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Investor Protection FAQ's

In Canada, the various provincial governments have the last word on investor protection. Each province has a securities commission or administrator that oversees a provincial securities act. This act is a set of laws and regulations that outline what players in the market can and cannot do.

All the securities acts are based on the principle of full and plain disclosure. Any information that will affect investors must be available to all investors in a timely fashion. Usually, the onus is on the issuer to disperse information. However, just because a company meets a regulator's requirements for disclosure does not mean its securities have investment merit. Potential investors should keep this in mind.

Securities commissions also require registration of all organizations and sales staff involved in the investment business. There are different categories of registration – investment dealer, registered investment advisor, mutual fund salesperson and so on. Before registration is allowed, basic standards must be met. These include minimum capital requirements for a firm and minimum educational qualifications for personnel.

The Acts also specify broader responsibilities for investment advisors and their relationships with clients. They are obliged to deal fairly, honestly and in good faith with clients.

The various securities administrations have many of the powers of the courts. They can investigate, undertake prosecutions for violations of the Acts, carry out hearings, and compel the attendance of witnesses. They can take evidence, seize documents, and freeze funds or securities. They cannot compel money to be paid back nor interfere in internal disputes of company shareholders.

However, they can suspend registrations and order trading in a security to cease. Sometimes, the regulator can prevent appointments to the boards of public companies. They can give public reprimands and levy fines. They can also recommend that a charge be laid in the criminal or civil courts.

Because securities regulation is a provincial matter, the various Canadian securities commissions and administrators have formed a national group to work towards making securities regulations compatible across Canada. This group is called the Canadian Securities Administrators (CSA). From time to time, this group issues national or provincial policies. One national policy on shareholder communication ensures that all shareholders who wish to receive company information such as annual reports.

Some people say that self-regulation is a bit like the fox guarding the henhouse. However, all regulatory responsibilities are carried out under the watchful eye of provincial regulators. Every by-law and rule created by an SRO and every single complaint is reviewed by the securities administrators. This ensures that the public interest is paramount. In addition, public governors sit on the Boards of all the SROs to monitor the public interest.

The Canadian securities industry, as with most professional bodies, highly values its self-regulatory status. Being able to regulate yourself is a privilege that must be earned every day. If the industry did not take this responsibility seriously, the privilege would be quickly lost. The industry understands that creating a system to serve only its own interests could not survive. Governments would step in. Serving the public interest is, in fact, in the best long-term interest of the industry.

Self-regulation also has real advantages for the public at large. For one, it is much less costly than a government bureaucracy. Right now the industry shoulders the very high cost of regulation and compliance. If it didn't pay the bill, the taxpayer would have to. Secondly, it works better. Those who know the markets are more able to make practical rules and are more aware of potential loopholes and compliance problems. In turn, the industry is more likely to comply with rules of its own making.

Some people will always be suspicious of self-regulation. Yet it has worked remarkably well in providing sound and cost-effective regulation in the Canadian securities markets.

SROs have two major responsibilities: to oversee the markets and to oversee the brokers and investment dealers who operate in the respective markets.

They do that in a variety of ways. First of all, they create standards that participants must meet prior to employment. They also create rules governing how the markets must operate and extensively investigate suspected infractions. And, they audit brokerage firms and dealers on a regular basis to ensure firms are solvent and following all the rules.

Not exactly. IIROC monitors the bond and money markets while each of the stock exchanges looks after its own market, be it for stocks, options, futures or all three! They do similar work, especially in the area of member regulation. In this area, there is some overlap of responsibilities as an investment dealer is often a member of both IIROC and the stock exchanges. All the SROs employ investigators and compliance officers to ensure the dealer community is meeting standards.

The market regulation area is more likely to be different at each SRO, reflecting the different kinds of markets each oversees. Stock markets are listed markets, often with direct public participation. Stock exchanges spend a great deal of time qualifying companies before they can be listed and in monitoring stock performance. Price performance in equities is very closely linked to the day-to-day life and performance of the company that issued the stock. To make sure these markets are fair, stock exchanges set rules to ensure material company information gets out to shareholders so that everyone trades on an equal footing. They can stop trading in the market to make sure that happens. Stock exchanges have many other rules to make the market more open and fair.

The bond market, however, is an unlisted market, generally for professionals. That does not mean that the market is regulated less strictly. Companies that are active in the bond markets must provide regular disclosure in addition to the extensive disclosure required before a new issue. The focus, however, is on ensuring visibility, fair access, and honest prices among dealers so that the investing public who are buying and selling in the bond and money markets can benefit.

Every firm that is a member of an SRO binds itself to follow the rules and regulations of the SRO upon qualifying for membership. Every investment dealer has a senior-level compliance department. This area's task is to make sure the rules and by-laws are followed in letter and spirit, compliance is also responsible for filing regular financial and operational reports to the SROs to provide an early warning system for problems.

The SROs work with compliance departments and monitor all reports. In addition, all brokers and dealers must submit to at least one audit a year, one surprise visit and one surprise financial questionnaire. When they belong to more than one SRO, they can choose which SRO will do the audit and the questionnaire.

For one thing, every member must maintain adequate capital in accordance with the nature and volume of business it conducts. If it falls below this level, the SRO can require action to correct the deficiency or to suspend the member's trading privileges. The SROs might also be looking to see that customers' fully paid-for securities are kept apart.

The SROs also employ staff who investigate complaints and infractions. The stock exchanges and IIROC have the authority to prosecute individuals who are suspected of wrongdoing and to exact penalties in the form of fines or suspensions.

Over 200 years ago in Britain, investors happily bought shares in a company whose product was "yet to be revealed" – even to itself! Today, companies like this would be drummed out of business. But lots of perfectly legitimate companies offer little more than promise. Should these companies be allowed to sell shares to the public?

One of the biggest challenges facing regulators and stock exchanges is how to strike a balance between protecting investors and ensuring valid ventures have access to capital. The company that shows little more than promise today may deliver results tomorrow. Or, it could go out of business. If a stock exchange sets too stringent listing standards to help protect investors from potential business failures, a growing venture may never get off the ground.

The industry has responded with variable listing standards. The TSX Venture Exchange, for example, has standards that are more likely to encourage companies that are brand-new. The more senior exchanges are the Toronto Stock Exchange and the Montreal Exchange and stocks here tend to have been around for a while. If you are looking for a stock on the venture capital exchanges, be very aware that the company may have no track record. That means it's going to be risky. If the stock is not listed anywhere, you have even less knowledge or reassurance. Look closely at the prospectus and be prudent!

Over and above setting listing standards, all exchanges in Canada require listed companies to disclose full information to shareholders and potential shareholders. This includes prospectus-type information for new issues as well as a requirement for continuous disclosure. If anything new happens that will affect the company's business, the company is obliged to release that information widely so all investors have access to it.

The industry believes that full, plain and true ongoing disclosure is good preventative medicine. It won't stop companies from going under, but it might stop you from sinking, too!

The industry has made headway in ensuring equal treatment for all investors. For example, it was often said that investors who owned non-voting shares were disadvantaged, not just through restricted voting rights but also if the company was being taken over. Common shares with restricted voting rights still exist, although they are unpopular and must be clearly identified as non-voting shares. Most companies now provide a coat-tail provision that gives non-voting shareholders a chance to take part in any special deals that are offered for the shares in a takeover.

Insider trading is carefully regulated. Insiders are those who have special access to information about a company that is not generally known and would affect the price of its securities. Anyone who is defined as an insider by the securities commissions has to report any trading in the security. It is illegal for advisors, investors, and anyone party to inside information to act on it.

Yes. The securities industry is regulated to ensure that all firms have enough capital for the business that they do. All firms that are members of an SRO must meet capital and liquidity requirements on an ongoing basis.* If a company suddenly can't meet the test, industry regulators are immediately alerted to the problem. The company must prove that it can meet the capital and liquidity requirements and show what action has been taken to ensure that this takes place quickly. Even if the worst happens and the firm becomes insolvent, your cash and securities must be returned to you by the receiver or trustee. If there is a shortfall and your account was with a member of one of the Self-Regulatory Organizations, your account is protected by the Canadian Investor Protection Fund.

Because of this system, you are just as safe with a small broker as a large one.

*In Quebec, the provincial securities commission monitors capital and liquidity requirements.

Credential is covered by CIPF insurance which provides up to $1 million dollars coverage per separate account. Visit CIPF.CA for specific coverage details. GIC's are also covered by CDIC insurance of $100,000 per GIC issuer.

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