CANADIAN

SECURITIES
Chapter 3
The Canadian Regulatory Environment
Agenda
• The Regulators
• The roles played by the agencies and legal entities through which the Canadian
securities industry is regulated

• Regulation and Supervision

• The principles that underlie securities legislation.

• Remediation
• The remediation options investors can access to resolve concerns they have with dealer
members.

• Ethical Standards in the Financial Services

• Identify unethical practices and conduct in securities trading.
CHAPTER 3
Introduction
Introduction
As 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.

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.

Investor protection is the primary goal of the regulators !... But not the only goal. Regulators
play a key role in fostering marketing integrity

To protect market integrity, the regulators require:

- Employees to meet high proficiency standards through mandatory education programs
- Investor protection funds are in place to protect individual investors
- Have the power to prosecute individuals and firms suspect of wrong doing
- Can impose penalties in the forms of reprimands, fines, suspensions, expulsion
THE REGULATORS
Provincial Regulation
Provincial Regulation
CSA / Provincial Regulation / SRO
Designed to improve, coordinate and
Establish and enforce industry
harmonize regulation of the
regulations that protect investors and
Canadian capital markets
maintain fair, equitable, and ethical
practices. In that capacity, SROs are
responsible for setting the rules that
govern many aspects of investment
Have the power to create and enforce dealers’ operations, including sales,
their own laws and regulations finance, and trading.

SRO
CSA / Provincial Regulation / SRO
Designed to improve, coordinate and
Establish and enforce industry
harmonize regulation of the
regulations that protect investors and
Canadian capital markets
maintain fair, equitable, and ethical
practices. In that capacity, SROs are
responsible for setting the rules that
govern many aspects of investment
Have the power to create and enforce dealers’ operations, including sales,
their own laws and regulations finance, and trading.

SRO
The CSA
Canadian Securities Administrators: An umbrella organization of
Canada’s ten provincial and three territorial securities regulators designed to
improve, coordinate and harmonize regulation of the Canadian capital
• 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

• https://www.securities-administrators.ca/aboutcsa.aspx?id=77
CSA / Provincial Regulation / SRO
Designed to improve, coordinate and
Establish and enforce industry
harmonize regulation of the
regulations that protect investors and
Canadian capital markets
maintain fair, equitable, and ethical
practices. In that capacity, SROs are
responsible for setting the rules that
govern many aspects of investment
Have the power to create and enforce dealers’ operations, including sales,
their own laws and regulations finance, and trading.

SRO
The SROs
• Self Regulatory Organizations: 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.
• SRO by-laws and rules are designed to uphold the principles of securities legislation.
• 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: IIROC, MFDA

 Investment Industry Regulatory
Organization of Canada (IIROC)
TO SET HIGH QUALITY REGULATORYAND INVSTMENT STANDARDS, PROTECT INVESTORS, AND
STRENGTHEN MARKET INTEGRITY WHILE MAINTAINING EFFICIENT AND COMPEDITIVE CAPITAL
MARKETS
• Oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.

• Sets and enforces rules that affect its dealer members and their registered employees.

• Enforces the proficiency of dealer members, as well as their business and financial conduct.

• Sets and enforces market integrity rules regarding trading activity on Canadian equity marketplaces.
 Investment Industry Regulatory
Organization of Canada (IIROC)

https://www.iiroc.ca/investors/dealers-we-regulate
Mutual Fund Dealers Association
(MFDA)
• The mutual fund industry’s SRO responsible for regulating the distribution and sales of
mutual funds by its members in Canada.

• MFDA does not regulate the mutual funds themselves; this responsibility remains with
the provincial securities administrators

• The MFDA has the ability to admit members, audit, enforce rules, and apply penalties.

http://mfda.ca/members/directory-of-members/
OSFI – Office of the Superintendent of Financial Institutions
• An independent agency of the Government of Canada Provincial Regulators regulate the:
designed to contribute to the safety and soundness of Securities Industry
the Canadian financial system. - Dealers
- Markets
• Responsible for regulating and supervising the following
- Securities
federally registered institutions: - Representatives
- etc
• Deposit-taking institutions including banks, trust and loan
companies, and co-operative credit associations
OSFI regulates the:
• Insurance companies, including life insurance companies,
fraternal benefit societies, and property and casualty Financial Industry
insurance companies - Banks/ Credit Unions etc.
- Insurance Companies
• Foreign bank representative offices that are chartered, - Foreign banks
licensed, or registered by the federal government - Federal Pension Plans
• Federally-regulated pension plans
***OSFI does not regulate the Canadian securities industry***
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 Investor Protection Fund
• Established in 1969 to foster confidence in the relationship between investors and
advisors.
• Primary role: Investor Protection, Secondary role: Overseeing the SRO system.
• The CIPF protects eligible customers in the event of the insolvency of an IIROC dealer
member.
• The CIPF is sponsored solely by IIROC and funded by quarterly assessments on IIROC
dealer members.

Video: https://cipf.ca/
Canadian Investor Protection Fund
• 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.
• 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, TFSA, 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, RESPs, and trusts, are each entitled to
the maximum coverage of $1 million, unless they are combined with other separate
accounts.
MFDA IPC
• 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.
• 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.
• MFDA IPC coverage is not currently available to customers with accounts held in
Quebec. The province of Quebec has its own compensation fund.
Canadian Deposit Insurance Corp.
• Canada Deposit Insurance Corporation (CDIC) is a federal Crown Corporation that
provides deposit insurance and contributes to the stability of Canada’s financial system.
• 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.
• The CDIC insures eligible deposits separately for different types of accounts, each covered up
to the maximum $100,000 limit.
Canadian Deposit Insurance Corp.
• To be eligible for insurance, deposits must be held with a member institution in Canadian
currency and payable in Canada.
• 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.
CHAPTER 3
Regulation and Supervision
The Purpose of Regulation
Changing landscape over the past 30 years:
• Ownership restrictions were eliminated for securities dealers
• Fixed commission rates were removed
• Stock exchanges were demutualized
• New trading venues were introduced
• Securities dealers and their representatives were challenged by new products
• Heightened competition
• Technological advances
• Demographic changes
The Purpose of Regulation
• 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. Ultimately, corporate governance represents a balancing act
between the interests of a company’s stakeholders, including senior management,
shareholders, customers, government, and the community.

• Rules are necessary to foster an environment of fairness and to protect the integrity of
the marketplace.
• 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
The Purpose of Regulation
Regulatory Model
The Canadian securities industry follows a principles-based regulatory model, rather
than a rules-based model.
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.

• Rules-based approach: imposes detailed rules designed to provide clarity and legal
certainty to market participants.
Principles-based
• clearer, simpler, and less costly to apply
• allows securities dealers to tailor their supervision and compliance functions to fit their
business
• 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.
• 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
 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.
 Disclosure
• 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 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.
• 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.
 Registration
See CSC – Chapter 3

National Registration Database (NRD)

• 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.
• 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.
 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.
• 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.
 Client Focused Reforms (CFRs)
• Client Focused Reforms (CFRs) came into force in December 2021 as amendments to NI 31-
103
• CFRs cover key industry requirements for the know your client (KYC) and know your
product (KYP) rules, conflicts of interest, suitability and relationship disclosure.
• The CSA developed the CFRs based on the concept that the interests of the client must
come first in the client-registrant relationship so that registrants who are in an advisory
role (i.e., provide investment recommendations to clients) make suitable
recommendations to their clients.
• The CFRs amend the current KYC requirements and create a formal KYP requirement.
• These changes support what the regulators refer to as enhanced suitability determination
obligations.
• “Suitability Obligation” - Applying due diligence to ensure that each investment
recommendation is appropriate for the client has become one of the fundamental
obligations of all registrants.
 Conflicts of Interest
• Securities dealers must develop and maintain policies and procedures to identify, disclose, and
address existing and potential material conflicts involving clients.
• For any registrant or service provider of end clients, a conflict of interest will arise in any situation
where a provider of a product or service has an interest that overlaps or diverges from that of the
client being served.
• NI 31-103
• required registered firms and individuals to identify, address, and disclose material conflicts of interest.
• address such conflicts in the best interest of the client and provide guidance to explain when a conflict of
interest is considered material
• must avoid material conflicts of interest if there are no appropriate controls available in the
circumstances that would be sufficient to otherwise address the conflict in the best interest of the client.

• For each conflict identified, the disclosure provided to clients must be prominent, specific, and
written in plain language outlining the following matters:
• The nature and extent of the conflict in question.
• The impact and risk it may pose to the client.
• The way in which it has been or will be addressed.
 Know Your Client & Suitability
• KYC and suitability are two of the three pillars of registrant expectations (the other is the KYP
rule). These concepts are interdependent.
• Registrant who neglects even one may not be fully compliant with regulatory expectations.

• To meet suitability obligations, registrants must follow the Know Your Client Rule and gather the
required KYC information, which include the client’s:
• Personal circumstances (not limited to financial circumstances)
• Financial circumstances
• Investment knowledge
• Investment needs and objectives
• Risk profile (guidance clarifies that this includes both the customer’s risk tolerance and their risk
capacity)
• Investment time horizon

* A client’s risk profile requires an understanding of their willingness to accept risk (risk tolerance) and
their ability to endure a potential financial loss (risk capacity). According to NI 31-103, a client’s risk
profile should reflect the lower of their risk tolerance and their risk capacity.
 Know Your Client & Suitability
• The CFRs also change the requirements with respect to confirming KYC accuracy and timeliness.
These changes will require registrants to:
• Take reasonable steps to obtain client confirmation that their KYC information is accurate.
• Keep KYC information current by updating it when becoming aware of a significant change.
• Review a client’s KYC information every 36 months even if the registrant hasn’t interacted with the
client.
• Update KYC information on initial client contact and annually during your review.

• means ensuring that all interactions with clients, including account opening, making Suitability
recommendations, and receiving orders, take the client’s unique situation into account. The CFR
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.
 Know Your Product
• Equally important in making a suitability determination is an understanding of the product being
recommended
• how it is constructed
• its features
• Risks
• Costs
• and a general idea of how it is likely to perform in various market conditions.

• This companion obligation of the KYC rule is referred to as the Know Your Product (KYP) rule.
• Clients have a right to know what they are agreeing to purchase and a rightful expectation that
their registrants know what they are selling.
• Without this knowledge, registrants can neither assess suitability nor explain the product’s
features and risks. And if they are unable to explain the product, the client, arguably, will not be
able to give proper instructions to buy or sell the product in question.
 Relationship Disclosure
• According to NI 31-103, to better inform clients of the nature of their account, the dealer member must
provide all clients with a relationship disclosure document that includes the following information:
• A description of the nature or type of the client’s account.
• The types of products and services offered by the firm.
• The types of risks that a client should consider when making an investment decision.
• A description of the risks of using borrowed money to finance a purchase of a security.
• Conflicts of interest that the firm is required to disclose.
• Operating charges and the types of transaction charges the client may be required to pay.
• The firm’s complaint handling procedures.
• A statement that the firm must determine that any investment action for the client is suitable for the
client and puts the client’s interest first.
• A general explanation of how investment performance benchmarks might be used.
• The reporting that the client will receive, including the date on which account statements and trade
confirmations will be sent and a description of the firm’s obligations to provide performance information,
including whether or not percentage return information will be sent.
CHAPTER 3
Remediation
 Remediation

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 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.
• The arbitrator then decides how the dispute should be resolved and what remedy should
be imposed, if any.

• 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.
 Arbitration
• 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 (OBSI)
• 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 some 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.
 CHAPTER 3
Ethics standards in the Fin. Services industry
 Ethical Standards

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.
 Ethical Standards
• 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.
 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
 Unethical Practices
• Using high-pressure or otherwise undesirable selling techniques
• Violating any statute applicable to the sale of securities
• 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
 Prohibited Sale Practices
• 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

National Do Not Call List

By Using the telephone to solicit new clients, an IA is considered to be a telemarketer by the
CRTC.
All telemarketers must subscribe to the 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
QUESTIONS?
Thank you