the client has been eliminated. SUITABILITY ASSESSMENT The CRM guidelines require that the suitability of an investment decision be conducted whenever any of the following trigger events occur: A trade is accepted. A recommendation is made. Securities are transferred or deposited to an account. There is a change of representative or portfolio manager responsible for the account. There is a material change to the KYC information for the account. REMEDIATION 3 | Describe the remediation options investors can access to resolve concerns they have with dealer members. There are times when clients feel that they have been treated unfairly by a firm that is a member of an SRO. The first step to remediation in such cases is for the client to attempt to resolve the dispute directly with the firm. If unsuccessful, the client has various options to address the dispute, other than suing the firm. ARBITRATION Arbitration is a method of dispute resolution in which an independent arbitrator is chosen to listen to the facts and arguments of both sides in the dispute. The arbitrator then decides how the dispute should be resolved and what remedy should be imposed, if any. The SROs can only discipline member registrants; they cannot order restitution to be made to clients. Therefore, SROs offer dissatisfied investors the option of pursuing damages through arbitration, rather than in court. Arbitration is often cheaper and faster than a court action, particularly if relatively small amounts of money are concerned. A client must receive an arbitration brochure when opening an account. If a written complaint has been received, a current brochure must be sent to the client. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 3 | THE CANADIAN REGULATORY ENVIRONMENT 3 13 If a client requests arbitration from an SRO, the securities dealer must accept both the process and the arbitrator’s decision. To be eligible for arbitration, the dispute must meet the following criteria: Attempts have been made to resolve the dispute with the investment dealer. The claim does not exceed $500,000. Claims for higher amounts may also be arbitrated, if both parties agree to the process. The decision of the arbitrator is binding. Before the arbitration process begins, both parties must sign an agreement to give up the right to further pursue the matter in court. OMBUDSMAN FOR BANKING SERVICES AND INVESTMENTS Another avenue for investors who feel that they have been treated unfairly is the Ombudsman for Banking Services and Investments (OBSI). This organization investigates customer complaints against financial services providers, including banks and other deposit-taking organizations, investment dealers, mutual fund dealers, and mutual fund companies. OBSI is independent of the financial services industry. For investors who have been unable to resolve their complaints with their financial services provider, OBSI provides a prompt and impartial resolution. The process is not binding for either the investor or the financial services provider. However, participating firms that do not agree to a recommendation by OBSI are publicly reported. To date, no member has failed to follow OBSI’s recommendation. ETHICAL STANDARDS IN THE FINANCIAL SERVICES INDUSTRY 4 | Identify unethical practices and conduct in securities trading. High ethical standards in the securities industry are of paramount importance, not only to the investing public, but also to the corporations that list their securities in the capital markets. If industry practices were seen to be unethical, it would be impossible for corporations to raise the money they need to expand and grow because the investing public would simply not participate. The exchanges and the SROs have extensive rules and regulations that govern trading on an exchange and industry practices in general. Infractions may lead to fines, suspension, expulsion, and even criminal charges. In this context, unethical conduct includes any omission, negotiation, or manner of doing business that is not in the public interest nor in the interest of the exchange, in the opinion of the disciplinary body. EXAMPLES OF UNETHICAL PRACTICES The following practices are examples of conduct that is considered unethical by the regulators: Deceiving the public, the buyer, or the vendor as to price of any transaction or the value of any security Creating, or attempting to create, a false or misleading appearance of active public trading in a security in an effort to make a profit Entering, or attempting to enter, into any arrangement to sell and repurchase a security in an effort to manipulate the market Making a fictitious trade that involves no change in the beneficial ownership of a security in an effort to mislead the public Using high-pressure or otherwise undesirable selling techniques Violating any statute applicable to the sale of securities © CANADIAN SECURITIES INSTITUTE (2017) 3 14 CANADIAN SECURITIES COURSE | VOLUME 1 Misleading a client as to the risk involved in purchasing a specific security Trading in one’s own account before effecting the same trade for a client (a practice known as front running) Conducting oneself in a way that would bring the securities business, the exchanges, or IIROC into disrepute Securities dealers are responsible for the acts or omissions of all their employees. In terms of discipline, unethical conduct of an advisor may be handled as though it were also the conduct of the securities dealer itself. PROHIBITED SALES PRACTICES Securities legislation prohibiting certain types of selling activities exists for very good reasons. Such regulations are designed to curb unethical behaviour, dishonest conduct, and high-pressure selling tactics. In the role of an IA, it is of vital importance that you study the rules applicable in your province and conform carefully to all the requirements. You should also be constantly aware of all changes in the law and immediately conform to such changes. NATIONAL DO NOT CALL LIST IAs often use the telephone as a tool to solicit new clients. By doing so, you are considered to be a telemarketer by the Canadian Radio-television and Telecommunications Commission (CRTC). The CRTC has established rules that telemarketers and the organizations that hire them must follow. In particular, all telemarketers must subscribe to the National Do Not Call List (DNCL). The DNCL rules prohibit telemarketers and clients of telemarketers from calling any number that has been registered on the DNCL for more than 31 days. As an advisor, you must follow these rules unless you are making calls that are specifically exempted. The term telemarketing is broadly defined to include sales or prospecting calls. Telemarketing firms must remove persons included in the DNCL from their calling lists. DIVE DEEPER To learn more about the National Do Not Call List, visit the website of the Canadian Radio-television and Telecommunications Commission. CLIENT-ADVISOR Can you use your knowledge to assess a situation in a case involving a client and investment advisor? Complete the online learning activity to assess your knowledge. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 3 | THE CANADIAN REGULATORY ENVIRONMENT 3 15 SUMMARY In this chapter we discussed the following aspects of the Canadian regulatory environment: The capital markets in Canada are regulated by provincial and territorial administrators who typically delegate authority to SROs. The SROs enforce member conformity with securities legislation and prescribe their own rules of conduct. IIROC is the SRO that deals with all investment dealers and trading regulation in the debt and equity markets. The MFDA deals with the distribution side of the mutual fund industry. Clients of IIROC member firms are protected against loss in case of insolvency by the CIPF. Clients of MFDA member firms have the same protection through MFDA IPC. Securities legislation is designed to protect investors by three means: (1) registration of securities dealers and advisors, (2) disclosure of facts necessary to make reasoned investment decisions, and (3) enforcement of laws and policies. Unethical conduct is defined as any omission, conduct, or manner of doing business that, in the opinion of the disciplinary body, is not in the interest of the public or the exchange. FREQUENTLY ASKED QUESTIONS If you have any questions about this chapter, you may find answers in the online Chapter 3 FAQs. REVIEW QUESTIONS Now that you have completed this chapter, you should be ready to answer the Chapter 3 Review Questions. © CANADIAN SECURITIES INSTITUTE (2017)