Chapter 3: The Canadian Regulatory Environment Flashcards
(41 cards)
1
Q
what does the OSFI do
A
office of the superintendent of financial institutions
- Regulates and supervises banks, insurance, trust and loan companies, pension plans
- It does not supervise the Canadian securities industry – this is done provincially
2
Q
what is the Canadian Deposit Insurance Corporation (CDIC)
A
- Federal Crown corporation
- Insures deposits up to $100k per depositor in each financial institution
- You personally can be insured for a total greater amount than $100k – the insurance is for each “account” – bank account; mortgage etc.
- However, this insurance is not for mutual funds, stocks, bonds
- applies for term deposits (ex. savings, chequing, GICs) if they mature < 5 years
- > 5 years, they are not insured
2
Q
Why would the Canadian government wish to insure bank deposits but not stocks / shares in Canadian companies?
A
they want Canadians to have confidence in their banking systems -> canadians would deposit their money in banks
2
Q
how is the canadian securities industry regulated
A
- The Canadian securities industry is regulated provincially
- Each province has its own securities commission – in Ontario it is the Ontario Securities Commission (OSC)
3
Q
what is the canadian securities association (CSA)
A
- formed by all 13 securities commissions to provide a national umbrella group to co-ordinate provincial activities (but only co-ordinate)
- provide securities regulatory system that protects investors from unfair, improper, or fraudulent practices
- helps make it fair, efficient, & vibrant capital markets
3
Q
why have efforts to set up a national securities commission been resisted by some provincial commissions
A
- currently the provincial commissions have a lot of power
- if they set up a national securities commission, those provincial commissions would have less power (they don’t want that)
4
Q
what is an SRO
A
- self-regulatory organizations
- An organization owned by its members that regulate and police themselves
- deals with member regulation, listing requirements, & trading regulation
5
Q
what are examples of SROs
A
- TSX
- Mutual Funds Dealers Associations (MFDA)
- Investment Industry Regulatory Organization of Canada (IIROC)
6
Q
what does the Investment Industry Regulatory Organization of Canada (IIROC) do
A
- IIROC oversees all investment dealer and trading activity in the Canadian debt and equity markets
- Monitor member firms for capital adequacy and business conduct
6
Q
what is the purpose of IIROC
A
- purpose is to set high quality regulatory & investment industry standards, protect investors, & strengthen market integrity while keeping efficient & competitive capital markets
- also a national SRO & therefore needs to ensure national policies & rules reflect the various perceptions of people in all parts of the country
6
Q
what is capital adequacy
A
- It is the amount of money (capital) that firms must set aside when holding bank deposits / making loans / raising capital for corporations
- If firms require less capital – their returns on this capital will be greater
- However, the greater the risk to these firms and the overall financial system (that was the financial crisis)
6
Q
what happened in the financial crisis
A
- companies in the US didn’t have much capital (they wanted less capital bc it meant more gain if value of assets don’t decrease)
- because having more capital = dilution of ownership for others
- when the financial crisis happened, the value of assets (mortgages) went down while the amount of liabilities stayed the same
- since A = L + E, companies had to remove equity to balance it back out
7
Q
what happened in the financial crisis for Canada
A
- real estate didn’t go down as much as it did in the US
- but regulations in Canada has required companies to have more capital
- so the canadian market didn’t face too much of an affect
8
Q
what is short selling
A
- selling for higher
- buying back later for less
9
Q
how does IIROC serve as a securities industry regulator
A
- Formulates standards and policies for Canadian debt and equity markets
- Monitors sales and trading activities of member firms
- regulates the qualifying & registration process of member firms
- If you dare to commit illegal trading activity as an investor in Canada, you are likely to hear from IIROC
10
Q
why is IIROC an extremely important part of a properly functioning Canadian capital environment
A
- because of how it reduced the affect of the great recession/financial crises
- The financial crises brought much criticism upon financial institutions and the organizations that regulate them, since they make companies have more capital
- but Canadian financial institutions were not nearly as affected as U.S. / European companies
- but the More stringent regulation was only partly a reason for this
- Going forward, there will be much greater scrutiny of financial institutions / regulators to ensure that a similar crisis is avoided
10
Q
what is the MFDA
A
- Mutual Fund Dealers Association
- Created in 1997 as a result of growth and need for regulation in mutual fund industry
- Goal of MFDA – establish a fund similar to Canadian Investor Protection Fund (CIPF) to protect mutual fund investors up to $100k per account
- Such a fund would be funded by MFDA member firms
11
Q
what is the Canadian Investor Protection Fund (CIPF)
A
- Protects investors from losses due to bankruptcy of its member firms (most investment dealers and stock exchanges)
- Role is to anticipate and solve financial difficulties at member firms before bankruptcy occurs
- an investor is automatically covered by the Fund the moment they become a customer to any of the SROs
- Provides coverage of up to $ 1 million related to losses from security holdings and cash balances combined – if a member firm goes bankrupt
- No losses are covered as a result of change of market values
12
Q
what is legislation and regulation designed to do
A
to protect investors and promote ethical standards
12
Q
who establishes the regulations
A
- provincial securities
- In the U.S., a national body, the Securities and Exchange Commission (SEC) does this
- the Canadian Securities Administrators (CSA) issue national policies that promote consistency in the regulatory environment across Canada
12
Q
what is the fundamental principal of many regulations
A
to ensure that full, true and plain disclosure of all material facts relating to the securities offered is provided to investors
12
Q
what are the 3 basic methods used to protect investors
A
- Registration of securities dealers and advisors
- Disclosure of material facts
- Enforcement of the laws and policies
12
Q
who are investment advisors/financial advisors/brokers
A
- helps you with investing
- works for investment dealers/investment banks
13
Q
what must sellers of securities (usually investment dealers) and investment advisors (IAs) must be
A
registered
- administrators can grant, suspend, or cancel registrations
13
What do IAs need to do to be registered
- New IAs must pass the Canadian Securities Course (CSC) and the Conduct and Practices Handbook for Securities Industry Professionals (CPH)
- Complete a 90 day training course
- Be subject to 6 months of supervision
- Complete the CSI’s (Canadian Securities Institute) Wealth Management Essentials course within 30 months of becoming an IA
14
what should IAs and member firms have towards their clients
fiduciary obligation
14
what does it mean to have fiduciary obligation
- This means that they must operate in the best interests of their clients and not their own (i.e. Sell a mutual fund to a client that gives a big fee to an IA but is not suitable to that client)
15
what are the obligations members firms and IAs must keep
- Not reveal confidential information
- Avoid conflicts of interests
- Ensure that all representations to clients are made honestly and in good faith (i.e. Tell the truth)
- Follow client instructions
15
what happens if an IA fails in any of their obligations
- it considered a breach of fiduciary duty
- Not only are they doing a lousy job, they could also be disciplined
16
who gives out the discipline for the member firms and IAs that breach fiduciary duty
- The SROs for the member firms / IAs
These include:
- The TSX and other exchanges
- IIROC
- MFDA
17
what are the 4 main areas of member/IA regulation
- Financial compliance
- Sales compliance
- Registration
- Enforcement
18
what are the 3 areas of market regulation
- Market surveillance (tracking whether there is insider trading);
- Investigation enforcement; and regulatory / market policy
- Where all transactions converge in one location
18
how does IIROC provide investor protection
by administering and enforcing a common set of trading rules (the Universal Market Integrity Rules) across all markets in Canada
18
how is ethical trading critical
- critical to the proper functioning of capital markets
- If the game is rigged – who is going to want to play?
18
what is the punishments for unethical behaviour
Unethical behaviour can be punished by fines, suspensions, criminal charges
18
what is moral hazard
if bad behaviour isn't punished, seems like it is encourage
19
what are examples of unethical behaviour
- Deceiving the public (lying)
- Misleading a board of directors
- Assuring no risk
- Violating statutes
- insider trading
19
what is insider trading like
- when you work in a company & have non-public material information & then trade on it
- like if you know your company will acquire another, so you know to expect the share price of the acquired, and you buy the shares before the price increases
- the punishment can be a fine, ban on working, and ban on trading shares
20
what are companies required to disclose
- Annual and quarterly financial statements
- Insider trading reports
- Information circulars
- Annual information forms
- Press releases
- Material change reports
20
what is insider trading (the legal kind)
- an insider (person who works in the company) that is buying shares of their own company or others
- is legal provided insider trading rules are adhered to
- Insiders are required to file reports reporting their trading activity in the company for which they are an insider
20
who are insiders defined as
- Directors or senior officers (CEO / CFO)
- A person or company controlling greater than 10% of the voting securities
- A reporting issuer that has acquired any of its own securities (i.e.. Buying back its own shares)
