Section 1: Risk Management & the Role of the Executive


Executive registration: register individuals who comprise the senior management of the firm. Chair, vice-chairs, CEO, president, COO, CFO, chief compliance officer. Generally, people who exercise significant influence over a regulated activity. You get approved as an exec by completing the PDO. You are then held to a higher standard. Your actions are subject to review.


The Role of an Executive


Beyond their particular roles and responsibilities, all executives have responsibilities to protect the interests of investors and the industry more generally. it is critically important that the executive has a fundamental understanding of how the business works in terms of its risks, revenue sources, key processes and regulatory rules.


Tone at the top - Executives must demonstrate through their actions the importance of compliance and risk management in the decision-making process.


The regulators make rules to promote the interests of both clients and dealer members, and to ensure the integrity of the capital markets.


A “significant area of risk” is any function, process or activity where a failure to mitigate or control the firm’s risk could lead to material harm to its liquidity, solvency, operational capabilities, clients, or client assets or other client positions.



• Conflicts of interest

• Account opening

• Account information and records

• Dealer member records and client communications

• Account supervision

• Minimum capital levels

• Early warning tests

• Regulatory financial report filing

• General internal controls

• Pricing internal controls

• Professional and fairness opinions

• Segregation and related internal controls 

• Custody and related internal controls 

• Safekeeping cash and securities

• Account transfers

• Financing arrangements (including cash and security borrowing and lending arrangements) 

• Operations

• Business continuity planning

• Clearing and settlement

• Derivative risk management


IIROC expects dealer members to document and maintain in their policies and procedures a list of executives and the significant areas of risk each executive is responsible for managing.


Risk Management Overview


Your business must operate within the regulations and all decisions must take regulations into account.


Systematic risk management - proactively identifies, assesses, manages and controls regulatory, strategic, business and process risks within the firm’s internal control structure.


The objective of risk management is not to eliminate risk but to balance the level of risk undertaken against the rewards expected when business goals are met.


Risk management processes should assess both the magnitude and probability of an adverse event.


Culture of compliance: Compliance should have visible prominence. 



Section 2: The Securities Industry


Chapter 1: Canada’s Regulatory Environment and Basic Securities Law


Provincial securities commissions and self-regulatory organizations (SROs) are the primary sources of the rules governing the industry.


When two or more regulations conflict, it is the strictest standard that applies.


The Canadian securities industry leans more toward principles-based regulation where regulators set objectives for dealer members and allow the firms themselves to decide how best to meet those objectives.


Investment Industry Regulatory Organization of Canada (IIROC) - National SRO. Activities: Establishes rules for DMs, market surveillance, DM regulation & compliance, etc. IIROC’s regulation is limited to its own dealer members.


Mutual Fund Dealers Association (MFDA): SRO responsible for regulating all sales of mutual funds by its members in Canada. The MFDA does not regulate the mutual funds themselves, as this responsibility has remained with the securities commissions.


Investment Industry Association of Canada (IIAC) - advocacy group that advances the growth and development of the Canadian investment industry.


Universal Market Integrity Rules (UMIR) - a standard set of rules that generally apply to equity trading on all Canadian marketplaces to promote fair and orderly markets.


A trading halt ensures that all investors have the same timely access to material information regarding an issuer.


Canadian Investor Protection Fund (CIPF) - compensates clients for losses arising when an IIROC dealer member becomes insolvent and cannot return client cash or securities. Clients of IIROC dealer members are entitled to a maximum coverage of $1,000,000 for each account. Margin, cash, joint %s are grouped together as one account.


Provincial Commissions: Each provincial securities commission has jurisdiction within its province or territory to register firms and individuals, make regulations governing dealer conduct, and grant exemptions to its regulations. Their enforcement powers generally include the authority to compel witnesses to attend hearings, take evidence under oath, seize documents for examination, and freeze funds or securities on deposit.


Canadian Securities Administrators (CSA) - joint panel of provincial SROs. Coordinates on policies and shared systems:


• System for Electronic Document Analysis and Retrieval (SEDAR) is used for electronic filings 


• System for Electronic Disclosure by Insiders (SEDI) is an online system for filing and viewing insider trading reports


• National Cease Trade Order (CTO) Database provides subscribers with a directory of existing orders and with near-real-time email notification 


• The National Registration Database (NRD) receives individual registration and IIROC approval applications, notices of termination, and changes of registration information.


CSA’s efforts to harmonize provincial regulations have led to the establishment of two types of instruments:

• National Instruments (NI), which have been adopted by all provinces but may contain exceptions where one or more provinces retain slight regulatory differences.

• Multilateral Instruments (MI), which have been adopted by some provinces only, as identified in the instrument.


One of the most important NIs for dealer members is NI 31-103 Registration Requirements and Exemptions. EMDs (firms), UDPs and CCOs must also register.



NP 31-201, National Registration System


NI 31-102 National Registration Database


NI 45-106, Prospectus Exemptions, which covers exempt distributions and includes a national definition of “accredited investor”


Companies are regulated through CBCA and provincial acts.


Dealer members should carefully assess the fitness for registration of all registrants when extraneous events such as a garnishment occur.


Dealer members that deal in foreign markets or with offshore clients must be familiar with the relevant regulatory regimes.


US compliance:


Securities Act of 1933 requires disclosure and prohibits fraud. Securities Exchange Act of 1934 created the SEC.


Financial Industry Regulatory Authority (FINRA) - US equivalent of IIROC.


International Organization of Securities Commissions (IOSCO) facilitates international communication and harmonization of securities legislation.


Financial Action Task Force on Money Laundering (FATF) an intergovernmental body comprised of over 30 member countries. It develops and promotes policies to combat money laundering and terrorist financing. In addition, it publishes a list of high-risk and non-cooperative jurisdictions without adequate anti-money laundering regimes.


Onus on DMs to deal with foreign compliance.


Financial Stability Board (FSB) - To coordinate at the international level the work of national financial authorities and international standard setting bodies.


Federal Legislation


The Bank Act

The Bankruptcy and Insolvency Act

CBCA - regulates proxy solicitations and insider trading for federally incorporated companies

ITA - imposes reporting requirements on dealers regarding client transactions that may include document requests or third-party demands for payment of funds from the Canada Revenue Agency (CRA)

Criminal Code

Canada’s Anti-Spam Legislation (CASL)  - must obtain either express “opt-in” or implied consent. Organizations that do not comply with CASL risk serious penalties, including criminal charges, civil charges, personal liability for company officers and directors, and penalties up to $10 m.

Personal Information Protection and Electronic Documents Act (PIPEDA - regulates how organizations and their employees can collect, use or disclose personal information.

Proceeds of Crime (Money Laundering) and Terrorism Financing Act (PCMLTFA)


Federal Agencies


Office of the Superintendent of Financial Institutions (OSFI) - the primary regulator of federally regulated financial institutions. It also provides actuarial advice to the Government of Canada. OSFI may also examine the operations of bank-owned dealers to assess their enterprise-wide risk management.


Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) - Its mandate is to detect money laundering and terrorist financing activities and to assist law enforcement agencies in deterring them. It looks at large cash transactions, cross-border movement of funds, and suspicious transactions. FINTRAC can also conduct audits of financial institutions’ compliance with PCMLTFA regulations, including DMs.


It can also refer non-compliance to law enforcement agencies for investigation and prosecution. IIROC usually conducts these audits and provides FINTRAC with the results under an MOU.


Office of the Privacy Commissioner - oversee PIPEDA


When a firm collects personal information from a client, the documentation must include a notification describing the purpose of the collection, use and disclosure of the information. Firms must decline to accept or administer an account in which the account owner does not consent to the collection, use or disclosure of personal information to the SROs.


RCMP - primary enforcer of Criminal Code market offences such as market manipulation, fraud and insider trading. They established Integrated Market Enforcement Teams (IMETs).


The Criminal Code - The objective of criminal law is to maintain a just, peaceful and safe society. Offences are classified as indictable or summary conviction. The Feds can create both, provinces only summary convictions.


The Criminal Code covers fraud, theft, misappropriation, false statements or pretences, forgery, false prospectus, organized crime. Insider trading is a criminal offence subject to a maximum of 10 years imprisonment.


Whistleblower protection requires a maximum penalty of five years in jail for off enders.


Other relevant acts - Customs Act, Excise Act and the Competition Act.


The Criminal Process - Client goes to police or securities administrators -> Charging document -> compelling court appearance.


In a criminal or Offence Act prosecution, the Crown must prove, beyond a reasonable doubt. This contrasts with administrative proceedings before a regulatory authority. In that case, the standard of proof is on a balance of probabilities and the person can be held liable not only if he or she “knew” about an offence, but also if he or she “ought to have known”.


Production orders are used primarily to obtain information from financial institutions and third parties (that is, persons not under investigation).


Securities-related offences may be subject to the following penalties:

• Absolute or conditional sentence

• Fines

• Imprisonment

• Parole and probation conditions

• Restitution orders

• Forfeiture of property

• Committal for contempt


Dealer and registrant liability usually arises under common law principles relating to contract law, duty of care, fiduciary duty, duty to supervise, negligence and misrepresentation.


Contract Law

DMs have an agency relationship with their clients through their agreements. These agreements are the primary source for determining a firm’s duties and identifying whether they have been breached


One of the cardinal rules of contract interpretation is that the court tries to honour the parties’ intentions.


Most client agreements have the following characteristics:

• Right to refuse to accept any client order when the firm deems this necessary for its own protection or for any other reason.

• They provide that no action taken by the firm shall be deemed a waiver of any of its other rights, remedies or powers (called a no-waiver clause).

• They can be changed only by written amendment.

• They can be terminated only on proper notice.


Remedies commonly sought for breach of contract include:

• Awards for damages for loss suffered

• Exemplary or punitive damages

• An order that the contract be completed

• A declaration that the contract is void and of no effect

• Litigation costs


Duty of Care- Dealer members have a duty to provide advice to clients fully, honestly, in good faith and with skill and knowledge. The most common actions against dealers for breach of duty of care involve breaches of rules around suitability, confidentiality and the Know Your Client (KYC) Rule.


KYC: Rule requires that dealer members use due diligence to learn the essential facts relative to every client, every account and every order. Diligence should be documented. Client should get copies of this. Must regularly update this information to capture any material changes to a client’s circumstances.


Suitability: The primary purpose of the KYC Rule is to ensure the suitability of investment recommendations made to clients. Before recommending an investment product, you must first understand how the product is constructed and how it is likely to perform in various market conditions (KYP).


DMs must maintain confidentiality regarding the identities and the personal and financial circumstances of their clients.


Fiduciary duty - imposed by common law, except in Quebec (Mandatory in QC). Trust, confidence, and reliance on skill, knowledge and advice. A dealer member that presents itself as having specialized expertise might be held to a higher standard. If the client is really relying on the DM, this could create a fiduciary relationship.


Regardless of whether a fiduciary duty exists, an RR has a duty under provincial and territorial securities laws to deal fairly, honestly and in good faith with his or her clients.


Duty to Supervise- Firms have a duty to supervise the conduct of their employees and may be held vicariously liable for contractual and fiduciary breaches of duty.


Negligence - Liability for negligence arises out of tort law principles. A client may, in addition to an action for breach of contract, sue for recovery of damages. Clients do not have to prove that the dealer member intended to cause harm. They need only prove that they suffered a loss as a result of the dealer’s negligence. To avoid liability, the dealer member must show that it reasonably applied appropriate skill and care under the circumstances.


Misrepresentation - Also arises out of tort law. The client must prove that the dealer member intentionally provided misleading information that caused a loss to the client when he or she relied on it. In most provinces investors are not required to prove they relied on misleading disclosure when buying or selling stock or other securities.


Civil claims - For more serious breaches and large monetary losses. Remedies: Restitution, damages, specific performance, null and void, costs, contempt. Any civil judgment involving a dealer member or RR must be disclosed to IIROC through the Complaints and Settlement Reporting System (ComSet).


The defence for civil claims is to prove that you considered suitability.



Chapter 2: 

Private Client Brokerage Business


As a consequence of changing demographics (and the resulting increase in demand for professional investment advice), regulators have identified the importance of registrants having a heightened understanding of client relationships, in particular their relationships with elderly clients.


The key distinction in private client is the reliance that a client places on the advice provided by his or her investment advisor. The IA is an RR.


For clients the initial distinguishing factors are likely to be brand, marketing, service, degree of personalization, convenience, size, reputation and price for perceived value.



ndustry Developments



1957 - RRSPs created. Now over 1/3 of investment balances with dealers.


1966 - CPP


1983 - stock trading commissions become negotiable. This triggered the split of the Canadian retail investment business into discount brokerage and full service brokerage. Discount brokers are not allowed to provide advice.


1987 - Canadian banks to acquire securities dealers.


1992 - banks were permitted to purchase or establish trust companies. 


90s - introducing/carrying broker relationship. This structure allowed for the proliferation of independent (non-bank) dealers.


2001 - PIPEDA


2009 - TFSA




Suitability Obligations - All recommendations must take the client’s unique situation and investment objectives into account. The advisor must evaluate factors such as age, sophistication, level of desired risk and investment knowledge. Key information about the client includes investment objectives, risk tolerance, experience and time horizon.


Know Your Client (KYC) - covered in IIROC’s Client Relationship Model (CRM) guidelines.


Firms and investment advisors are required to evaluate the suitability of investments in each client’s account in the following circumstances:

• When a trade is accepted

• When a recommendation is made

• When securities are transferred or deposited into the account

• When there is a change of representative on the account

• When there is a material change to the KYC information for the account


Suitability obligations under the CRM project:

• Provide each client a copy of their KYC information.

• Consider a client’s time horizon when assessing suitability.

• Supervise compliance with the new suitability requirements.

• Provide clients with relationship disclosure information at the time of account opening.


know your product (KYP) - Because of the proliferation of complex investment products, the KYP rule is a critically important part of the KYC requirement to make suitable recommendations. There are additional requirements to be satisfied if the product is being offered to retail clients.


Current market trend has been the shift toward understanding risk first and maximizing potential return second. Recent experience now suggests that the correlation of well-diversified assets converges under the worst market conditions, thus providing less benefit than would have been expected.


Business Models


Transaction Execution (discount brokerage) Model



• Low client acquisition cost 

• Execution only with no advice

• Significant investment in technology to increase automation as much as possible and to keep transaction costs low

• Support client interaction

• Competition based on commission pricing and fees charged for non-core services


Investment Guidance Model - Found in both discount and full-service scenarios, including funds.



• Limited or full securities license

• Range of support tools, including research to support decision-making

• Generally reactive client management 

• Competition on perceived value for money

• Typically, commission-based pricing (which may require fees for additional services)


Investment Advice Model - full service brokerage. Characteristics:

• Full securities license (under which RRs can sell any product, subject to proficiency requirements)

• Full range of securities

• Some proprietary products, including managed portfolios

• Proactive client acquisition and management by individual advisors

• Core business consisting of investment portfolio management, although financial, retirement and estate planning can be available

• Competition based on level and quality of service

• Typically, commission-based compensation

• Planning services may be included as part of enhanced service level for good clients


Portfolio Management Model - similar to the investment advice model, with the following additional characteristics:

• Discretionary and non-discretionary portfolios

• Individually managed relationships

• High level of service

• Portfolios and finances often managed in overall wealth context

• Competition based on reputation, individual attention and, occasionally, investment outcomes

• Typically, fee-based compensation on asset value under management


Wealth Management Model - characteristics:

• Multiple regulatory jurisdictions

• Premium holistic service, often including business and personal wealth

• Typically involves a team of experts

• May involve multi-generation money management

• Competition based on individual attention, high level of service, expertise and access to a broad range of professionals beyond the financial services industry to support specific needs.

• Premium pricing, usually fee-based on assets or negotiated fl at fee (or combination of both)


Forces effecting change:

• Competitive environment

• Flexibility of regulatory boundaries

• Product innovation

• Pricing flexibility and power

• Initial investment and cost to deliver

• Market and individual client segment demand • Willingness of target market to pay




The three primary sources of retail brokerage revenue are commissions, fees, and interest spreads on cash balances and margin loans.


Wrap accounts - bundled. Mix of commissions and fees.


The fee-based compensation mechanism more accurately portrays the value of an investing relationship (since IAs provide more than trades).


The reasoning behind a decision to choose a fee-based or a purely transactional account should be well documented by the advisor.


Types of Fee-based Accounts Fee-based accounts:

• Non-discretionary fee-based accounts -Traditional advisory relationship, where client must approve each transaction.


• In-house managed fee-based accounts - May include mutual fund wraps or separate account programs.


• Third party managed account programs - May include multiple advisors with different mandates.


• Accounts managed by an RR who is licensed as a portfolio manager - allows the portfolio manager to act with discretion and do not require client approval for transactions.


The four pillars -  banking, securities, insurance and trust. Insurance is separately regulated.


Profitability drivers


Firm Level

The ratio of transaction-based commissions to asset-based commissions is a key driver of near-term profitability.


The ratio of fixed-to-variable expenses


The following measures are regularly monitored:

• Revenue and profit growth (and industry rankings in these measures)

• Revenue/ profit per employee

• Profit per employee

• Employee retention

• Market share (and ranking) by product

• Share (and ranking) of trading volume

• Asset growth

• Audit and compliance record

• Industry awards and accolade


Advisors level measures - average account size, average transaction size, assets under management, top line revenue, profitability of business, and incidence of credit losses or compliance issues.


Staff turnover.


There is an obligation on firms to assess advisors’ fitness for registration before hiring them.


Client Profit Drivers


• Average client account (or relationship) size

• Number of products per client

• Client loyalty including share of a client’s investable assets

• Client acquisition costs

• Service costs




The role of compliance in the private client brokerage business is to protect the firm’s advisors and clients and the firm itself.



• Creates procedures, protocols, documentation and reports to facilitate a culture of compliance

• Uses available technologies to avoid duplication of data and reports

• Monitors and enforces desired behaviours

• Works with partners to identify and investigate irregularities

• Conducts forensic investigations in the event of a client complaint or internal irregularity

• Creates a safe environment to surface and address issues

• Ideally allows the firm to be proactive as opposed to simply reactive to issues as they arise


Risk Management


As the potential for reward from the business increases, it is not unusual to expect increasing risk, particularly reputational risk.


Clients are concerned about the following risks:

• Market performance (relative and absolute) • Purchasing power erosion

• Cash flow , liquidity sufficiency

• Longevity (outliving assets)


Firm risks:

• Market performance risk

• Interest rate risk

• Currency risk

• Arbitrage risk

• Regulatory and legal risk

• Operational and strategic risk

• Professional, financial or reputational harm

• Risk of fraud and theft

• Partner and product failure


IIROC has provided additional guidelines around the review and approval of new products before they are introduced.


Advisor Proficiency - Continuing education appropriate to the role is mandated on a three-year cycle and is updated regularly. This requirement includes knowledge of product, service, investment, planning, compliance and legal information. Proficiency is a reporting requirement and it must be relevant, contemporary and demonstrable. Accreditations must be relevant, substantial and meaningful for advisors to use them for marketing purposes.


Global market interdependence has also raised the question of future international oversight and scrutiny



Chapter 3: 

Online Investment Business Models

Online investment models, which have traditionally included the discount brokerage model and now include what is becoming known as online wealth management or robo-advisory.


In both discretionary and non-discretionary online advisory services, a client questionnaire is used to determine an appropriate asset allocation in a client’s portfolio based on that client’s required rate of return and risk tolerance. A suitability call typically follows, during which a portfolio manager of the fi rm verifi es that the algorithmically-generated portfolio is suitable for the client


Business Models


Discount Brokerage Model - order-execution-only.


Online Wealth Management Model - Post dot com crash, there was more demand for advice.


Robo advisors operate under the same registration category as portfolio managers of traditional discretionary firms (which are regulated directly by provincial securities commissions). Investments are limited to ETFs.


Client segments: investors and traders.


- Investors - considered to be accumulators or consolidators; they are focused on the long-term and therefore do not trade very often.


- Traders - sophisticated and knowledgeable person who may focus full-time on market activity and who uses real-time news, streaming quotes, charts and specialty trading platforms. Discount brokerage is the channel of choice for this client segment.


Discount Brokerage Trends - growth driven by baby boom generation entering their prime earning years.


The entire retail securities industry was affected by technology in four key ways:

• Increased client accessibility

• Direct links to order-processing platforms 

• Rapid public adoption of internet 

• Able to handle vastly increasing and fluctuating volumes without delay


By 2016, the client experience became the key differentiator among discount brokerage firms (since costs were already driven down).


Challenges in Discount Brokerage:

• Conflicts with other investment channels - traditional full service arms had to be convinced about the merits of the discount segment.


• Regulatory considerations - Took a while to remove the suitability requirements and allow for order-execution only accounts. Discount brokers sought to avoid liability for the independent decisions made by clients.


Regulators have ruled that discount brokers must never be seen to be giving advice to their clientele. In addition, more attention should be paid to discount brokers given the possibility that these institutions may be used to carry out inappropriate or illegal behaviour such as money laundering.


• Commoditization to maintain a competitive edge


• Pricing pressures



Registration Categories:


- IR - transaction only. No advice. Knows products.

- RR - traditional client relationship

- PM - has relationship and a fiduciary responsibility.


Business Models Within Discount Brokerage

Multi-branch, nationwide network call centre: Original TD model. Makes individual investing accessible to all Canadians, regardless of their affiliation or relationship with any other financial institution.


Multi-call centre structure with regional sales: marketing the business to their personal bank branch. Basically a sales operation.


Provincial ops with regional sales: At the time registration was in your province only. Provincial ops offices made it faster to open accounts.


Limited branch with street locations: Like provincial ops with street locations added. This model allowed for limited use of expensive real estate, while creating a market presence in specific locations.


Tech-based firms: Focused on speed and cost. Enable volume trading, global trading. High marketing spend. 


Industry Impact of Discount Brokerage - rapid pace of technology development. Clients began to question the value of their full-service advisors and to ask for direct Internet access to view their accounts.


New wealth management model - The shift toward wealth management was an attempt to protect revenues by creating constant and recurring revenue streams and by retaining clients.


Has a unified managed account that enables advisors to create an asset allocation across household accounts using a broad range of products. It also allows the advisor to optimize tax management when rebalancing, among other features.


Discount Brokerage Revenue Sources- By 2015, commissions represented less than 30% of discount brokerage revenues. “Other” revenue sources comprised almost 60%, of which a significant proportion was spread revenue. Discount brokers also collect mutual fund trailer fees representing approximately 5% of revenues.


Online Wealth Management



• They provide clients with goal-based online investment management.

• Portfolios are created utilizing algorithms based on modern portfolio theory and on online client questionnaires.

• A telephone call with an advisor verifies suitability

• Advisor support is offered to varying degrees

• Portfolios are built primarily ETFs.

• Portfolios are regularly rebalanced • Financial planning may be offered 

• Service may be provided to the end client as well as to intermediaries

• Competitive positioning is based on the client experience


Robo-advisors in Canada are commonly discretionary.


Trends in Online Wealth Management - Robo-advisors are often portrayed as the investment channel of choice for the millennial generation.


Robo-advisors have capitalized on the passive investment trend by building portfolios mostly with ETFs.


CRM2 requires fees and performance to be more transparent.


Robo advisory enables servicing smaller accounts.


Challenges in Online Wealth Management:

• Achieving scale to attain profitability

• High client acquisition costs

• The need to differentiate offering with low barriers to entry


The rules governing discretionary and non-discretionary online advice were the same as those for traditional models. Firms offering online discretionary asset management should still place the onus for suitability and KYC on a registered portfolio manager.


There is a risk in robo that an advisor has to assess/ manage too many accounts. These firms must also provide clients with reasonable access to a portfolio manager, either online or by phone.


A discretionary online offering can service smaller accounts more cost-effectively simply because client consent does not have to be obtained each time portfolio changes are made.


Some robo-advisors that started as distributors have also expanded into asset management by adding proprietary products to portfolios.


Industry Impact of Online Wealth Management 


Online wealth management services have: 

- reduced service costs for clients, allowing for more personalized services

- increased advisor productivity and

- enabled a trend toward vertical integration.


Robo-advisory was not simply a distribution strategy; it was an approach to wealth management premised on the view that asset allocation, rather than security selection, is the greatest contributor to investment returns


Robo-advisory is predominantly a fee-based model.


Primary risk factors for online investment models:

• Operational risk - the risk of internal disruption in the performance of current processes

• Business interruption risk - risk that an outside factor could affect a firm’s ability to continue operations. Every Dealer Member shall establish and maintain a business continuity plan enabling DMs to stay in business.

• Technology risk - operating and security (passwords, review account activity)

• Credit risk - unable to cover margined accounts and the risk that clients and counterparties will fail to pay their obligations.

• Staffing risk

• Reputational risk

• Regulatory risk


Market segmentation drives strategy.


KSFs for online investment models:

• Trust - In the digital age, trust is engendered to a great extent by the transparency of the online experience.

• Client experience end to end. 

• Product availability - Clients of discount brokers want choice. Robo advisors focus on simplicity.

• Reliable and up-to-date technology which provides superior market access - Clients want their transactions completed quickly and accurately

• Investment performance - competitive factor for robo, not self-directed.


Key Measurement Ratios: Number of specific types of accounts , Daily transaction volumes, Total daily commissions, fund revenues, margin loans o/s, productivity ratio (transfers)


Whereas discount brokerage thrived by offering a broad range of products, online wealth management as a whole offers a comparatively narrow selection.


Clients are becoming increasingly knowledgeable about the investment market because of their ready access to information.


Many rob advisor products out there. Research needed to find the best one for you.


Discount brokerage pricing is pretty uniform now. Expect price pressure in the managed asset sector.


Key factors in order of importance in to clients: • Client interaction (trading and operation support)

• Account information and statements

• Trading costs and fees

• Account offerings

• Information resources

• Problem resolution



Chapter 4.

Investment Banking Business


Front Office:

• Corporate finance-  IPOs, private placements, deb issuances (including gov’t)

• Government finance

• M&A - structuring and execution of acquisitions, divestitures, mergers and joint ventures, as well as corporate restructurings and defenses against unsolicited takeover attempts.

• Sales and trading

• Research

• Corporate banking

• Merchant banking

• Securities services


The purpose of an underwriting syndicate is to mitigate the risk of a price decline in a bought deal. In Canada, a more or less even split exists between best efforts and bought deals. In the US, there is a greater tendency for deals to be done on a bought deal basis.


In addition to commissions banks can earn a fee for structuring advice (setting yield on debt as an example).


Only recognized

government securities distributors (GSDs) and primary dealers

(a subset of GSDs) are permitted to bid on Bank of Canada bonds. Primary dealers have greater responsibilities (participating in each auction and maintaining secondary markets) and privileges than other GSDs.


Many corporate bonds are targeted only at institutional investors.


Canada has no centralized exchange or facility for bond and money-market trading. Transactions occur in an over-the-counter market.

- Bid - price at which they are prepared to buy.

- Offer - price at which they are prepared to sell.


Investment dealers primarily earn their profits from the bid/offer spread. The spread between bid and offer prices indicates the liquidity of the underlying security.


Techniques Used to Value a Target


DCF - requires high predicability of CF.


Comparable transaction - effective when data on truly comparable transactions are available.


Comparable company - Compared to similar public companies.


Breakup valuation - analyzing each of the target’s business lines.


Target stock price history - target price performance is analyzed against a broad market index . Same is done to the buyer in order to find an exchange ratio (stock deal).


M&A multiples- used when comparable transactions or comparable companies are not available.


LBO analysis - performed when the target is a potential candidate for LBO. Th e objective is to determine the highest price an LBO group would pay. This price is often the floor price for the target.  The analysis incorporates financing for the LBO.


Leveraged recapitalization - aimed at identifying the maximum value a public company can deliver to its shareholders today. This analysis is performed in the context of a probable or pending hostile off er for the target.


Gross revenue multiplier - typical with private companies where sales data is the most reliable data.


Book value - Not true value, but FV - BV can help estimate goodwill.


EPS multiple - known multipliers do not reflect control premiums. Income does not necessarily represent cash fl ow from operations.


Liquidation analysis - can be used to establish a floor for valuation. Relevant if a business is being acquired for its underlying assets rather than as a going concern.


A fairness opinion acts as an insurance policy offering directors a first line of defense against shareholders’ lawsuit


Restructuring - assets divested, structure, tac, etc.


Equity trading desks comprise both agency traders (also known as coverage traders - execute large (block) trades for institutional clients. They cover specific accounts) and liability traders. Success in attracting agency business from institutional clients is usually dependent on order execution, particularly in difficult situations. Liability - Firms want to be seen as the go-to dealer with respect to a particular stock or sector.


An investment bank’s reputation suffers if the IPO security price declines after the issuance. Therefore, to protect its reputation, the bank may support the stock with its own capital and keep it at or just above the issuance price for a period of time.


The institutional sales representative is the relationship manager between the institutional client (typically a money manager) and the investment bank’s service providers.


Research - drives more trading volume.


IIROC Rule 3400- Analyst standards: Because analysts service both internal corporate finance needs and the needs of buy-side clients, a number of regulatory initiatives have been introduced, that are designed to eliminate or minimize possible conflicts of interest. DMs must have written policies and procedures in place to control potential conflicts of interest.


The following areas must be covered by such policies and procedures:

• Disclosure policy - determines how research will be disseminated and the rating system. Analysts are required to disclose in research reports whenever the fi rm or one of its affiliates owns 1% or more of any class of an issuer’s equity securities.


• Public comments - Procedures must be in place.


• Trading restrictions on persons who are directly involved in preparing research reports for a period of 30 calendar days before and five calendar days after.


• Compensation disclosure - required to disclose whether they have received payment for any services provided to the issuer or have offered any investment banking services to the issuer within the preceding 12-month period.  Also, has the analyst been comped for i-banking revenue?


• Distribution of third party research - must meet the same disclosure requirements that would have applied had the report been issued in the dealer member’s name. If the third party research provider is not a Canadian research dealer, the dealer member is required to disclose that the research provided may not meet Canadian disclosure requirements.


• Analyst site visits to issuers - must disclose the extent to which they viewed the material operations of an issuer and also whether their travel expenses were paid or reimbursed.


• Quiet periods - prohibited from issuing research reports for equity or equity-related securities of an issuer for 10 calendar days after initial public offerings or three calendar days after secondary offerings.


Financial Engineering - Innovative security design.


Securitization: repackage financial products to change the risk-to-return characteristics of the resulting securities. Typically, securitized products have three tranches: an AAA tranche, a mezzanine tranche and an equity tranche.


The risk is always that securitized products are highly specific, with generally not much of a ready secondary market.


DMs must have formal written policies and procedures appropriate to their business to ensure that no new product is introduced to the marketplace before it has been thoroughly vetted from regulatory, risk management and business perspectives.


An effective due diligence program for new products should include the following elements:

- written proposal for new products.

- Preliminary assessment

- detailed review by compliance, legal, finance, marketing, sales and operations

- Formal approval

- Assessment of training needs


Things an RR needs to know in order to assess suitability: General features and structure, risks, costs, parties involved, legal aspects.


Corporate banking: Bridge loans, Money market lines, Project finance, Institutional term loans & Acquisition financing.


Merchant Banking - Principal equity investments. Benefits - management fees, capital gains, and contributions to underwriting and M&A business.


The timing and the amount of future profits are highly uncertain, making valuation difficult.


The following private equity valuation approaches are commonly used:


• Net present value

• Option valuation

- assigns a value to the flexibility the venture capitalist has in making follow-on investments.

• Venture capital - takes into account negative cash flows and uncertain high future profits. The terminal value is discounted back. The final step is to calculate the current percentage ownership, taking into consideration the dilution effects when the portfolio company goes through several rounds of financing.


Black-Scholes variables:

• Exercise price

• Stock price

• Time to expiration

• Standard deviation of stock returns

• Time value of money


This approach is useful because it specifically incorporates the option to wait, learn more and then make the investment decision.


Securities Services - Prime brokerage, Securities lending (cover shorts), Financing. These services make it possible for the client to have multiple brokers while maintaining one brokerage account.


A good prime broker provides the following services and advantages:

• Centralized custody

• Clearance

• Securities lending

• Competitive financing rates

• A single debit balance and credit balance

• Real time and periodic portfolio accounting

• Position and balance validation

• Electronic trade download

• Wash sale reports


Key Success Factors


• Deep client relationships

• Strong product lines

• Ability to provide clients with an integrated solution to help them achieve superior results

• Strong global presence and local knowledge • Strong financial strength

• Effective risk management process

• Solid governance structure

• Integrity and professionalism

• Appropriate compensation system that attracts and retains talent


Recent Trends


• Regulatory compliance and high standards of governance have become an integral part of the business.

• Emerging markets and Asia are providing faster growth opportunities.

• In the wake of the 2008 sub-prime crisis, firms have de-leveraged somewhat, and are now using tangible common equity as a measure of financial strength.

• Technological advancements are constantly forcing firms to either keep up or risk being left behind.


Middle Office:

• Risk management

• Compliance

• Corporate treasury


Back Office:

• Operations

• Information technology



The Distribution of Securities


Unless an exemption has been granted, all provincial securities acts require that a prospectus be filed and delivered if the offering or sale of securities is deemed to be a distribution to the public.


The prospectus requirement generally applies to:

• New issues (IPO and additional treasury offerings)

• Except in Quebec, trades from a control (20%+) position - treated as a distribution of securities

• Trades in securities previously acquired by way of a prospectus exemption


A company issuing additional securities into the marketplace would already be referred to as a reporting issuer. A prospectus is normally still required in such cases.


Preliminary Prospectus - required to have on its front cover, in red ink, a statement to the effect that its preliminary prospectus has been filed, is not in final form, and is subject to completion or amendment. Securities may not be sold, nor may offers to buy be accepted, until a receipt for the final prospectus has been obtained from the appropriate regulator.


All provinces other than Quebec require a preliminary prospectus to be filed, and in Quebec, one may be filed.


It must cover the form and content of a final prospectus, but may exclude information on the price paid to the underwriter and the price at which the securities will be offered to investors.


Passport System - British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia (though must still register with Ontario directly). The issuer deals and files documents with only its principal regulator. Companies must pay fees in every province and territory.


Does not relieve an issuer from filing a French language prospectus in the Province of Quebec.


Permitted Activities During the Waiting Period - period between the issuance of a receipt for a preliminary prospectus and receipt for a final prospectus. During this period, the underwriters may solicit expressions of interest from potential purchasers of the security. It is permissible during the waiting period to advertise the proposed issue to let the public know that the preliminary prospectus is available.


Final Prospectus - The investment decision is based solely on the information contained in the prospectus. Contains offering price, proceeds, underwriter discount, consent of experts.


The final prospectus must be mailed or otherwise delivered to all purchasers no later than midnight on the second business day after an agreement of purchase.


Prospectus Contents


- Cover Page Disclosure 

- Summary

- Info relating to the Issuer: name and business, selected financial information, capital structure, recent facts, and trends.

- Info relating to the Security

- Info relating to the Officers and Shareholders - backgrounds, comp, ownership, options, etc.

- Info relating to the Parties Involved - CEO, CFO, underwriter certificates.


Market Out clause - permits the underwriter to cancel an offering without penalty under certain conditions - i.e. changes in market conditions. A reference to the conditional aspects of the underwriting is required on the cover page.


Short Form Prospectus System


May be used by certain issuers when much of the information found in a long form prospectus is already available. Focuses on matters relating primarily to the securities being distributed.


Under National Instrument 44-101, an issuer is permitted to use a short form prospectus under the following conditions:

• The issuer electronically files using SEDAR.

• It is a reporting issuer 

• It has filed current annual F/S and a current AIF

• It is not an issuer whose operations are ceased or whose principal asset is cash

• It has equity securities listed and posted for trading or quoted on a short-form eligible exchange.


NI 44-102, Shelf Distributions


NI 81-101 -  requires mutual funds to produce and file a plain language document containing key information about each class or series of a mutual fund. Must be made available on the mutual fund’s website or the fund manager’s website and be delivered to investors prior to purchase.



• It must summarize the key facts about the fund in no more than two pages.

• It must be written in language that is easy to understand.

• It must include the following information:

    – A description of the fund, including its holdings

   – Historical performance data

   – Risk rating

   – Costs or fees associated with buying, owning and redeeming the fund


The Bought Deal


The underwriter commits to buy a specified number of securities at a set price, which it then resells to the public. The underwriter can solicit investor interest in these newly offered securities for up to four business days before the filing of the preliminary prospectus.


Each DM participating as an underwriter of a public offering must sign a prospectus in which the firm certifies that, to the best of its knowledge, information and belief, the prospectus constitutes full, true and plain disclosure of all material facts relating to the offered securities.


IIROC’s Guidance Respecting Underwriter Due Diligence:

- Due diligence: prospectus contains all prescribed information & information provided to the underwriter by the issuer is thoroughly investigated.


- Contextual determination: must exercise professional judgment regarding reasonable diligence.


- External consideration: Does the DM need o go above and beyond the normal process?


A firm’s procedures should cover IRROC compliance & level of business risk that is appropriate.


For TSX-V offerings, the exchange, rather than a provincial securities commission, reviews the prospectus and approves or disapproves it. This is like a short form prospectus. So must already be filing and the offering must be < $2M.


Exempt Issues


NI 45-106 Exemptions


Accredited Investor - certain financial institutions, governments, regulated pension funds, trust companies, certain investment funds, registered advisors and dealer members, affiliates of an issuer and registered investment advisors. Also, individuals with financial assets > $1M, NI > $200K, joint NI > $300K. Corps and other entities with net assets > $5M.


Must obtain a completed and signed risk acknowledgement form from that individual accredited investor.


Private Issuer - a company with no more than 50 shareholders, not including employees or former employees. A purchaser can be a director, officer, employee, founder or control person of the issuer, a spouse or close relative of that person, a close personal friend or business associate of that person, a security holder of the issuer, or an accredited investor.


Family, Friends and Business Associates- Must sign risk acknowledgement in ON and SK.


Offering Memorandum - Dealer registration is not required if the issuer prepares an offering memorandum in the prescribed form and delivers it to the purchaser prior to or at the time of purchase. Purchasers must sign a risk acknowledgement form, which must be retained by the issuer for eight years.


An eligible investor:

• Has net assets, alone or with a spouse, in excess of $400,000

• Has net income before taxes in excess of $75,000

• Has net income before taxes combined with that of a spouse in excess of $125,000

• Is an accredited investor

• Is a person described in the FFBA

• Has obtained advice regarding the suitability of this investment from a dealer member or its equivalent


Minimum Amount - if the cost to the purchaser is not less than $150,000 paid in cash. The purchase amount cannot be syndicated among a number of purchasers.


Crowd funding:

• The issuer must distribute ethrough an online funding portal.

• No single person can invest can more than $1,500 per distribution.

• The issuer group cannot raise more than $250,000 on aggregate.

• The issuer must provide each purchaser a contractual right to withdraw within 48 hours of the purchaser’s subscription.


Purchasers’ Statutory Rights


- Right to withdraw from an agreement to purchase securities within two business days after receipt or deemed receipt of a prospectus or any amendment to the prospectus.


- Right to rescind a contract for the purchase of securities while still the owner thereof if the prospectus or amended prospectus offering the security contains a misrepresentation.


- Right of action for damages provides that an issuer and its directors and anyone who signs a prospectus may be liable for damages if the prospectus contains a misrepresentation.


The underwriter or directors will not be liable if they conduct a thorough enough investigation to provide reasonable grounds to believe that there has been no misrepresentation.


Secondary Market Liability - in the event of a misrepresentation in filed documents.


Restrictions on Trading- during the period commencing two business days before the price of an offering, and throughout the period of their distribution, issuers, underwriters and DMs, among others, are restricted in their ability to trade in those securities. Except normal course trades.


Hot Issues - employees of issuer or DM can’t buy. Leave the demand to the public.


Continuous disclosure


Issuers are also required to make timely disclosure of material changes through press releases and filing of material change reports.


Financial Disclosure - NI 51-102 - must file audited financial statements within 90 days (120 for TSX-V). iInterim financial statements - 45 (senior), 60 (junior). All statements must be board-approved


MD&A - both for annual and interim F/S


Senior reporting issuers must file an annual information form (AIF) .


Press Releases and Material Change Filings- as it becomes known to management that a material change has occurred in the issuer’s affairs.


A material change is generally defined as a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of its securities. Must also file a Material Change Report.


An issuer must also file a business acquisition report within 75 days after a significant acquisition (defined as a business representing 20% of the issuer’s consolidated assets, investments or income. For venture issuers, the proportion is 40%).


Selective disclosure occurs when an issuer discloses material, non-public information to a select few individuals or companies, but not broadly to the investing public. NI  51-201 prohibits this.


SEDAR -  Filing with SEDAR is now mandatory for most reporting issuers in Canada (NI 13-101).

• Prospectuses

• Annual information forms

• Financial statements

• Annual reports

• Reports of material changes

• Press releases

• Circulars


A SEDI issuer is any reporting issuer, other than a mutual fund, that files disclosure documents electronically through SEDAR.


Proxies and Proxy Solicitation - Reporting issuers must have periodic shareholders’ meetings at least annually. Must solicit proxy votes through Information circulars that state whether or not the solicitation is made on behalf of management. Covers directors to be elected, remuneration of management, appointment of auditors, etc.


NI 54-101 - SH communication - ensure that beneficial security owners continue to receive proxy-related materials and that they have ample opportunity to vote the securities that they own. Reporting issuers must send annual and special meeting materials to beneficial owners.


NOBOs or “non-objecting beneficial owners” OK being contacted directly from a list.


Proxy-related materials generally include the notice of meeting, information circular, financial statements (in the case of an annual meeting) and form of proxy.


Except in extremely limited circumstances, a dealer member cannot exercise any voting rights in respect of the security of which it is not the beneficial owner.


Capital requirements on underwriting


Until a prospectus has been cleared by the provincial securities commission, the underwriter must provide for margin on the underwriting positions as if it owned them. Margin can be reduced under the following conditions:

• Expressions of interest from exempt purchasers (based on low historical renege rates by this group of purchasers).

• Out clauses in underwriting agreements(market and disaster)

• Issuance of a standard-form new issue letter (SFNIL) - provides stand-alone financing to an underwriter for an issue. This results in the actual transfer of the risk of loss to the issuer of the letter.


Section 3: Ethics and Governance

6. Making Ethical Decisions


Ethics = foundation for industry rules. An effective ethics program is a powerful tool for creating a strong corporate culture where company values and aspirations play a critical role. Strong ethics boost a firm’s reputation in the marketplace. It attracts talent and clients.



• It represents the rules or standards governing the behaviour of a particular group or profession.

• It is a set of moral principles or values.

• It is the study of the general nature of morals and moral choices made by individuals.


Morals are the rules and habits of conduct of a society.


Ethics Versus Rules -  Rules are the minimum. Don’t cover every situation.


The norms in the securities industry are based upon the ethical principles of trust, integrity, justice, fairness and honesty.


Industry rules and regulations can be distilled into five primary values: 


• Registrants must use proper care and exercise independent professional judgement.


• Registrants must conduct themselves with trustworthiness and integrity, and act in an honest and fair manner in all dealings with the public, clients, employers and colleagues.


• Registrants must, and should encourage others to, conduct business in a professional manner that will reflect positively on themselves, their firms and their profession.


• Registrants should also strive to maintain and improve their professional knowledge and that of others in the profession.


• Registrants must act in accordance with the Securities Act(s) and the requirements of all SROs of which the firm is a member


• Registrants must hold client information in the strictest confidence.


Securities regulations that prohibit marketing, advertising or sales communication that is deceptive or misleading.


IIROC Rules:

• They must observe high standards of ethics and conduct in the transaction of their business.


• They must not engage in any business conduct or practice which is unbecoming or detrimental to the public interest.


• Their character, business reputation, experience and training must be consistent with these ethical standards. 


A 1st time ethics violation might be accidental. A repeat offence calls character into question.


Principles-Based Regulation - Rather than being subject to detailed and technical standards, industry participants are generally expected to apply judgment and discretion in determining whether a given activity conforms to broadly defined values and standards.


Tone from the top - senior management must consistently demonstrate the behaviour expected of all employees.


Expectations of ethical conduct fostered by industry standards encourage reliance on preventive control systems. Such systems are more effective than systems that rely entirely on the detection of wrongdoing, typically after the fact. They also cost less.


Risks of Unethical Behaviour - Such behaviour may pay off in the short term, but not in the long term. Overall, there is an increasing demand in the industry for business practices based on honesty, trust and full disclosure.


When unethical behaviour is detected and broadly revealed to the public, you may see: customers leaving, loss of confidence, staff departures, fines.


Consistent ethical behaviour can have the following benefits:

• Monitoring costs are reduced.

• Authority can be decentralized

• Dealer members work more efficiently when employees are trustworthy.

• Employees’ loyalty is enhanced.

• A dealer member with a reputation for honesty is more apt to be dealt with in a straightforward manner compared to a dealer member with a poor reputation.




Ethical values have four common characteristics:

• They are beliefs, not facts.

• They are long-lasting (though not unchangeable).

• They guide personal and corporate behaviour and goals.

• They influence present actions designed to achieve future goals.


A basic starting point in resolving ethical dilemmas is to articulate and agree on which ethical values are in conflict.


The five basic values that underlie ethical decision-making are justice, respect, duty of care, responsibility and compassion.


Duty of care - people must exercise special care toward those with whom they have relationships of dependency or reliance.


Right vs. wrong - no dilemma here. Codes of conduct, codes of ethics and compliance policies are mainly concerned with these situations.  Four tests: legal, smell, front page, mom.


Right vs. right - dilemma.


Types of Ethical Dilemmas:


Integrity - The values of honesty or integrity clash with the values of commitment, personal responsibility or promise keeping.


Societal - The rights or values of an individual conflict with those of the group. It can also be seen in terms of us vs-them, self-vs-others.


Goal-based - Immediate needs or desires run counter to future goals, or when means clash with ends.


Fairness - The values of fairness, equity, and righteousness conflict with the values of compassion and empathy.  (Ex - employee who inappropriately claims overtime pay during a period when his partner is unemployed).


Conflict of interest - occurs when a duty owed to another person is compromised by either a personal interest or a conflicting duty owed to a third party.


Must avoid even the appearance or perception that a conflict exists.


Ethical dilemmas are typically resolved by applying four principles:


• Ends-based principle - The action chosen should result in the greatest good for the greatest number of people.


• Rule-based principle - The action chosen should follow the rule that deals most effectively with the situation.


• Social contract-based principle - View the action in terms of how it affects the well-being of the group.


• Personalistic principle - Supports the decision that is most authentic to the decision-maker as a person.



Chapter 7. Corporate Governance


Strong ethics underlies good corporate governance. Corporate governance is the process and structure used to guide and direct the business affairs of corporations. It is a system of expected behaviours. Applies to the board and management. 


The board of directors is responsible for ensuring that the principal compliance risks to the firm are identified managed.


The Importance of Good Corporate Governance - there is a link between the governance of a company and its performance. Institutional investors require high standards of corporate governance.  


CG focuses on problems resulting from the relationship between shareholders and management. 


A CG system should perform the following roles: 


• Address issues concerning the responsibilities of boards, how they are constituted and how they function 


• Formalize the relationships between the board, management and stakeholders. 


• Provide systems that facilitate the flow of information for risk management. 


• Propose guidelines and recommendations that focus on the board of directors and the quality of its members.


The role of the board of directors is to act honestly and in good faith and in the best interests of the corporation. Corporate governance policy may include the following areas: Board membership, CEO selection, board meetings, delegation & policies for conflict of interest, confidential info, info mgmt & risk mgmt. And the role of S/Hs.


Principles of corporate governance- stewardship, accountability, independence, alignment of interests of all stakeholders, shareholder democracy and duty of care.


Five principles of corporate governance developed by the OECD: 


• Protect shareholders’ rights 


• Ensure the equitable treatment of shareholders 


• Recognize the rights of stakeholders as established by law 


• Ensure timely and accurate disclosure of all material matters 


• Ensure the strategic guidance of the company, and accountability of the board and management




CalPERS Corporate Governance Core Principles and Guidelines: 


• Board independence and leadership 


• Board processes and evaluation 


• Individual director characteristics 


• Shareowner rights



Pension Investment Association of Canada’s four general principles of corporate governance:


- management is accountable to the board of directors. The board reports to the S/Hs.

- Compensation should be designed to deal with management conflicts of interest

- minority shareholders should not be treated differently from controlling shareholders.

- The proxy vote should be used to support ethical conduct. 



CalPERS’ corporate governance principles provide the following independence suggestions: 


• A substantial majority of the board should consist of directors who are independent. 


• Independent directors should meet periodically (at least once a year) alone, without the CEO or other non-independent directors. 

• The jobs and responsibilities of the chair and the CEO should be separated. 

• If the chair is also the company’s CEO, a lead independent director should be designated by the board to coordinate the other independent directors. 

• Certain board committees should consist entirely of independent directors, including those committees dealing with audit, director nomination, board evaluation and governance, CEO evaluation and management compensation, and compliance and ethics.


No director should also serve as a consultant or service provider to the company. 


Director comp should be heavily weighted to stock. 


Ethics in corporate governance basically revolves around the implied duty that a corporation has to all of its stakeholders. 


Investment dealer issuers are generally faced with the same set of requirements as public companies. However, privately held dealers are not required to have a governance approach. If they adopt one it should address the following issues: 

• Clear structured lines of authority 


• Stability and continuity of management and financial policy 


• Strategy 


• Independent advice 



Directors of investment companies face special issues with respect to fiduciary duty and conflict of interest because of the nature of their type of business. 


Ontario Teacher’s Pension Plan Board (OTPPB) discloses how they vote their proxies. OMERS and the OTPPB incorporated a number of escalating actions in dealing with investee companies whose corporate governance needed improving, such as: 

• Writing to senior management voicing concerns 


• Meeting with management outside annual or special shareholders’ meetings 


• Meeting with board members 


• Supporting constructive corporate governance challenges of other shareholders 


• Engaging in legal action




The CBCA provides the following services: 

• Gives shareholders means to communicate, make proposals and participate in decision making


• Allows strong international representation on the boards of CBCA corporations (the majority resident Canadian requirement being 25%) 


• Provides a due diligence defense for directors that allows the advancement of defense costs


NI 81-106 - requires the disclosure of proxy voting by investment funds. Investment funds that are reporting issuers must establish policies and procedures for voting proxies. It also requires investment funds to maintain an annual proxy voting record.


NI 58-101 -  requires issuers to disclose the corporate governance practices that they have adopted. 


One area in which Canada leads is board independence, specifically in keeping the chair and CEO positions separate. 75-80% of S&P 500 companies had a combined CEO/chair, whereas 70-75% of TSX companies have separate roles. 


Many TSX companies are controlled by a single shareholder or a group of shareholders with voting control. About 1/4 are controlled by a single shareholder or group of shareholders with “effective” control, (between 20% and 49.9%). Only about 14% of the listed companies are widely held. The majority of Fortune 500 corporations are widely held. 


Only 29% of the Canadian companies surveyed had identifiable rules regarding a board’s legal obligations. 


Canadian study:


• Only 28% had policies regarding directors’ third party dealings. 

• Only 21% had policies concerning board members’ disclosure requirements. 

• Only 3% had policies directed at corporate social responsibility




Chapter  8. Senior Officer and Director Liability


Directors of Canadian corporations must fulfil a number of duties including a fiduciary duty and duty of care to act in the best interests of the corporations they serve.


Types of business structures


Sole proprietorship - not considered separate legal entities for legal or taxation purposes. Unlimited liability. 


Partnership - can take one of two forms: general partnerships (unlimited liability) or limited partnerships. A general partnership is not a separate legal entity.


Corporation - Unlike a partnership or sole proprietorship, a corporation is a separate legal entity distinct from its owners, with virtually the same powers as an individual. Corporations can carry on business, own and control assets, enter into contracts, acquire rights and obligations, incur debts, and sue or be sued. Can act only through their directors, officers and employees, who are agents for the corporation. 


Shareholders’ liability is limited to the capital invested. 


A provincially incorporated corporation can carry on business only in the province of incorporation. 


By-laws typically deal with items such as shareholders’ meetings, directors’ meetings, the qualification, election and removal of directors, the declaration and payment of dividends, and signing authority for documents.


Private corp - < 50 S/Hs. Restrictions on transfer.


Officers and Directors 


Things to look at before taking on a role: the financial condition of the company, the quality of its record keeping procedures, the composition and structure of its board, the quality of management, the potential for product liability and the available liability insurance coverage.


Directors - Directors are expected to act in a fair, honest, diligent and ethical manner with the best interests of the corporation and its stakeholders in mind. A director must be of the age of majority and of sound mind and they must not be an undischarged bankrupt. 


Liable for: illegal acts, improper dividends, 6 months’ wages.


Officers - officers hold office until the annual meeting. Includes, CEO, President, Secretary, treasurer. 


Liable for: corp statutes, regulatory sanctions, misrepresentations in filings, Insider trading.


NI 31-103 - individuals who deal with the public must be employed by registered dealer members and must be registered as dealing representatives. Must register a UDP and CCO. 


IIROC Rule 7 – Dealer Member Directors and Executives.

(Did we cover director roles above? If not, type in new notes.)


Duties of Directors


Directors must exercise a degree of skill and diligence that would amount to reasonable care that an ordinary person might be expected to take in such circumstances (CBCA).


Duty of Care- devote the necessary time and attention to make informed decisions. More care needed in some situations like a take-over bid. In reviewing directors’ actions, the courts primarily review the process rather than the result. 


Duty of Diligence - actively questioning management and advisors, as well as engaging experts where necessary and reviewing their reports. Proof of diligent behaviour provides directors with a defence to liability under many statutes. A director will be deemed to have consented to a decision made in his or her absence unless, within seven days after becoming aware of the resolution, his or her dissent has been recorded.


Duty of Skill - expected to apply their abilities, education, experience and training to the standard of a reasonably prudent person in comparable circumstances.


Business Judgment Rule - recognizes that directors may make honest mistakes in business decisions. 


The rule applies only to the extent that the director met a proper standard of due diligence in reaching a decision.


Five elements:

1. Directors are protected against claims for wrongful acts, but not against claims for failure to act. Inaction is only protected if it is a conscious decision.


2. Directors who are disinterested and independent are protected. 


3. The decision of the directors was reached after making a reasonable effort to obtain and evaluate all relevant information.


4. Directors must act in good faith toward the corporation. 


5. Decisions must be supported by some rational basis and were made in the best interests of the company.


Fiduciary Duty - must put the interests of someone else completely above their own interests. Every director and officer is a fiduciary of his or her corporation


Duty to the Public -  Not an explicit requirement, but happens when directors discharge their primary duties.


Conflicts types:


Self-dealing - directors or officers having a direct or indirect interest.


Corporate opportunity: directors or officers attempting to divert a business opportunity from the corporation to themselves.


Directors or officers may take advantage of business opportunities declined by the corporation for valid business reasons, but only after full and fair disclosure by the directors or officers of their intentions.


Duty to Disclose Interest in Corporate Transactions - contract will be valid if the director has properly disclosed (in writing) the interest to the board, the director has abstained from voting on the contract and the contract was fair and reasonable to the corporation.


Continuation of Duty - Directors and officers retain their fiduciary duties even after they resign or retire.


Board committees don’t absolve other directors of their responsibilities.


NI 52-110 - responsibilities and composition of audit committees. Audit committees must have at least three members who are independent of the corporation and are financially literate.


Reliance on Management and Experts - Directors are entitled to rely upon the information prepared by management and the reports of experts such as lawyers, accountants and appraisers - only do so when it is reasonable.


If a particular director has an expertise, the remaining directors cannot rely on that director’s advice unless the director has been retained as an advisor.


Director liability can arise from three sources:

• In tort (that is, damage, injury, or a wrongful act )

• In contract

• As a result of a statutory provision


Directors and officers can be held liable either jointly or individually with the corporation, as well as with fellow directors and officers.


Individual liability would normally only be found against a director if the wrongful activity was done knowingly and deliberately.




Directors must approve the creation and issuance of shares, debt financing, payment of dividends and various corporate reorganization issues such as take-over bids or mergers.


Payment of Dividends - may not declare a dividend if there are reasonable grounds for believing that the corporation would not meet certain statutory solvency tests if the dividend was paid. Jointly and severally liable to the corporation for any amounts paid and not recovered.


Impairment of Capital - Directors can be similarly liable in the following circumstances:

 • Purchase redemption, retraction or other acquisition of shares of the corporation


• Provision of loans, guarantees or other financial assistance to certain related parties


• Payment of an amount to a shareholder who has exercised statutory dissent rights


• Payment to an officer or director of an indemnity prohibited by the corporate statute


• Payment of an unreasonable commission to any person purchasing shares of the corporation


• Issuing shares for property or past services which have a fair market value less than if the shares had been issued for money


Raising Capital - In a public offering, statutory civil liability exists not only for the corporation, but also for each of the directors of the corporation who can be held personally liable if there is a misrepresentation in the prospectus. Not true for a private placement.


Due Diligence Defence - must prove that they conducted a reasonable investigation and have reasonable grounds to believe that there was no misrepresentation in a prospectus or financial filing. The liability of inside directorsis probably higher, and the due diligence defence may not be available to them.


The best way to avoid liability through a due diligence defence is to institute a corporate compliance program.


Take-Over Bids - In Canada, take-over bids more frequently involve an insider bid. In the US, in the context of a take-over, directors are more or less auctioneers charged with obtaining the highest available price for shareholders.


Four fundamental principles underlying the take-over bid regime:


1. The primary objective is the protection of the interests of the shareholders of the target corporation.


2. Target corporation managers and directors are in a conflict of interest position arising from their existing roles, which may change as a result of a take-over.


3. The shareholders must make the decision on the take-over bid; directors provide information to assist this process.


4. The proper response to a take-over bid is to encourage an auction for the shares of the corporation.


Must send a directors’ circular to all shareholders within 15 days of receipt of an offer. The directors’ circular must offer a recommendation.


Poison Pills - methods used by target companies to make a take-over prohibitively expensive without the co-operation of the target company’s management. Directors and officers can use poison pill strategies for the improper purpose of keeping their jobs, to the detriment of shareholders.


Insolvency - unable to pay its liabilities as they become due. The first obligation of the board of directors is to ensure that the proper management team is in place to manage the corporation’s recovery and deal with creditors. The directors themselves owe no duties to creditors of the corporation but must act in the best interests of the corporation.


The most significant personal liability for a director relates to statutory obligations to pay wages and withholding obligations for taxes and other source deductions. The obligation only arises during the time that they were actually directors. As a result, directors may choose to resign as the situation of the corporation becomes clear.




Directors’ statutory liabilities take two main forms: direct liability and indirect liability.


Statutory liabilities can be imposed in three different ways. The most severe - strict liability, (liability regardless of whether a director was aware that a breach was taking place or not). The failure to file and pay wages and statutory remittances falls within this category.


Less strict - able to prove diligence defense.


In the third type of offence, liability is imposed where a director authorized, permitted or acquiesced in the commission of an offence by the corporation.


The potential penalty under the CBCA is a fine up to $5,000 or a prison term up to six months, or both.


Competition Act - bid rigging, price discrimination, predatory pricing and conspiracies to lessen competition. Can end up facing criminal prosecutions with fines ranging up to $10 million or five years imprisonment. The establishment of a compliance program may well result in a significant reduction in penalty should the corporation and its directors find themselves off side the law.


Employee-Related Matters - up to six months’ wages and vacation pay owed. Directors are not liable for termination pay. An action must be brought within two years of the date on which the individual ceased to be a director. A director cannot be sued unless the corporation has been successfully sued within six months of the date the wages were due and has failed to satisfy the judgment. 


Also be liable under the ITA for the failure of a corporation to remit source deductions. A due diligence defence may be available.


Liability under the Criminal Code:

• Issuing a false prospectus

• Fraudulently affecting the market

• Insider trading

• Manipulation of stock exchange transactions


Civil Liabilities - directors would not be liable in their personal capacity unless there was bad faith, fraud or deceit involved in their actions.


Disclosure Obligations - there is liability for directors and officers who authorize a document that is required to be filed and contains a misrepresentation.


The person or corporation making such a misrepresentation in a filing is subject to a fine of not more than $5 million or imprisonment up to five years or both. Any director or officer who authorizes, permits or acquiesces in the commission of an offence under this provision is subject to a similar penalty.


NI 52-109 - requirement for annual CEO and CFO certificates.


Secondary Market Liability - Limits have been placed on liability for directors and officers to the greater of $25,000 or half of his or her total 12-month compensation from the company. No limit if there was deliberate misrepresentation. Limitation period of three years from the date of the misrepresentation or failure to disclose.


Liability Relating to Insider Trading - Directors are insiders of their corporations. Insiders are required to report their shareholdings upon becoming an insider of a reporting issuer and any change in those holdings within five days following such change. Must not trade securities of the issuer while he or she is in the possession of material undisclosed information. Time for the information to be disseminated to the general public must also be allowed, usually a period of 24 to 48 hours following the official press release for large and medium sized companies, and even up to a week for smaller and lesser known companies.


Insiders are also prohibited from tipping any other person with respect to material undisclosed information, unless it is in the necessary course of business.


Act provides for a fine of not less than the profit made or loss avoided, and not more than the greater of $5 million and an amount equal to triple the profit made or loss avoided, whichever is greater.


Defenses - reasonably thought the info had been disclosed. Innocent trade (i.e automated program).


NI 55-104 - Insider Reporting Requirements. 10 day requirement for fi ling initial insider reports. Subsequent insider reports must be fi led within five calendar days.

- CEO, CFO, COO, and the directors

- A person or company responsible for a principal business unit

- 10% holder


Oppression Remedy - action where S/H feels he is being oppressed by the directors.


Director defence

• Attending all meetings 

• If absence is necessary, fully reviewing of the meeting’s minutes

• Ensuring that any dissent is recorded in the minutes

• Obtaining professional advice in potentially contentious situations

• Insisting on timely information of all potential liabilities facing the corporation

• Ensuring that appropriate committees are established 

• Reviewing all public corporate documentation, especially those items which are required to be filed with regulators.


If a director has failed to act honestly and in good faith, the corporation is prohibited from indemnifying the director.


Before accepting an appointment as a director, a prospective director should give careful consideration as to whether he or she has sufficient information about the corporation. 



Section 4: Managing Risk


Chapter 9: Risk Management in the Securities Industry

Objectives of risk management:

- to meet regulations

- prevent loss

- Reduce sensitivity of earnings and market value to external variables

- Optimize the level of risk undertaken in relation to the business objectives being pursued

- protecting and enhancing reputation

- yielding competitive advantage.


There should be a system of checks and balances to prevent any person or group from gaining excessive power to take risks on behalf of an organization.


Risk management framework- encompasses the scope of risks to be managed, the systems and procedures to manage risk, and the roles and responsibilities of the risk management team members.



• Clearly defined and written risk management policies and procedures covering risk identification, measurement, monitoring, reporting and control.


• An organizational structure clearly defining the roles and responsibilities of those who take risks and those who manage them.


Risk types:

• Credit and counterparty risk - limits on country, industry, and business and product lines.


• Market risk - limits on market value exposure, earnings volatilities, stress testing, and sensitivities to key market drivers.


• Liquidity and funding risk - limits on illiquid assets, liability diversification, credit and liquidity commitments, asset pledging, and cash flow mismatches.


• Operational risk - limits for maximum error rates by operation, system, or process. Limits may also include dealer member deadlines to resolve outstanding audit items. Boundaries should be established for sales practices and products.


Risk policies should be established independently by a qualified risk management function. A balance between control and reward is desirable when setting limit levels.


Risk management KSFs:

• The board clearly defines business strategy and risk appetite through policies, capital adequacy and earnings volatility requirements.


• A culture of risk is instilled at every level of the organization and in every aspect of business activities.


• Risk infrastructure includes a process for risk identification, measurement, controls and reporting.


• Roles and responsibilities in the different business units should include clearly defined risk management functions.


Market risk - risk of loss resulting from changes in market risk factors, such as foreign exchange rate, interest rates, equity prices, commodity prices and credit spreads.


Measures: Value-at-risk (VaR), Stress testing, Price sensitivities to underlying market drivers & Model risk reserves.


Value-at-Risk - measure of the likely loss of market value at a pre-defined confidence level and holding period for a given portfolio.  Factors: exposure, volatility, confidence level. VAR determines capital requirements.


Stress Testing - VAR is a good risk measure under normal market conditions, but a relatively poor measure for extreme events because of its various underlying methodology assumptions, such as normal distribution. DMs require a framework to assess the impact of extreme events.


Stress testing quantifies loss under extreme but probable events


Standard stress testing is scenario and sensitivity-based.

• Scenario-based - focuses on simultaneous behaviours of all market drivers in an event and is defined as the worst loss among stress scenarios.

• Sensitivity-based - stress market drivers individually to assess their impact.


Scenario types: historical, hypothetical, hybrid (modified historical).


Limits are commonly established for the following drivers:

• Notional principle amounts

• Sensitivities to yield curve changes

• Sensitivities to credit spread changes

• Daily and cumulative losses

• Options and exotic products, impacts of volatilities, correlations, and time-decay


Model risk types:


Erroneous - A model is only as good as its underlying assumptions.

- Model Implementation and Calibration Error - wrong design, programming errors.

- Model Misapplication - wrong model for the scenario.


Consider an independent model vetting function.


Credit Risk Management


Credit risk -  the potential financial loss if a borrower or counterparty in a transaction fails to meet its contractual obligations. Credit risk management deals with identification, quantification, mitigation, monitoring and control of this risk.


Indicators: exposure at default (EAD), probability of default (PD) and loss given default (LGD). Loss = EAD × PD × LGD


For portfolio management, a key control is industry review:

• An analysis of the key risks inherent in each given industry (including cycles, exposure to technological change, political influence, regulatory change and barriers to entry)

• Performance of the portfolio

• Underwriting standards

• The industry’s risk ratings


Operational risk Management

OR is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.


Categories: Fraud (internal, external), employment practice, client, product and business practices,  loss of assets, business interruption, operating processes.


OR framework: partner with mgm’t, self assess risk, risk monitoring.


Control weaknesses:

• Inadequate segregation of duties

• Poor trader supervision

• Disregard of identified control weaknesses. Ensure that control recommendations are implemented.

• Insufficient foreign branch office control


Loss distribution approach - Inputs: single event severity distribution and loss frequency distribution over a given time horizon. A Monte Carlo simulation is often used to generate an aggregated loss distribution.


Challenge in implementing LDA is the availability of sufficient high-quality data.



Ch. 10: Managing Risk in the Financial Sector


Rules-based compliance has tended to be the historical norm in Canada. However a general movement towards principles-based regulation is apparent. The principles-based approach is clearer, simpler and less costly to implement than a rules-based approach because it allows dealer members to tailor their supervision and compliance to their business models.


If you use principle-based reg, then you can’t point to your rules as a defence. Instead, need to document how decisions were made.


Tone at the top - starting point for an effective risk management system. Risk mgm’t has to be a clear priority.


IIROC reviews the performance of supervisory and compliance functions within a dealer member separately. Since compliance functions are in support and don’t have authority over people.


Role of the Compliance Department - monitoring and reporting adherence

to rules, regulations, requirements, policies and procedures. It must also properly document these activities.  For compliance purposes, it is essential that appropriate internal controls be in place.


Rule 2600 - control standards for DMs.


Internal controls are the policies and procedures management establishes and maintains to assist in achieving its objective of ensuring the systematic conduct of a dealer member’s business.



- Preventive: minimize or prevent fraud and error.  

- Detective: ID so that corrective action may be promptly taken.


If risks are higher, invest in preventive controls.


An IC will be inadequate if it could result in a material loss, misstatement, inability to operate, violate a reg.


Policies and procedures must be reviewed and approved in writing by senior management at least annually.


Internal controls necessary to be compliant with Rule 2600


Capital adequacy: CFO is responsible for continuously monitoring the dealer member’s capital position to ensure that adequate RAC is maintained. Monitoring:

- At least weekly review

- Applying liquidity, capital and profitability tests under the early warning calculations for Early Warning Level 1 and Level 2

- File monthly financial reports. Conduct at least annually a documented supervisory review of the management reporting system


Insurance: An insurance policy is the first line of protection of a dealer member’s assets against losses arising from fraud, theft, or dishonest acts perpetrated by its employees. Insurance coverage should be reviewed and approved at least annually.


Segregation of Client Securities: Reported at least twice weekly. These items must be placed in “acceptable securities locations” under written custodial agreements. A daily supervisory review of clients’ securities is necessary. 


Safekeeping of client securities: All securities and cash must be protected against material loss, and all potential losses must be promptly reported for regulatory, financial and insurance purposes. Methods of transportation selected for securities in transit comply with insurance policy terms, taking into account value, negotiability, urgency and cost factors.


Smaller DMs might not be able to fully comply with segregation so must have offsetting controls.


Safeguarding securities & cash: A senior official should be designated to be responsible for reviewing and approving all bank reconciliations in writing, at least monthly. This function must be performed by someone without incompatible functions.


Pricing Securities: Policies to ensure that errors, omissions and discrepancies in pricing are adequately rectified. Independent verification of security prices and inventory positions should be conducted at least monthly. All pricing procedures should be documented.


Derivative risk management: must have written risk management procedures to identify, measure, manage and monitor risks associated with the use of derivatives in their treasury, trading and sales. The board of directors should be responsible for approving, reviewing and amending all significant risk management policies.


Senior management must report at least annually to the board on risk exposures (except for exchange traded options). Derivative positions should be marked-to-market at least daily using independent pricing models.


Opening New Accounts

KYC - The New Account Application Form (NAAF) serves as the legal contract between the dealer member and its client. This is how DMs know how to serve the client. Can’t make appropriate recommendations without this knowledge.


The NAAF must be reviewed and approved by a designated partner, officer, director or business location supervisor.


Risks from failing to monitor NAAFs:

•Failure to verify a client’s identity can result in client fraud, insider trading or money laundering.


• Failure to verify a client’s address, or permitting the use of a mailbox address, can result in client or advisor wrongdoing.


• Inconsistencies in client information and investment objectives can result in client complaints of unsuitable investments.


• Inaccurate date of birth is problematic when dealing with a minor or an elderly person, and also with registered accounts.


IROC Rule 2500 - incomplete NAAFs and documentation not received must be noted, filed in a pending documentation file and be reviewed on a periodic basis. Action must be taken within 25 days.


Client ID requirements - to meet anti-money laundering and anti-terrorist financing requirements, to assist in KYC and making suitability determinations, and in general for ensuring that dealer members are dealing with authorized persons.


Account opening procedures should provide the necessary information to make a reasonable, risk-based assessment of clients, their source of income and the amount of expected activity in an account.


FINTRAC rules require high risk clients to be subject to some form of enhanced supervision.


A DM may exercise extra due diligence in the following circumstances:


• The client is from or engaged in business with countries with weak anti-money laundering legislation.


• The transaction involves a country where corruption is prevalent or where sanctions have been applied.


• The client operates a cash-intensive business such as a casino or automated banking machine business.


• The client resides in an area in Canada where there are known risks of money laundering or significant criminal activity.


• The transaction or the relationship involves a senior foreign government official or an immediate family member or close associate of such a person (often referred to as a politically exposed person (PEP) or politically exposed foreign person (PEFP).


IIROC Rule 1300.1 -  DM must verify the identity of any 10% holders no later than six months after the account has been opened.


Non-resident individual accounts - check the passport or verify with the bank.


Disclosure Requirements

IIROC’s Client Relationship Model (CRM) mandates requirements related to relationship disclosure and conflict of interest disclosure.


Relationship Disclosure Requirements  - Rule 3500 - minimum standards for client or firm relationship disclosure to be provided by dealer members to clients at the time of account opening.


The disclosure must include the following components:

• The types of products and services offered by the firm


• 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 


• Material firm and adviser conflicts of interest and a statement that future material conflict of interest situations, where not resolved, will be disclosed to the client as they arise


• All fees, charges and costs associated with operating, transacting and holding investments in the account


• The reporting the client will receive and a description of the firm’s obligations to provide performance information.


Receipt of the disclosure document must be positively acknowledged by the client at the

time of account opening.


Conflicts of Interest Disclosure - Firms are required to develop and maintain policies and procedures to identify, disclose and address existing and potential material conflicts involving clients.


Any such conflicts must be addressed “in a fair, equitable and transparent manner and considering the best interest of the client or clients.


Product-Related Disclosures - policies for distributing prospectuses, circulars, etc.


Electronic delivery - Because of specific jurisdictional issues, dealer members must also make sure that proper disclaimers and procedures are in place regarding company websites and that a designated person approves all posted advertising and content.


Objecting or non-objecting beneficial owners -  owners who do or do not object to the release of their names and other information. Until these instructions are received from the client (in written or oral form), dealer members are prohibited from holding securities on the client’s behalf.


All sales communications issued to the public must be accurate and truthful and must not include unjustified promises of specific results, opinions or forecasts of future events.


Account Supervision


IIROC Rule 1300 requires that dealer members use due diligence to learn the essential facts relative to each client and to every order or account accepted.


The suitability of investments in each client’s account must be assessed in the following circumstances:

• When a trade is accepted


• When a recommendation is made


• When securities are transferred or deposited into the account


• When there is a change of representative on the account


• When there is a material change to the KYC information for the account


All suitability assessment reviews must be performed by taking into consideration the client’s current financial information, investment knowledge, investment objectives, time horizon and risk tolerance, and the account’s current investment portfolio composition and risk level. RRs must maintain evidence of these reviews in the client file.


Evidence of supervisory reviews must be maintained at head office for seven years and on-site for two years.


Seniors are considered to be more vulnerable. Higher standard of regulatory scrutiny. Need to take extra care in complying with their KYC, KYP and suitability obligations when dealing with vulnerable clients.


If you have separate locations the need a supervisor to oversee KYC and other compliance responsibilities.


Management must describe in written detail the duties and responsibilities associated with account approval and supervision.


Supervision of Options and Futures Accounts -  Dealing in options and futures potentially exposes dealer members to additional risks that must be accounted for in the supervision of these accounts.


• The Designated Supervisor must ascertain that an appropriate NAAF exists for each new client account

• The head office and business locations must ascertain that all futures accounts are approved and supervised by a Designated Supervisor.


• Must ensure the continuous supervision of each day’s trading in futures contracts and futures contract options.


Institutional Account Supervision -IIROC Rule 2700. All individuals are considered retail clients regardless of their net worth, securities under management or level of sophistication.


Most institutional clients are sophisticated investors who evaluate the suitability of the products and services in which they transact and make their own decisions. The dealer member must determine the level of suitability owed to that client based on the client’s level of sophistication.


Dealer members have no suitability obligation for institutional clients who are also permitted clients (as defined in NI 31-103) and who have waived the dealer members’ suitability obligations in writing.


DMs are required to have anti-money laundering and anti-terrorist financing procedures in place to cover their institutional business and clients.


The dealer member’s policies and procedures must ensure that the firm meets the regulatory standards regarding the review and approval of orders prior to the entry of any order on a marketplace.


Trading Requirements - A head of trading must be appointed.


Monitoring elements: audit trails, storage, reviews, controls, disclosures. Annual review.


Information barriers: to safeguard info against inappropriate use. 


Manipulative Trading Practices:

• Engaging in any conduct that has the effect of deceiving the public, the purchaser or the vendor of any security as to the nature of any transaction or as to the price or value of the security


• Creating or attempting to create a false or misleading appearance of active public trading in a security


• Entering or attempting to enter into any scheme or arrangement to sell and repurchase a security in an effort to manipulate the market


• Causing the last sale or last bid or offer for the day in a security to be higher or lower than warranted with the intent to manipulate closing price quotations


• Using or attempting to use any manipulative or deceptive scheme or contrivance to influence the market price of a security


• Making a fictitious transaction in a security or knowingly giving or receiving an order involving no beneficial change of ownership of a security


• Misleading or attempting to mislead any SRO or any board of governors or committee of an SRO on any material point


• Making a practice, directly or indirectly, of taking the side of the market opposite to the side taken by clients


At a minimum, the written compliance procedures for employee education and post-trade monitoring must include the following points:


• Employees must know the rules and understand their obligation for client priority and best execution


• Employees must be trained to handle particular trading situations that arise, such as client orders spread over the day and trading along with client orders.


• All brokers’ trading must be monitored as required by UMIR.


• Complaints from clients concerning potential violations of the rules must be documented

and followed-up.


• All traders’ personal accounts and those related to them must be monitored daily to ensure that no apparent violations occurred.


• At least once a month, a sample of proprietary inventory trades must be compared with contemporaneous client orders for detection of possible front running.


Supporting functions:


• Order room: focal point of all trading activity and the last point at which a trade can be stopped before execution.


• Accounting department: should be able to catch possible fraud, cover-up.


• Securities cage: Look for unusual delivery instructions, any unusual deposit of street-name or corporate securities, or large deposits of cash.


Recordkeeping Requirements


Staff must be informed of record retention policies through the issuance of a written policy statement.


Sources of reporting obligations:

• IIROC, MFDA, and the provincial securities regulators



• Office of the Superintendent of Financial Institutions (OSFI)

• Canadian Security Intelligence Service (CSIS)



IIROC Rule 3100 - establishes the minimum requirements concerning information that registrants are required to report.


A dealer member must report the following statistical and summary information through the Complaints and Settlement Reporting System (ComSet):

• All customer complaints, other than service complaints


• All securities-related civil claims and arbitration notices 


• All judgments, awards, private settlements, arbitrations or other resolutions of any securities- related claim or complaint 


• Internal investigations that are commenced by the dealer member


National Registration Database (NRD) - The regulators approve registrations based on the information filed through the NRD. Dealer members must designate one or more individuals as Authorized Dealer Representatives (AFRs). These individuals are responsible for managing access to the NRD.


PCMLTFA responsibilities -


Compliance regime should include the following elements:

• The appointment of a compliance officer


• The development and application of compliance policies and procedures


• A review of compliance policies and procedures to test their effectiveness


• An on-going compliance training program for employees or agents or any other individuals authorized to act on behalf of the dealer


For corporate accounts, a copy of official corporate records identifying individuals authorized to sign on behalf of the corporation must be retained. If there are subsequent changes to this information, a board resolution stating the changes must be included in the records.


Dealers must retain records in such a way that they can be provided to FINTRAC within 30 days of a request to examine them.


Four principal reporting requirements with respect to money laundering and terrorist financing activities:

• Suspicious transactions and attempted transactions - submit reports to FINTRAC within 30 days


• Terrorist property holdings - a terrorist property report must be submitted, without delay, to FINTRAC, the RCMP, CSIS and IIROC. The transaction should not be completed and the property in question must be immediately frozen.


Dealer members are required to submit a monthly report to IIROC identifying clients whose names are on the OSFI list.


• Large cash transactions - $ 10K in 1 transaction or in one 24 hour period.

• The exporting or importing of cross-border currency and monetary instruments to and from Canada


The PCMLTA program must be audited every 2 years.


PIPEDA compliance framework:


• Appoint a privacy officer.


• Identify the information to be collected and explain why it must be collected.


• Get consent before collecting information.  (express consent and implied consent for less sensitive info)


• Get written consent for the material already received by the dealer or investment advisor.  Must include notification describing the purpose for the collection, use and disclosure of the information.


• Store the consent and the notice given to the client.


• Establish practices and procedures for collecting information.


• Establish reasonable safeguards to protect information.


• Establish timelines for destroying information.


• Develop a dealer-wide communication policy.


• Establish complaints procedures.


Violations of PIPEDA can range from up to $10,000 for a summary conviction up

to $100,000 for an indictable offence.


Cybersecurity - resources:

• Cyber Security Self-Assessment Guidance (OSFI)


• Guidance on cyber resilience for financial market infrastructures (International Organization of Securities Commissions, or IOSCO)


• Checklist for a Small Firm’s Cybersecurity Program (Financial Industry Regulatory Authority, or FINRA)



Chapter 11: Financial Compliance and Capital Requirements


IIROC specifies the minimum amount of capital dealer members are required to have.

A minimum amount of $75,000 and a maximum of $250,000.


Measuring Solvency - net liquid assets - assets that are readily convertible into cash (or equivalents) minus current liabilities. Then deduct reserves or cushions.


Risk adjusted capital (RAC) - measures the dealer member’s use of capital or capital losses against calculated excess capital.


Early warning system - based on profitability, liquidity and capital tests.


Liquidity risk -  the risk that the assets held by a business cannot be readily disposed of at their reported value when needed, or that liabilities of the business will be greater than anticipated. The primary objective of the capital formula is to quantify and effectively address liquidity risk.


LR can be a component of market, credit or operational risk.


Other financial risks:


• Counterparty risk is the risk of loss due to a counterparty default or insolvency.


• Price risk is the risk of loss due to a price decline.


These are addressed through margin requirements.


• Concentration risk is the risk of loss due to a sudden change in circumstances at an issuer company, either positive or negative.


Addressed by the capital formula’s security concentration charge.


Bad debt losses can usually be prevented by strictly adhering to the Know Your Client (KYC) Rule, cash and margin account regulations and the Know Your Employee principle.


Insurance: An insurance policy is the first line of protection of a dealer member’s assets against losses arising from fraud, theft or dishonest acts perpetrated by its employees. The prescribed coverage:


• Fidelity coverage for any loss through any dishonest or fraudulent act of any of its employees


• On-premises coverage for any loss of money or securities through robbery, burglary, theft, hold-up, mysterious disappearance, damage or destruction while within any of the insured’s offices


• In-transit coverage for any loss of securities while in transit in the custody of any employee


• Forgery coverage for any loss from forgery or alteration of cheques


• Securities coverage for any loss from having received or delivered forged cheques, or from having purchased, sold, received or delivered counterfeit securities


Capital Formula


1. Net allowable assets: Total Financial Statement Capital – Non-allowable Assets(assets that cannot be disposed of quickly or do not have a readily known current realizable value).



2. RAC: Net Allowable Assets – Minimum Capital and Margin Required + Applicable Tax Recoveries –Securities Concentration Charge


Carrying brokers are dealer members that offer back office services and facilities to other dealer members known as introducing brokers.


The minimum capital required for carrying brokers is $250,000. Likewise, the minimum for introducing brokers of Types 2, 3 and 4 is $250,000. In the case of Type 1 introducing brokers, the minimum capital required is $75,000.


Type 1 brokers must clear all trades through their carrier and must continuously disclose that relationship.


The margin rates prescribed by IIROC rules vary by type of security and are not issuer-specific. Margin required includes client account margin, contingent liabilities and the amount of the deductible under the Financial Institution Bond. In addition, there is a provision for futures contracts. They represent future commitments that are not recorded on the balance sheet of the dealer member.


The concentration margin requirement is based on individual and aggregate futures contract positions relative to the capital base of the dealer member.


There are two types of concentration charge: individual (when a clients’s position is > x% of DM assets) and commodity (aggregate positions in the same commodity > x% of net allowable assets).


Securities concentration charge accounts for exposure to securities of an issuer beyond specified limits in relation to RAC. The concentration charge is calculated on the five largest issuer positions only. The rules only apply to securities with a greater than 10% margin requirement.


• If the first highest loan value (sum of inventory & client margin positions) of the security of an issuer (or related group) exceeds 2/3 of RAC (before concentration charge and minimum capital), a concentration charge of 150% of the excess is levied.


• If the second, third, fourth or fifth highest loan value of securities of an issuer (or related group) exceeds half of RAC (before concentration amount and minimum capital), a concentration charge of 150% of the excess is levied against the dealer member.


DMs have five business days to correct any situation relating to over-concentration before they must provide funds for the concentration charge.


Final RAC should be > = o. DMs have 24 hours to correct the a RAC deficiency or face suspension of membership.


Early Warning System - includes capital, liquidity, profitability and frequency tests. It anticipates capital shortages and liquidity problems and is designed to encourage dealer members to build a capital cushion.




1. Early warning excess (EWE)

          RAC ± Liquidity and Contingency Items = EWE


2. Early warning reserve (EWR)

           EWE – Capital Cushion = EWR


If EWE < 0, early warning Level 2.


For EWR, the capital cushion to be deducted from the EWE is 5% of the total margin required.


EWR measures the firm’s ability to absorb a material increase in its total margin requirements and to assess the impact on EWE.


If EWR < 0, early warning Level 1.


Triggers and Sanctions


The system focuses on three important aspects: profitability, capital and liquidity.


Level 1 triggers:

- P/L: current month’s loss 6x >  RAC


- Capital: RAC < 5% of margin required


- Liquidity: EWR < 0.


Level 1 sanctions:


• Early filing of monthly financial report


• Written explanation from the CEO and CFO and description of resolution, with a copy to the firm’s auditor and to CIPF


• On-site visit by IIROC to review procedures and adequacy for monitoring and reporting daily capital


• No reductions of capital, repayment of subordinated debt without IIROC approval, no payment of dividends


• No payment can be made, directly or indirectly, by way of loan, advance, or bonus to any director, officer, partner, shareholder, related company, affiliate or associate


• No increase in non-allowable assets unless a prior binding commitment to do so exists


Level 2 triggers:


- P/L - if 3x loss > RAC


- Capital: RAC < 2% of margin required


- Liquidity: EWE < 0.


- Frequency: A DM on EW 3x in any 6 month period.


Level 2 sanctions:


 • Sanctions in Level 1 continue to apply


• Weekly capital reporting


• Dealer member to complete a business plan explaining how it will rectify early warning



• Special customer security custody reporting


• Reduction in allowable free credit segregation limit


• Potential payment for special examination or monitoring deemed necessary by IIROC


• Potential prohibition, at IIROC’s discretion, against opening any new branch offices, hiring any new registered representative or investment representative, opening any new customer accounts or changing in any material respect the inventory positions of the dealer member


Dealer members are required to file capital-related reports with IIROC on a monthly and annual basis.


Margin is designed to be at a rate that reflects the potential loss on liquidation of the assets to which the margin requirements are applied.


Any loan made to bolster RAC must be subordinated.



12. Consequences of Noncompliance


Client complaint prevention measures include appropriate policies and procedures, education of staff and registrants, monitoring of all personnel and periodic detailed reviews.


Types of Client Complaints


• Service issues: typically about fees and commissions and about issues such as

unreturned phone calls.


• Administrative issues: errors in client records, which should be resolved by head office administrative staff.


• Performance issues: when clients are unhappy with the performance of their portfolio.


• Trading disputes: arise from a difference of opinion as to instructions given about a specific transaction.


• Regulatory contraventions:  issues such as churning, unauthorized trading, unsuitable recommendations, or misappropriation of funds. A regulatory contravention that stems from poor judgment, such as an unsuitable recommendation, rather than conscious misconduct, may still result in the same degree of civil and regulatory liability.


RR duties:

•Maintain accurate and up-to-date KYC documentation.


• Comply with and enforce rules and policies.

• Deal fairly, honestly and in good faith with clients.

• Avoid conflicts of interest with clients.

• Provide accurate information and reasonable advice.

• Make and file accurate notes of client conversations.

• Obtain clear instructions and carry them out properly.

• Determine the suitability of each transaction.

• Monitor changes in circumstances that may affect suitability.

• Make reasonable efforts to advise clients when a requested transaction is unsuitable.

• Identify clients who complain frequently.

• Maintain regular and frequent contact with all clients.


All complaints must be referred to a supervisor.


Management can reduce client complaints by making sure that the following responsibilities are carried out:

• Use appropriate due diligence when hiring.


• Proper training and resources.


• RRs must communicate regularly with clients and review accounts periodically, not just when doing a trade.


• Management must initiate and maintain a program of contact with clients.


• Management must deal decisively with RRs who receive repeat complaints.


Must appoint a Designated Complaints Officer. Can be the UDP.


Need written procedures that clients can access.


Alleged misconduct may include, but is not limited to, allegations of breach of confidentiality, theft, fraud, misappropriation or misuse of funds or securities, forgery, unsuitable investments, misrepresentation, unauthorized trading relating to the client’s accounts, other inappropriate financial dealings with clients, or engaging in securities-related activities outside of the dealer member.


Responding to complaints:

• The acknowledgement letter must be sent to a client within five business days of receipt of a complaint.


• The response letter must be accompanied by the IIROC-approved complaint handling process brochure and be sent to a client as soon as possible, but no later than 90 calendar days from the date of receipt by the firm.


• The dealer member is obligated to advise a client in cases where a final response will not be sent within the stated timeline. It must also contact IIROC through ComSet with an explanation for the delay.


Keep complaints filed for 7 years.


The decision to not commence an investigation, and the reason for not doing so, must be fully documented and maintained.


Dealer members should maintain adequate records of any internal investigation and resolution and report them to IIROC. As part of an internal investigation, dealer members must review and amend their policies and procedures as required and keep adequate records.


DMs may be penalized if they fail to take the following actions:

• Adopt and periodically revise adequate policies and procedures.


• Adequately conduct an internal investigation, review or audit where required by legislation

or the dealer member’s policies and procedures.


• Follow up by taking appropriate internal disciplinary action.


• Keep adequate records regarding an investigation, follow-up and consequences.


Provisions for whistleblowers must be in place.


Requirements for internal dealer member investigations:


The following offenses are subject to such investigations:

•Theft or fraud

• Misappropriation of funds or securities

• Forgery

• Money laundering or terrorist financing

• Market manipulation or Insider trading

• Misrepresentation

• Unauthorized or discretionary trading


Dealer members must keep detailed records of internal investigations that show the cause, steps taken, and results. They must maintain the records for a minimum of two years from the date the internal investigation is completed.


The following incidents may trigger an IIROC review to determine whether a regulatory violation has occurred:

• Irregularities in the results of monitoring processes

• Receipt of information provided by another regulatory body or law enforcement agency

• Self-reporting

• Complaint


After assessing the materials provided and other information, IIROC will make one of the following determinations:

• Close the matter without action.


• Close the matter and take no formal disciplinary action, but issue a cautionary letter.


• Refer the matter to IIROC’s Investigation Department to conduct a detailed and formal investigation. Results: No further action, warming, enforcement disciplinary action.


Warning letters are expressions of staff opinion only and not a formal finding. They do not have to be disclosed on the NRD.


It is IIROC policy to attempt to reach a negotiated settlement of the allegations and penalties with the respondent before starting disciplinary proceedings.


Hearing process: Contested hearings are initiated by the issuance of a Notice of Hearing and statement of allegations by IIROC.


Usually, IIROC can impose penalties and remedies only after a hearing has been held. However, if it is necessary for the protection of the public interest, IIROC can restrict, suspend or revoke a respondent’s access to the marketplace, without a hearing by issuing a temporary order before the hearing starts.


Sanctions:  for approved persons and DMs


Fines < $5M or 3x the offence, whichever is greater, suspension, revocation, prohibition.


Remedies that may be imposed - consultant, more supervision, requalification, more compliance.


Civil proceedings - for economic settlements.


Privileged docs - cannot be subpeonad. Can be withheld from adverse parties, regulators, clients (in the course of investigating a complaint) and judges.