## _cr1473 - INTRODUCTION AND SCOPE ## Source details **Canonical URL:** [_cr1473 - INTRODUCTION AND SCOPE](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1473.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1473.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1473.pdf.json) --- ### SUMMARY — Key findings and recommendations - Assessment type and scope - Assessment conducted under the methodology for targeted assessments; full assessment conducted in 2007 based on IOSCO 2003 methodology. - Due diligence covered principles 1, 2, 3, 6, 7, 8, 9, 12, 19, 20, 22, 23, 24, 28, 29, 30, 31, 32, 34, and 35 in their entirety; principles 25 and 37 partially reassessed. - Remaining principles carried forward from 2007 descriptions. - Overall evaluation - Canadian framework demonstrates a high level of implementation of the IOSCO Principles. - Provincial securities regulatory agencies possess broad powers; enforcement powers of largest provincial regulators considered leading practices. - High degree of harmonization among provincial regulators and coordination efforts; robust supervision arrangements for many market participant categories. - Main challenges and recommended areas for further action - Stronger coordination - Multiple regulatory agencies and SROs supervise components of securities markets, complicating a “full” view of risks. - Coordination arrangements should be strengthened to ensure two-way communication. - Additional capacity in specialist areas - Four agencies face resource challenges from increased market complexity; started hiring staff with trading, product manufacturing experience, market experience, and economists. - More robust use of quantitative analysis - Collection and use of quantitative data varies; right type of data should be collected uniformly and made available for analysis to provincial regulators and the CSA Committee on Risk. - Increased on-site inspection activity - Authorities should consider measures to increase the number of on-site inspections and refine risk-based approach. - Enforcement and criminal prosecution - Criminal enforcement results mixed and visible mainly in some largest provinces; egregious conduct should be prosecuted by criminal authorities when exceptional powers required. - SROs have strengthened enforcement strategies, particularly compliance reviews. - Timeliness of policy decision-making - Consensus-based governance arrangements may affect timeliness; regulators should ensure timely policy formulation. ### INTRODUCTION AND SCOPE — Assessment design and methodology - Mission and timing - Targeted assessment of the Canadian Securities Market conducted June 3–28, 2013 by Ana Carvajal, Monetary and Capital Markets Department. - Rationale for targeted approach - Canada met minimum threshold for targeted assessment given 2007 full assessment; due diligence informed scope and led to full coverage of listed principles and partial reassessment of principles 25 and 37. - Basis and standards used - Assessment conducted using the IOSCO Principles and Objectives of Securities Regulation approved in 2010 and Methodology adopted in 2011. - Principle 38 not assessed because covered under Principles for Financial Market Infrastructure; issues related to CDCC as an SRO not covered. - Due diligence considerations - Considered: (i) risks and vulnerabilities of Canadian securities markets, (ii) regulatory developments since 2007, (iii) areas with deficiencies in 2007, (iv) new IOSCO emphases, (v) crisis lessons on robustness and supervision intensity. - Assessors examined licensing, off-site monitoring, on-site inspection programs, follow-up on findings, and use of enforcement actions. - Evidence base and engagements - Relied on self-assessment and market data reports by OSC, AMF, BCSC and ASC; review of national instruments, laws, registration, inspection and enforcement files; meetings with OSC, AMF, BCSC, ASC, CSA Secretariat, Finance Canada; SROs (IIROC, MFDA, CSF, MX), CIPF, market participants, auditing firms, CRAs and law firms. - Geographic and institutional focus - Primary focus on four largest provinces: Ontario, Québec, British Columbia and Alberta, which comprise roughly 95 percent of Canadian securities market activity. ### DESCRIPTION OF REGULATORY STRUCTURE AND PRACTICES — Institutional arrangements and harmonization - Federal-provincial structure - Securities markets in Canada regulated at provincial level; 13 regulatory authorities each administer separate securities laws and regulations. - Underlying objectives common: protection of investors and ensuring fair, efficient capital markets. - Variation across provincial regulators - Four largest provinces—Alberta, British Columbia, Ontario and Québec—supervise roughly 95 percent of the market and are operationally independent and self-funded by levies on market participants. - Comprehensive powers include rulemaking, registration, recognition, designation, supervision and enforcement authority, including quasi-criminal authority. - AMF adjudication carried out through an independent tribunal, the Bureau de Décision et de Révision (BDR). - Role of the CSA - CSA is a non-statutory association of provincial securities regulatory authorities to improve harmonization, coordination and streamlining. - Secretariat established in 2004 with 6 staff providing logistical support and managing national databases. - Harmonization initiatives and outstanding differences - CSA adopted 40 national instruments and multilateral instruments covering issuers, CIS, marketplaces and registrants. - Important differences remain in: enabling legislation for derivatives, certain prospectus exemptions, registration exemptions for EMDs in the northwest jurisdictions, and registration of non-resident IFMs. ### SUPERVISORY COORDINATION, PASSPORT AND PRINCIPAL REGULATOR APPROACH - Passport system and principal regulator - Passport implemented for issuers, CIS, securities intermediaries and CRAs; decision by principal regulator automatically extended to other provinces. - Ontario has not joined passport system; interface allows OSC decisions as principal regulator to be extended elsewhere. - Principal regulator approach applies to ongoing supervision including review of periodic filings and on-site inspections. - Coordination for SROs and exchanges - IIROC and MFDA coordinate based on principal regulator approach; exchanges use lead regulator approach. - Enforcement coordination tools: joint investigations, joint adjudications and reciprocal orders. - Committee system exists to coordinate topics and set national priorities. - CSA governance - Policy Coordination Committee (PCC) members are Chairs of eight regulators (British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia). - PCC oversees policy development, facilitates decision-making and provides recommendations to CSA Chairs. - CSA Secretariat permanent in Montréal; Secretariat has 6 staff. ### MARKET STRUCTURE — Equity, debt, derivatives, and ATS (key statistics) - Equity markets - Total market capitalization at end of 2012 nearly $2.2 trillion, or about 121 percent of GDP. - Four equity exchanges: TSX, TSXV, CNSX, Alpha. - TMX Group combined market capitalization $2.18 trillion and over 3,800 listed companies; TMX Group ranks eighth largest exchange group worldwide by market capitalization. - TSX: 1,567 listed companies; represents approximately 98 percent of total aggregate Canadian market capitalization. - TSXV: 2,257 listed companies; approximately 57 percent of TSXV listings operate in mining sector. - CNSX: total market capitalization $1.18 billion with 189 listed companies at end-2012. - Alpha Exchange: recognized April 2012; does not presently list issuers’ securities for trading. - Debt markets - Nominal value of total bonds outstanding at year-end 2011 just under $2.2 trillion (approximately 122 percent of GDP). - Corporate bonds total $631 billion; a little more than 50 percent issued by non-financial corporations. - Canadian chartered banks: bonds represent approximately 40 percent of their total assets. - Derivatives markets - Mexico (MX) is Canada’s financial derivatives exchange. - OTC derivatives concentrated among the big six Canadian banks; Canada accounts for US$18 trillion in OTC derivatives, or approximately 2.8 percent of the global market in 2012. - Alternative Trading Systems (ATS) - Seven ATS trading equity securities; three ATS trading debt securities; one securities lending ATS. - Dark pool activity peaked at 5.67 percent of volume traded in September 2012; declined to 1.73 percent as of December 2012. ### COLLECTIVE INVESTMENT SCHEMES (CIS), ETFs, HEDGE FUNDS — key statistics and trends - Investor distribution channels and advice - At end-2011, 91 percent of investment fund assets were acquired and held by investors through distribution channels involving an advisor. - Mutual funds - Mutual funds account for about 27 percent of total financial wealth in Canada. - As of December 2012, mutual fund industry AUM: $849.7 billion. - Since February 2009 mutual fund assets increased by $298.8 billion or 54 percent. - Total mutual fund net sales for 2012: $30.4 billion (2011: $21.2 billion). - ETFs - Quoted market value on the TSX of $56.4 billion from 265 funds listed in 2012 (2008: $19.4 billion from 77 funds). - ETFs accounted for 6 percent of total investment fund and managed fund assets at end-2012. - As of December 2012: leveraged and inverse ETFs ~2.5 percent of ETF assets; synthetic ETFs ~5 percent; physical replication ETFs 95 percent. - As of September 2012 approximately 58 percent of Canadian-listed ETF assets held by retail investors. - Hedge funds - Canadian hedge fund assets estimated at $31 billion; about 2 percent of global hedge fund industry (global estimate about $2.6 trillion in 2012). - In 2012, 275 hedge funds in Canada (including funds of funds); more than 80 percent have less than $100 million in AUM. ### INTERMEDIARIES AND MARKET PARTICIPANTS — structure and concentrations - Structure and registration - Specialized intermediaries required; banks and insurance companies provide securities services through subsidiaries. - Three main categories: dealers, advisers and IFMs. Dealer subcategories include investment dealers (IDs), mutual fund dealers (MFDs), scholarship plan dealers, exempt market dealers (EMDs) and restricted dealers. - IDs and MFDs must be members respectively of IIROC and MFDA, except mutual fund dealers in Québec (AMF oversight). - Registered firms (as of December 2012) - 1,498 active firms registered to carry out investment activities in Canada, of which 1,365 headquartered in Canada. - 202 registered firms are IIROC members; 119 are MFDA members. - 543 registered firms were IFMs. - Role of bank-owned subsidiaries and concentration - Six bank-owned dealers accounted for 93 percent of the revenue in Ontario of the top 10 firms. - As of December 2012, six bank-owned dealers accounted approximately for 80 percent of all trading volume. - Bank-owned asset management subsidiaries control 60 percent of AUM of the top 10 asset management firms and 27 percent of sector’s total AUM. - Subsidiaries of the six Canadian banks accounted for 92 percent of total number of sales representatives of IDs and 64 percent of sales representatives for MFDs. ### GENERAL PRECONDITIONS FOR EFFECTIVE SECURITIES REGULATION - Preconditions from 2007 remain: sound macroeconomic policies, appropriate legal/tax/accounting frameworks, modern contract and company law, high-quality accounting and auditing standards, oversight of auditing profession, alternative dispute resolution mechanisms and impartial judiciary. - IFRS implemented for issuers offering securities to the public; auditors must comply with International Auditing Standards. ### MAIN FINDINGS — principles and supervisory effectiveness (selected) - Regulator-related principles - Four regulatory agencies have high degree of independence and strong accountability; part-time commissioners can pose conflict of interest mitigated by selection processes and recusal obligations. - Progress in coordination under CSA; challenges remain on data availability and quantitative analysis for systemic risk. - High degree of transparency, public consultation, published policy statements and investor education carried forward from 2007. - SRO principles - SROs recognized based on eligibility criteria addressing financial viability, capacity, governance and fair access; supervision includes off-site reporting, on-site inspections and regular contact with regulators. - Governance evolution significant; some conflict of interest challenges persist. - Enforcement principles - Credible supervision with significant SRO role; adequate risk-based on-site inspection approach overall, enforcement significantly improved. - Material challenges remain with criminal law enforcement by government departments and law enforcement agencies. - Cooperation principles - Four largest agencies signatories of IOSCO MMoU; explicit and comprehensive powers to share information domestically and internationally. - Issuers and CIS principles - Issuers and publicly offered CIS subject to prospectus and continuous disclosure regimes aligned with IOSCO standards. - CIS operators subject to registration and fit-and-proper requirements; custody required for public CIS with safeguards for related-party custodians. ### DETAILED ASSESSMENTS — selected principle grades and findings - Principle 1 (Responsibilities of Regulator): BI — responsibilities clearly established; coordination needs strengthening. - Principle 2 (Independence and accountability): BI — robust independence; part-time commissioners potential conflict. - Principle 3 (Powers, resources and capacity): FI — robust powers; need for continued specialized hiring. - Principle 6 (Systemic risk): BI — methodology developed; analysis mostly qualitative; data availability challenge. - Principle 8 (Conflicts of interest): FI — important conflict areas identified; authorities analyzing actions (e.g., trailing commissions). - Principle 9 (Oversight of SROs): BI — strong oversight; governance issues remain. - Principle 12 (Enforcement): BI — enforcement improved; criminal enforcement mixed. - Principles 13–16, 17–21, 22, 23–31, 33–36: grades vary between FI and BI with detailed findings in the source text (examples preserved above). - Principle 38: Not assessed. ### KEY STATISTICS — regulator budgets, staffing, enforcement and filings (selected exact figures) - Regulator revenues and expenses (selected) - OSC 2012 $85,638,000 $90,025,000; 2011 $72,955,000 $84,047,000; 2010 $61,466,000 $79,450,000 - AMF 2012 $88,818,000 $84,140,000; 2011 $84,849,000 $105,957,000; 2010 $152,334,000 $84,953,000 - ASC 2012 $31,344,000 $31,688,000; 2011 $30,087,000 $32,413,000; 2010 $32,733,000 $28,392,000 - BCSC 2012 $36,872,000 $36,244,000; 2011 $34,889,000 $31,216,000; 2010 $31,409,000 $30,845,000 - IIROC 2012 $84,999,000 $92,662,000; 2011 $80,478,000 $77,402,000; 2010 $76,517,000 $72,741,000 - MFDA 2012 $30,700,000 $30,200,000; 2011 $29,400,000 $28,900,000; 2010 $25,200,000 $26,500,000 - Staffing (permanent employees, totals by regulator) - OSC: 2010 417; 2011 424; 2012 455 - AMF: 2010 366; 2011 378; 2012 406 - ASC: 2010 171; 2011 183; 2012 183 - BCSC: 2010 210; 2011 215; 2012 239 - Total (OSC + AMF + ASC + BCSC): 2010 1,164; 2011 1,200; 2012 1,283 - Aggregate securities regulation staff in 2012 (OSC + AMF + ASC + BCSC + IIROC + MFDA) = 1,876 staff. - Enforcement statistics (aggregate CSA enforcement 2012) - Investigations opened: 1,419 (Illegal Distribution 324; Misconduct by Registrants 109; Illegal Insider Trading 690; Disclosure Violations 14; Market Manipulation 91; Other Cases 191) - Investigations closed: 1,156 - Proceedings initiated: 447 - Cases concluded: 462 - Companies sanctioned: 336 - Persons sanctioned: 681 - Complaints (selected jurisdictions, annual totals) - Total complaints: 2008 4,594; 2009 5,280; 2010 4,739; 2011 4,947; 2012* 3,803; 5 years 23,363 ### RECOMMENDED ACTION PLAN — targeted recommendations (selected by principle) - Principle 1 - Continue addressing differences in derivatives, prospectus exemptions, EMD registration exemptions, and non-resident IFM registration to achieve further harmonization. - Foster convergence of supervisory practices; consider more frequent peer reviews. - Strengthen coordination among provincial regulators and SROs for a full view of risks; deepen coordination with other financial authorities including crisis management. - Ensure level playing field across investment products and pursue arrangements allowing timely decision making. - Principle 2 - Agencies with commission structures should consider internal policies restricting directors of issuers/registrants from sitting on agency boards. - Principle 3 - Continue hiring staff with specialized expertise. - Principle 6 - Deepen systemic risk framework with more quantitative analysis; devise a data and resources strategy; strengthen two-way communication with SROs. - Principle 12 - Build cooperative arrangements with criminal authorities; MFDA: ensure timely firm responses to compliance reviews; IIROC: strengthen nexus between compliance reviews and enforcement; use coordinated enforcement tools. - Principle 19 - Monitor CPAB’s enforcement tool usage; consider fines and improved transparency; improve information sharing between CPAB, audit committees and regulators; amend provincial laws to ensure legal protection and non-compellability for CPAB staff. - Principle 22 - Finalize implementation of on-site inspection program for DROs. - Principles 24 & 29 - Enhance use of on-site inspections, especially in largest provinces; consider explicit integrity and solvency requirements for shareholders and directors to enable refusal of unsuitable candidates; harmonize registration categories. - Principle 25 - Consider extending custody requirements to all CIS (custodian requirement for CIS offered to public already implemented). - Principle 30 - Strengthen prudential framework governing use of un-invested client cash. - Principle 32 - Institutionalize crisis management arrangements with specific protocol and simulation exercises; include OSFI for largest IDs; work toward implementing portability requirements. - Principle 34 - Continue development of automated cross-market surveillance systems. - Principle 35 - Review additional transparency needs in government debt market; coordinate with IIROC to review minimum size for dark orders; consider expanding post-trade transparency in corporate and government bond markets. ### REGULATORS’ RESPONSE — summary - Regulators welcome the IMF review and recognition that Canadian framework demonstrates a high level of IOSCO implementation. - Regulators state on-site inspection program based on comprehensive risk-based model is appropriate and will be continuously assessed; believe current level of on-site inspections is appropriate. - Regulators acknowledge progress in enforcement and continue cooperation with criminal authorities; note criminal cases are prosecuted. - Regulators emphasize harmonization is strong but allow jurisdictional tailoring where beneficial; will continue to assess regulatory requirements for Portfolio Managers and Exempt Market Dealers and to consider IMF recommendations in ongoing projects. - Regulators thanked IMF assessor for professional engagement. *Source: _cr1473 - INTRODUCTION AND SCOPE (IMF staff report excerpts provided in the content unit).* ### INTRODUCTION AND SCOPE ____________________________________________________________________ 7 ### _cr1473 - INTRODUCTION AND SCOPE ____________________________________________________________________ 7 ### SUMMARY — Key findings and recommendations - Assessment type and scope: - This assessment was conducted under the methodology for targeted assessments. - A full assessment was conducted in 2007 based on the methodology approved by IOSCO in 2003. - Based on due diligence the assessment covered principles 1, 2, 3, 6, 7, 8, 9, 12, 19, 20, 22, 23, 24, 28, 29, 30, 31, 32, 34, and 35 in their entirety while principles 25 and 37 were partially reassessed. - Nothing in the due diligence suggested the need to reassess the remaining principles. - Overall evaluation: - The Canadian framework demonstrates a high level of implementation of the IOSCO Principles. - Provincial securities regulatory agencies have broad powers, and in areas such as enforcement powers these could be considered leading practices. - Provincial regulators have increasingly achieved a high degree of harmonization of their regulatory frameworks and have made significant efforts to coordinate, streamline processes and procedures, and achieve convergence in supervisory practices. - Robust arrangements exist for the supervision of many categories of market participants, and use of enforcement powers by the largest provincial regulators has been strengthened significantly. - Main challenges and recommended areas for further action: - Stronger coordination: - Multiple regulatory agencies and SROs supervise different components of the securities markets, making it challenging to have a “full” view of risks. - Existing coordination arrangements should be further strengthened to ensure two-way communication. - Additional capacity in specialist areas: - The four agencies face resource challenges arising from increased market complexity. - Agencies have started to add staff with trading and product manufacturing experience, market experience, and economists to better understand risks. - More robust use of quantitative analysis: - Collection and use of quantitative data varies across agencies; the right type of data should be collected uniformly and consistently and made available for analysis to provincial regulators and the CSA Committee on Risk. - Increased on-site inspection activity: - On-site inspections are key for early detection of poor practices and weaknesses in internal controls and risk management. - Authorities should consider measures to increase the number of on-site inspections and refine their risk-based approach. - Enforcement and criminal prosecution: - Use of enforcement powers in connection with criminal offenses remains a challenge; results in criminal enforcement are mixed and visible mainly in some of the largest provinces. - Cases involving the most egregious conduct (e.g., boiler rooms, major frauds, repeat offenders) should be prosecuted by criminal authorities because some investigatory and exceptional powers are only available to those authorities. - The SROs have strengthened enforcement strategies, particularly in connection with compliance reviews, and such efforts should continue. - Timeliness of policy decision-making: - Current governance arrangements based on consensus-building across several entities may affect timeliness of decision making; regulators should continue efforts to ensure timely policy formulation. ### INTRODUCTION AND SCOPE — Assessment design and methodology - Mission and timing: - A targeted assessment of the Canadian Securities Market was conducted June 3–28, 2013, as part of the Financial Sector Assessment Program by Ana Carvajal, Monetary and Capital Markets Department. - Rationale for targeted approach: - Canada met the minimum threshold for a targeted assessment given the 2007 full assessment. - Due diligence informed the scope and led to full coverage of the listed principles and partial reassessment of principles 25 and 37. - The guidance for targeted assessments requires carrying over descriptions of principles not reassessed to provide a complete view. - Basis and standards used: - The assessment was conducted using the IOSCO Principles and Objectives of Securities Regulation approved in 2010 and its Methodology adopted in 2011. - Principle 38 was not assessed because it is covered under the Principles for Financial Market Infrastructure; issues related to CDCC as an SRO are not covered in this assessment. - Due diligence considerations: - Due diligence considered: (i) risks and vulnerabilities of the securities markets in Canada, (ii) regulatory developments since 2007, (iii) areas with deficiencies in 2007, (iv) new areas of emphasis in the IOSCO Principles and Methodology, and (v) lessons from the crisis emphasizing robustness of regulation and intensity of supervision. - Assessors were required to examine licensing, off-site monitoring, on-site inspection programs, follow-up on findings, and the use of enforcement actions. - Evidence base and engagements: - The assessor relied on: (i) a self-assessment and a report on market data prepared by OSC, AMF, BCSC and ASC; (ii) review of national instruments, laws, regulations, registration, inspection and enforcement files; (iii) meetings with leadership and staff of OSC, AMF, BCSC, ASC, CSA Secretariat, and representatives of Finance Canada; (iv) meetings with SROs (IIROC, MFDA, CSF, MX), CIPF, market participants, auditing firms, credit rating agencies and law firms. - Geographic and institutional focus: - The assessment primarily analyzed the regulatory framework and supervisory practices of the four largest provinces: Ontario, Québec, British Columbia and Alberta, which comprise roughly 95 percent of the activity of the Canadian securities market. - The assessor judged this focus reasonable given harmonization via national instruments and the practical challenges of assessing 13 separate frameworks. - Where relevant, distinctions in legal or regulatory frameworks and practices of specific agencies are mentioned as examples. ### DESCRIPTION OF REGULATORY STRUCTURE AND PRACTICES — Institutional arrangements and harmonization - Federal-provincial structure: - Securities markets in Canada are under a system of provincial regulation and supervision. - There are 13 regulatory authorities each administering a separate set of securities laws and regulations. - Securities legislation in all provinces and territories share the same underlying objectives: the protection of investors and ensuring fair, efficient capital markets. - Specific regulations and powers can differ by province, although a high degree of harmonization exists. - Variation across provincial regulators: - The nature, structure, resources and powers of provincial regulators vary. - In the smallest provinces a regulator might still be part of government, funded by it and with limited resources. - The four largest provinces—Alberta, British Columbia, Ontario and Québec—roughly supervise 95 percent of the market. - These four regulators are operationally independent and fully self-funded by levies imposed on market participants. - They have comprehensive powers including rulemaking, registration, recognition, designation, supervision and enforcement authority, including quasi-criminal authority. - In the case of the AMF, adjudication of administrative cases is carried out through an independent tribunal, the Bureau de Décision et de Révision (BDR). - Role of the CSA: - Under the umbrella of the CSA, provincial regulators seek to harmonize laws and coordinate supervisory and enforcement activities. - The CSA is a non-statutory association bringing together all Canadian securities regulatory authorities to improve regulation and supervision. - A Secretariat, located in Montreal, was established in 2004 and currently has 6 staff in charge of providing logistical support to CSA committees and managing national databases. - Harmonization initiatives and outstanding differences: - The CSA has adopted 40 national instruments and multilateral instruments covering issuers, CIS, market places and registrants. - Most aspects of securities regulation have been harmonized according to authorities and market participants. - Important differences remain in: enabling legislation for derivatives, certain prospectus exemptions, registration exemptions for EMDs in the northwest jurisdictions, and registration of non-resident Investment Fund Managers (IFMs). *Source: _cr1473 - INTRODUCTION AND SCOPE ____________________________________________________________________ 7* ### 17. On the supervisory front, different initiatives have been implemented to eliminate ### _cr1473 - 17. On the supervisory front, different initiatives have been implemented to eliminate ### Supervisory coordination and passport/principal regulator approach - A passport system has been implemented for issuers, CIS, securities intermediaries and credit rating agencies (CRAs): a decision to issue a receipt or a registration/designation decision taken by the principal regulator (usually the regulator of the province where the issuer/CIS/securities firm/CRA is domiciled) is automatically extended to the other provinces. - Ontario has not joined the passport system; provinces created an interface whereby decisions taken by the OSC as the principal regulator are automatically extended in the rest of the provinces. - Where Ontario is not the principal regulator, the principal regulator acts as the liaison with the issuer/CIS/securities intermediary/CRA so the system functions as a single “window” vis-à-vis the participant. - The principal regulator approach applies to ongoing supervision, including: - review of periodic filings, and - on-site inspections. - Coordination for SROs: - IIROC and MFDA: coordination based on a principal regulator approach (one regulator acts as coordinator on behalf of all regulators). - Exchanges: coordination based on a lead regulator approach (one regulator recognizes the exchange, others grant exemptions). - Enforcement coordination tools used: joint investigations, joint adjudications and reciprocal orders. - A system of committees provides a forum to coordinate and discuss topics, including novel issues, and to set up national priorities. ### Market structure — Equity, debt, derivatives, and ATS - Equity markets: - Total market capitalization of the Canadian equity market at the end of 2012 was nearly $2.2 trillion, or about 121 percent of GDP. - Four equity exchanges in Canada: TSX, TSXV, Canadian National Stock Exchange (CNSX), and Alpha Exchange Inc. (Alpha). - TMX Group (TSX and TSXV) combined market capitalization of $2.18 trillion and over 3,800 listed companies; TMX Group is the eighth largest exchange group worldwide by market capitalization. - TSX: 1,567 listed companies; represents approximately 98 percent of total aggregate Canadian market capitalization. - TSXV: 2,257 listed companies; approximately 57 percent of listed companies on the TSXV operate in the mining sector. - CNSX: total market capitalization of equity listings was $1.18 billion with 189 listed companies at end-2012; operates Pure Trading facility. - Alpha Exchange: recognized as an exchange in April 2012; does not presently list issuers’ securities for trading. - Debt markets: - Nominal value of total bonds outstanding at year-end 2011 amounted to just under $2.2 trillion (approximately 122 percent of GDP, both in local and foreign currency). - Corporate bonds: $631 billion; a little more than 50 percent issued by non-financial corporations. - Canadian chartered banks: bonds represent approximately 40 percent of their total assets. - Derivatives markets: - MX: Canada’s financial derivatives exchange, listing equity, currency, index and interest rate derivatives. - OTC derivatives: concentrated among the big six Canadian banks; majority of transactions by Canadian market participants are with foreign counterparties. - Canada accounts for US$18 trillion in OTC derivatives, or approximately 2.8 percent of the global market in 2012; interest rate swaps and foreign exchange contracts are the dominant products. - NGX: largest energy exchange based in Calgary; offers physical spot and forward natural gas and crude oil contracts deliverable in Canada and the U.S., and financial natural gas and electricity derivatives contracts. - ICE Futures Canada: agricultural exchange offering futures and options contracts for the Canola contract. - Alternative Trading Systems (ATS): - Seven ATS trading equity securities in Canada; three ATS trading debt securities; one securities lending ATS. - Equity ATS listed: Bloomberg Tradebook Canada, Chi-X Canada / CX2 Canada, Equilend Canada, Instinet Canada, Liquidnet Canada, MATCH Now (operated by TriAct), Omega ATS, TMX Select. - Debt ATS listed: CanDeal, CBID, Cross (ICX), MarketAxess. - Securities Lending ATS listed: Equilend Canada. - Dark pool activity: peaked at 5.67 percent of volume traded in September 2012; declined to 1.73 percent as of December 2012 (decline attributed to regulatory changes mandating minimum price improvement for dark trades and giving priority to lit orders at the same price on the same marketplace). - ATS have grown in number and significantly increased their share of trading volume in the last decade. ### Collective Investment Schemes (CIS), ETFs, and hedge funds - Investor distribution channels and advice: - At the end of 2011, 91 percent of investment fund assets were acquired and held by investors through distribution channels involving the intermediation of an advisor. - Mutual funds: - Mutual funds account for about 27 percent of total financial wealth in Canada. - As of December 2012, mutual fund industry AUM: $849.7 billion. - Since February 2009 (the crisis low point), mutual fund assets increased by $298.8 billion or 54 percent. - Total mutual fund net sales for 2012: $30.4 billion (up from $21.2 billion in 2011). - Annual long-term fund sales in 2012 were the highest since 1997. - Post-GFC shift from equity funds to balanced and fixed income funds; money market funds decline due to lower yields relative to alternatives. - ETFs: - Quoted market value on the TSX of $56.4 billion from 265 funds listed in 2012 (up from $19.4 billion from 77 funds in 2008). - At the end of 2012, ETFs accounted for 6 percent of total investment fund and managed fund assets. - As of December 2012: - leveraged and inverse ETFs constituted approximately 2.5 percent of all ETF assets; - synthetic ETFs held approximately 5 percent and physical replication ETFs held 95 percent of total ETF assets under management. - As of September 2012, approximately 58 percent of Canadian-listed ETF assets were held by retail investors. - Canadian retail investors also held $10.1 billion in U.S. listed ETFs, representing 16 percent of all ETF investment by Canadians at September 2012. - Hedge funds: - Canadian hedge fund assets estimated at $31 billion; about 2 percent of the global hedge fund industry (global estimate about $2.6 trillion in 2012). - In 2012, 275 hedge funds in Canada (including funds of funds). - Hedge funds in Canada are about 4 percent of the total size of mutual funds. - More than 80 percent of hedge funds have less than $100 million in AUM. - The hedge fund industry is concentrated within a few firms. ### Intermediaries and market participants - Structure and registration: - Specialized securities intermediaries required; banks and insurance companies must provide securities market services through a subsidiary. - Three main categories: dealers, advisers and investment fund managers (IFMs). - Dealer subcategories: investment dealers (IDs), mutual fund dealers (MFDs), scholarship plans dealers, exempted market dealers and restricted dealers. - IDs and MFDs must be members respectively of IIROC and MFDA, except mutual fund dealers in Québec (oversight by the AMF). - Registered firms (as of December 2012): - 1,498 active firms registered to carry out investment activities in Canada, of which 1,365 headquartered in Canada. - 202 registered firms are IIROC members; 119 are MFDA members. - 543 registered firms were IFMs. - Role of bank-owned subsidiaries and concentration: - The six bank-owned dealers accounted for 93 percent of the revenue in Ontario of the top 10 firms. - As of December 2012, the six bank-owned dealers accounted approximately for 80 percent of all trading volume. - Canadian bank-owned asset management subsidiaries control 60 percent of AUM of the top 10 asset management firms and 27 percent of the sector’s total AUM. - Subsidiaries of the six Canadian banks accounted for 92 percent of the total number of sales representatives of IDs and 64 percent of the sales representatives for MFDs. ### General preconditions for effective securities regulation - Preconditions from the 2007 assessment remain noted (not reassessed): - Sound macroeconomic policies, appropriate legal, tax and accounting frameworks, and absence of entry barriers to the market. - Existence of modern contract and company law at the provincial level. - Accounting and auditing standards of high international quality; IFRS implemented for issuers that offer securities to the public; auditors must comply with the International Auditing Standards. - System of oversight of the auditing profession in place. - Alternative dispute resolution mechanisms and an impartial judiciary. ### Main findings (principles and supervisory effectiveness) - Principles related to the regulator: - Four regulatory agencies have a high degree of independence from government and strong accountability. - Existence of part-time commissioners can pose conflict of interest; mitigated by provincial selection processes and obligations to recuse on conflicted decisions. - Under the CSA, provincial regulators have made significant progress in coordination and ensuring a level playing field; a few challenges remain. - Progress made on arrangements to identify emerging and systemic risk; availability of data and use of quantitative analysis remain challenges. - Regulators are aware of key conflicts of interest in the market and are reviewing actions to address them. - Carry from 2007: high degree of transparency, public consultation on regulations, published policy statements, codified ethics code, reporting obligations, active investor education. - Principles for SROs: - SROs recognized based on eligibility criteria addressing financial viability, capacity, governance, and fair access. - Supervision includes off-site reporting, on-site inspections, regular meetings and close contact with SRO staff. - Governance evolution in SROs significant; some conflict of interest challenges remain. - Principles for enforcement: - Canada has a credible supervision system with significant SRO role; includes offsite monitoring and on-site inspections. - Adequate risk-based approach to on-site inspections overall; in agencies with largest populations this has led to more focused use of on-site inspections. - Enforcement by regulatory agencies has progressed significantly and is currently robust. - SROs taking steps to ensure timely firm response to compliance deficiencies (MFDA) and strengthen nexus between compliance reviews and enforcement (IIROC). - Material challenges remain regarding enforcement of criminal laws by government departments and law enforcement agencies. - Principles for cooperation: - Carry from 2007: largest regulatory agencies have explicit and comprehensive powers to share information with local and domestic authorities without external approval. - Four largest jurisdictions are signatories of the IOSCO Multilateral Memorandum of Understanding (MMoU). - Agencies can obtain information not in their files on behalf of foreign regulators and have shown commitment to exchange information domestically and internationally. - Principles for issuers: - Carry from 2007: issuers subject to disclosure obligations at authorization and on an ongoing basis, fully in line with IOSCO standards; system for review of prospectus and continuous disclosure obligations; liability provisions ensure issuer responsibility for the prospectus. - Principles for CIS: - CIS operators subject to registration based on fit and proper requirements; requirements harmonized though review processes vary across provinces. - Supervision of intermediaries includes off-site monitoring and on-site inspections; risk-based approach has led to more focused use of on-site inspections in larger agencies. - Hedge fund managers subject to same regulatory regime as other CIS operators. - All CIS offered to the public required to have a custodian; custody can be provided by a related party but additional safeguards include requirement custodians are regulated entities, existence of the IRC, and disclosure to investors. - Carry from 2007: public offerings of CIS subject to disclosure requirements at authorization and on an ongoing basis, fully in line with IOSCO principles; rules in place on separation of assets. *Source: _cr1473 - 17. On the supervisory front, different initiatives have been implemented to eliminate* ### 45. Principles for market intermediaries—Market intermediaries are subject to registration ### 45. Principles for market intermediaries—Market intermediaries are subject to registration ### Registration and fit-and-proper requirements - Market intermediaries are subject to registration based on fit and proper requirements. - While requirements have been harmonized, the process to review applications varies in important ways across provinces. - Overall requirements are robust. ### Prudential requirements and risks - Prudential requirements for investment dealers need to better capture the risks associated with the use of un-invested moneys of clients. ### Supervision arrangements - Current arrangements for the supervision of intermediaries include both off site monitoring as well as on-site inspections. - These arrangements are adequate; however the use of a risk-based approach has resulted in a more focused use of onsite inspections, particularly for the agencies with the largest populations. ### Early warning and contingency coordination - There are early warning systems in place. - There is a need to improve coordination arrangements in the event of a failure of large investment dealers. *Source: _cr1473 - 45. Principles for market intermediaries—Market intermediaries are subject to registration_* ### 46. Principles for secondary markets—Carry from the 2007 assessment: “The operation of an ### _cr1473 - 46. Principles for secondary markets—Carry from the 2007 assessment: “The operation of an ### Summary findings — overarching observations - Provincial-level regulation and supervision of securities markets with responsibilities and mandates of the four regulatory agencies clearly established by law. - High degree of harmonization of the regulatory framework, with important differences remaining across provinces (derivatives, prospectus exemptions, registration exemptions for EMDs in northwest jurisdictions, registration of non-resident IFMs). - Coordination mechanisms exist (CSA committee system, passport system, HoA), but need strengthening — particularly for crisis management and to develop a “full” view of risks. - Exchanges subject to authorization regime based on eligibility criteria including financial viability, capacity, governance, and fair access; ATS regulated as dealers but can be regulated as exchanges once a threshold is reached. - Two main clearing entities (CDS and CDCC) have mechanisms to manage large exposures including selection criteria for clearing members, margins and collateral. - Robust market surveillance and pre-trade and post-trade transparency provisions; dark orders permitted but framework incentivizes transparency. - Arrangements to minimize failed settlements are reasonable; robust reporting requirements for shortselling. ### Detailed assessments of selected IOSCO Principles (principle #: grade — key findings) - Principle 1. The responsibilities of the Regulator should be clear and objectively stated. — BI - Responsibilities and mandate of the four regulatory agencies clearly established by law. - Harmonization high though some differences remain. - Coordination mechanisms (CSA committee, passport system) exist; should be strengthened for a “full” view of risks and crisis management. - Principle 2. The Regulator should be operationally independent and accountable. — BI - Robust operational and financial independence framework. - Accountability via MoF and judicial review. - Part-time board members can be directors of issuers/registrants per current legal framework; selection processes and conflict of interest rules mitigate concerns. - Principle 3. The Regulator should have adequate powers, resources and capacity. — FI - Robust powers: rulemaking, registration, recognition, information requests, on-site inspections, administrative sanctions, quasi-criminal actions. - Resources increased over time; need to continue recruiting specialized expertise. - Principle 4. Regulatory processes should be clear and consistent. — FI (Carry from the 2007 assessment) - High transparency and public consultation; active investor education. - Principle 5. Staff should observe highest professional standards. — FI (Carry from the 2007 assessment) - Codes of ethics developed; reporting obligations and compliance monitoring mechanisms in place. - Principle 6. Monitor, mitigate and manage systemic risk. — BI - Definition and methodology for systemic risk developed; analysis mostly qualitative; data availability a challenge. - HoA used for systemic risk discussions; coordination needs deepening for crisis management. - Principle 7. Review perimeter of regulation regularly. — BI - CSA committee system main mechanism for emerging risks; analysis mainly qualitative; data challenges. - Principle 8. Manage conflicts of interest and misalignment of incentives. — FI - Several important conflict areas identified (including trailing commissions); authorities analyzing regulatory actions. - Principle 9. Oversight of SROs. — BI - Strong oversight framework for SROs (recognition, rule approval, reporting, on-site inspections); governance issues remain. - Principles 10–11. Inspection, investigation, surveillance and enforcement powers. — FI (Carry from the 2007 assessment) - Broad investigative, surveillance and enforcement powers, including on-site inspections without prior notice, injunctions, trading suspension, asset freezes, administrative sanctions and referrals to criminal authorities. - Principle 12. Effective and credible use of enforcement and compliance programs. — BI - Risk‑based on-site inspection programs; enforcement significantly improved. - Challenges remain with criminal enforcement authorities; coordination progress mixed across jurisdictions. - Principles 13–16. Information sharing, disclosure and assistance to foreign regulators; issuer disclosure. — FI (Carry from 2007) - Broad authority to share information; four largest agencies signatories of IOSCO MMoU and hold bilateral MoUs. - Issuers subject to authorization and ongoing disclosure requirements. - Principles 17–21. Shareholders’ rights, accounting and audit oversight. — FI (17,18,20,21 — carries); BI (19) - Corporate framework addresses shareholders’ rights; mandatory tender offer for acquisition of control of listed company. - Financial statements prepared under Canadian GAAPs; audits per Canadian AS. - CPAB oversight of auditing firms: robust on-site inspections; limitations include absence of fine authority, transparency limits, and incomplete legal protection in some provinces. - Principle 22. Oversight of credit rating agencies. — BI - Designation process aligned with IOSCO Code of Conduct; on-site inspection system not yet in place. - Principles 23–31. Analysts, CIS, hedge funds, intermediaries, prudential requirements, compliance functions. — FI or BI per principle - Sell-side analysts and investment dealers subject to robust conflict rules (IIROC). - CIS operators, distributors and advisers subject to registration; variations across provinces in review of internal controls and risk management. - HFs: IFMs subject to registration; HFs not required to register; supervisory powers sufficient to obtain information. - Market intermediaries: registration based on fit and proper criteria; capital requirements use net capital formula; investment dealers may use un-invested client cash — prudential framework needs strengthening in light of MF Global lessons. - Compliance systems required; on-site inspection programs risk-based and adequate but more focused in largest provinces. - Principle 32. Procedures for market intermediary failure and crisis management. — BI - Early warning systems for IDs and MFDs; quarterly reporting and notification for others. - No comprehensive protocol for insolvency of securities firms (large ID); crisis management group recently constituted after MF Global Canada. - Principles 33–35. Trading systems, supervision of exchanges, trading transparency. — FI (33 carry; 34,35 FI) - Exchanges authorized based on integrity, financial viability and capacity; ATS regulated as dealers until threshold. - IIROC and derivatives exchanges have robust automated real-time and post-trade surveillance; MoU between IIROC and MX in place; automated cross-market surveillance under development. - Equity markets: robust pre- and post-trade transparency including a consolidated tape; debt markets pre- and post-trade transparency appears adequate; dark orders allowed but incentivized toward transparency. - Principle 36. Detect and deter manipulation and unfair trading. — FI (Carry from 2007) - UMIR and MX trading rules prohibit manipulation and deceptive trading; insider trading pursued by regulatory agencies and in some cases criminal authorities. - Principle 37. Management of large exposures, default risk, market disruption. — FI (Partially carry from 2007) - CDS and CDCC mechanisms: capital requirements for clearing members, margins, collateral, transaction caps. - Mandatory buy-in for failed settlement not required but rules provide incentives for timely settlement; reporting obligations for shortselling. - Principle 38. Securities settlement systems and CCPs supervisory requirements. — Not assessed ### Key implementation grades (as reported) - Fully Implemented (FI) - Broadly Implemented (BI) - Partly Implemented (PI) - Not Implemented (NI) - Not Applicable (NA) ### Recommended action plan — targeted recommendations by principle (selected) - Principle 1 - Continue addressing differences in derivatives, prospectus exemptions, EMD registration exemptions, and non-resident IFM registration to achieve further harmonization. - Foster convergence of supervisory practices; consider more frequent peer reviews. - Strengthen coordination among provincial regulators and SROs for a full view of risks; deepen coordination with other financial authorities including crisis management. - Ensure level playing field across investment products (e.g., distribution obligations for segregated funds). - Pursue arrangements allowing timely decision making. - Principle 2 - Agencies with commission structures should consider internal policies restricting directors of issuers/registrants from sitting on agency boards. - Principle 3 - Continue hiring staff with specialized expertise. - Principle 6 - Deepen systemic risk framework with more quantitative analysis; devise a data and resources strategy. - Strengthen two-way communication with SROs and coordination with other financial authorities for crisis management. - Principle 7 - Enhance emerging risk identification with quantitative analysis and consider strengthening decentralized risk monitoring structure and SRO-level arrangements. - Principle 8 - Prioritize identification and regulatory action on conflicts of interest, including trailing fees. - Principle 9 - Focus on governance issues in SRO oversight. - Principle 12 - Build cooperative arrangements with criminal authorities. - MFDA: ensure timely firm responses to compliance reviews. - IIROC: strengthen nexus between compliance reviews and enforcement. - Use tools for coordinated enforcement (joint investigations, reciprocal orders). - Principle 19 - Monitor CPAB’s enforcement tool usage; consider adding fines and improving transparency of disciplinary measures. - Improve information sharing between CPAB, audit committees and regulators. - Amend provincial laws to ensure legal protection and non-compellability for CPAB staff. - Principle 22 - Finalize implementation of on-site inspection program for DROs. - Principle 24 & 29 - Enhance use of on-site inspections (individual and thematic) especially in largest provinces. - Consider explicit integrity and solvency requirements for shareholders and directors to enable regulators to refuse unsuitable candidates. - Follow up differences in requirements across PM, EMD, ID and MFDA categories; harmonize MFD category. - Principle 25 - Consider extending custody requirements to all CIS (custodian requirement for CIS offered to the public already implemented). - Principle 30 - Strengthen prudential framework governing use of un-invested client cash to capture risks adequately. - Principle 31 - Continue monitoring risk-based approach efficacy and enhance on-site inspections where needed. - Principle 32 - Institutionalize crisis management arrangements with specific protocol and simulation exercises. - Include OSFI in coordination arrangements for largest IDs that are part of banking groups. - Work toward implementing portability requirements. - Principle 34 - Continue development of automated cross-market surveillance systems. - Principle 35 - Review need for additional transparency in government debt market (recommendation from 2007 not yet implemented). - Coordinate with IIROC to review minimum size for dark orders. - Consider expanding post-trade transparency in the corporate bond market and government bond market. *Source: INTERNATIONAL MONETARY FUND.* ### 47. The Canadian securities regulators participating in the FSAP (the regulators) welcome ### _cr1473 - 47. The Canadian securities regulators participating in the FSAP (the regulators) welcome ### Overall response and assessment - The regulators welcome the IMF’s review of the Canadian framework for the regulation and supervision of securities markets. - Appreciation expressed for the IMF Mission Team’s “thoroughness and professionalism in assessing our system against the IOSCO Principles.” - Regulators are “pleased that the IMF recognizes and concludes that ‘the Canadian framework for the regulation and supervision of securities markets demonstrates a high level of implementation of the IOSCO Principles.’” - IMF recognition that in some areas, “such as enforcement, the securities regulators have powers that can be considered at the forefront of securities regulation.” - The IMF’s 2007 FSAP recommendations “were carefully considered” and regulators “continue to develop and implement reform initiatives consistent with our G-20 commitments and with IOSCO reform initiatives, policies and standards.” - Regulators will “carefully consider the findings and recommendations from this FSAP” and continue to improve oversight and supervision; several IMF recommendations align with ongoing projects. ### On-site inspections - Regulators have implemented “an on-site inspection program of regulated firms based on a comprehensive risk-based model.” - The risk-based approach permits efficient and effective supervision by focusing on firms and operational areas considered highest risk. - Regulators continuously assess risks for each regulated firm “in light of all available information” and review factors used in the risk-based model while considering enhancements. - Regulators believe “the current level of on-site inspections is appropriate,” and will “continue to assess the efficacy of the on-site inspection program and make justified adjustments as necessary.” ### Enforcement of criminal laws - Regulators “welcome the IMF’s conclusion that there has been significant progress in enforcement by the provincial Canadian securities regulators.” - IMF recognized increased regulator efforts to support enforcement of criminal laws by relevant criminal authorities. - Regulators emphasize that “cases involving criminal activity in the capital markets are in fact prosecuted.” - Regulators will “continue to cooperate with the criminal authorities and assist them in pursuing their responsibilities to prosecute such matters.” ### Commentary on Supreme Court of Canada reference - Regulators requested IMF focus on “the substantive elements of the securities regulatory regime” rather than constitutional and political considerations of responsibility delineation. - Regulators consider comments respecting Supreme Court of Canada observations in a constitutional matter “go beyond the scope of the assessment against the IOSCO Principles.” - Regulators note the IMF’s reference to the Court’s decision is “a short excerpt of a summary and does not provide the full extent and meaning of the Court’s unanimous decision.” ### Part-time commissioners and conflict of interest management - Regulators take risks of conflicts of interest seriously and are “pleased that the IMF recognized that we have comprehensive and robust policies for managing potential conflicts that work well, and that there is no evidence of interference.” - OSC, BCSC and ASC permit, “as a matter of law, the inclusion of part-time Commissioners who may be directors of an issuer or registrant.” - Regulators concluded automatic exclusion of otherwise qualified persons could be detrimental to Commission effectiveness. - For OSC and ASC, inclusion of a small number of Commissioners who sit as directors, coupled with strong conflict policies, “provides a significant benefit to the collective ability of each Commission to engage in analysis and decision-making.” - Conflict management policies and procedures “are intended to capture all types of potential conflict situations, and are not specifically tied to a Commissioner’s status as a director of a market participant.” ### Harmonization across jurisdictions - Canadian securities regulatory regime is “highly harmonized” due to substantial regulator work. - Regulators recognize benefits of harmonization but note each Commission may implement non-harmonized laws where beneficial to that jurisdiction’s capital market given “the size, history and geographic realities of Canada.” - Harmonization is an important element and a strength, permitting tailored implementation to achieve investor protection and market efficiency. - Regulators will “continue to ensure that highly harmonized securities laws are implemented where appropriate, but not where doing so would be to the detriment of any jurisdiction’s capital market.” ### Direct supervision of shareholders and directors of registrants - Regulators implemented an oversight regime that includes ongoing substantive consideration of: - “the integrity and solvency of shareholders of registrants” and - “the integrity, solvency and experience of directors of registrants.” - These matters are considered at registration application and while the registrant remains registered. - Regulators have legal authority to deny registration on such grounds and to attach conditions to suspend or terminate registration, providing “the requisite indisputable authority over shareholders and directors of registrants.” ### Regulatory regime for portfolio managers and exempt market dealers - Regulators acknowledge perceptions that an unlevel “playing field” may exist for some market participants. - In promoting efficient capital markets and robust investor protection, regulators consider differences in: - permitted activities, - standards of care applicable to each category, - scope of operations (including custody), - business model, and - types of clients. - These differences lead to “substantively distinct, but equally balanced and fair, regulatory requirements.” - Regulators do not feel that, at this time, Portfolio Managers and Exempt Market Dealers should be required to: - become members of an SRO, or - contribute to a contingency fund. - Regulators “will continue to assess the appropriate regulatory requirements for such entities.” ### Conclusion and acknowledgement - Regulators thanked IMF assessor Ms. Ana Carvajal “for her professionalism, openness and availability to discuss thoroughly all aspects of this assessment.” ### Detailed assessment purpose and methodology - Purpose: ascertain whether legal and regulatory securities market requirements and regulator operations “meet the standards set out in the IOSCO Principles,” and to identify gaps, inconsistencies, weaknesses and areas for improved powers or implementation. - Assessment categories: “fully implemented, broadly implemented, partly implemented, not implemented and not applicable.” - IOSCO assessment methodology provides assessment criteria for each Principle and recognizes means of implementation may vary with domestic context, structure, and stage of capital market development. ### Scope of reassessment and Principle 1 (excerpt) - Only Principles 1, 2, 3, 6, 7, 8, 9, 12, 19, 20, 22, 23, 24, 28, 29, 30, 31, 32, 34, 35 have been assessed in their entirety; Principles 25 and 37 were partially reassessed. - Descriptions, comments, and grades for Principles 4, 5, 10, 11, 13, 14, 15, 16, 17, 18, 21, 26, 27, 33, and 36, and the description for Principles 25 and 37 were carried over from the 2007 full assessment “in order to provide a complete view.” - Principle 1 — Description (Authority and coordination): - Securities regulation in Canada is a provincial and territorial matter; ten provinces and three territories have adopted a Securities Act administered and enforced by local securities regulators; some jurisdictions have specific commodity futures and/or derivatives legislation. - With the exception of the AMF, three other regulatory agencies are specialized regulators; the AMF is an integrated regulator. - All four agencies have a legal mandate “to protect investors and to foster fair and efficient capital markets.” - All four agencies have rule making powers, power to issue policy, authority to issue notices, and power to grant exemptive relief; the four agencies, except the OSC, can grant blanket exemptive relief orders applying to a whole category of intermediaries; the OSC may grant category orders in certain circumstances. - The Canadian Securities Administrators (CSA) is a non-statutory association of provincial regulators to foster collaboration and coordination; CSA does not have direct regulatory or supervisory functions but members agree on policy and supervisory initiatives to achieve harmonization and streamline processes. - CSA governance: Chair and Vice-Chair elected for a two-year term (one renewal permitted). - CSA operational structure: standing committees include Enforcement, Market Oversight, Registrant Regulation, Investment Funds, Compliance, Systemic Risk and Investor Education; project committees address specific policy projects (examples include OTC derivatives, securitization and financial innovation, credit rating agencies, and take-over bids). - Chairs of each CSA member meet quarterly in person and bi-monthly by conference call. - CSA established the Policy Coordination Committee (PCC) in August. *Source: IMF staff report text provided in the content unit.* ### 2003. Its members are the Chairs of eight regulators (British Columbia, Alberta, ### _cr1473 - 2003. Its members are the Chairs of eight regulators (British Columbia, Alberta, ### CSA governance, PCC and Secretariat - The Policy Coordination Committee (PCC) oversees the CSA’s policy development initiatives and facilitates decision-making. Its members are the Chairs of eight regulators (British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia). - The PCC acts as a forum for timely resolution of policy development issues, monitors ongoing issues and provides recommendations to the CSA Chairs for their resolution. - The CSA established a permanent Secretariat in March 2004 in Montréal. The Secretariat’s main functions are logistical support for policy initiatives (including reports on progress) and management of the national databases. ### Differences in regulatory requirements or practices across provinces - There are currently 40 national instruments and four multilateral instruments covering areas including: (i) issuers; (ii) CIS; (iii) registrants; and (iv) marketplaces. - Three areas with important provincial differences: - Derivatives: - Derivatives are overseen differently across Canadian jurisdictions with regulatory authority derived through a variety of legislative regimes. - Legislative reforms are underway in certain provinces to align derivatives regulation. - A harmonized approach to OTC derivatives regulation is being developed at the CSA level by the CSA Derivatives Committee; the committee is drafting “model” rules. - Due to differences in enabling legislation, final provincial/territorial texts may not be identical, but the objective is that the substance of the rules will be the same and market participants and derivative products treated similarly across Canada. - Prospectus Requirements—Exemptions: - Members of the CSA have implemented virtually identical distribution requirements and a set of 41 exemptions from prospectus requirements. - The bulk of exemptions apply equally in all provinces, but two exemptions are not applicable in Ontario: - use of an offering memorandum as substitute for a prospectus - offerings to certain classes of individuals close to the issuer (Ontario has a more restricted exemption) - The OSC is undertaking a review of the exempt market to determine whether to adopt these two exemptions. - Registration Requirements: - Members implemented a virtually identical registration regime and developed 28 exemptions from registration requirements which apply equally except for two key differences: - Northwest EMD Exemption: - In Alberta, BC, Manitoba, the Northwest Territories, Nunavut and the Yukon Territory (the Northwestern jurisdictions), a person or company is exempt from registering as an EMD when trading in securities distributed in reliance of certain prospectus exemptions (accredited investor exemption, friends, family and close business associate exemption, offering memorandum exemption and $150,000 minimum amount exemption). - To rely on the exemption a person or company must meet certain conditions and confine permitted trading activities to their local jurisdiction or the Northwestern jurisdictions. - Registration of Non-Resident IFMs: - Ontario, Québec and Newfoundland and Labrador require non-resident IFMs to register if the IFM is managing one or more investment funds that distribute or have distributed securities to residents in those jurisdictions, unless the IFM satisfies one of two exemptions: - exemption where there are no security holders of any of the investment funds managed by the IFM or active solicitation of residents in the local jurisdiction - exemption available only to international IFM, where distribution in the local jurisdiction is restricted to permitted individuals - Remaining jurisdictions have issued guidance for determining whether a non-resident IFM must register; distribution in the jurisdiction is not determinative. - Authorities note harmonization does not require identical requirements; system can accommodate local needs. - Stakeholders recognize harmonization progress under CSA but expressed concern regarding differences for registrants (EMDs and foreign IFMs) and potential unlevel playing field in practice. - Concern regarding timely policy formulation: international implementation of major commitments compares to G-20 peers; domestic proposals can take longer due to stakeholder consultation, diametrically opposed views, and alignment with US policy responses. ### Registration processes and passport system - Passport system developed for review of: - prospectus filings - discretionary relief applications - dealer, adviser and IFM registrations - credit rating organization designations - All provinces except Ontario have adopted the passport system. - Passport effects: - Market participant obtains decision from its “principal regulator” and gains access to other jurisdictions. - Principal regulator generally is regulator of the jurisdiction of head office within Canada. - Interface policies between Ontario and other jurisdictions: if head office is in Ontario OSC acts as principal regulator and its decision is effective elsewhere; regulators in other jurisdictions may deal with their principal regulator and the OSC will coordinate review and raise concerns with the principal regulator. ### Ongoing supervision, SROs and exchanges - Ongoing supervision follows a principal regulator approach: - Continuous disclosure obligations of an issuer reviewed by its principal regulator. - Principal regulator approach for IIROC and MFDA: - Both SROs recognized by nearly all provincial regulators (MFDA not recognized in Québec). - One regulator acts as coordinator and channels requests from different provincial regulators to the SRO. - IIROC coordination arrangements formalized in a MoU signed in 2008. - OSC is principal regulator for IIROC; BCSC for MFDA. - Lead regulator approach for exchanges: - Lead regulator (usually securities regulator in jurisdiction of exchange head office) recognizes the exchange; other provincial regulators grant exemption based on mutual reliance. - Lead regulators listed: - OSC is lead regulator for TMX - BCSC and Alberta for TSX Venture - AMF for MX - Manitoba for ICE - ASX for NGX - Coordinated approach to supervision of CDCC: - BoC, AMF and OSC working on an MoU to ensure coordination; other regulatory authorities with jurisdiction over CCPs will become signatories. ### Systemic risk and enforcement - CSA has a committee on systemic risk for national identification and monitoring using a definition and methodology relying heavily on the four largest agencies. - Enforcement coordination: - Provincial regulators inform each other of important enforcement investigations via CSA Enforcement committee to determine joint investigations/joint hearings. - Provincial regulators can issue reciprocal orders. ### Convergence in supervisory practices - Practices fostering convergence: - Elevation of novel issues to CSA committees under passport protocol. - Development of standardized checklists, best practices guides and manuals (e.g., registration checklists; on-site inspection manuals). - Training: CSA-coordinated specialized training every two years for provincial regulator staff. - Peer reviews infrequent; at least one peer review conducted for prospectus review. - Supervisory differences across provinces exist in: - registration information requirements and review level - risk-based frameworks determining supervision intensity - frequency of on-site inspections - Differences in requirements across products supervised by different sectoral regulators: - Disclosure requirements for segregated funds similar to “fund facts” for investment funds. - Distribution obligations vary by province (e.g., Québec via Distribution Act); concern about unlevel playing field between segregated funds and CIS. ### Coordination with SROs - Mechanisms in place: - SROs must provide on-site review plans to regulators. - SROs must provide periodic reports on investigations opened. - SROs must notify regulators of sanctions imposed. - Periodic meetings at different organizational levels. - SRO participation in specific CSA committees (e.g., CRM2, Registrant Regulation) and joint projects (e.g., dark pools) and IIROC’s participation in inter-agency calls. ### Coordination across the financial sector - Heads of Agencies (HoA): - Informal body including Chairs of the four largest provincial securities regulators (Alberta, British Columbia, Ontario and Québec), the Governor of the Bank of Canada, the Superintendent of Financial Institutions, and senior Department of Finance officials. - Forum to coordinate policy in areas of shared responsibility including systemic risk. - Current HoA work driven by G20 commitments: OTC derivatives, shadow banking, hedge funds, and financial benchmarks. - Joint Forum: - Established in 1999 by CSA, Canadian Council of Insurance Regulators and Canadian Pension Supervisory Authorities to coordinate regulation of financial products and services across pension, securities and insurance sectors. - Senior representatives meet once a year; working groups formed for specific projects (example: disclosure obligations for insurance companies). - Memoranda of Understanding (MoUs): - OSC and OSFI Accord in 1987, MoU in 1998; AMF signed MoU with OSFI in 1998. - More regular exchange of information occurs with IIROC, which shares on-site review findings with OSFI. ### Assessment and key recommendations (summary) - Assessment: Broadly Implemented. - Main reasons for grade: - Need to continue coordination of supervision across provinces. - Need to continue harmonization efforts in some areas (registrants, prospectus exemptions). - Recommendations and observations: - Continue monitoring passport system for registrants to ensure robust supervision across provinces. - Conduct further analysis to ensure differences in supervisory intensity derive from differences in entity risk rather than resource availability. - Consider additional tools to ensure supervisory convergence (e.g., more frequent peer reviews). - Strengthen enforcement coordination (e.g., greater use of joint hearings, reciprocal orders, or other arrangements). - Enhance two-way communication between SROs and regulatory agencies; consider permanent SRO participation in committees and strategic priority discussions. - Continue efforts to develop a level playing field for distribution of investment products by insurance firms. - Ensure final OTC derivatives regulations achieve substantive uniformity across jurisdictions and review remaining differences in prospectus exemptions and registrant requirements against the objective of avoiding an unlevel playing field. --- ### Principle 2 — Regulator independence and accountability (summary) - Legal status of agencies: - OSC is a crown corporation with a board of at least nine and no more than 15 commissioners; Chair and up to three Vice Chairs are full time. - AMF is a legal person and mandatory of the state with a single-person governing body (president and CEO). - BCSC is a government agency governed by a board of at least two and no more than 11 members; Chair is also CEO; currently BCSC has eight members. - ASC is a crown corporation with a Chair and two Vice-Chairs who are full time; Chair is also CEO; currently ASC has 12 members. - Appointments and terms: - AMF president and CEO appointed by government for a five year period and cannot be removed without valid reason. - OSC, BCSC, ASC commissioners appointed by Order in Council of the Lieutenant Governor; governance committees review composition and recommend candidates. - OSC commissioner term may not exceed five years; re-appointment possible; fixed term appointments cannot be rescinded except with due cause. - BCSC member initial term: other than Chair/Vice-Chair 2-4 years; Chair/Vice-Chair 3-5 years; eligible for reappointment; Lieutenant Governor may remove Commissioners for cause. - ASC law does not set length of appointment; ASC Governance Policy: do not seek appointment/reappointment longer than three years; Chair typically five years; Lieutenant Governor in Council may remove members; judicial precedent requires due cause for removal. - Protection of staff: - All four agencies have statutory provisions protecting board/chair and staff for acts/omissions in good faith. - In Québec statute expressly states AMF assumes defense of personnel; other agencies assume legal defense administratively. - Mitigation of commercial influence: - Part-time commissioners can carry other professional activities and be directors of issuers/registrants but must disclose conflicts and recuse. - OSC and BCSC disallow Commissioners acting as directors of registrants; acting as director of issuer requires Chair approval. - Recusal applies to individual cases and policy; effects vary: complete exclusion from documentation/decision in individual cases; participation but abstention in policy votes. - AMF head must perform functions exclusively except limited educational and non-profit activities. - Government involvement: - Issuance of regulations generally requires Ministerial approval (BCSC requires approval to initiate and finalize rule proposals). - OSC, ASC and AMF required to obtain ministerial approval of MoUs for exchange of information; statutory revision periods exist (OSC 60 day period). - In practice Ministers have not rejected MoUs; BCSC informs Minister as practice. - Government not involved in day-to-day operations beyond these oversight roles. - Funding: - All four agencies are fully self-funded; main income is fees paid by market participants. - OSC and BCSC set fees by rule subject to MoF approval; published for comment; Minister can approve, reject, or return rule. - AMF fee proposals submitted for comment and subject to Governmental approval. - ASC fees set by Lieutenant Governor in Council; ASC submits business cases to MoF; staff unaware of cabinet rejecting recommendations. - Budgets independent from Government budget but require MoF approval; AMF government approves appointment of key personnel based on advisory committee recommendation. - Recent salary limitations affected OSC and BCSC (salary caps, freezes, dismantling bonuses); ASC not subject to cap; AMF salaries set by collective contracts authorized by Treasury. - Agencies report limitations have not affected ability to attract personnel. - Accountability: - Agencies accountable to Government via MoF with differing oversight arrangements: - ASC: Mandate and Roles Document (November 22, 2010); Minister reviews/approves strategic direction. - BCSC: Chair signs annually a shareholder’s letter of expectations; three year service plan submitted to MoF for approval. - OSC: MoU delineates roles; MoU renewed every five years; Minister approves annual business plan (not statement of priorities). - AMF: Strategic plan must be approved by Government after advisory committee recommendation. - All agencies required to produce Annual report and audited financial statements submitted to MoF and legislative body; decisions subject to judicial review. - Assessment: Broadly implemented. - Key comment: Potential for interference of commercial interests from part-time members in commission-structured agencies. Assessor considers commission structure useful but recommends additional safeguards where commissioners are directors of registrants; suggests directors of issuers should generally not be members to avoid perception of conflict. ### Principle 3 — Powers, resources and capacity (summary) - Powers of each securities regulator: - Make legally binding rules, adopt policies and guidance (rulemaking generally subject to ministerial approval; policies generally require public consultation except ASC). - Grant discretionary exemptions (issued as “orders”; blanket orders available except OSC is limited by prohibition on certain blanket orders). - Review prospectuses and issue prospectus receipts. - Grant registration/recognition/designation for securities intermediaries, exchanges, SROs and CRAs; impose terms and conditions and revoke authorizations following due process. - Monitor compliance: review books and records, conduct on-site inspections, request information periodically and ad-hoc. - Conduct investigations with subpoena powers (banking records, telephone records, ISP records); emergency relief available (asset freezes, cease trade orders, officer/director bans). - Impose enforcement actions including administrative fines (generally up to $1 million) and disgorgement; adjudicative bodies are Commissions (except AMF uses separate administrative tribunal BDR whose members appointed by government for fixed terms removable only for due cause). - Quasi-criminal authority to prosecute offences with imprisonment up to five years less a day and/or fines up to $5 million; OSC can directly prosecute in courts; AMF uses dedicated prosecutors. - Budget and recent financial conditions: - Agencies funded by fees; market conditions produced falling revenues and annual deficits at some agencies; agencies retain reserves to maintain capacity. - Regulator Revenues and Expenses—selected figures: - OSC - 2012 $85,638,000 $90,025,000 - 2011 $72,955,000 $84,047,000 - 2010 $61,466,000 $79,450,000 - AMF - 2012 $88,818,000 $84,140,000 - 2011 $84,849,000 $105,957,000 - 2010 $152,334,000 $84,953,000 - ASC - 2012 $31,344,000 $31,688,000 - 2011 $30,087,000 $32,413,000 - 2010 $32,733,000 $28,392,000 - BCSC - 2012 $36,872,000 $36,244,000 - 2011 $34,889,000 $31,216,000 - 2010 $31,409,000 $30,845,000 - IIROC - 2012 $84,999,000 $92,662,000 - 2011 $80,478,000 $77,402,000 - 2010 $76,517,000 $72,741,000 - MFDA - 2012 $30,700,000 $30,200,000 - 2011 $29,400,000 $28,900,000 - 2010 $25,200,000 $26,500,000 - OSC historical context: - From 2003 to 2008 OSC accumulated operating surpluses; portions returned via rebates/subsidized fees/refunds. - OSC froze participation and activity fee rates in 2009 and limited increases in 2010 to deplete surplus over a three-year fee cycle; resulted in deficits 2010–2012 covered by prior surpluses. - April 2013 OSC established a new fee rule to increase fees to address operating deficit and return to cost recovery and build a small surplus by end of three-year fee cycle in 2016. - AMF fiscal 2011 expenses included $20,600,000 payments to settle investor claims related to fraud. - IIROC fiscal 2012 expenses increased to strengthen IT infrastructure and expand staff. - Human resources and staffing (2010–2012) - Permanent Employees—Total by regulator (2010, 2011, 2012): - OSC: 2010 417; 2011 424; 2012 455 - AMF: 2010 366; 2011 378; 2012 406 - ASC: 2010 171; 2011 183; 2012 183 - BCSC: 2010 210; 2011 215; 2012 239 - Total (OSC + AMF + ASC + BCSC): 2010 1,164; 2011 1,200; 2012 1,283 - 3-year growth average: - OSC 5% - AMF 2% - ASC 4% - BCSC 5% - Functional staffing snapshot (selected categories, 2012 totals by regulator shown in table in source): - Enforcement 2012 totals: OSC 126; AMF 131; ASC 46; BCSC 54; total 357 - Registrants and Compliance 2012 totals: OSC 70; AMF 18; ASC 17; BCSC 31; total 136 - Market Regulation and Derivatives 2012 totals: OSC 27; AMF 15; ASC 7; BCSC 6; total 55 - Corporate Finance/Investment Funds 2012 totals: OSC 85; AMF 65; ASC 46; BCSC 50; total 246 - Advisory and Support Offices 2012 totals: OSC 147; AMF 177; ASC 60; BCSC 98; total 482 - National SRO staffing 2012: - IIROC had 422 employees; approximately 270 engaged in enforcement, registration and compliance oversight. - MFDA had 171 employees; approximately 130 engaged in enforcement, registration and compliance oversight. - Aggregate securities regulation staff in 2012 (OSC + AMF + ASC + BCSC + IIROC + MFDA) = 1,876 staff. - Salaries and recruitment: - Agencies able to pay competitive salaries; OSC, ASC, BCSC conduct benchmarking surveys. - BCSC and ASC salary targets: 50th percentile of comparative market. - IIROC salary target: 75th percentile. - AMF salaries based on Québec Treasury Department guidelines and negotiated collective contracts. - Training budgets (Annual Aggregate Training Budgets): - 2010 Total $1,819,675 - OSC $535,000 - AMF $694,675 - ASC $300,000 - BCSC $290,000 - 2011 Total $2,474,025 - OSC $576,000 - AMF $1,180,025 - ASC $300,000 - BCSC $418,000 - 2012 Total $3,156,214 - OSC $851,000 - AMF $1,527,214 - ASC $300,000 - BCSC $478,000 - Average Voluntary Turnover rate: - OSC: 2010 3.61%; 2011 4.34%; 2012 5.91% - AMF: 2010 3.5%; 2011 4.2%; 2012 5.8% - ASC: 2010 11%; 2011 13%; 2012 10% - BCSC: 2010 7%; 2011 7.8%; 2012 3.3% - Technological resources and national systems: - Agencies collectively spent more than $60,000,000 on information technology in fiscal 2012. - National electronic filing systems exist for: - official filings by public companies and investment funds - registration forms for dealers and advisers - filing and dissemination of insiders reports - repository of cease trade orders - disciplined persons list - National Registration Search (NRS) containing names of all registrants in Canada, except those registered solely with the OSC - CSA plans to invest about $100,000,000 to replace National Systems in phases over the next five years, integrating standalone systems into a single filing system and implementing technology advancements (XBRL, Web 2.0, user interface improvements). - Provincial initiatives include AMF’s development of a market surveillance system for automated surveillance across equity and derivatives markets. - Governance and priority setting: - OSC, ASC and BCSC use Commission structure (Commission members serve as board directors and set strategic priorities); AMF uses Superintendent structure (president sets priorities). - All four agencies prepare strategic plans (usually three-year horizon) involving senior management, staff and stakeholder consultation. - Governance mechanisms: - OSC, BCSC, ASC have Governance, Audit and Human Resource Committees. - AMF has an advisory committee supporting the chairperson. - Internal audits and risk management frameworks exist across agencies (OSC in process of establishing framework). *Source: IMF content unit _cr1473 - 2003. Its members are the Chairs of eight regulators (British Columbia, Alberta,* ### 2003. Its members are the Chairs of the eight regulators (British Columbia, Alberta, ### _cr1473 - 2003. Its members are the Chairs of the eight regulators (British Columbia, Alberta, ### CSA governance, Secretariat, Business Plan, funding - PCC (Policy Coordination Committee) oversees CSA policy development, facilitates decision-making, resolves policy development issues, monitors ongoing issues and provides recommendations to the CSA Chairs. - Committee of the Chairs of the four largest agencies formed to solve differences among provinces. - The CSA develops a Business Plan every three years; Business Plan for 2013-2016 finalized to promote coordination and harmonization. - Permanent Secretariat established in March 2004 in Montréal: - Main function: logistical support, reports on progress, manage national databases. - Project manager recently added to support committees and ensure project delivery on schedule. - Secretariat currently has 6 staff. - CSA is funded by its members on a per capita basis. ### Investor education - Assessment: Fully Implemented - Regulatory agencies run investor education programs: community outreach, seminars, trade-show exhibitions, brochures, investor alerts, public advertising, web-based educational resources, contact centers. - Both OSC and AMF have investor education funds funded from administrative penalties. ### Resources, staffing and governance of provincial regulators - Comments: Agencies face resource challenges from increased market complexity; steps taken to add professional staff with market experience and economists—effort should continue. - Importance of commitment to operational work in supervision (compliance) and enforcement. - Provincial-level governance structures appear robust; emphasis on enterprise risk management and linkage with internal audit units. ### Principle 4 — Clear and consistent regulatory processes (Assessed 2007) - Overall: high degree of transparency; regulations submitted to public consultation; decisions subject to judicial review. - Consultation processes: - OSC and AMF subject to statutory mandated consultation; draft regulations and policy statements published in bulletins and official newspaper. - Agencies publish comments and explanations in bulletins; use consultative committees and groups. - Required to take into account economic impact of regulations before adoption. - OSC created Economic Analysis, Strategy and Project Branch to prepare cost-benefit analyses for significant projects (examples: auditor oversight; certification of disclosure in issuers’ annual and interim filings; mutual fund governance). - Procedural fairness: - AMF required to provide reasons for unfavorable decisions (Section 319 AMF SA; Section 8 Act respecting administrative justice). - OSC must provide written reasons upon request (Statutory Powers Procedure Act); in practice both provide reasons for major decisions. - Persons affected by AMF decisions (except those under Distribution Act) can seek review by independent tribunal BDRVM (Section 318 AMF SA). SROs can appeal (Section 322 AMF SA). - Decisions subject to judicial review (Section 324 AMF SA; Section 9 ONT Act; Section f Ontario Commodity Futures Act). - Criteria for granting licenses established in OSC and AMF frameworks. - Assessment: Fully implemented ### Principle 5 — Staff professional standards, confidentiality (Assessed 2007) - All regulatory agencies developed codes of ethics and professional conduct covering honesty/integrity, procedural fairness, conflict of interest prevention, confidentiality. - Transactions in securities: - Staff can invest in securities subject to conditions/restrictions (e.g., prohibited from trading securities under investigation; prohibited from margin buying; prohibited from short selling). - OSC: commissioners and staff required to file an undertaking and sign a certificate of compliance annually (detailed list of investments); must report all securities trades (other than in exempt securities) within five days; directors periodically review staff trading; OSC subject to Public Service of Ontario Act 2006 (ethical conduct, disclosure/investigation of wrongdoing); OSC setting up internal disclosure/wrongdoing process. - AMF: president and delegated personnel required to provide detailed annual asset reports and update on material change; reports analyzed by CEO secretariat; secretariat has on occasions ordered staff investment actions including blind trusts. - Confidentiality: explicit provisions (OSC By Law No. 2; Section 16 of the AMF). - Investigations of ethics violations: procedures exist; nature and investigator depend on seriousness. - Assessment: Fully implemented ### Principle 6 — Systemic risk monitoring, mitigation, management - CSA Systemic Risk Committee (SRC) constituted in 2009: main mechanism to identify and monitor systemic risk arising from securities markets. - SRC composed of staff of the largest CSA provinces. - Meetings: conference calls every two weeks; in-person once a year. - SRC working definition of systemic risk: risk of a shock - affecting a significant number of market participants contemporaneously, - which may directly or indirectly result in: - a broad decrease in the availability, or a significant increase in the cost, of capital for issuers and individuals; and/or - a significant erosion of investor confidence in the fairness and efficiency of the capital markets. - Identification process: - Comprehensive assessment at least once every two years. - Top-down exercise identifying major categories of capital markets activities and participants; identified more than 50 categories. - Prioritization high/medium/low—currently mainly qualitative due to data challenges—using FSB/IMF/BIS criteria (size/significance, interconnectedness, availability of substitutes) plus level of regulation and jurisdiction. - High and medium categories analyzed in depth; each category evaluated on scale 1 (low) to 5 (high) for size/significance, interconnectedness, availability of substitutes. - SRC gathers information/data/reports from academics, other regulators, IOSCO, FSB. - Monitoring and reporting: - For each risk SRC proposes a risk owner (another jurisdiction or CSA committee). - SRC monitors mitigation progress via quarterly inter-agency meetings. - SRC accountable to CSA Chairs; delivers an annual report documenting risk monitoring findings and recommendations. - Practice examples and initiatives: - Repo market identified as important source of funding liquidity and potential systemic risk (lack of transparency): - CDCC developing a fixed-income CCP including repos; - IIROC enhancing Market Trade and Reporting System (MTRS) with trade-by-trade reporting to increase repo transparency; - CSA Investment Funds Committee proposing enhanced disclosure of investment funds that engage in securities lending. - SRC recommended permanent body within CSA to address systemic risk; SRC transformed into permanent standing committee. - SRC recommended regular meetings between HoA staff—ongoing approximately quarterly. - HoA (Heads of Agencies) composition and focus: - Composed of Chairs from four largest provincial securities commissions (Alberta, British Columbia, Ontario and Québec), Governor of the Bank of Canada, Superintendent of Financial Institutions, senior members from Department of Finance. - Chaired by Governor of the BoC; meets at least quarterly. - Main focus includes OTC derivatives trading and clearing framework. - Interagency staff-level calls: SRC participates with Bank of Canada, Department of Finance (Canada), IIROC and OSFI. Example: 2011 four calls on shadow banking, securitized instruments, hedge funds, ETPs, MMFs, potential shortage of safe assets collateral and global macroeconomic conditions. - Expertise: - SRC staff built methodology and conducted literature review on funding and market liquidity risk measurement. - Expertise primarily built at provincial level in largest agencies; some agencies created units contributing to SRC (e.g., AMF Strategic Oversight for systemic risk and economic analysis developing risk dashboard). - SRC staff participates in IOSCO’s SCRR. - Assessment: Broadly Implemented - Comments: - Good start; methodology allows holistic view and periodic reassessment with monitoring/accountability. - Need for more quantitative analysis and better data; consideration of centralized CSA database and expertise pooling recommended. - Encourage assessment of SRO engagement for risk identification (e.g., IIROC strategic issues management) and strengthening sector-level coordination for crisis management (see Principle 32). ### Principle 7 — Regular review of perimeter of regulation - CSA committee system is primary vehicle to raise issues from regulated and unregulated entities, including emerging risks (committees structured by topic). - Relevant committees: Securitization and Financial Innovation Committee; Unregulated Market Service Providers Committee. - Provincial regulators’ internal committees to identify risks: - OSC: Policy Review Committee (PRC), Emerging Risk Committee (ERC), Novel Products, Structures and Financial Innovation Committees (NPSFIC). - AMF: risk management committee, new team in market surveillance for new products and market trends; Strategic Oversight unit. - IIROC: strategic issues meetings monthly to discuss trends and emerging risks. - Actions triggered by committee concerns: - Sweeps to determine extent of issues (example: sweeps on EMDs). - Policy proposals and project proposals sent to policy coordination committee with mandate forms and resource estimates. - Legislative amendment discussions initiated where rulemaking insufficient (example: policy proposal on non-bank ABCP—see Principle 8). - Review of rules and exemptive relief: - Rules typically reviewed one year after coming into force or as new info emerges; exemptive relief often contains “sunset” provisions to promote review. - Example of new registration category created for IFMs after risks identified (incorrect/untimely NAV; financial statements; transfer agency; conflicts of interest). - Assessment: Broadly Implemented - Comments: - Need to deepen approach via more quantitative analysis. - Strengthen two-way communication with SROs (especially IIROC). - Consider more structured mechanisms for follow up (similar to SRC). ### Principle 8 — Conflicts of interest and misaligned incentives - Regulated entities: - Framework requires mechanisms to identify, monitor and mitigate conflicts (avoidance, control, disclosure). - Public CIS required to establish an Independent Review Committee (IRC) with independent members to review conflicts and approve/provide recommendations (see Principle 24). - Conflict obligations exist for auditors (Principle 20), CRAs (Principle 22), sell-side analysts (Principle 23), and SROs (Principle 9). - Policy issues identified requiring regulatory action: - Trailing commissions: policy proposal on consultation considering options from better disclosure to banning trailing commissions. - Distribution of securities of related issuers: OSC compliance inspections led to actions against EMDs—13 EMDs suspended or referred to OSC Enforcement from early 2010 to date. Ontario staff initiated initiative to address related issuer distribution issues (more reliable information, notification and ongoing disclosure). IIROC and MFDA issued notices outlining concerns (example: IIROC Notice 13-0039 on best practices for distribution of non arms length investment products). - Sale of mutual funds via borrowing: OSC staff issued a notice [text indicates placeholder]. - Issuers: - Main mechanism to address misaligned incentives is disclosure (prospectus requires related party transactions and executive/director compensation disclosures). - Issues identified: - Non-bank ABCP pre-crisis: CSA SAFI finalizing proposal to amend short term debt prospectus exemption to prevent issuance of non-bank ABCP with synthetic assets. - Public offering of emerging market issuers: OSC Emerging Markets Issuer Review of 24 issuers raised concerns on governance, auditing and listing practices—led to collaborative work with other regulators and gatekeepers. - Assessment: Fully Implemented - Comments: - Policy and enforcement actions should be timely. - For trailing commissions, coordination with other financial authorities recommended to ensure level playing field across like-products (segregated funds, banking products with embedded trailing commissions). ### Principles for Self-Regulation (SROs) — Principles 9–15 (overview) - Key national SROs: IIROC (investment dealers and trading conduct), MFDA (mutual fund dealers). CSF in Québec regulates individuals (mutual fund dealer reps, scholarship plan dealer reps); NGX conducts its own market surveillance. - Recognition and oversight: - Securities and derivatives legislation authorize recognition as SRO by issuance of Recognition Orders (ROs) with terms and conditions. - Recognition criteria include corporate governance, public interest regulation, conflict management, equitable fees, membership access, financial/technology/human resources, rule comprehensiveness, fair disciplinary process, cooperation with regulators and foreign bodies. - Recognition process: draft application, staff review (corporate governance, conflicts, membership, viability), public comment (typically 30 days), final RO issuance. - Recognition in multiple jurisdictions coordinated among regulators. - Corporate governance requirements for SROs: - Fair representation on governing bodies; minimum independent/public directors (minimum 50 percent on boards and rules for committee representation). - IIROC and MFDA required to demonstrate fit and proper directors/officers. - MX Regulatory Division must be independent and self-financing; regulatory fees/fines for exclusive regulatory use. - Conflicts of interest and separation of functions: - SROs required to identify/manage conflicts and file written policies with regulators; changes to governance subject to prior approval. - IIROC governance terms addressed past conflicts of interest concerns (TSX shareholder influence) by requiring board composition measures. - Governance of enforcement functions: IIROC hearing panels include industry representatives (two industry + one independent member); MFDA regional councils have roles in enforcement and policy. - Oversight approach and program: - CSA established oversight committees for IIROC (chaired by OSC) and MFDA (chaired by BCSC). - Oversight program includes rule approval, periodic reporting, quarterly meetings, on-site reviews, automation review program (Annual Independent System Review, notification of material failures, regular reporting). - SROs required to submit financial statements, strategic plans, statistics on compliance and enforcement, self-assessments (IIROC within 90 days; MFDA within 120 days of fiscal year end). - Inspections and periodic reviews: - Recognizing regulators perform on-site inspection at least once every three years for IIROC and MFDA; risk-based coverage of functional areas; review teams from participating jurisdictions. - IIROC post-merger on-site review in 2009 concluded substantial compliance with ROs but requested action plans on deficiencies (e.g., enforcement nexus with compliance reviews). - MFDA oversight review 2009 and 2012 using new risk-focused methodology—identified areas for improvement and follow-up plans. - CSF inspected by AMF every three years; earlier inspections revealed governance and supervision issues with sections—implementation plans filed and AMF monitors follow-up. - Reporting requirements and on-site review details (selected): - IIROC reporting obligations: prompt notification of material violations; misconduct by members; if member financial viability uncertain; schedule for on-site reviews; quarterly reports of terms/conditions on approved persons; quarterly reports of exemptions from UMIR; detailed enforcement reports. - MFDA reporting: material changes to organizational structure; disciplinary/settlement hearings; misconduct by members or employees; failure to file required reports; conditions that could give rise to investor protection fund payments; annual report of regulatory staff complement. - CSF supervision plan includes reporting to AMF on fraud/serious irregularity, material changes, complaints, member contributions, syndic activities, discipline committee activities, annual report and financial statements. - Assessment for SRO oversight: Broadly Implemented - Comments: - Need to continue improving corporate governance of SROs (question 6 of methodology). - On-site reviews revealed conflicts of interest risks; recommendations and follow-up plans in place. - Improvements encouraged for CSF (board composition, relationship with sections) and review role of membership in enforcement and rulemaking for IIROC and MFDA. ### Principles for Enforcement (Principles 10–12) — inspection, investigation, surveillance, enforcement - Principle 10 — Powers: - Most agencies have comprehensive inspection, investigation and surveillance powers. - Both OSC and AMF can: - conduct on-site inspections including books and records without prior notice (Sections 13, 19, 20 OSC Act; Section 9 AMF Act); - obtain books and records and request data without judicial action (Sections 19, 20 OSC Act; Section 10 AMF Act); - supervise exchanges and regulated trading systems. - Record keeping obligations typically seven years for members and marketplaces (NI 21–101). - Assessment: Fully implemented - Principle 11 — Enforcement powers: - OSC and AMF can investigate compliance (Sections 11,12 OSC Act; Section 12 AMF Act). - OSC has power to impose administrative sanctions and seek quasi-criminal sanctions (Section 127 OSC Act); AMF administrative sanctions mainly imposed by independent tribunal BDRVM (AMF SA). - Both can seek injunctions, bring civil proceedings, suspend trading, freeze assets, compel information/documents/testimony from third parties, refer matters to criminal authorities. - Private right of action for damages exists. - Information sharing with SROs and police permitted (some restrictions on compelled information sharing). - After 2007 a specific “Fraud-on-the-market” offence enacted to sanction persons participating in conduct perpetrating a fraud on any person or creating misleading trading/artificial price. - Assessment: Fully implemented - Principle 12 — Effective and credible use of enforcement powers; compliance programs: - NI 31-103 requires registrants to have systems of controls and supervision; guidance outlines internal controls, day-to-day supervision and systemic monitoring. - Required registered individuals: UDP (Ultimate Designated Person) and CCO (Chief Compliance Officer); CCO must submit annual report to board on compliance. - On-site inspections: - Conducted by IIROC for IDs, MFDA for MFDs (except Québec where AMF inspects MFDs), securities regulators for other registered firms. - Approximately 1500 registered firms: ~1200 under securities regulators direct supervision, 200 under IIROC, 100 under MFDA. - Principal regulator distribution: OSC ~65 percent (~975 firms); AMF ~14 percent (~210 firms); British Columbia ~9 percent (~135 firms); Alberta ~8 percent (~120 firms) — 96 percent total. - Inspection process: - Risk-based selection; SROs use fixed schedules; regulators inspect high-risk firms and some random medium/low risk firms. - Deficiency letters issued; MFDA does not distinguish significant vs other deficiencies (regulators consider change to address unresponsive members). - Regulators and SROs can refer cases to enforcement. - Market surveillance: - IIROC and derivatives exchanges are front-line for market surveillance with real-time and post-trade automated systems; anomalies generate alerts and referrals to regulators when third parties involved. - Regulators complement SRO systems (monitor media, issuer releases). - Cyber surveillance units exist (AMF cyber surveillance team created in 2010 monitors 1000+ sites). - Intelligence and complaints: - Contact/Complaint Centers acknowledge complaints generally within two to five business days; initial assessment then referral if substantive. - JSIUs and ÉIRF gather intelligence on fraudulent securities activity. - Complaint numbers (selected jurisdictions, by year): - AMF: 2008 1,027; 2009 1,751; 2010 1,412; 2011 1,532; 2012* 1,011; 5 years 6,733 - ASC: 2008 688; 2009 799; 2010 984; 2011 795; 2012* 734; 5 years 4,000 - BCSC: 2008 1,388; 2009 1,261; 2010 1,053; 2011 1,417; 2012* 1,133; 5 years 6,252 - OSC: 2008 1,491; 2009 1,469; 2010 1,290; 2011 1,203; 2012* 925; 5 years 6,378 - Total: 2008 4,594; 2009 5,280; 2010 4,739; 2011 4,947; 2012* 3,803; 5 years 23,363 - Enforcement by IIROC and MFDA: - IIROC enforcement originates from complaints and internal referrals; historically bulk of enforcement actions come from complaints affecting individuals; IIROC increased referrals from compliance after process enhancements; enforcement tools include money penalties, remedial actions, suspensions, settlements requiring admission of guilt. - IIROC disciplinary distribution shift (2010 → 2012): - 2010: 84 percent individuals, 12 percent firms, 4 percent supervisors - 2012: 70 percent individuals, 23 percent firms, 8 percent supervisors - MFDA enforcement: similar origins and tools; shift from education-first to more disciplinary actions after second cycle of inspections resulting in improved internal controls. - Enforcement resourcing and outcomes: - Enforcement staff levels (Organizational totals and enforcement counts): - Organizational total (2012): AMF 406; OSC 455; BCSC 239; ASC 183; Total 1,284 - Enforcement staff level: 2010 total 311; 2011 total 324; 2012 total 351 - Enforcement/Organizational total percentages 2012: AMF 32%; OSC 28%; BCSC 23%; ASC 25%; Total 27% - Aggregate CSA enforcement 2012: - Investigations opened: 1,419 (Illegal Distribution 324; Misconduct by Registrants 109; Illegal Insider Trading 690; Disclosure Violations 14; Market Manipulation 91; Other Cases 191) - Investigations closed: 1,156 - Proceedings initiated: 447 - Cases concluded: 462 - Companies sanctioned: 336 - Persons sanctioned: 681 - Cases Concluded (by type) 2009–2012: - Contested Hearing: 2009 37; 2010 39; 2011 47; 2012 62 - Settlement Agreement: 2009 69; 2010 71; 2011 53; 2012 35 - Court Proceedings: 2009 35; 2010 64; 2011 24; 2012 39 - Quasi-criminal sanctions since April 1, 2008 (selected): - OSC: 14 persons; Jail term 5-36 months; In 8 cases imprisonment was 18 months or more - AMF: 12 persons; Jail term 2-60 months; In 7 cases imprisonment was 12 months or more - ASC: 2 persons; Jail term 24-36 months - BCSC: 5 persons; Jail term 2-24 months; In 3 cases imprisonment was 12 months or more - Cooperation and coordination: - CSA Enforcement Committee meets monthly (teleconference) and twice a year in person; developed Multi-jurisdictional Enforcement Guide and Joint Assessment Committee; new case-sharing database. - Reciprocal Orders usage (2009–2012): - Number of Cases: 2009 46; 2010 52; 2011 37; 2012 9 - Number of Individuals: 2009 54; 2010 57; 2011 60; 2012 11 - Number of Companies: 2009 19; 2010 13; 2011 13; 2012 10 - Cooperation with law enforcement: - IMET units established 2003 to investigate/prosecute capital market fraud of national significance—ten IMET teams in Vancouver, Calgary, Toronto and Montréal. - IMET program charged 47 individuals since creation; 13 convicted (sentences 18 months to 13 years); seven cases remained before courts as of 2012. - JSIU and AMF’s ÉIRF gather intelligence and opened investigative files (examples: JSIU opened 109 files year ending March 31, 2011; 27 files year ending March 31, 2012; ÉIRF opened 178 files year ending March 31, 2011; 146 in 2012; since April 2012 opened 72 files). - National Securities Fraud and Economic Crime Prosecutors Affiliation (since 2007) examines best practices for investigation/prosecution. - Assessment: Broadly implemented - Comments: - Significant progress in enforcement and resource commitment; increased use of administrative penalties and quasi-criminal powers improves deterrence where criminal enforcement results mixed. - SROs (IIROC, MFDA) strengthened enforcement strategies; IIROC improved nexus between compliance reviews and enforcement. - Need to increase speed of enforcement to maintain deterrent effect. - Criminal enforcement still mixed; integrated teams and prosecutor coordination yield better results in some provinces; some provinces dependent on Attorney General priorities. - Recommend continued enhancement of on-site inspections, improving MFDA follow-up on member deficiencies, and improved public statistics on enforcement outcomes. ### Principles for cooperation and information sharing (Principles 13–15) - Principle 13 — Authority to share public and non-public information: - OSC (Section 153 OSC Act) and AMF (Section 297 AMF SA) have authority to share information with domestic and foreign regulators without external approval; MoU not required; independent interest in the conduct not precondition for exchange; can share unsolicited information. - Assessment: Fully implemented - Principle 14 — Information-sharing mechanisms (MoUs): - OSC MoUs (local and foreign) require Minister approval (Section 143.10 OSC Act); AMF approval required at local level (Section 3.8 Act respecting the Minister du Conseil executif); AMF exploring streamlining. - OSC, AMF, Alberta and British Columbia signatories of IOSCO MMoU; numerous bilateral MoUs exist (including with US SEC). - OSC handled high request volumes historically (fiscal 2005–2006: ~16,000 requests; 775 from foreign regulators). - Assessment: Fully implemented - Principle 15 — Assistance to foreign regulators: - OSC and AMF can assist foreign regulators to obtain information not in their files, including brokerage account records; provision of banking account info obtained under compulsion subject to limitations. - OSC provided assistance in over 45 cases in the last year; in roughly 10 of those no MoU existed. - Assessment: Fully implemented ### Principles for Issuers, Disclosure and Corporate Governance (Principles 16–18) - Principle 16 — Disclosure of financial results, risks and material information - Harmonized National Instruments cover prospectus disclosure, short-form prospectus, shelf distributions, prospectus and registration exemptions, continuous disclosure obligations and foreign issuer exemptions (NI 41–101; 44–101; 44–102; 45–106; 51–102; 71–102). - Prospectus and continuous disclosure requirements: - Annual financial statements with audit and MD&A within 90 days of fiscal year end (120 days for venture issuers). - Annual Information Form (AIF) same deadline (except venture issuers). - Quarterly financial statements and MD&A within 45 days after interim period (60 days for venture issuers). - Material change reports: immediate press release and formal report within 10 days. - Prospectus review under MRRS: principal regulator assigned; non-principal regulators have five days to comment; opt-outs possible. - Continuous Disclosure Review System (CDRS): principal regulator reviews disclosure documents; CSA aims to review 25 percent of large issuers and 10 percent of smaller issuers by number—AMF stricter (three-year cycle for 30 largest; 25 percent of remaining large issuers on four-year cycle; ten-year cycle for the rest). - OSC and AMF review mechanisms: fast review by financial examiners; in-depth full review by industry specialized teams; OSC uses quantitative risk model; AMF has senior internal quality control review. - Liability: issuers subject to strict liability for prospectus; underwriters subject to due diligence; Ontario, Alberta and Québec extended liability to continuous disclosure (November 9, 2007 legislation); other provinces in process. - Assessment: Fully Implemented - Comments (2013): Exempt market capital raising significant—monitoring important; BCBC strategic priority includes exempt market monitoring; policy proposal to update exempt market framework under consideration—careful balance necessary. - Principle 17 — Fair and equitable treatment of holders of securities - Majority of shareholder rights governed by provincial corporate law; takeover and proxy frameworks highly harmonized. - Typical provisions: - One share one vote (articles may provide cumulative voting); - Approval of changes to terms/conditions of securities via class/type meetings; - Fundamental changes require statutory votes (often two-thirds) with dissenting shareholders entitled to fair price; - Timely notice of meetings; NI 54–101 governs proxy procedures; - Substantial/insider holdings disclosure: early warning at 10 percent (drops to 5 percent when formal bid outstanding); insider reporting within 10 days of becoming director/officer and for changes within 10 days; SEDI electronic database available to public. - Assessment: Fully implemented - Comments (2013): Policy proposal to tailor disclosure/governance for venture issuers—balance important. - Principle 18 — Accounting standards quality - NI 52–107 harmonized acceptable accounting principles and auditing standards. - Issuers prepare financial statements according to Canadian GAAP; goal to adopt IFRS by 2011 (issues for oil, gas, mining/extraction activities noted). - Audits per Canadian AS by AASB; goal to adopt International Auditing Standards. - Auditor independence: NI 52–108 and NI 52–110 (Audit Committees) require auditor reporting to audit committee and pre-approval of non-audit services; CPAB oversight of auditors. - Enforcement: regulators can order amendments to statements, suspend trading, impose sanctions; OSC and AMF publish lists of issuers with reporting deficiencies. - Assessment: Fully Implemented ### Principles for Auditors and Auditor Oversight (Principles 19–20) - Principle 19 — Auditor oversight (CPAB) - CPAB (Canadian Public Accountability Board) established 2003; independent not-for-profit; Council of Governors includes Chair of CSA, OSC, AMF, Superintendent of Financial Institutions, a fifth CSA-selected governor and an experienced professional accountant. - Provincial Audit Regulator Members vote on by-law amendments and receive financial statements; some provinces enacted statutes making CPAB accountable to government (Ontario and five others). - Board of Directors: 11 directors appointed by Council; at least 4–5 professional accountants; at least 2 with oversight regulatory experience. - Funding: Annual Participation Fees allocated among participating audit firms in proportion to audit fees to reporting issuers; fee currently 2.0 percent of audit fees (foreign firms certain jurisdictions 0.2 percent). One-time flat fee on joining. - Authority via Participation Agreements under NI 52-108 and By-law No. 1 requiring cooperation from firms. - Powers: establish participation requirements; publish register of participating firms; conduct inspections directly or with provincial bodies; investigations and impose requirements/restrictions/sanctions; assist provincial accounting bodies and foreign oversight bodies; provide comments on standards. - Remedial measures: recommendations typically required to be implemented to CPAB satisfaction within normally 180 days; Rule 601 remedies include additional education, policies, reviewers/supervisors, termination of engagements, independent monitors, prohibitions on new reporting issuer clients, public censure, monetary assessments, termination as participating firm. - Inspection cycle: firms with 100+ reporting issuer clients inspected annually; 50–99 clients inspected at least every two years; <50 clients at least every three years (CPAB relies on provincial bodies for smaller firms). - Practice and results: - CPAB staff: 42 accountants directly involved in inspections (4 Montreal, 7 Vancouver, 26 Toronto, 5 contractual). - 2011 inspections: 88 firms inspected; 245 audit engagements inspected. - 2011 follow-up: 7 requirements placed, 1 restriction; no sanctions in 2011; prior years summary: 2010 requirements 3; 2009 requirements 2; 2008 requirements 9. - CPAB publishes annual report of inspection findings. - Assessment: Broadly Implemented - Comments: - Grade mainly due to enforcement-related issues (question 7 methodology). - CPAB relies mainly on recommendations for largest firms; question whether more use of sanctions and pecuniary penalties warranted—particularly for smaller firms where reputation incentives weaker. - Need improved information sharing with audit committees and regulators. - Encourage provinces that have not provided legal protection/non-compellability to CPAB staff to do so. - Principle 20 — Auditor independence - Independence standards embedded in provincial professional bodies’ rules and NI 52-110. - Prohibitions and required safeguards cover financial interests, loans/guarantees, close business relationships, family/personal relationships, employment relationships, management functions and specified non-audit services. - Non-audit services prohibitions include bookkeeping, financial information systems design/implementation (subject to safeguards), actuarial, valuation, internal audit, expert services, legal services that involve dispute resolution, corporate finance and tax planning/advisory (subject to guidance). - Audit partner rotation mandatory after seven years with five year cooling-off lag. - Firm-level quality control per CSQC 1 and Canadian Auditing Standard 220; engagement partner must form conclusion on compliance with independence. - NI 52-110 requires audit committees (independent members) to recommend external auditor, recommend compensation, oversee external auditor, pre-approve non-audit services, review hiring policies. - CPAB reviews include auditor independence processes and compliance with Rule 204 Independence Standards. - NI 51-102 requires reporting issuers to notify change of auditor with reasons, modified opinions, unresolved issues; notices filed within 30 days after termination/resignation and 30 days after successor appointment. *Source: _cr1473 (selected sections provided) — text as supplied.* ### Part 13 of NI 81-106 requires public investment funds to follow the “noisy withdrawal” ### _cr1473 - Part 13 of NI 81-106 requires public investment funds to follow the “noisy withdrawal” ### Noisy withdrawal regime - Part 13 of NI 81-106 requires public investment funds to follow the “noisy withdrawal” regime set out under NI 51-102. - Assessment: Fully Implemented - Comments: The challenges on the effectiveness of audit committees are not unique to Canada. The assessor encourages the authorities to continue working on developing tools to facilitate their role. ### Principle 21 — Audit standards (assessed in 2007) - Regulatory framework: - Harmonized in NI 52–107 Acceptable Accounting Principles, Auditing Standards and Foreign Currency. - Issuers must prepare financial statements according to Canadian GAAP issued by the Accounting Standards Board (ASB). - ASB goal reassessed: minimize differences with and implement International Financial Reporting Standards (IFRS) by 2011. - IFRS does not address specific standards for oil, gas and mining/extraction activities, posing challenges for the Canadian market. - Audits must be prepared in accordance with Canadian AS issued by the Audit and Assurance Standards Board (AASB) of the Canadian Institute of Chartered Accountants; the AASB’s goal is to adopt the international auditing standards. - Auditor independence mechanisms (NI 52–108 Auditors Oversight and NI 52–110 Audit Committees): - The auditor must report directly to the audit committee, which is responsible for overseeing and must pre-approve all non-audit services. - The auditor must comply with rules established by the Canadian Public Accounting Board (CPAB), which has issued rules on independence. - CPAB role: - Independent corporation mandated to oversee external auditors that provide auditing services to listed companies throughout the country. - Governing body is a council of governors on which securities regulators are represented. - Conducts on-site inspections of auditing firms, which are obliged to correct any deficiency found by the CPAB. - Regulatory enforcement: - A regulatory authority can order an issuer to amend financial statements that do not comply with accounting standards, suspend trading of an issuer and impose sanctions. - OSC and AMF publish lists of issuers with deficiencies in reporting obligations; once corrected, the issuer is removed from the list. - In Ontario, deficiencies identified via a continuous disclosure review result in placement on an errors and refiling list. - Assessment: Fully implemented ### Principle 22 — Credit rating agencies oversight - Use of ratings: - Securities legislation includes numerous references to credit ratings that can confer differential treatment (examples: prospectus and registration exemptions for short-term debt with specified credit rating; eligibility for short-form prospectus; eligibility for investment by money market mutual funds). - Designation and registration: - Pursuant to NI 25-101 any credit rating organization wishing its ratings to be eligible for regulatory use must be registered as a designated rating organization (DRO). - NI 25-101 requirements based substantially on the IOSCO Code; goal to be internationally consistent to allow recognition by ESMA. - Application requirements (Form 25-101F1): - Organizational structure of the credit rating organization. - List of credit rating affiliates. - Copy of the code of conduct incorporating provisions in Appendix A to NI 25-101. - Description of procedures and methodologies used in determining credit ratings. - Description of policies/procedures to prevent misuse of material, non-public information. - Description of policies/procedures to address and manage conflicts of interest. - Information regarding credit analysts and credit analyst supervisors. - Information regarding the designated compliance officer. - A list of the largest users of credit rating services by net revenue earned during the prior fiscal year. - Financial statements for each of the three fiscal or calendar years ending immediately before the date of the initial application. - Information regarding revenues for the fiscal or calendar year ending immediately before the date of the initial application. - A credit rating organization already registered as an NRSRO with the SEC may file its most recent Form NRSRO instead of Form 25-101F1. - Quality and integrity of ratings (Appendix A to NI 25-101): - Procedures to ensure credit ratings are based on a thorough analysis of all relevant information. - Use only rating methodologies that are rigorous, systematic, continuous and subject to validation based on experience, including back-testing. - Ratings employees must use established methodologies and apply them consistently. - A credit rating must be assigned by the DRO and not by an employee or agent of the DRO. - Ratings must reflect all information known and believed relevant to the DRO, consistent with its published methodology. - Monitoring and updating ratings: - DRO will allocate adequate personnel and financial resources to monitoring and updating credit ratings; once published, the DRO will monitor on an ongoing basis and, at least annually, update the rating (except for ratings that clearly indicate they do not entail ongoing monitoring). - DRO must establish a committee to review, on at least an annual basis, and make changes to methodologies, models and key rating assumptions. - DRO must initiate a review of the accuracy of a rating upon becoming aware of any information that might reasonably be expected to result in a rating action and promptly update the rating as appropriate. - If separate analytical teams are used for initial ratings and subsequent monitoring, each team must have the requisite expertise and resources. - Records: - Section 13 requires a DRO to keep books and records for a period of seven years from the date the record was made or received, in a safe location and durable form, and in a manner permitting prompt provision to the securities regulator upon request. - Resources: - DRO must ensure ratings employees and agents have appropriate knowledge and experience. - DRO must devote sufficient resources to carry out high-quality credit assessments of all rated entities and rated securities. - DRO must adopt measures to ensure information used is of sufficient quality and from a source a reasonable person would consider reliable. - Independence and conflicts of interest: - DRO will not refrain from taking a rating action based on the potential effect of the action on the DRO or market participants. - DRO and employees must remain independent and maintain appearance of independence and objectivity. - Credit rating determination will be influenced only by factors relevant to the credit assessment. - DRO will not allow decisions to be affected by business relationships between the DRO or affiliates and any other person or company. - DRO will not rate an affiliate or associate of the organization or a ratings employee; must not assign a rating if a ratings employee is an officer or director of the rated person or company. - DRO will not permit ratings employees or associates to transact in securities or derivatives within their primary analytical responsibility area, other than holdings through an investment fund. - Board oversight: - DRO will not issue a credit rating if a board member participated in deliberation involving a specific rating where the member has a financial interest in the outcome. - DRO will not compensate an independent board member in a manner or amount that a reasonable person could conclude links compensation to the DRO’s business performance. - Conflict of interest disclosure: - DRO will identify and eliminate or manage and publicly disclose any actual or potential conflicts of interest influencing ratings employees. - DRO will disclose actual or potential conflicts in a complete, timely, clear, concise, specific and prominent manner. - Compensation disclosures (Section 3.9 Appendix A): - DRO will publicly disclose the general nature of compensation arrangements with rated entities. - If DRO or an affiliate receives non-rating compensation from a rated entity, the DRO will disclose the percentage that non-rating fees represent out of total fees received from that rated entity, affiliate or related entity. - If DRO or an affiliate receives directly or indirectly 10 percent or more of its annual revenue from a particular rated entity or subscriber (including revenue from affiliates or related entities), the organization will disclose that fact and identify the particular rated entity or subscriber. - Prospectus and continuous disclosure rules require companies to disclose whether they paid the credit rating organization that provided a credit rating and whether they paid for any other services provided by the credit rating organization during the last two years. - Timely distribution and non-selective disclosure: - Section 4.1 requires DRO to distribute ratings decisions and updates in a timely manner. - DRO will publicly disclose policies for distributing ratings, ratings reports and updates. - Except for ratings disclosed only to the rated entity, DRO will disclose to the public, on a non-selective basis and free of charge, any ratings decision regarding reporting issuers or their securities, and any subsequent decisions to discontinue such a rating if the decision is based in whole or in part on material non-public information. - Transparency of procedures, methodologies and assumptions: - DRO will publicly disclose methodologies, models and key rating assumptions and any material modifications, including sufficient information so outside parties can understand how a rating was arrived at. - DRO will assist investors in understanding what a credit rating is and its limits relative to particular financial products; DRO will clearly indicate attributes and limitations of each credit rating. - Information on past performance: - Section 4.13 requires DRO to publicly disclose yearly data about historical default rates of its rating categories and whether default rates have changed over time, including verifiable, quantifiable historical information organized and structured to assist investors in drawing performance comparisons between DROs. - Protection of non-public information: - DRO and employees will take all reasonable measures to protect confidential information shared by rated entities under confidentiality agreements or mutual understanding; unless permitted or required, confidential information will not be disclosed. - DRO and employees will not use confidential information for any purpose except rating activities or as allowed by law or confidentiality agreement. - DRO and employees will not share confidential information with employees of any affiliate; internal sharing only as necessary for credit rating functions. *Source: _cr1473 - Part 13 of NI 81-106 requires public investment funds to follow the “noisy withdrawal”* ### Section 4.21 of Appendix A to NI 25-101 provides that the DRO and its employees will ### _cr1473 - Section 4.21 of Appendix A to NI 25-101 provides that the DRO and its employees will ### Non-disclosure and confidentiality - Section 4.21 of Appendix A to NI 25-101 provides that the DRO and its employees will not selectively disclose any non-public information about ratings or possible future rating actions of the DRO, except to the issuer or its designated agents. ### Foreign CRAs and “DRO affiliate” concept - NI 25-101 includes the concept of a “DRO affiliate” for foreign entities that are subject to regulatory oversight in other jurisdictions. - Definition: A DRO affiliate is “an affiliate of a DRO that issues credit ratings in a foreign jurisdiction and that has been designated as a DRO affiliate under the terms of the DRO’s designation.” - Suitability and designation: - The suitability of an affiliate to be designated as a DRO affiliate is determined on a case-by-case basis at the time of designation. - To make such a determination the designating securities regulator considers the legal and supervisory framework of the foreign jurisdiction, including whether the credit rating organization is authorized or registered in that foreign jurisdiction and whether the credit rating organization is subject to effective supervision and enforcement. - Compliance scope: - A DRO affiliate is not required to comply with all of NI 25-101, although, where appropriate, references to a DRO affiliate are included in NI 25-101. - Example requirement: A DRO, or a DRO affiliate that is a parent of the DRO, must have a compliance officer that monitors and assesses compliance by the DRO and its employees with the organization’s code of conduct and with securities legislation. ### Cooperation with foreign regulators (MoUs) - The agencies have entered into the following MoUs: - The OSC, AMF and the BCSC entered into a MoU with ESMA concerning the regulatory cooperation related to the supervision of credit rating organizations that operate in both the European Union and Canada. The Supervisory MOU sets forth the terms and conditions and a framework for consultation, cooperation and information sharing related to the day-to-day supervision and oversight of credit rating agencies that operate across our jurisdictions. - The OSC, AMF, ASC and BCSC have a MoU with the US SEC regarding mutual assistance in the supervision and oversight of regulated entities (which include credit rating organizations) that operate on a cross-border basis in the United States and Canada (the SEC MOU). - The OSC, AMF, ASC and BCSC have a MoU with ASIC regarding mutual assistance in the supervision and oversight of regulated entities (which include credit rating organizations) that operate on a cross-border basis in Australia and Canada (the ASIC MOU). - The securities regulators are currently in the process of negotiating other MOUs with the FSA and the CFTC that deal with supervisory cooperation. ### Application process for designation as a DRO - NP 11-205 describes the process for the filing and review of an application to become a DRO in more than one jurisdiction of Canada. - Key procedural features: - An application to become a DRO in multiple jurisdictions is prepared under the passport system. - The application to become a DRO is filed only with, and fees paid only to, the principal regulator. - The principal regulator will review the application and its decision to grant the designation automatically results in a deemed designation in the notified passport jurisdictions. - Generally, the principal regulator is the regulator in the jurisdiction where the DRO’s head office is located, or, if the DRO does not have a head office in Canada, the jurisdiction where the DRO’s largest branch office is located. ### Powers, remedies, and enforcement - Securities regulators may, subject to providing the credit rating organization the right to be heard, do the following: - (i) refuse to designate a credit rating organization, - (ii) cancel the designation of a credit rating organization, or - (iii) impose or change the terms and conditions of the designation. - Remedies available to securities regulators against a DRO include: - order that a DRO enact changes to its practices and procedures; - order that a DRO be reprimanded; - order that a DRO that has not complied with securities legislation pay an administrative penalty for each failure to comply; - revoke its designation order; or - launch an enforcement investigation and quasi-criminal proceeding. - Additional authority: - Securities legislation authorizes the securities regulators to designate, in writing, one or more persons to review the books, records and documents required to be kept by a DRO for the purpose of determining whether the DRO is complying with securities legislation. ### Ongoing oversight and reporting requirements - Filing requirement: - No later than 90 days after the end of its most recently completed financial year, each DRO must file a completed Form 25-101F1 with the securities regulators. - Form 25-101F1 includes prescribed information about the business and operations of the DRO and includes a narrative explanation of the policies, practices and internal controls adopted by the DRO to ensure compliance with the requirements of NI 25-101. - Compliance reviews: - DROs, as market participants, are subject to compliance reviews. ### Practice to date (applications and designations) - Applications received: - To date, the securities regulators have received applications from four credit rating organizations. The applicants were DBRS Limited, Fitch, Inc., Moody’s Canada Inc., and Standard & Poor’s Rating Services (Canada). - Principal regulator designation: - Since the head office of each credit rating organization or affiliate is located in Toronto, Ontario, the OSC was identified as the principal regulator. - Designation timeline and supervisory review: - On April 30, 2012, the OSC granted designation orders to each of the applicants, but exempted the applicants from the application of NI 25-101 for six months to allow the applicants to review and amend, if necessary, their policies, practices and internal controls in order to be compliant in all material respects with NI 25-101. - The April 30th designation orders were granted to satisfy the endorsement requirements in the European Union (EU) regarding the use of credit ratings issued by Canada-based rating agencies. - During the summer of 2012, OSC staff reviewed the information provided by the applicants pursuant to Section 6 of NI 25-101 to ensure that it was complete and to ensure that the applicants’ policies, practices and internal controls were compliant in all material respects with the requirements of NI 25-101. - As part of this process, three staff members and a manager reviewed the filings provided by the applicants and met with the applicants to discuss concerns or discuss policies and practices that would have to be implemented or revised in order to be compliant in all material respects with NI 25-101. *Source: Section excerpt from the IMF staff report PDF.* ### 101. This process began in May 2012 and concluded with the granting of the ### _cr1473 - 101. This process began in May 2012 and concluded with the granting of the ### Designation process and applicant changes - Timeline: - Process began in May 2012 and concluded with the granting of the designation orders on October 31, 2012. - Changes requested and implemented by applicants (examples): - One applicant adopted a board governance charter which sets out the duties and responsibilities of the board and incorporates the requirements of NI 25-101. - One applicant adopted a compliance mandate which sets out the duties and responsibilities of the CCO. - One applicant made changes to its organizational structure to appoint a designated compliance officer for the purpose of compliance with NI 25-101. - One applicant revised its outsourcing policy and its worldwide securities trading and conflicts of interest policy to incorporate the requirements of NI 25-101. - All of the applicants adopted new internal procedures and provided a sample presentation of credit ratings (PCR) to outline how they have incorporated the requirements in Sections 4.4 to 4.7 of Appendix A to NI 25-101. - Passport outcome: - Pursuant to the passport system described, the designation orders issued by the OSC were deemed to have been issued in all of the other Canadian provinces and territories. ### DRO Compliance Review Program - Status and staffing: - Given that the regulatory regime for DROs was recently implemented, the OSC has not yet conducted on-site compliance reviews of any DRO. - Staff with specific expertise in CRAs was hired. - The OSC is currently developing a compliance program based on the requirements set out in NI 25-101. - It is anticipated that the compliance program will be in place by the summer of 2013. - On-site program approach: - The on-site program will use a risk-based approach. - Certain topics identified for the first inspection include independence and reporting lines of chief compliance officers, and new business. - The frequency of on-site compliance reviews will vary depending on risks identified and whether the risks identified require immediate action. - OSC staff will monitor and consider areas for review on an annual basis. - International coordination: - Under the Supervisory MOU with ESMA, OSC staff participate in quarterly conference calls with ESMA staff to share information about the supervision of DROs that are also registered in the European Union. - Example: ESMA staff completed a compliance review of DBRS Ratings Limited (a UK affiliate of DBRS registered in the European Union) during the summer of 2012 and shared the results with OSC staff. - OSC staff have provided progress reports to ESMA staff concerning the applications for designation for each of the applicants. - Assessment: - Assessment: Broadly Implemented - Comments: The grade is mainly the result of the fact that an on-site review program for DROs is not yet in place in connection with question 2b) of the methodology. The assessor acknowledges that the authorities have committed the resources and have a credible plan for the implementation of on-site reviews. ### Principle 23 — Oversight of other entities providing analytical or evaluative services (sell-side analysts and others) - Regulatory framework for sell-side analysts: - NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) does not provide for a distinct registration category for individuals or firms providing analytical or evaluative services. - Registration is generally based on whether an entity or individual provides advice in relation to the trading of securities, or trades in securities; if so, they must be registered either as an adviser or as a dealer. - NI 31-103 exempts from registration persons who provide advice in securities if the advice is not individualized; in such case NI requires disclosure of conflict of interest. - Sell-side analysts are usually employed by investment dealers required to be members of IIROC. - Conduct and conflicts requirements: - All registered dealers and advisers, and registered individuals acting on their behalf, are required by securities legislation to deal fairly, honestly and in good faith with their clients and to put in place policies and procedures to address conflicts of interest. - IIROC Rule 3400 — Research Restrictions and Disclosure Requirements: - Rule establishes minimum requirements for analysts when publishing research reports or making recommendations, including written conflict of interest policies and procedures for each Dealer Member. - Dealer Member must prominently disclose in any research report: - any information regarding its, or its analyst's business with or relationship with any issuer which might reasonably be expected to indicate a potential conflict of interest; - the Dealer Member’s system for rating investment opportunities and how each recommendation fits within the system and must disclose on their websites or otherwise, quarterly, the percentage of its recommendations that fall into each category of their recommended terminology; and - its policies and procedures regarding dissemination of research. - Public comments by dealer employees about an issuer must reference any relevant research report or disclose that such a report does not exist. - Distribution of third-party research requires disclosure of items that would be required if prepared internally. - Specific conflict-of-interest rules (examples): - Investment banking interactions: - Dealers must have policies and procedures to prevent research recommendations being influenced by investment-banking department; minimum measures include: - prohibition on approval of research by investment banking department; - limiting comments from investment banking to factual error corrections; - preventing investment banking from receiving advance notice of ratings or rating changes; - systems to control and record flow of information between analysts and investment banking. - No Dealer Member may pay compensation to an analyst directly based on specific investment banking transactions; dealers must disclose in research reports if the analyst received compensation based on the Dealer Member’s investment banking revenues in the previous 12 months. - Relationship of officers or staff with issuers: - Dealers prohibited from issuing research if the analyst or associate serves as officer, director or employee of the issuer or in any advisory capacity. - No individual directly involved in preparation of the report can effect a trade in the issuer’s security for 30 calendar days before and 5 calendar days after issuance of the research report, unless prior written approval is obtained. - Dealers must have policies to prohibit trading by partners, directors, officers, employees or agents in anticipation of distribution of research that could affect the security price. - Firm-issuer relationships and services: - No Dealer Member may offer favorable research or delay changing a rating as inducement for business or compensation from an issuer. - Dealer Members must disclose in research reports if and to what extent an analyst viewed material operations of an issuer and must disclose issuer-paid travel reimbursements. - No Dealer Member may issue a research report for an equity regarding an issuer for which the Dealer Member acted as manager or co-manager of an initial or secondary public offering within certain deadlines. - Dealer Members must issue notice of intention to suspend or discontinue coverage, except when suspension is due solely to placement on restricted list. - Monitoring compliance with Rule 3400: - IIROC monitors compliance through Business Conduct Compliance Department (BCC) normal-course business conduct examinations. - BCC reviews a sample of research and analysis publications issued by: - IIROC members; - their registered individuals (approved persons), including research analysts; and - any third parties retained to perform similar services on behalf of IIROC members. - Research compliance is a component of the firm’s risk rating (high, moderate, low), which determines examination frequency. - Risk rating guidance: - High: research promotes maximum results while minimizing risks and excluding mandatory disclosures. - Moderate: research accurately reflects risks and return of a security. - Low: IIROC member does not engage in research. - Deficiency ratings: - Low rating example: member has not implemented satisfactory policies and procedures concerning research. - High rating example: member knowingly omitted material disclosures required by Rule 3400. - Low and moderate deficiencies are often highlighted and firms must inform IIROC of corrective steps. - IIROC’s compliance examination modules test activities relevant to Rule 3400 across scenarios and business models; examination results over time indicate Rule 3400 is an adequate regulatory framework for research activities. - Other analysts and expert service providers: - Qualified persons under NI 43-101: - NI 43-101 requires scientific or technical disclosure to be prepared by or under supervision of, or approved by, a qualified person. - Technical reports for first-time disclosure of mineral resources/reserves or preliminary economic assessment must be prepared by qualified persons independent of the issuer. - Qualified persons must comply with professional standards and generally use industry best practices; regulators may challenge or request revised reports if concerns about experience arise. - Valuators under MI 61-101: - MI 61-101 requires formal valuations to be provided by valuators independent of interested parties and with appropriate qualifications; independence and qualifications assessed case-by-case with examples of non-independence provided. - Proxy advisors: - On June 21, 2012, the CSA published a consultation paper on proxy advisory firms outlining concerns (conflicts of interest, lack of transparency, limited engagement with issuers, corporate governance implications, reliance by institutional investors) and possible regulatory responses; responses to the consultation are currently being reviewed. - Assessment: - Assessment: Fully Implemented - Comments: The rules for research analysts are in line with international best practices. The assessor notes that review of their compliance is part of IIROC’s review program. ### Principle 24 — Collective Investment Schemes (CIS) regulatory standards - Registration categories and distribution: - Pursuant to NI 31-103: - CIS operators are required to register in the category of IFM. - Individuals carrying out activities on behalf of a registered IFM are not required to register. - Advisers that provide portfolio advice to a CIS must be registered in the category of PM. - Dealers that market or sell a CIS must be registered in the category of dealer. - A dealer who markets securities of conventional CIS must be a member of IIROC or the MFDA except in Québec. - A dealer who markets securities of non-conventional CISs must be an IIROC member. - A dealer who markets securities of prospectus-exempt CISs to investors under a prospectus exemption must be registered as an EMD or an IIROC dealer member. - IFM operation and registration: - An IFM is required to register if it directs the business, operations or affairs of one or more investment funds, as provided in securities legislation. - Jurisdictions have adopted different approaches/interpretations to determine when registration is required for non-resident IFMs; interpretations set forth in MIs. - A firm wishing to be a CIS manager must apply for registration as an IFM and demonstrate minimum entry standards (“fit and proper requirements”) including proficiency, solvency and integrity requirements. - Minimum capital: - Overall NI 31-103 imposes a minimum capital requirement of $100,000 on all IFMs. - Calculation based on Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1). - Section 12.1(2) of NI 31-103 requires that the excess working capital of a firm as calculated on Form 31-103F1 must not be less than zero for two consecutive days. - Insurance: - NI 31-103 requires maintenance of insurance. - Amount of insurance required is based on calculations taking into account factors including assets under management (AUM). - The IFM must take into account likely changes in its AUM when assessing insurance coverage required. - Internal controls: - NI 31-103 requires registered firms to establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to provide reasonable assurance of compliance with securities legislation and to manage business risks in accordance with prudent business practice. - IFM internal controls should be appropriate based on size, complexity and risks of the business and CIS managed. - Human resources — approved persons and permitted individuals: - NI 31-103 specifically requires registrants, including IFMs, to designate a UDP and a CCO; these are “approved” individuals subject to integrity, proficiency and solvency requirements. - UDP: maximum authority ensuring firm is run prudently and in compliance with laws and regulations. - CCO: establishes and maintains policies and procedures to assess compliance, monitors and informs UDP of non-compliance; must submit an annual report to the board on compliance matters. - UDP and CCO must have direct access to the board of directors or equivalent when necessary. - Permitted individuals (per NI 33-109) must apply for review and include: - directors, CEO, CFO, chief operating officer, or functional equivalents; or - individuals who beneficially own, directly or indirectly, or exercise control or direction over 10 percent or more of the voting securities of the firm. - Permitted individuals undergo extensive integrity, solvency and proficiency disclosure in registration forms but are not “approved individuals” (regulators lack direct power to deny appointment). - Regulators can achieve oversight by refusing firm registration at entry or seeking remedies (suspension, terms and conditions) on an ongoing basis. - Registration process and reviews: - Applicants must complete Forms 33-109F4 and 33-109F6 providing extensive information including UDP and CCO identity, business history, organization and ownership chart, registration history, financial condition, conflicts of interest, regulatory actions, and criminal convictions or charges in past seven years. - In BC, Alberta and Manitoba, applicants are required to submit policies and procedures and a business plan for regulator consideration. - Regulators assess individuals via Form 33-109F4 including background checks (criminal offences, civil actions alleging fraud, theft, deceit, misrepresentation or similar misconduct, bankruptcies, regulatory proceedings) and review of securities industry experience. - Time and resources for registration review vary; where concerns arise agencies may request additional policies, procedures, and business plans; meetings with principals and premises visits may occur in some provinces. - Some provinces conduct a “light” on-site review of a new firm within 6–12 months of registration; in some jurisdictions a full on-site inspection roughly 18 months after registration is common. - On average, roughly 19 percent of new firms get inspected early on. - Agencies indicated low frequency of registration refusals; applicants usually address staff questions (often conflict of interest); in exceptional cases applicants withdraw. - Regulators have power to impose terms and conditions on registrants with an opportunity for the registrant to be heard before terms become final. - Changes to registration and duty of care: - Registrants must notify regulators of changes to information previously submitted in Form 33-109F6 and Form 33-109F4 within prescribed time. - IFM statutory standard of care: - act honestly, in good faith and in the best interests of the CIS; and - exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in the circumstances. - Under Section 4.4 of NI 81-102, agreement or declaration of trust must state IFM responsibility for loss arising from failure to carry out responsibilities according to standard of care as set out in NI 81-107; CIS cannot relieve IFM from such liability. - Conflict of interest governance: - Securities legislation prohibits transactions likely to give rise to conflicts. - NI 81-107 requires publicly offered CISs to have an IRC to oversee IFM’s handling of conflict of interest matters; IRC must have at least three members independent of the CIS, its IFM or related entities. - IRC members are not regulator-approved; IFM ensures they meet NI requirements (staff have in at least one case challenged inclusion during prospectus review resulting in withdrawal). - IRC must approve certain transactions and recommend on others involving conflicts; must prepare and file an annual report to security holders and provide a copy to regulator detailing instances of IFM acting without positive IRC recommendation, failures to meet IRC conditions, and summary of recommendations and approvals relied on. - When IFM does not meet a condition, IRC must notify regulators in writing as soon as possible. - Staff consider IRC to be providing value; IRC members tend to be seasoned retired professionals; notifications of breaches have occurred and IRC-identified concerns have been addressed by IFMs. - Other CIS obligations: - Specific obligations concerning best execution, trading, churning, due diligence apply to advisers for CIS investments. - Specific obligations related to disclosure of fees: fees and expenses must be included in prospectus in specified format. - Management expense ratio is reported semi-annually as part of the MRFP, and in the Fund Facts for conventional CIS on an annual basis. - Distribution and sales practices: - Obligations concerning the distribution of CIS (sales practices) are addressed in NI 81- (text truncated in source). *Source: _cr1473 - 101. This process began in May 2012 and concluded with the granting of the* ### 105. The intention of NI 81-105, by prohibiting certain sales practices and compensation ### _cr1473 - 105. The intention of NI 81-105, by prohibiting certain sales practices and compensation arrangements, is to reduce conflicts between the interests of investors and those of dealers, their sales representatives and managers. ### Intention of NI 81-105 and trailing commissions - NI 81-105 prohibits certain sales practices and compensation arrangements with the intention "to reduce conflicts between the interests of investors and those of dealers, their sales representatives and managers." - Both authorities and market participants stated that trailing commissions is an issue of concern in Canada, as they "induce dealers and their sales representatives to sell CIS securities based on the incentives they receive rather than on what is suitable for, and in the best interests of, investors." - The agencies informed that there is currently a CSA consultation proposal on trailing commissions that includes different alternatives to address this problem, "from better disclosure to banning trailing commissions." ### Outsourcing (delegation by IFMs) - Section 7.3 of 31-103CP: an IFM may delegate or outsource certain functions to other service providers; the IFM remains responsible and must supervise the service provider. - Part 11 of 31-103CP: discusses general business practices for outsourcing arrangements; requires written, legally binding contracts specifying expectations. - Due diligence expectations for IFMs when engaging service providers include assessment of: - reputation, - financial stability, - relevant internal controls, and - ability to deliver the services. - IFMs should maintain a detailed business continuity plan and review those of service providers to ensure no disruption in key business functions. - Regulators, the IFM and the IFM’s auditors must have the same access to the work product of a third-party service provider as if the IFM performed the activities; IFMs should ensure and, if necessary, contractually require this access. - Delegation arrangements should generally be disclosed to investors in the prospectus of a publicly offered CIS. - Agencies indicated delegated functions (e.g., fund accounting and valuation) are generally "available for hire" in Canada; numerous service providers exist and IFMs can organize alternative arrangements if needed. - Agencies have in some cases imposed terms and conditions or required hiring of a third party to review arrangements. ### Record-keeping obligations - Pursuant to NI 31-103 a registered firm must maintain records for a period of seven years from the date the record is created, "and be maintained in a safe location and in a durable form." - Records must be maintained so they can be provided to regulators "in a reasonable period of time." - Registered advisers who manage the portfolio of CIS assets are subject to NI 31-103 transaction-record requirements and "must have a complete record of the assets belonging to the CIS" to ensure orderly transfer if the adviser winds up its business. ### Regulatory powers and sanctions - NI 31-103 gives regulators authority to request periodic and ad-hoc information and to conduct on-site inspections and investigations. - Outcomes of inspections, CD reviews or investigations may lead to recommendations for regulatory actions including terms and conditions, suspension of registration, or referral to enforcement. - Possible sanctions (applicable to individuals and firms) can include orders: - that the registration or recognitions granted to a person or company be suspended, restricted or terminated; - that a person or company cease trading in securities for a period of time or permanently; - barring an individual from serving as an officer or director of an issuer or a registrant; - prohibiting a person or company from becoming or acting as a registrant or a promoter; - if the person or company has not complied with securities legislation, that the person or company disgorge any amounts obtained through non-compliance with securities legislation; and - if the person or company has not complied with securities legislation, that an administrative penalty be imposed for each failure to comply. - Temporary measures: regulators may impose temporary orders (including temporary cease trading) if hearing delays would be prejudicial to the public interest. - Regulators may direct a "freeze" of funds, securities or other property until they or the applicable provincial court orders otherwise. - If a criminal offence appears to have occurred, staff will refer the matter to the appropriate police service. ### Compliance inspections: framework and practice - CSA regulators conduct on-site inspections of registered firms, including IFMs, on a regular basis; framework is risk-based and intended to identify registrants likely to have material issues or risk of harm to investors. - Inspections are normally on-site; desk reviews (inspections from regulators’ offices) are also used. - Annual desk reviews of registrant financial statements and capital calculations assess compliance with working capital requirements. - Agencies classify firms usually in three categories: high, medium and low risks; risk assessment questionnaires may be used. - Frequency of reviews depends on registrant population and resources; higher risk firms receive more intense/frequent monitoring. - Inspection work is complemented by product-side work (CD reviews); low risk firms are sometimes reviewed to test the framework. - CSA-developed common "templates" for inspection modules that are tailored by firm risk. IFM inspection modules cover: - transfer agent and security holder accounting, - fund accounting, - trust accounting, - financial condition of the IFM, - marketing and sales practices, - referral arrangements, - use of service providers, - offering documents, - IRC, - conflicts of interest, - compliance and supervision, including policies, procedures and overall compliance structure. - Agencies perform for-cause inspections (e.g., complaints, referrals from another branch, SRO or regulator). - Agencies conduct sweeps/targeted reviews (example: Ontario sweep of IFMs of flow-through limited partnerships (FTLP managers) — review of six major FTLP managers; deficiency letters issued to all; terms and conditions imposed on one manager due to significant compliance issues; five other managers had adequate compliance systems). - Inspection type data (as presented in source): - Inspection type 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 - Regular inspections 13111112 21 - Targeted inspections/sweeps: - Valuation and expenses of CIS 26--- - - Labour-sponsored and venture capital CIS 5-- - - - High risk registrants -15-- 18 - Exchange traded CIS -6-- - - Money market CIS -18-- - - Hedge funds -7321 - - IFMs of flow through limited partnerships --- - 6 - For-cause inspections 372 - - - Total 47644513 45 - Regulators may distribute questionnaires or surveys to gather information or assess need for follow-up (example: October 2012 survey to IFMs on exposure to sovereign or corporate debt of issuers domiciled in Greece, Italy, Ireland, Portugal and/or Spain). ### Continuous Disclosure (CD) reviews - Under NI 81-106 CISs that are reporting issuers must file CD documents including annual and interim financial statements, Management Report of Fund Performance (MRFP) and AIFs. - Regulators review CD documents as part of CD reviews; scope and detail vary by jurisdiction. Some conduct planned and ad hoc CD reviews; some perform full reviews of CIS issuers on a regular basis. - CIS selection for reviews is based on size, type, investment strategies and risk rating. - Planned reviews: staff generally contact IFMs for relevant information; ad hoc reviews rely on information already filed. - Examples of planned reviews: - review of portfolio composition disclosure; - review of advertising and marketing materials produced by CISs; - examination of whether conventional CISs were understating their risk rating in their Fund Facts; - review of financial statement disclosure relating to securities lending; - review of dollar cost averaging funds. - Examples of ad hoc reviews recently completed: - exposure of Canadian CISs to potentially problematic European debt; - review of linked notes offering exposure to LIBOR or another benchmark that could have similar problems (e.g. not independently checked); - review of exposure of Canadian money market funds to downgraded US Treasury debt. ### Assessment, risk-based approach, and recommended supervisory actions - Assessment notes differences across provinces in registration and supervision of IFMs; practices vary in how thoroughly new registrants are assessed at entry. - In many provinces the registration review focuses on integrity, solvency and proficiency tests and minimum capital requirements, leaving internal controls and risk management to regular on-site inspection programs. - The assessor acknowledges a risk-based approach is reasonable and acceptable but notes it has resulted in a more focused use of on-site inspections for IFMs; product-side CD reviews act as a complement. - An additional investor safeguard: assets must be held by a custodian. - Recommendations/suggested actions: - Securities regulators should continually consider measures to increase the number of on-site inspections (individual firm inspections and/or thematic/sweeps) and refine their risk-based approach. - Authorities should analyze pros and cons of approaches to registration that allow some new firms to enter with a more basic level of review, to determine potential for build-up of significant problems. - The assessor encourages authorities to ensure shareholders are explicitly subject to integrity and solvency criteria and that directors face a minimum set of experience requirements; regulators should have indisputable powers to request changes of a shareholder or director when requirements are not met. - Authorities should follow up on issues related to approval powers over shareholders and directors to avoid delays in corrective action. ### Principle 25: legal form, segregation and protection of client assets - Legal form: - Framework does not prescribe legal form of CIS; freedom to use trust, corporation or limited partnership provided structure and unit holder rights are described in the prospectus. - Majority are set up as trusts largely due to favorable tax treatment. - Segregation of assets: - All conventional funds (open-ended funds) must have a custodian. - Entities authorized to provide custodial services to CIS are limited to: - banks listed in Schedule I, II or III of the Bank Act (Canada); - trust companies incorporated under the laws of Canada (or a provincial jurisdiction) with shareholders’ equity of not less than $10,000,000; or - an affiliated company (incorporated under the laws of Canada or a provincial jurisdiction) of such a bank or trust company if the affiliate has shareholders’ equity of not less than $10,000,000 (or the bank/trust company has assumed responsibility for all of the custodial obligations of the affiliated company). - A sub-custodian holding portfolio assets outside Canada must generally be either an affiliate of a Canadian bank or trust company (meeting the criteria above), or a foreign company with shareholders’ equity of not less than the equivalent of $100,000,000, regulated as a banking institution or trust company by the government of the foreign country. - The IFM is strictly prohibited from acting as custodian or sub-custodian for any CIS it manages. - Primary custodians used by Public CISs in Canada are concentrated among relatively few federally or provincially regulated financial institutions (FI Custodians); securities regulators estimate that 90 percent of Public CIS assets in Canada are held by three firms: CIBC Mellon Trust Company; RBC Investor Services Trust; and State Street Trust Company. - Prospectus-exempt CIS: - Are not subject to the custody requirement; OSC staff informed that in practice IFMs of a prospectus-exempt CIS generally retain an entity qualified to act as a custodian for assets of a Public CIS. - Securities regulators are reviewing custodial arrangements as part of ongoing amendments to NI 31-103, which would codify the existing business practice to require registered dealers, advisers and IFMs to use a prescribed custodian to hold client assets, including prospectus-exempt CISs. - Custody by related affiliates: - Framework does not prohibit an IFM from engaging a related bank as custodian; in practice some affiliated entities act as custodian for CISs created and managed by a related IFM. - Safeguards mitigating conflict of interest where custodians are related affiliates: - Standard of Care: custodian and sub-custodian subject to a standard requiring the degree of care, diligence and skill a reasonably prudent person would exercise, or at least the same degree of care as with respect to its own property of a similar kind. - CIS cannot relieve its custodian from liability to the CIS or a security holder for loss arising from the custodian’s failure to exercise the mandated standard of care. - Oversight of custodians: custodians are subject to oversight by a banking supervisor (OSFI or AMF in this case) and are required to be audited. - Compliance report on custody: Under section 6.7(3) of NI 81-102 (text truncated in source). _Italic: Source: _cr1473 - 105. The intention of NI 81-105, by prohibiting certain sales practices and compensation arrangements_ (PDF chapter/section)._ ### section 14.6 of NI 41-101 conventional and non conventional CISs, ### section 14.6 of NI 41-101 conventional and non conventional CISs ### Custodial compliance reporting requirements - Conventional and non-conventional CISs, respectively, must file a custodial compliance report within 30 days after the filing of their annual financial statements. - The custodian of the CIS must include the following in the report: - (i) the names and addresses of all sub-custodians of the CIS; - (ii) whether the custodian and sub-custodian agreements are in compliance with the custodial requirements under the Custody Rules; and - (iii) whether, to the best of the knowledge and belief of the custodian, each sub-custodian satisfies the eligibility criteria for sub-custodians under the Custody Rules. ### Conflict of interest framework - Under NI 81-107 Independent Review Committee for Investment Funds (NI 81-107), an IFM of a Public CIS must have written policies and procedures for “conflict of interest matters”, which include the use of affiliated service providers, including custodians. - The arrangement with affiliated service providers must be submitted to the IRC of the CIS for its review and recommendation. - The IRC must: - conduct an annual review of the adequacy and effectiveness of the IFM’s conflict of interest policies, and - report any breaches of those policies to the IFM for correction. ### Disclosure requirements for affiliated parties and custodial fees - The AIF of a Public CIS must disclose whether any person or company that provides services to the CIS, or to the IFM in relation to the CIS, is an affiliated entity of the IFM, and must show the relationships of those affiliated entities in the form of a diagram. - The disclosure must refer the reader to the audited financial statements of the CIS where amounts paid to affiliated entities by the CIS are shown. - Any individuals who are both a director or senior officer of the CIS, or partner, director or officer of the IFM, and also of the affiliated entity of the IFM, must be identified in the form. - Disclosure of related party transactions is required in a Public CIS’s annual and interim MRFP in addition to disclosure in the financial statements. If a CIS has engaged in a related-party transaction, it must disclose: - the identity of the related party; - the relationship to the CIS; - the purpose of the transaction; - any ongoing commitment to the related party; and - the basis on which any compensation to the related party was calculated. - All CISs subject to NI 81-106 Investment Funds Continuous Disclosure must disclose the custodial fees paid by the CIS in their financial statements. ### Audits and compliance oversight reviews - Conventional and non-conventional CISs must be independently audited on an annual basis. - The audit includes reconciliation between the portfolio records of the CIS and the custodian’s records. - Custodians are required by Canadian Auditing and Assurance Standards to prepare third-party assurance reports in accordance with the Canadian Standard on Assurance Engagements 3416 (CSAE3416) and to provide copies of these reports to the IFM. - Regulatory staff review the contents of such reports, including testing of internal controls regarding the safekeeping of CIS assets and any exceptions reported by auditors. - Compliance reviews of IFMs undertaken by securities regulators cover the IFM–custodian relationship, including: - review of policies and procedures and contracts; and - on-site inspections that include a high level review of the books and records of the custodian or sub-custodian in relation to the custodial agreement and interviews of key personnel involved in daily decision making governing portfolio assets. - Custody arrangements have been the subject of issue-oriented reviews by securities regulators. ### Assessment and assessor comments (Principles 24–27 context) - Assessment: Fully Implemented (Principles 24 to 27 apply to CIS offered to the public). - Comments: - The custodianship requirement in the Canadian framework is compliant with the Principles since it applies to all public CIS. - The assessor encourages authorities to extend the custodianship requirement to all CIS, as currently foreseen in the policy proposal on the table. - The IOSCO methodology does not prohibit custody by a related party but requires additional safeguards. In Canada: - custodians are regulated entities subject to oversight by a financial regulator; - related party custody arrangements must be reviewed by the IRC; and - disclosure must be provided to investors. - These safeguards appear to be in place in Canada. ### Disclosure, valuation, pricing, and redemption (Principle 26–27) - Disclosure requirements harmonized via NI 81–106. - Prospectus for public offering must include information about: - legal constitution of the CIS; - rights of unit holders; - the CIS operator; - the custodian; - investment objectives and strategies; - risks and suitability to particular investors; - valuation; subscription and redemption issues; - fees and expenses. - Ongoing disclosure obligations include: - Annual financial statements. - Semi-annual financial statements. - Management Report of Fund Performance (MRFP) provided with annual and semi-annual statements. - Portfolio composition on a quarterly basis. - Net asset value at least once a week or if the CIS uses derivatives on a daily basis. - Annual report by the independent review committee. - Financial statements must be prepared in accordance with Canadian GAAP. Audits must be conducted in accordance with Canadian AS. - Assessment: Fully implemented. - Comments from 2013 assessment: - Authorities are encouraged to prioritize initiatives to (i) eliminate any potential unlevel playing field between conventional and non-conventional CIS, particularly regarding the investment framework, and (ii) modernize the framework for alternative CIS. ### Asset valuation, NAV calculation, pricing errors, and suspension of redemptions (Principle 27) - NI 81-106 harmonizes provisions regarding valuation of publicly held CIS assets, including calculation frequency and currency. - Net asset value (NAV) must be calculated in accordance with Canadian GAAP. - CICA Accounting Guideline 18 specifies that CIS should value all their assets at fair value and present them on this basis in financial statements. - Specific rules changed in October 2006: investments in an active market must be valued at the bid and ask price, rather than at closing price. Regulators provided a one year exemption. Financial statements still have to be calculated based on Canadian GAAP. - Valuation of illiquid assets is covered in Investment Funds Institute of Canada (IFIC) guidance. - NAV calculation frequency: - at least once each week if the CIS does not use derivatives; and - every business day if the CIS uses derivatives. - If a CIS publishes prices in the financial press it must provide its current price to the financial press in a timely manner; the Companion Policy specifies attempting to meet publishing deadlines. - Pricing errors: - The regulatory framework does not include explicit provisions on pricing errors. - IFIC has developed voluntary industry standards addressing determination of errors, material thresholds, processing errors, and assigning cost of errors; manager remains ultimately responsible for valuing the CIS. - Suspension of redemption: - CIS may suspend redemption when normal trading is suspended on the exchange or with the approval of the regulator. - While redemption rights are suspended, CIS can postpone paying redemptions and cannot accept purchases. - Assessment: Fully implemented. - Comments from 2007 carried forward: - Authorities are considering delinking calculation of the NAV from Canadian GAAP for subscription and redemption purposes (subscription and redemption calculated with the closing price), while financial statements would remain in accordance with Canadian GAAP. ### Hedge funds oversight (Principle 28) - Hedge funds are not a distinct category of CIS in Canada; no global agreed-upon definition. CSA Staff Notice 81-316 Hedge Funds (2007) provides a working definition: pools using alternative investment strategies such as long and short positions, arbitrage, leverage, options, futures, bonds and other instruments. - As of June 2012: - HFs AUM represented about four percent of the total size of MFs in Canada, and two percent of the global HF market. - More than 80 percent of all hedge funds have less than $100 million in assets under management. - Entities involved in HF operation typically must register under NI 31-103 where applicable: - Operators register under the IFM category. - Advisers providing portfolio advice register under the PM category. - Dealers marketing or selling securities register under the ID or the EMD categories. - Prime brokers register under the IC and are subject to NI 31-103 regulatory requirements. - IFM requirements for hedge funds (same as other IFMs): - Fit and proper requirements for individuals performing the UDP and CCO positions. - Financial resources: the minimum capital is $100,000 as calculated according to Form 31-103F1. - Insurance: an IFM must maintain insurance based on either one percent of its assets or the assets it has under management, with a minimum per clause of $200,000 and a maximum of $25,000,000 or a higher amount set by the board of directors; same insurance as required for portfolio managers. - A system of compliance including (i) compliance with rules and regulations and (ii) internal controls and risk management. - Policies and procedures to address conflict of interest. - The HF custodian is not required to register under NI 31-103 if the custodian is not in the business of trading or advising. NI 41-101 contains requirements relating to custodians for hedge funds that offer securities under a prospectus. - In the majority of cases, hedge funds are distributed in Canada on a prospectus exempt basis, through private placements; most prospectus exemptions are set out in NI 45-. *Source: section 14.6 of NI 41-101 conventional and non conventional CISs (excerpt provided).* ### 106. As a result the HFs themselves are not subject to any review by the securities ### _cr1473 - 106. As a result the HFs themselves are not subject to any review by the securities ### Hedge funds (HFs) — regulatory scope and operational requirements - HFs that distribute securities under a prospectus become reporting issuers and are subject to comprehensive regulatory requirements on: - prospectus filing and disclosure; and - operational requirements including investments of the fund; conflicts of interest; custodianship of assets; CD; purchases and redemptions; and sales practices. - IFMs are required to keep assets segregated. - IFMs of HFs (other than those that offer securities under a Prospectus) are not by law required to use a separate custodian, although a 2007 Staff Notice indicated client assets were held in safekeeping predominantly by large third parties (banks, dealers, trust companies). - HFs that offer securities under a prospectus are required to use the services of a custodian (see Principle 25 reference in source). ### Regulator powers, information flows, and international cooperation - Regulators have the same powers regarding IFMs of HFs as for other IFMs (Principle 24). - Regulators receive qualitative and quantitative information via: - information at registration of IFM and adviser; - information during compliance reviews; - prospectus filing information on risks (when distributed by prospectus); - ongoing CD filing requirements (if securities distributed by prospectus), including: annual and interim financial statements; MRFP; AIFs; and, on a quarterly basis, the hedge fund’s top 25 holdings; - reports of exempt trades (for prospectus-exempt distributions) including name and address of the hedge fund; investor name; description of securities; date and particulars of the trade. - In jurisdictions with the largest populations, regulators obtain periodic information of all IFMs via risk-assessment questionnaires. - Regulators can request ad-hoc information (example: 2012 survey to all IFMs on Eurozone exposures). - Laws permit the four agencies to collect and share information domestically and internationally and with law enforcement; all four are signatories of the IOSCO MMoU. Compliance review results are occasionally shared with foreign authorities, including the SEC. ### Disclosure to investors and distribution methods - HFs sold under a prospectus: required to provide full, true and plain disclosure and become reporting issuers subject to CD requirements. - Most Canadian HFs are distributed on a prospectus-exempt basis under NI 45-106, where exemptions limit distributions to persons with sufficient investment knowledge or resources to obtain expert advice; such investors may not require substituted disclosure. ### Ongoing supervision and thematic work - Ongoing supervision of IFMs managing HFs is integrated into general IFM supervisory programs: - Off-site monitoring includes annual self-assessment questionnaires (OSC receives these). - On-site inspections frequency depends on regulator risk classification; IFMs managing HFs tend to fall in high risk categories. - Example: AMF identified 25 HF managers in a 2009 thematic review; 8 of those 25 were inspected in the last 2 years based on AMF risk score. - Thematic inspections on HFs: - 2007 thematic inspection focused on valuation methodologies, portfolio holdings exposure to illiquid assets, counterparty risk, ability to meet redemptions, and procedures/controls to monitor portfolios. - 2012: Canada participated in the second IOSCO Hedge Fund Survey sent to a sample of HF managers; a report by IOSCO was anticipated. ### Assessment status (as in source) - Assessment: Fully Implemented (context: HF regulatory aspects described). ### Principles for Market Intermediaries — registration and categories (Principle 29) - NI 31-103 requires firms to register if they are: - in the business of trading or advising; - holding themselves out as in the business of trading or advising; - acting as an underwriter; - acting as an IFM (directing business/operations/affairs of an investment fund). - Dealer categories: investment dealers (IIROC members), mutual fund dealers (MFDA members except Québec), scholarship plan dealers, EMDs, restricted dealers. - Adviser categories: portfolio manager and restricted portfolio manager. - Fitness for registration assessed via proficiency, integrity and solvency criteria; registrants must demonstrate continuing fitness. - NI 33-109 prescribes forms for applicants and registrants (Form references preserved in source). - Registrants may be subject to terms and conditions; applicants/registrants have an opportunity to be heard before terms/conditions become final. ### Specific firm registration requirements and investor protection funds - IIROC members must participate in CIPF: - Maximum coverage: $1,000,000. - CIPF history: 18 CIPF member insolvencies since CIPF’s inception in 1969; CIPF has made payments of $36,000,000, net of recoveries; no eligible customers have suffered a loss of property. - MFDA members must participate in IPC: - Maximum coverage: $1,000,000 (coverage commenced July 1, 2005). - Clients with accounts in Québec at MFDA member firms are generally not entitled to IPC protection if assets are held in Québec. - Québec: mutual fund dealers and scholarship plan dealers registered in Québec must contribute to Fonds d’indemnisation des services financiers (FISF). ### Capital and prudential requirements (Principle 30) - Capital requirements summarized by category (exact figures preserved): - Carrying brokers and introducing brokers (Types 2, 3 and 4): minimum capital $250,000. - Type 1 introducing brokers: minimum capital $75,000. - Mutual fund dealer Level 1: $25,000; Level 2: $50,000; Level 3: $75,000; Level 4: $200,000. IFM registered and Level 2 or 3 dealer must maintain minimum capital of at least $100,000. - Mutual fund dealer (non-member, Québec): minimum capital = $50,000 plus deductible on liability insurance. - Scholarship plan dealer: $50,000 (Form 31-103F1). - EMD: $50,000 (Form 31-103F1). - Portfolio manager: $25,000 (Form 31-103F1). - IFM: $100,000 (Form 31-103F1). - Form 31-103F1 Calculation of Excess Working Capital: - Must be prepared using Canadian GAAP. - Components include current assets (with exclusions), deductions for current liabilities, deductions for long-term related party debt (unless subordinated), deductions for minimum capital, deductions for market risk (using Schedule 1 margin rates), deductions for bonding/insurance under Part 12 of NI 31-103, deductions for guarantees, and unresolved differences. - Excess working capital must not be less than zero for two consecutive days; registrant must notify regulators as soon as possible if excess working capital is less than zero. - Regulators’ monitoring: - Review quarterly and annual filings; risk-based approach to depth of review. - Inspections include review of working capital policies and controls. - As of March 2013 in Ontario, five registrant firms were on terms and conditions related to capital inadequacies identified during compliance inspections. - Breach response: - Registrant must explain breach, resolve deficiency within 2 days, and provide evidence of resolution. - Regulators may require more frequent Form 31-103F1 filings (e.g., monthly for six months). - IIROC and MFDA capital frameworks: - IIROC: Uniform Capital Formula leading to Net Allowable Assets and Risk Adjusted Capital (RAC). Minimum capital examples: $250,000 for certain broker types; margin rates based on a 95percent confidence over a three-day trading period (text preserves "95percent"). - IIROC’s Free Credit Segregation Limit: free credit limit = Net Allowable Assets * 8 + Early Warning Reserve * 4; excess free credit balances must be segregated in government securities (term ≤ one year) or cash in trust account. - MFDA: Adjusted working capital approach; RAC must be ≥ zero at all times; minimum capital varies by level; related party debt considered current liability unless subordinated. - Assessment: Broadly Implemented (comments cite need to strengthen prudential framework for IDs given ability to use un-invested client monies and lessons from MF Global; further analysis encouraged on concentration limits, leverage ratios, and potential consolidated supervision). ### Internal controls, compliance functions, and organizational requirements (Principle 31) - NI 31-103 requires registrants to maintain policies and procedures establishing a system of controls and supervision to: - provide reasonable assurance of compliance with securities legislation; and - manage risks in accordance with prudent business practices. - UDP and CCO roles: - Each registered firm required to designate a UDP (ultimate designated person) and a CCO (chief compliance officer); both are subject to registration. - CCO must report serious non-compliance issues to UDP and provide an annual compliance report to the board. - External evaluation: - Non-IIROC/MFDA registrants: no regulatory requirement for external evaluation of internal controls; auditors must consider controls relevant to financial statements; auditors must report material breaches to senior management and, if in the public interest (e.g., fraud), to securities regulators. - IIROC and MFDA member firms: independent auditors must review systems annually (IIROC) or per rule; auditors must report material breaches to IIROC/MFDA. - Organizational processes: - Fair dealing, segregation of key duties (principle-based expectations; CP to NI 31-103 expects UDP and CCO to be different persons and larger firms to segregate duties). - Segregation of assets: registered firms must hold client assets in trust separate from firm property; client cash must be held at prescribed financial institutions or with IIROC/MFDA members; IIROC and MFDA require segregation/trust accounts; IIROC permits bulk segregation with identification of each customer’s positions and requires regular value calculations (IIROC Dealer Member Rule 2000.4). - Conflicts of interest: registrants must identify and respond to material conflicts; 31-103CP sets avoidance, control, disclosure approaches. - KYC and suitability: registrants must establish client identity, insider status, suitability information (needs/objectives, financial circumstances, risk tolerance), and creditworthiness where financing provided (applies to investment dealers). Records must be kept current. - Know your product obligations: IIROC guidance (Note 09-0087) and CSA Staff Notice 33-315; IIROC targeted reviews (e.g., structured products) and subsequent corrective actions. - Relationship disclosure information requirements set out detailed disclosure items (nature/type of account; product/service identification; risk descriptions; costs and compensation; reporting frequency; dispute resolution availability; KYC information). - Statements of account: at least once every three months (clients may request more frequently). - Record retention: seven years from creation, safe location, durable form, and accessible to regulators in reasonable period. - Electronic trading (NI 23-103): marketplace participants must have policies/procedures/controls, pre-trade automated controls and post-trade monitoring, and ability to disable automated order systems; IIROC amended UMIR to reflect NI 23-103. ### Supervision, inspections, and thematic sweeps - Risk-based inspection programs across securities regulators, IIROC, and MFDA; harmonized CSA full inspection program for main registration categories. - Inspection statistics (selected totals preserved from source): - Total inspections across categories over five years: 949 (table totals in source). - IIROC FinOps on-site examinations (past five years): F12: 159; F11: 165; F09/F10: 169; F08: 169; F07: 159. - IIROC Business Conduct Compliance exams F12: 114; F11: 90; F09/F10: 112; F08: 108; F07: 119. - IIROC Trading exams F12: 55; F11: 61; F10: 66; F09: 61; F08: 68. - MFDA on-site compliance totals (selected): 2007 total 150; 2008 total 144; 2009 total 181; 2010 total 183; 2011 total 153. - Sweeps and thematic reviews (examples): - Relationship disclosure sweep (CSA members). - Ontario sweep of 87 EMDs and advisers (KYC/KYP/suitability) — OSC targeted review. - Eurozone exposure survey (Ontario). - CSA marketing sweep of over 50 portfolio managers (marketing practices). - ABCP sweep for large portfolio managers (no significant exposure to non-bank sponsored ABCP found in reviewed portfolios). - IIROC thematic work: Non-Arm’s Length Investment Product Review (F13), Client Complaint Handling Review (F12), Use of Titles and Designations (F12), Product Due Diligence Review (F11), PPNs compliance review (F09/10), branch office supervision (F08), debt market trading (F07). - Assessment: Broadly Implemented (comments cite intensity of on-site program for intermediaries under direct supervision of securities regulators; importance of robust on-site inspections for PMs and EMDs; recommendation to extend OBSI requirement to all intermediaries and strengthen OBSI oversight). ### Dealing with failure of market intermediaries (Principle 32) — monitoring and resolution tools - Early detection: - Main mechanism: filing financial statements and working capital forms; firms must notify regulators of capital deficiencies. - When working capital < 0, regulators may require monthly (dealers) or quarterly (advisers) Form 31-103F1 filings. - Regulator powers to address deterioration: - Impose terms and conditions (restrict activities; require consultant or monitor; require monthly reporting; require ongoing management reporting; require close supervision of individuals). - Issue orders for staff to attend premises and require disclosure. - Suspensions of registration. - Accept voluntary surrenders of registration provided firm has resolved obligations to clients and submitted required documentation (evidence of client complaints resolution, transfer/return of client assets, up-to-date audited financial statements with auditor’s comfort letter, SRO withdrawal evidence, officer/partner certificate). - SRO early warning systems and triggers: - MFDA and IIROC monitor monthly unaudited financials and early warning calculations. - Early warning triggers summarized (thresholds for Capital, Liquidity, Profitability, Frequency; IIROC has Level 1 and Level 2 distinctions). - Upon triggering, member must explain remediation, file next monthly financials within 15 business days, and may be prohibited from actions that reduce capital or increase non-allowable assets without approval. - MFDA/IIROC may prohibit opening new branches/accounts, hiring, or materially changing investment positions for members in early warning. - MFDA and IIROC must report to regulators failure to file required reports or triggering early warning thresholds that could affect compensation funds. - Investor protection funds (coverage preserved): - CIPF (IIROC): maximum coverage $1,000,000; historical payments $36,000,000; 18 member insolvencies since 1969. - IPC (MFDA): maximum coverage $1,000,000; coverage commenced July 1, 2005; Québec accounts may be excluded if served from Québec office. - FISF (Québec): mandatory contributions by mutual fund and scholarship plan dealers in Québec to compensate victims of fraud, dishonest practices and embezzlement; AMF assesses claims and determines indemnity amounts. *Source: _cr1473 - 106. As a result the HFs themselves are not subject to any review by the securities* ### Part XII of the Bankruptcy and Insolvency Act of Canada (BlAC) establishes a special ### _cr1473 - Part XII of the Bankruptcy and Insolvency Act of Canada (BlAC) establishes a special ### Bankruptcy regime for securities firms - Part XII of the Bankruptcy and Insolvency Act of Canada (BIAC) establishes a special regime for administering bankruptcies of securities firms. - Regulators or CIPF can apply in court for a bankruptcy order against a registered firm under the BIAC. - Section 256(2) of the BIAC: the suspension of a registered firm by a regulator constitutes an act of bankruptcy if the suspension is due to the failure of the firm to meet capital adequacy requirements. - The liquidation and winding-up of the firm are effected under corporate legislation. ### Customer protection and the CIPF (Canadian Investor Protection Fund) - In an insolvency of an IIROC ID: - All customers’ positions are clearly identified on the books and records of the IIROC dealer. - Securities go into a customer pool, along with the securities and cash held by the firm for its own account. - The customer pool is shielded from other creditors of the insolvent firm and are readily identified and transferred to, or to the order of, the customer. - If CIPF sees any risk of a shortfall in the customer pool: - All assets in the pool are frozen. - CIPF will distribute these assets among customers on a pro rata basis and will top any shortfall up to CAD$ 1,000,000 per customer account. - Once distribution and top up have been calculated, CIPF will distribute the customer assets to a solvent dealer on behalf of or to the customer. - It is possible that if the customer account was greater than CAD$1,000,000 after the prorata distribution, the customer will suffer a loss. - Derivatives: - Free credit balances from customers’ derivatives positions and margin deposits become part of the customer pool and are handled similarly. - Any losses suffered by customers in a dealer insolvency could be covered by CIPF within the defined limits (i.e. up to CAD$ 1,000,000 per customer). - Staff noted that issues related to the impact of the PFMI on segregation practices for the derivatives markets are currently being assessed. ### Failures of IIROC member firms since 2002 (cases and outcomes) - Failures of IIROC member firms are relatively rare; when they occur, customer assets are protected and typically there is an orderly transfer of accounts to another IIROC member firm. - Three IIROC member firm failures since 2002: - MF Global: - November 2011, IIROC announced the suspension of MF Global Canada Co. when it became capital deficient as a result of the bankruptcy of the U.S. parent. - MF Global Canada Co.’s bankruptcy was the first of an IIROC member firm since 2002. - IIROC, together with CIPF, obtained a bankruptcy order appointing a trustee in bankruptcy to administer the Canadian accounts and manage their orderly transfer to another IIROC member firm. - Peregrine: - July 2012, Peregrine Financial Group, Inc. (U.S.-based) filed for bankruptcy. - IIROC protected clients of Peregrine Financial Group Canada, Inc.; within a week, all customer futures accounts of the Canadian firm were accounted for and successfully transferred to another IIROC member firm. - Penson: - January 11, 2013, Penson Financial Services Canada Inc. (indirect subsidiary of Penson Worldwide, Inc.) filed for bankruptcy. - IIROC suspended Penson and took measures to ensure transfer of the accounts to other IIROC member firms. ### Post-MF Global coordination and preparedness - After the insolvency of MF Global Canada: - A working group list with the names of the main parties to contact in an insolvency was put together. - A crisis management group was constituted, integrated by regulatory agencies, IIROC, CDIC, CIPF, and Finance Canada. - The goal is for this group to meet periodically (one meeting already took place). - One initial objective is to identify the financial groups under this group and determine scenarios for simulation exercises. - Some participants suggested reviewing the bankruptcy framework so that the special regime could be triggered for suspensions for reasons different from failure to meet capital requirements. ### IIROC April 24, 2012 Investor Alert (Information for Clients of IIROC-Regulated Firms if an Investment Dealer Stops Doing Business) - Objective: explain to clients the role of IIROC and CIPF when a firm goes out of business, voluntarily or by regulatory action, including insolvency. - The alert provides information on: - how IIROC member firms are required to follow specific rules intended to minimize the possibility of financial failure and to protect clients’ assets, should a firm become insolvent; - IIROC’s minimum capital requirements aim to ensure firms do not assume excessive leverage or engage in business practices exposing them to too much risk; - IIROC monitors and enforces compliance with minimum capital and securities segregation regulations; - in the event a firm fails or becomes insolvent, clients will be notified by the bankruptcy trustee or other insolvency official handling the firm’s affairs. ### Failures and procedures for MFDA member firms - Firms must notify the MFDA immediately of: - the firm being declared bankrupt; - the firm making a voluntary assignment in bankruptcy; - the firm making a proposal under any legislation relating to bankruptcy or insolvency; - the firm being subject to, or instituting, any proceedings, arrangement or compromise with creditors; - a receiver and/or manager assuming control of the firms. - If an MFDA member firm commences bankruptcy proceedings: - the MFDA orders the firm to wind up or appoint a receiver or similar officer; - an MFDA hearing panel may place terms and conditions or suspend a firm’s registration; - if a hearing panel cannot rectify a situation within a time period it may prescribe, the panel may suspend a member for a further period, immediately terminate the rights and privileges of a member, immediately expel a member or penalize a member; - a hearing panel may also impose penalties. - MFDA staff: overall insolvency is less of a concern for MFDs than for IDs due to the narrower set of activities; recent economic environment increased MFD insolvencies but generally no major concerns in their handling. ### Assessment and commentary on insolvency arrangements - Assessment: Broadly implemented - Comments: - The grade reflects the need for stronger arrangements in connection with the insolvency of large IDs (Question 1 of the Methodology). - For registered firms under direct oversight by securities regulators, current “early warning” mechanisms are more basic, justified by simpler business models. - For the largest IDs, MF Global highlighted the importance of coordination arrangements. Steps taken include the constitution of a working group list and a crisis management group. - Important next steps: - institutionalize coordination arrangements; - establish a specific protocol defining roles of each party; - include simulation exercises as a regular part of the crisis management framework. - Coordination arrangements should include OSFI given that the largest IDs are part of banking groups. - The impact of the portability principle on segregation of assets in derivatives markets is under review. ### Principles for secondary markets (Principles 33–35): regulatory authorization, supervision, surveillance, transparency - Principle 33: Establishment of trading systems, including securities exchanges, should be subject to regulatory authorization and oversight. - NI 21-101 Marketplace Operation harmonized recognition of exchanges and ATS. - Authorization regime and lead regulator approach in practice. - Recognition criteria include: - Financial viability: exchanges required to maintain sufficient financial resources. - Capacity: annual capacity tests, stress tests, independent system review, contingency plans, fit and proper directors. - Clearing and settlement: must conduct clearing through clearing agencies recognized by the OSC and the AMF. - Equitable treatment of members: fair fee allocation, no unreasonable discrimination. - Dispute resolution mechanisms under regulator oversight. - Record-keeping: seven years; first two years in readily accessible location. - Mechanisms to identify and address disorderly trading. - Approval of rules and transparency via consultation. - Assessment: Fully implemented - Principle 34: Ongoing regulatory supervision of exchanges and trading systems to maintain integrity through fair and equitable rules. - Responsibilities for monitoring: - IIROC performs market surveillance for all equity ATSs and equity exchanges (outsourced to IIROC). - Derivatives exchanges perform their own market regulation and real-time and post-trade monitoring. - Securities regulators collect and analyze market data for broader market trends and trading practices (no real-time monitoring). - IIROC surveillance capabilities: - Receives all order and trade data from all equity marketplaces in Canada, including dark pools, in real-time. - Uses STEP for cross-market monitoring with alerts, detection of unusual activity, trade-throughs, locked markets, and patterns violating UMIR or securities law. - Debt ATSs: - No real-time market surveillance currently. - Quarterly filings of value and number of trades information are reviewed for trends. - IIROC is developing a debt surveillance system to require members to report all trades. - IIROC monitors debt trading against Rule 3300 Fair Pricing in dealer compliance reviews. - ICE Futures: - Uses SMARTS for real-time surveillance and performs post-trade analysis. - Regulatory Division implementing an on-site review program. - ICE Futures has an information sharing MOU with IIROC. - MX: - Uses SOLA Surveillance for day-to-day and post-trade analysis. - Established position limits and reporting limits; conducts inspections of approved participants. - NGX: - Internal systems for trade surveillance; Flagged Trades Reports detect anomalies. - ASC monitors large traders and relevant price relationships; NGX reports daily positions and transactions data. - Contracting parties generally required to have net worth exceeding $5,000,000 or total assets exceeding $25,000,000. - Cross-market surveillance and MOUs: - IIROC has an MOU with MX to cooperate, coordinate investigations, share examination schedules, and exchange reports. - Since May 2008 IIROC made 509 referrals to MX, 506 concerned insider trading. - Oversight mechanisms for exchanges and ATSs: - Formal on-site examinations, review of rule filings, regular consultations, ad hoc inquiries. - Oversight MOU assigns lead regulators (AMF for MX; OSC for CNSX, Alpha and TSX; MSC for ICE Futures; ASC for NGX; ASC and BCSC jointly for TSX-V). - Oversight MOU lists standards expected: fair governance, conflict management, financial viability, market integrity, monitoring and enforcement, clearing and settlement, information sharing, etc. - On-site oversight examinations: - Exchanges: periodic reviews covering governance, trading halts, surveillance, position limits, access, transparency, risk management, systems and technology. - ATS: IIROC conducts on-site examinations to avoid duplication and reviews compliance with IIROC rules and NI 21-101 and NI 23-101. - Powers of regulators: - Securities regulators can impose remedies, restrictions, require reviews, and make any decision considered in the public interest (including suspension, restriction, or termination of registration/recognition). - Minor non-compliance typically dealt with informally; significant non-compliance may trigger formal enforcement action. - No instances significant enough to merit enforcement action against an exchange or ATS to date. - Assessment: Fully implemented - Comments: - IIROC and exchanges have robust automated systems; further enhancement planned for surveillance across cash and derivatives markets. - AMF published an RFI on May 15th, 2013 to seek technology solutions and cost estimates. - Current mechanisms for corporate bond market surveillance are limited given OTC nature; assessor encourages improvements. - Principle 35: Regulation should promote transparency of trading. - Exchange-traded securities: - NI 21-101 requires marketplaces that display orders to provide accurate and timely information regarding orders and trades to an information processor. - Sections 7.1, 7.2, and 7.5 of NI 21-101 and Subsection 14.4(2) set obligations for accurate consolidated real-time feeds. - Since June 2009, TSX Inc. has acted as the information processor for exchange-traded securities other than options. - Dark pools and dark liquidity (framework revised in 2012, implemented via NI 21-101 and UMIR amendments): - Dark pools and dark orders are allowed, but obligations aim to incentivize transparency: - No pre-trade transparency required if marketplace only displays orders to employees or retained persons and orders meet or exceed a minimum size — as of today there is no minimum size. - UMIR Rule 6.3 Exposure of Client Orders: Participants must immediately enter for display a client order to purchase or sell 50 standard trading units or less unless exceptions (including price improvement) apply. - Part 6 of NI 23-101 includes the Order Protection Rule (OPR) to prevent trade-throughs. - Iceberg orders: - Allowed, including price improvement iceberg orders. - Visible orders have priority over hidden parts; hidden parts revealed are treated as new orders for time priority. - Hidden portion that can trade at a different price will be a dark order. - Bypass markers can be used to meet OPR and bypass interaction with hidden orders. - Block trades: - UMIR uses thresholds such as $100,000 or 50 standard trading units (5000 shares for securities trading over $1.00) in several contexts. - Orders larger than 50 standard trading units or $100,000 may trade with a Dark Order at market price if no displayed orders are available at that price. - Rule 6.3 exempts larger orders from immediate display; Rule 6.4 requires trades to be entered on a marketplace (with exceptions). - Monitoring of transparency: - Marketplaces must file a quarterly report informing the CSA about activities within 30 days after each calendar quarter (starting 4th quarter of 2012). - Detailed order and trading information must be filed by all marketplaces; all order and trade information is provided in real-time to IIROC, which monitors Canadian equity marketplaces. - IIROC and CSA will monitor the impact of the dark liquidity amendments to determine if a minimum size for dark orders is required; volume of dark orders has diminished to less than 2 percent of trading volumes since the adoption of the framework. - IIROC Rule 7.12 on Participant and Access Persons: Participants or Access Persons should not enter an order on a marketplace if they know or ought reasonably to know that handling of the order may result in non-compliance with UMIR; IIROC surveillance can detect and enforce violations. - Information to market participants: - NI 21-101 (as amended effective July 2012) requires market participants be provided with sufficient information to understand how their orders are handled and executed. *Source: _cr1473 - Part XII of the Bankruptcy and Insolvency Act of Canada (BlAC) establishes a special* ### Section 10.1 of NI 21-101 provides that a marketplace must publicly disclose on its ### _cr1473 - Section 10.1 of NI 21-101 provides that a marketplace must publicly disclose on its ### Marketplace disclosure and publication procedures (Section 10.1 and related) - Section 10.1 of NI 21-101 requires a marketplace to publicly disclose on its website information reasonably necessary to enable a person or company to understand the marketplace’s operations or services, including, but not limited to: - how orders are entered, interact and execute; - all order types; - where routing is offered, how routing decisions are made; - when indications of interest are disseminated, the information disseminated and the types of recipients of such indications of interest. - Applications to be recognized as an exchange are published by the CSA for comment. In Ontario, an ATS's Notice of Initial Operations is also published for comment. - Applications and notices usually contain information about how orders will be handled and executed by the exchange or ATS. - Information regarding changes to a marketplace's operations may be published for comment: - The information to be filed and the criteria/process for publication are set out in the applicable marketplace protocol. - Significant changes are published for a 30-day comment period. - CSA staff review notices/materials before publication to ensure adequate detail, analysis and discussion to elicit meaningful public comment. - If comments are received, the marketplace must forward copies of the comments, a summary of the public comments and the marketplace’s response to those comments promptly after the end of the comment period. ### Unlisted debt securities (Part 8 of NI 21-101) - Section 8.1 (government debt securities): - Marketplaces and inter-dealer bond brokers must provide accurate and timely information about orders and trades in government debt securities to an information processor. - There is an exemption in place that exempts marketplaces and inter-dealer bond brokers from requirements of Section 8.1 until January 1, 2015. - Section 8.2 (corporate debt securities): - Marketplaces must provide accurate and timely information about orders and trades to an information processor, but only with respect to corporate debt securities designated by the information processor (designated corporate debt securities). - Inter-dealer bond brokers and dealers executing trades outside of a marketplace are subject to transparency requirements for designated corporate debt securities only with respect to trade information (post-trade transparency). - Reporting thresholds and content: - Only dealers and marketplaces that have reached 0.5 percent of the total market share of the corporate bond market are required to report information on trades in corporate bonds. - No pre-trade reporting is required at this time. - Information to be reported includes: issuer; coupon; maturity; price; time of the trade; and subject to caps set out below, the volume traded. - The information must be provided no later than one hour from the time of the trade or such shorter period determined by the information processor. - Information processor role and current coverage: - CanPX has been approved to act as the information processor for corporate debt securities since 2003. - CanPX, in consultation with the CSA, has set the standards for transparency for corporate debt securities. - The information processor shall produce an accurate consolidated feed in real-time showing the information provided to the information processor (Section 8.3). - CanPX currently displays trading information for around 150 of the most liquid corporate debt securities (the number in the past was much lowers, around 75). - Staff expectation: overtime the number of securities subject to post-trade transparency should increase. ### Assessment and policy commentary on transparency (Principles 35 and related) - Assessment: Fully Implemented - Comments and recommendations: - The Canadian framework is robust in connection with pre-and post trade transparency of the equity markets including the existence of a consolidated tape. - The new framework for dark orders and dark pools appears reasonable; volume of dark orders has diminished since the establishment of such framework. - The assessor encourages regulatory authorities to further consider the benefits of establishing a size limit for dark orders. - Given the corporate bond market is OTC, the current level of transparency required is appropriate vis-à-vis Principle 35. - The assessor encourages authorities to: - continue expanding the universe of securities subject to post-trade transparency; - lift the exemption applicable to the government bond market. ### Regulation to detect and deter manipulation and unfair trading (Principle 36) - Description and enforcement framework: - Assessed in 2007. - National Instrument 23-101 Trading Rules harmonizes the framework for provincial regulators in this area. - UMIR contains provisions prohibiting market manipulation and other unfair practices in equity markets; RS (as SRO) has disciplinary powers to impose sanctions for UMIR violations. - MX has trading rules covering manipulative or deceptive methods of trading and disciplinary powers. - Serious misconduct not pursued by RS or MX (e.g., insider trading) falls within provincial regulators’ frameworks; provincial regulators have disciplinary powers and procedures. - Insider trading also constitutes a criminal offence under the Criminal Code of Canada; application is carried out via police and courts. - Assessment: Fully implemented - Comments: Carry-forward from 2007 assessment — “While the framework to detect and deter unfair practices is robust, actual enforcement is in need of improvement as discussed under Principle 10”. ### Management of large exposures, default risk and market disruption (Principle 37) - Description (TSX / CDS / CDCC / IDA coordination): - Assessed in 2007. - CDS provides two central counterparty (CPP) services, one for equity securities and the other for government debt instruments. - Pre-settlement edits ensure settlement does not result in a negative balance in a participant’s fund account exceeding the participant’s limit (calculated as sum of used portion of its operating cap and any available credit lines) and that there is sufficient collateral to cover any negative imbalance. - CDS imposes a soft CPP cap presently set at CAN$80 million on participants on a CPP service. - Certain obligations/actions are triggered if participants exceed thresholds, including provision of additional collateral and notification to the regulator and the IDA. - CDS Participant Rules authorize CDS to share information on its participants with exchanges/ATSs, securities depositories, securities clearing agencies, payment clearing systems or SROs of which the participant is a member, any insurer of the participant including CIPF or the Canada Deposit Insurance Corporation (CDIC) or the participant’s primary Canadian regulatory body. - The IDA requires members to calculate their exposure on a daily basis; a report is sent to the OSC and the AMF on a monthly basis. - CDCC (clearing house of the MX) manages large exposures via: - Selection criteria for clearing members, mainly capital; - Initial margin as well as daily margins; - Additional margins for low capitalized members. - MoUs exist between IDA and CDS, and between IDA and CDCC; under these MoUs IDA monitors financial soundness of IDA members and must notify CDS or CDCC immediately if it receives information of material concern about a member. - If a CDS participant is on early warning, it is subject to additional collateral charges imposed by CDS. - Under recognition order terms, IDA must notify the OSC and the AMF if an IDA member is placed on early warning, including overexposure to certain counterparties. - Issues assessed in 2013: Failed settlements and short sales (see below). ### Failed settlements and settlement procedures (NI 24-101 and related practice) - NI 24-101 requires dealers to establish, maintain and enforce policies/procedures to facilitate settlement of trades at the settlement date prescribed by the exchange. - Most recognized exchanges require settlement on the regular settlement date (T+3 in most cases) unless otherwise agreed. - No compulsory buy-ins for failed trades, but recognized exchanges and CDS have procedures allowing a purchaser, at its option, to buy-in securities to satisfy a failed trade: - The buy-in occurs 48 hours after CDS receives notification that the buyer wants to buy-in the seller, at which time marketplace participants are notified of buy-in details. - The buy-in trade takes place on a cash next-day delivery basis and the failing seller is liable for any difference if the price of the buy-in exceeds the buy-in price. - Reporting and monitoring: - Daily reports on settlement failures are available to IIROC via CDS. - UMIR requires participants and access persons with failed settlements outstanding for an extended period (10 days after the standard settlement date, typically T+13) to report the failure, including the reason, to IIROC, together with any information IIROC may require. - Persons required to file an extended failed trade report to IIROC must make arrangements to borrow the security before executing additional short sales. - UMIR allows IIROC to designate a security as: - subject to a requirement that short sellers locate a borrow before trading; and/or - ineligible for short sales. - Since these designations were introduced in October 2012 and October 2008 respectively, IIROC has not designated any securities as being subject to pre-borrow requirements or as being ineligible. - Restrictions have been imposed in the past where the public float of a security shrank making it very difficult or impossible to borrow securities to cover short sales. - Equity exchanges have relieved market makers from continuous posting obligations where that would require selling short and no securities are readily available to borrow. - Assessment: Fully Implemented - Comments: While there is no mandatory buy in, the assessor considers the current framework provides sufficient incentives for compliance. IIROC analysis shows failed settlement is not an issue of major concern in Canada. ### Short sales regulation, monitoring, exemptions and practice - Monitoring and reporting: - IIROC can monitor equity markets in real-time. - UMIR requires all orders that would result in a short sale to include a “short sale” designation to allow IIROC to identify short sale orders in real-time. - IIROC uses short sale markers to detect declines in a security’s price associated with changes in the rate of short selling compared to historical patterns. - UMIR requires participants and access persons to provide aggregated short position reports for each individual account twice each month as of the 15th and the last day of the month. - Equity exchanges gather short position information for their listed securities and make it available to market authorities. - The TSX publishes the top 20 short positions by security and the top 20 changes in short positions by listed security on its website; the CNSX publishes short positions for all listed securities on its website. - IIROC publishes information on consolidated cumulative short selling activity on all marketplaces for each security on a semi-monthly basis; this approach began in January 2013. - Exemptions to short selling (short-marking exempt orders include): - an arbitrage account; - the account with market making obligations in respect of a particular security and only on orders for that security; - a client, non-client or principal account: - for which order generation and entry is fully-automated, and - which, in the ordinary course, does not have at the end of each trading day more than a nominal position, whether short or long, in a particular security; - a principal account that has acquired, during a trading day, a position in a particular security in a transaction with a client that is unwound during the balance of the trading day such that, in the ordinary course, the account does not have, at the end of each trading day, more than a nominal position, whether short or long, in a particular security. - Transactions deemed not to be short sales (deemed ownership includes cases where the person): - has purchased or entered into an unconditional contract to purchase the security, but has not yet received delivery; - owns another security convertible or exchangeable into that security and has tendered such other security for conversion/exchange or issued irrevocable instructions to convert/exchange; - has an option to purchase the security and has exercised the option; - has a right or warrant to subscribe for the security and has exercised the right or warrant; - has entered into a contract to purchase a security that trades on a-when-issued basis and such contract is binding on both parties and subject only to the condition of issuance or distribution of the security. - Practice and empirical findings: - IIROC’s 2011 study on short sales and failed trades did not show significant problems with failed trades; failures are relatively few and a large majority relate to technical/administrative problems with long sales rather than short sales. - Assessment: Fully Implemented ### Principles relating to clearing and settlement (Principle 38) - Description: (not provided) - Assessment: Not assessed. - Comments: (none provided) *Source: _cr1473 - Section 10.1 of NI 21-101 provides that a marketplace must publicly disclose on its (PDF chapter/section).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1473.pdf_