Fin 4203 -Ch 3.pdf

The Canadian Regulatory Framework Chapter 3 Recognize the different registration categories for dealers and advisors Registration is only required if the individual or firm is engaged in the business of: trading, underwriting or advising in securities. To determine if a person or a firm should be re...

The Canadian Regulatory Framework Chapter 3 Recognize the different registration categories for dealers and advisors Registration is only required if the individual or firm is engaged in the business of: trading, underwriting or advising in securities. To determine if a person or a firm should be registered, the regulators will look at the type of activity and whether it is carried out for a business purpose Factors which will be examined include: whether the activity is similar to that of a registrant; the intermediation of trades; carrying on the activity directly or indirectly with repetition, regularity or continuity; being compensated; and soliciting trades directly or indirectly Recognize the different registration categories for dealers and advisors NI 31-103 uses the familiar definition of a “security”, which is very broad and generally includes an interest in the capital, property or profits of a person or company; evidence of an option to purchase a security; an interest in a trust, estate or association; a profit-sharing agreement; an interest in an oil, gas or mining lease, claim or royalty; certain annuity contracts; an interest in a scholarship trust; and any investment contract General Definitions for registration purpose Dealer:  A person or company who is in the business of trading in securities in the capacity of a principal (take position and then sell to customer) or agent (as a middleman to connect buyer and seller). Investment Fund Manager:  This is a new category of registration for those persons or companies who manage investment funds, which include pooled funds. Advisor: This registration is for a portfolio manager or a restricted portfolio manager. i) Portfolio Manager: Persons or companies who manage the investment portfolios of clients through discretionary authority granted by the clients. ii) Restricted Portfolio Manager: Persons or companies who act as an advisor in respect of a security in accordance with the terms, conditions, restrictions or requirements applied to its registration. FIRMS – business entities There are 3 types of registration categories for FIRMS:  Dealers  introducing / Carrying brokers Arrangements  Investment Representatives (IR) (1) Dealers Some of the relevant dealer categories are as follows: i) Investment Dealer: A person or company who engages in the business of trading in securities in the capacity of an agent or principal and is a dealer member of IIROC. An investment dealer also has the authority to act as an underwriter. ii) Mutual Fund Dealer: A person or company registered exclusively for the purpose of trading in shares or units of mutual funds. Other than in Quebec, a mutual fund dealer must be member of the MFDA. iii) Scholarship Plan Dealer: Restricted to scholarship plan investments. iv) Exempt Market Dealer: A person or company who deals in the exempt market, such as private placements. This is the former Ontario and Newfoundland registration of Limited Market Dealer. v) Restricted Dealer: An open category which will allow flexibility in registration FIRMS – business entities-2 (2) INTRODUCING/CARRYING BROKER ARRANGEMENTS  Carrying brokers are dealer members that offer back office services and facilities to other dealermembers, which are known as introducing brokers. The services provided by the carrying broker may include: execution, clearing, and settlement of trades (jitney services); custody of customer funds and securities; compliance; maintenance of books and records of client transactions; and financing of client positions. FIRMS – business entities-3 the carrying broker has “Know Your Client” & non financial compliance rules & reg obligations only under Type 1 arrangement Client is considered a client of the… Type 1 Carrying Broker AND Introducing Broker Responsibility for Know Your Client Carrying Broker AND Introducing Broker Type 2 Carrying Broker AND Introducing Broker Introducing Broker Responsibility for NonFinancial Compliance rules and regs Carrying Broker AND Introducing Broker Introducing Broker Responsibility for Antimoney laundering / suspicious transaction Carrying Broker AND Introducing Broker Carrying Broker Carrying Broker Carrying Broker AND AND Introducing AND Introducing Introducing Broker Broker Broker reporting Type 3 Carrying Broker AND Introducing Broker Type 4 Carrying Broker AND Introducing Broker Introducing Broker Introducing Broker Introducing Broker Introducing Broker  Exemptions from Registration Private investment clubs with fewer than 50 members do not have to register exemption from dealer registration is provided for transactions in specified debt, being primarily debt from governments or financial institutions INDIVIDUALS – persons  Individuals who wish to trade in securities for the public or advise in the purchase of sale of securities must be registered Registrants may transact in securities business only in the provinces in which they are registered as Registered Reps (RR) Registrants must disclose all outside activities (including employment) and obtain pre-approval of the dealer member prior to engaging in any outside activities IIROC rule 18.14 provides that a registered representative (RR) or investment representative (IR) may engage in a business activity, including another gainful occupation, outside of the dealer member The provincial Acts (i.e. Securities Act) permit representatives to advertise that they are registered to sell securities, provided that the information is true, and the category of registration is specified Principal/agent relationships – allowed by IIROC Rule 39 one entity legally appoints another to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act), e.g. RR is the agent and the Investment Dealer is the principal Incorporated salespersons are not allowed. (1) Registered Representative (RR) Registration as a new RR/IA requires 1. Formal training: Candidate must successfully complete the CSC and the CPH Course 2. 90-Day Period of Restricted Client Contact: IIROC Rules state that individuals in the training period are not permitted to have contact with customers or prospects in obtaining, taking or soliciting orders for or advising on trades in securities, as they are not yet registered. 3. Six-Month Period of Supervision: After approval as RR, the registrant is placed under the close supervision of his or her supervisor 4. 30-Month Requirement: Registered Representatives dealing with retail customers (other than a Registered Representative dealing in mutual funds only) must successfully complete the Wealth Management Essentials (WME) course within 30 months after his or her approval. 5. Continuing Education (CE): Participation in the industry’s CE program is a condition of maintaining a licence. Canadian Securities Institute (CSI) offers courses and exams for CSC, CPH, and WME Why is continuing education (CE) important for an RR (IA)?. stay abreast of product developments, legal and compliance issues, emerging industry trends and other capital market developments  IIROC CE program consists of two parts: Training who 10 hours of compliance training and 20 hours of professional development training IAs and Supervisors of retail RRs Retail IAs, IRs, supervisors of IRs, non-retail IA’s CE Cycle: 2 years. RR (IA) must complete 30 hours within the 2 years  If a registrant has not completed the required courses at the end of the CE cycle, penalties will be invoked  RRs, commonly referred to as Investment Advisors (IAs), are individuals registered to provide advice on the full range of equity and fixed income securities products, excluding options and futures  The attributes that make for a successful IA include:. Extensive industry knowledge; Strong communication skills; and Ethical decision making IIROC staff evaluate whether an individual appears to be “fit and proper” for approval/registration, on 3 criteria: 1. Integrity, which includes honesty and good faith, particularly in dealings with clients, and compliance with IIROC rules and securities laws; 2. Financial solvency, which is considered relevant because it is an indicator of the risk that an individual will engage in self-interested activities at the expense of clients; and 3. Competence, which includes prescribed proficiency and knowledge of the requirements of IIROC rules and securities law. Not provide registration / approval : 1. the applicant is not qualified by reason of integrity, solvency, training or experience or 2. the approval is not in the public interest (2) Investment Representative (IR).  Investment Representatives are individuals registered solely to take/submit client orders for execution – under no circumstances must these registrants provide clients with investment advice; No invst advice  IR’s are not allowed to solicit orders (buy or sell) or provide investment advice to clients   proficiency requirements for IRs are similar to those for IAs, with the exception of the length of the training period, the 30-month and continuing education requirements. They are not required to fulfill the 30-month requirement Before registration is given by IIROC for the individuals to become IRs, individuals in these training programs are not permitted to have contact with customers or prospective customers in obtaining orders. Explaination the registration process under the National Registration Database. Canadian securities industry professionals and firms are required to register with the securities regulatory authority in each province or territory where they do business. Non-registered personnel (e.g. clerks or secretaries) employed by a dealer member or a related financial services entity cannot 1. open client accounts; 2. distribute or receive order forms for securities transactions 3. assist clients in completing order forms for securities transactions; 4. provide recommendations or advice on securities; 5. complete “Know Your Client” information on a NAAF (New Account Application Form) other than the biographical information; a 6. solicit securities transactions Explaination the registration process under the National Registration Database-2 All regulatory filings regarding registered individuals (RR or IR) must be completed through the National Registration Database (NRD). The NRD is a web-based system that permits dealers and advisors: 1. to file registration forms electronically, 2. reduces the regulatory burden for industry participants 3. and harmonizes securities regulations across jurisdictions NRD advantages: 1. IAs who want to register in multiple provinces only have to file a single electronic registration form (Form 33-109F4) to satisfy all jurisdictions in Canada. 2. The NRD also eliminates the burden of providing proof of registration in other jurisdictions 3. registrations in all jurisdictions renew on December 31 of each year and not on different dates as was the case under the old paper-based system 4. it will not accept incomplete applications. The user will receive an automatic message on the screen if he/she tries to submit incomplete applications or filings using NRD, and will be required to complete the missing information 5. providing firms with full access to all registration information about individuals associated with their firm 6. provides easy access to registrant information across the country Rule 3100 requires registrants to notify their employer, i.e. Investment Dealer, within two business days of a material change (e.g. change of residential address). The firm (i.e. the employer) must report within 10 days of the change to IIROC’s Registration Department via the NRD list of items that registrants (RR or IR) must report to their employer (i.e. dealer member): 1. there is any change to information contained in Form 33-109F4; 2. the registrant has reason to believe he or she is in violation of any law or legislation a. pertaining to securities or exchange contracts, any by-laws, regulations, rules, rulings or b. policies of any SRO, professional licensing or registration body in any jurisdiction, inside or outside of Canada; 3. the registrant is the subject of any customer complaint in writing, except service complaints; 4. the registrant is aware of a customer complaint, in writing or any other form, relating to any other registrant that involves allegations of theft, fraud, misappropriation of funds or securities, forgery, money laundering, market manipulation, insider trading, misrepresentation or unauthorized trading.escribe the requirements for dealing with clients in the United States  The basic rule is that the IA must be registered in the state in which the U.S. client resides. Sections : IDPC 1402 - Standard of Conduct Rule 3100 - Inform material change of registrants IDPC 3301 - Product Due diligence Rule 3230: Advisory Accounts Rule 3240: Order Execution – Only Accounts Rule 3270: Discretionary Accounts and Managed Accounts Forms : Form 33-109F4 - Single registration form NRD (multiple provinces) Form 33-109F6 - Dual registered firm (registration form)