Abstract
This paper presents an assessment IMF report on implementation of the International Organization of Securities Commission (IOSCO) principles in Canada. It highlights that developing an integrated and robust view of risks to support supervisory actions remains a key challenge. The IMF report suggests that the securities regulators should continue to take steps to ensure timely decision making in policy formulation. However, the current governance arrangements, based on a consensus building approach across several entities, is expected to affect timeliness of decision making.
Introduction and Scope
6. 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. A full assessment was conducted in 2007 based on the methodology approved by IOSCO in 2003. As a result Canada met the minimum threshold for a targeted assessment. Based on the due diligence2 conducted 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 reassessed3. Nothing in the due diligence suggested the need to reassess the remaining principles. The guidance for targeted assessments requires the assessor to carry over the description of the principles that have not been assessed in order to provide a complete view.
7. Such due diligence took into consideration (i) risks and vulnerabilities of the securities markets in Canada, (ii) regulatory developments that have taken place in Canada since 2007, (iii) areas where deficiencies were found in 2007, (iv) new areas of emphasis in the new IOSCO Principles and Methodology,4 and (v) the lessons from the crisis, both in terms of areas that require deeper attention as well as in regard to the need for assessors to take a more critical look at both the regulations in place to determine whether they are adequately capturing the risks of the system, and the intensity of supervision and enforcement, to determine the extent to which the regulatory framework is being implemented in practice. Information and Methodology Used for the Assessment.
8. The assessment was conducted based on the IOSCO Principles and Objectives of Securities Regulation approved in 2010 and its Methodology adopted in 2011. Principle 38 is not assessed as this Principle now is covered under the Principles for Financial Market Infrastructure; as a result issues related to CDCC as an SRO are not covered in this assessment.
9. The recent global financial crisis has reinforced the need for assessments to be more critical, both in terms of the robustness of regulation as well as the intensity of supervision. On the regulatory side, assessors are been required to look more closely at the extent to which regulations in place adequately capture the risk undertaken by different participants. On the supervisory side, assessors are required to look more deeply into the licensing process, the off-site monitoring and onsite inspection programs as well as how the supervisor follows-up on findings, including the use of enforcement actions, to make an informed judgment on the overall quality of supervision. In jurisdictions that rely extensively on SROs such critical analysis has also applied to them. In many jurisdictions this enhanced approach has had an impact on grades. In addition, experience has been gained in connection with principles 6 and 7 which allows assessors to delve deeper into the analysis of the processes in place to identify emerging and systemic risk. Furthermore through the Assessment Committee, IOSCO itself is developing further guidance to assess these Principles.
10. The assessment largely relies on an analysis of the regulatory framework and supervisory practices of the four largest provinces (Ontario, Québec, British Columbia and Alberta) to draw inferences on the level of implementation of the Principles for the country as a whole, given the challenge of assessing 13 frameworks. As will be further explained below, securities regulation in Canada is under provincial regulation. Given that the legal and regulatory framework has been largely harmonized via national instruments and the fact that these four provinces comprise roughly 95 percent of the activity of the Canadian securities market; the assessor believes this to be a reasonable approach. When relevant, the assessor has made the necessary distinctions in the legal and or regulatory framework, and practices of specific regulatory agencies are mentioned to provide examples as to how a particular requirement has been implemented in practice.
11. The assessor relied on (i) a self-assessment and a report on market data, which were prepared by the OSC, AMF, BCSC and ASC; (ii) the review of relevant national instruments, laws, regulations, and other documents provided by the regulatory agencies including registration, inspection and enforcement files; (iii) meetings with the chairs of the OSC and the ASC, the president of the AMF, and the executive director of the BCSC and staff of the OSC, AMF and BCSC, and other public authorities, in particular representatives of Finance Canada; as well as (iv) meetings with SROs (IIROC, MFDA, CSF, MX); CIPF; market participants including securities firms, market operators (both exchanges and ATSs), auditing firms, credit rating agencies and law firms.
12. The assessor wants to thank staff of the OSC, AMF, BCSC, ASC and CSA Secretariat for their full cooperation as well as their willingness to engage in very candid conversations regarding the regulatory and supervisory framework in their provinces. The assessor also wants to extend her appreciation to all other public authorities and market participants with whom she met.
Description of Regulatory Structure and Practices
13. Securities markets in Canada are under a system of provincial regulation and supervision. As a result there are 13 regulatory authorities each one administering a separate set of securities laws and regulations. Overall securities legislation in all the provinces and territories have the same underlying objectives—the protection of investors and ensuring fair, efficient capital markets—and the regulatory authorities share the same core responsibilities. However, actual regulations developed by each province to address these core set of goals and responsibilities can differ. As a result, the specific powers of the authorities can differ (although a set of basic powers is available to all of them), and in a few instances, the specific requirements for a particular category of market participants can differ (although as will be explained below there is currently a high degree of harmonization).
14. The nature, structure, resources and powers of the provincial regulators vary. The assessor was informed that in particular in the smallest provinces the regulator might still be part of the government, funded by it and with limited resources. That is not the case for the four largest provinces—Alberta, British Columbia, Ontario and Québec—which roughly supervise 95 percent of the market. These regulatory agencies 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—not only administrative but also quasi-criminal authority. In the case of the AMF, the adjudication of administrative cases is carried out through an independent tribunal, the Bureau de Décision et de Révision (BDR).
15. Under the umbrella of the CSA, provincial regulators are seeking to harmonize laws and regulations and coordinate their supervisory and enforcement activities. The CSA is a non-statutory association that brings together all Canadian securities regulatory authorities with the objective of improving regulation and supervision of Canadian securities markets. A Secretariat, located in Montreal, was established in 2004. The Secretariat currently has 6 staff in charge of providing logistical support to the CSA committees and managing national databases in the area of securities markets.
16. The CSA has undertaken several initiatives to harmonize securities regulation via the adoption of national (and a few multilateral) instruments. There are currently 40 national instruments and multilateral instruments, covering a wide variety of areas including issuers, CIS, market places and registrants. As confirmed by the authorities and market participants, most aspects of securities regulation have been harmonized. However, there are a few important differences that remain in connection with the enabling legislation for derivatives, certain prospectus exemptions, registration exemptions for EMDs in the northwest jurisdictions, and registration of non-resident Investment Fund Managers (IFMs), as will be explained in the assessment.
17. On the supervisory front, different initiatives have been implemented to eliminate duplication and ensure coordination. In particular, a passport system has been implemented for issuers, CIS, securities intermediaries and credit rating agencies. Under the passport system 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; however the provinces created an interface, whereby decisions taken by the OSC as the principal regulator are automatically extended in the rest of the provinces. In cases where Ontario is not the principal regulator, the principal regulator acts as the liaison with the issuer/CIS/securities intermediary/CRA so that vis-à-vis the participant the system works as a single “window”. The principal regulator approach also applies to on-going supervision, including review of periodic filings and on-site inspections. The provincial regulators have also worked on the development of a coordinated approach for SROs. In the case of IIROC and MFDA coordination is based on a principal regulator approach, whereby one regulator acts as coordinator of actions on behalf of all regulators; and in the case of the exchanges is based on a lead regulator approach, whereby one regulator recognizes the exchange, while the others grant exemptions. In the area of enforcement, regulators have made use of joint investigations, joint adjudications and reciprocal orders to coordinate their actions. Finally, a system of committees serves as a forum to coordinate and discuss topics, including on novel issues, and to set up national priorities.
18. Provincial regulators rely largely on self-regulatory organizations (SROs) for the regulation and supervision of the market and its participants. The regulation and supervision of investment dealers and market surveillance of all equity markets is under the Investment Industry Regulatory Organization of Canada (IIROC), the regulation and supervision of mutual fund dealers except in Québec is under the Mutual Fund Dealers Association of Canada (MFDA), mutual fund dealers in Québec are under the supervision of the AMF and the discipline and education of individuals who act on behalf of mutual fund dealers in Québec is a responsibility of the Chambre de la Sécurité Financière (CSF), and all other non-equity exchanges are primarily responsible for market surveillance, including MX and NGX for derivatives markets.
19. A recent decision of the Supreme Court of Canada ratified the provincial nature of securities regulation but recognized a role for the federal government on “matters of genuine national importance and scope going to trade as a whole in a way that is distinct from provincial concerns, including management of systemic risk and national data collection.”5
Market Structure6
A. Markets
Equity exchanges
20. The total market capitalization of the Canadian equity market at the end of 2012 was nearly $2.2 trillion, or about 121 percent of GDP. There are four equity exchanges in Canada: TSX, TSXV, Canadian National Stock Exchange (CNSX), and Alpha Exchange Inc. (Alpha).7
21. The TSX and TSXV, owned and operated by the TMX Group have a combined market capitalization of $2.18 trillion and over 3,800 listed companies, making the TMX Group the eighth largest exchange group worldwide by market capitalization. The TSX, with 1,567 listed companies, is the senior equities market, representing approximately 98 percent of the total aggregate Canadian market capitalization. The majority of the largest companies listed on the TSX operate in the financial sector or extractive industries. The TSXV, with 2,257 listed companies, is the junior equities market and public venture capital marketplace for emerging companies. Approximately 57 percent of listed companies on the TSXV operate in the mining sector.
22. CNSX is an alternative stock exchange for smaller issuers that offers simplified disclosure requirements and a market structure tailored for micro-cap and emerging companies that do not have the financial resources to list on other major exchanges. At the end of 2012, total market capitalization of equity listings was $1.18 billion with 189 listed companies. CNSX also operates Pure Trading, a facility which provides an alternative marketplace for the trading of securities listed on recognized Canadian stock exchanges other than CNSX.
Debt markets
23. The major components of the Canadian bond market are the market for Government of Canada bonds, Canada Mortgage Bonds, provincial bonds and corporate bonds. The 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). Of those, corporate bonds amounted to $631 billion, of which a little more than 50 percent was issued by non-financial corporations.
24. The amount of corporate bonds issued in Canada has continued to increase since 2008, while the issuance of money market instruments, such as commercial paper and bankers’ acceptances, declined following the financial crisis up until 2010. In 2011 and 2012, net issuance of both commercial paper and bankers’ acceptances showed signs of recovery. Canadian chartered banks are major investors in CAD-denominated bonds, with these instruments representing approximately 40 percent of their total assets.
Derivatives markets
25. The MX is Canada’s financial derivatives exchange, listing equity, currency, index and interest rate derivatives. The over-the-counter (OTC) derivatives market is concentrated amongst the big six Canadian banks and the majority of transactions involving Canadian market participants are entered into with foreign counterparties. Globally, Canada accounts for US$18 trillion in OTC derivatives, or approximately 2.8 percent of the global market in 2012, with interest rate swaps and foreign exchange contracts being the dominant products.
26. The Natural Gas Exchange (NGX) is Canada’s largest energy exchange based in Calgary. It provides electronic trading, central counterparty clearing and data services to the North American natural gas, crude oil and electricity markets. NGX 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.
27. Intercontinental Exchange (ICE) Futures Canada is Canada’s agricultural exchange. It was established in 1887 as the Winnipeg Grains and Produce Exchange and has been facilitating futures contract trading since 1904. ICE Futures Canada offers futures and options contracts for the global benchmark Canola contract.
Ats
28. There are currently seven ATS trading in equity securities in Canada. There are also three ATS trading debt securities; however, most of the debt trading is done over the counter. There is also one securities lending ATS.
Ats
Ats
| Equity ATS | Debt ATS | Securities Lending ATS |
|---|---|---|
| Equilend Canada | ||
| Bloomberg Tradebook Canada | CanDeal | Group |
| Chi-X Canada / CX2 Canada | CBID | |
| Instinet Canada Cross (ICX) | MarketAxess | |
| Liquidnet Canada | ||
| MATCH Now (operated by TriAct) | ||
| Omega ATS | ||
| TMX Select |
Ats
| Equity ATS | Debt ATS | Securities Lending ATS |
|---|---|---|
| Equilend Canada | ||
| Bloomberg Tradebook Canada | CanDeal | Group |
| Chi-X Canada / CX2 Canada | CBID | |
| Instinet Canada Cross (ICX) | MarketAxess | |
| Liquidnet Canada | ||
| MATCH Now (operated by TriAct) | ||
| Omega ATS | ||
| TMX Select |
29. ATS have grown in number and significantly increased their share of trading volume in the last decade. The chart below shows the relative market share of ATSs, as measured by trading volume, for TSX listed stocks.
Market Share Trend (TSX Listed Stocks)
Citation: IMF Staff Country Reports 2014, 073; 10.5089/9781475523850.002.A001
Market Share Trend (TSX Listed Stocks)
Citation: IMF Staff Country Reports 2014, 073; 10.5089/9781475523850.002.A001
Market Share Trend (TSX Listed Stocks)
Citation: IMF Staff Country Reports 2014, 073; 10.5089/9781475523850.002.A001
30. Dark pools operate as ATS. Currently Liquidnet, Matchnow, Instinet and IntraSpread—Dark pool activity reached a high of 5.67 percent of volume traded in September 2012 before declining sharply, down to 1.73 percent as of December 2012. This decline has been attributed to regulatory changes that mandate a minimum level of price improvement for dark trades and give priority to lit orders over dark orders, at the same price on the same market place.
B. CIS
31. Canadian investors access the market through a diverse range of product channels, but continue to favor financial advice over making self-directed investment decisions. 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.
32. Mutual funds remain a popular investment vehicle for Canadians, accounting for about 27 percent of total financial wealth in Canada. As of December 2012, the mutual fund industry had assets under management of $849.7 billion, surpassing pre-downturn highs. Since February 2009, the low point for industry assets during the crisis, mutual fund assets have increased by $298.8 billion or 54 percent. Total mutual fund net sales for 2012 were $30.4 billion, up from $21.2 billion in 2011. In addition, annual long-term fund sales in 2012 were the highest they have been since 1997.
33. In reaction to the GFC, the fund industry has seen a shift from equity funds to balanced and fixed income funds. Money market funds have also experienced a decline of assets, as a reaction of investors to lower yields paid by MMFs relative to their alternatives such as high interest savings accounts.
Fund Type by AMU (CAD millions)
Fund Type by AMU (CAD millions)
| Dec-06 | Dec-11 | |
|---|---|---|
| Money Market | 47,711 | 37,374 |
| Fixed Income | 100,045 | 202,296 |
| Balanced | 130,950 | 159,497 |
| Equity | 435,311 | 401,362 |
| Other | 3,969 | 5,133 |
| Total | 717,986 | 805,662 |
Fund Type by AMU (CAD millions)
| Dec-06 | Dec-11 | |
|---|---|---|
| Money Market | 47,711 | 37,374 |
| Fixed Income | 100,045 | 202,296 |
| Balanced | 130,950 | 159,497 |
| Equity | 435,311 | 401,362 |
| Other | 3,969 | 5,133 |
| Total | 717,986 | 805,662 |
ETFs
34. While still small, ETFs have grown markedly in recent years. They reached a 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, in Canada, the assets of leveraged and inverse ETFs constituted approximately 2.5 percent of all ETF assets. As of December 2012, synthetic ETFs held approximately 5 percent and physical replication ETFs held 95 percent of total ETF assets under management. At September 2012, approximately 58 percent of Canadian-listed ETF assets were held by retail investors, with the difference accounted for by institutional clients. In addition to Canadian listed ETFs, Canadian retail investors also held $10.1 billion in U.S. listed ETFs which represented 16 percent of all ETF investment by Canadians at September 2012.
Hedge funds
35. The Canadian hedge fund industry is relatively small. Canadian hedge fund assets were estimated at $31 billion, or about 2 percent of the global hedge fund industry, which was estimated to be about $2.6 trillion in 2012. In 2012, there were 275 hedge funds in Canada, which also includes funds of funds. As compared to mutual funds, HFs are only about 4 percent of the total size of mutual funds in Canada. Individual Canadian hedge funds also tend to be small, with more than 80 percent of all hedge funds having less than $100 million in assets under management. The hedge fund industry is concentrated within a few firms.
C. Intermediaries
36. Canada has a system of specialized securities intermediaries. As a result banks and insurance companies that want to provide securities markets services must do it through a subsidiary. There are three main categories: dealers, advisers and investment fund managers (IFMs). Within the dealer category there are five 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 which are subject to the oversight of the AMF.
As of December 2012, there were 1,498 active firms registered to carry out investment activities in Canada, of which 1,365 were headquartered in Canada. There are 202 registered firms that are IIROC members and another 119 are MFDA members. The remaining registrants are directly overseen by the securities regulators. Out of such number 543 were IFMs.
37. Some of the largest securities firms are subsidiaries of major Canadian banks. Further, through their subsidiaries the six major banks play an important role in securities markets. Below is some data on the importance of bank-subsidiaries.
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 exercise control of 60 percent of AUM of the top 10 asset management firms and 27 percent of the sector’s total AUM.
The 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.8
General Preconditions for Effective Securities Regulation
38. The assessment conducted in 2007 included the following findings in regard to preconditions: “There are a number of general preconditions necessary for the effective regulation of securities markets that appear to be in place in Canada. Those preconditions relate to sound macroeconomic policies, appropriate legal, tax and accounting frameworks, and the absence of entry barriers to the market.” Preconditions were not reassessed during this assessment. The assessor notes, however, the existence of modern contract and company law at the provincial level. Accounting and auditing standards are of high international quality; further IFRS have been implemented for issuers that offer securities to the public and auditors have to comply with the International Auditing Standards. There is in place a system of oversight of the auditing profession. There are alternative dispute resolution mechanisms and an impartial judiciary.
Main Findings
39. Principles related to the regulator—Current governance arrangements in the four regulatory agencies provide them a high degree of independence from the government, while at the same time subject them to strong accountability. The existence of part-time commissioners can pose conflict of interest, which are mitigated by the selection process established in the provinces and on an ongoing basis by the obligation of members to recuse themselves on decisions where they face conflicts. Under the umbrella of the CSA the provincial regulators have made significant progress in coordination and in ensuring a level playing field; however a few challenges remain. They have also made significant progress in the development of arrangements for the identification of emerging and systemic risk, although the availability of data and use of quantitative analysis is currently a challenge. Finally the regulators are aware of key conflicts of interest prevailing in the market, and are currently reviewing the sets of actions needed to address them. Carry from the 2007 assessment: “They are subject to a high degree of transparency, including public consultation on regulations and published policy statements. At the same time, they abide by high standards of ethics that have been codified into an ethics code, with certain reporting obligations. They are active on investor education”.
40. Principles for SROs—SROs are subject to recognition based on eligibility criteria that among others address issues of financial viability, capacity to carry out their functions, governance, and fair access. Supervision is based on a set of mechanisms that include off-site reporting, on-site inspections, as well as regular meetings and close contact with SRO staff to discuss ongoing issues. There has been a significant evolution on governance arrangements in all SROs; but some challenges remain vis-à-vis conflict of interest.
41. Principles for enforcement— Canada has established a credible system for the supervision of the market and its participants in which SROs play a significant role. Current arrangements include both offsite monitoring and on-site inspections. While overall the regulatory agencies have in place an adequate risk-based approach to on-site inspections, in the agencies with the largest populations such risk based approach has resulted in a more focused use of on-site inspections. Enforcement by the regulatory agencies has experienced significant progress in recent years and is currently robust. The SROs are taking important steps to ensure timely response of firms to the deficiencies found in their compliance reviews (MFDA) and to strengthen the nexus between their compliance reviews and their enforcement activity (IIROC). Material challenges remain in connection with enforcement of criminal laws by government departments and law enforcement agencies.
42. Principles for cooperation—Carry from the 2007 assessment: “The largest regulatory agencies have explicit and comprehensive powers to share information with both local and domestic authorities and can do so without the need of any external approval. The four largest jurisdictions are signatories of the IOSCO Multilateral Memorandum of Understanding (MMoU). They have the power to obtain information that is not in their files on behalf of foreign regulators. They have shown clear a commitment to exchange information and assist other regulatory agencies both domestically and internationally”.
43. Principles for issuers—Carry from a 2007 assessment: “Issuers are subject to disclosure obligations at the moment of authorization and on an ongoing basis, fully in line with IOSCO standards. The regulatory agencies have developed a system for review of the prospectus as well as continuous disclosure obligations. Liability provisions are in place to ensure issuers’ responsibility for the prospectus”.
44. Principles for CIS—CIS operators 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. Current arrangements for the supervision of intermediaries—which include both off site monitoring as well as on-site inspections—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. Hedge Fund managers are subject to the same regulatory regime than other CIS operators. All CIS that are offered to the public are required to have a custodian. Although custody can be provided by a related party, additional safeguards are in place, including the requirement that custodians are themselves regulated entities, the existence of the IRC, and disclosure to investors. Carry from the 2007 assessment: “Public offerings of CIS are subject to disclosure requirements at the moment of authorization and on an ongoing basis, fully in line with IOSCO principles. There are rules in place on separation of assets”.
45. Principles for market intermediaries—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, however prudential requirements for investment dealers need to better capture the risks associated with the use of un-invested moneys of clients. 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. There are early warning systems in place; however there is a need to improve coordination arrangements in the event of a failure of large investment dealers.
46. Principles for secondary markets—Carry from the 2007 assessment: “The operation of an exchange is subject to an authorization regime based on eligibility criteria that include financial viability, capacity, governance, and fair access. Alternative Trading Systems (ATS) are regulated as dealers subject to certain market requirements; however the framework allows the regulatory agencies to regulate them as exchanges once they reach a certain threshold. There are plans to deal with market disruptions, although in one of the agencies these should be further developed […]. The two main clearing entities, one for securities and the other for derivatives, have developed reasonable mechanisms to manage large exposures including selection criteria for clearing members, margins and collateral”. There are robust mechanisms in place for market surveillance. Exchanges and ATS are subject to pre-trade and post-trade transparency provisions. Dark orders are allowed; but the current framework incentivizes transparency. Arrangements to minimize failed settlements are reasonable, and there are robust reporting requirements in connection with shortselling.
Summary Implementation of the IOSCO Principles—Detailed Assessments
Summary Implementation of the IOSCO Principles—Detailed Assessments
| “Only principles 1,2,3,6,7,8,9,12,19,20,22,23,24,28,29,30,31,32,34, and 35 have been fully assessed, while principles 25 and 37 were partially reassessed. The summary of key findings for principles 4, 5, 10, 11, 13, 14, 15, 16, 17, 18, 22, 26, 27, 33, 36, and partially from principle 25 and 37 has been carried over from the assessment conducted in 2007in order to provide a complete view.” | ||
|---|---|---|
| Principle 1. The responsibilities of the Regulator should be clear and objectively stated. | BI | Securities markets are regulated and supervised at the provincial level. The responsibilities and mandate of the four regulatory agencies analyzed are clearly established by law. There is a high degree of harmonization of the regulatory framework for securities markets; although a few important differences remain. Different arrangements have been put in place to foster coordination among the provinces (such as the committee system of the CSA) and streamline processes and procedures (such as the passport system for issuers, CIS registrants and CRAs) and to achieve convergence in supervisory practices across the provinces (such as the development of templates, manuals, and training), though there are particular areas where differences in supervisory approaches exist. Vis-à-vis the SROs’ supervision, several coordination mechanisms have been put in place. All such arrangements should continue to be strengthened to ensure that a “full” view of risks is developed. There are also coordination mechanisms with other financial authorities, via the HoA; however there is a need to deepen such arrangements including in connection with crisis management. |
| Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers. | BI | The four regulatory agencies work under a robust framework of independence from the government, both operational and financial. At the same time there are mechanisms for accountability to the Government via the MoF, and decisions of the regulatory agencies are also subject to judicial review. The existence of part time members on the boards of the agencies that have a commission structure, and in particular the possibility currently allowed by the legal framework that they can be directors of issuers and registrants poses concerns vis-à-vis commercial interests. In practice, such concerns are mitigated by the selection processes in place in the respective jurisdictions, which looks at skills, integrity and confidentiality issues and the existence and application of strong conflict of interest rules which require members to recuse themselves from decisions where they face a conflict. In practice the effects of the recusal range from abstaining from voting in a decision, where the conflict is more remote to not receiving any document nor participating at all in the decision, where the conflict is more direct. |
| Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers. | FI | The four regulatory agencies have robust powers to regulate and supervise the markets, including rulemaking authority, registration, recognition and designation authority, power to request information, and conduct on-site inspections and the power to impose administrative sanctions and to pursue quasi-criminal offenses. Resources in the four agencies have increased over time to respond to market growth and the growing regulatory perimeter. The agencies should continue their efforts to recruit staff with specialized expertise. |
| Principle 4. The Regulator should adopt clear and consistent regulatory processes. | FI | Carry from the 2007 assessment The regulatory agencies are subject to a high degree of transparency including public consultation regarding regulations and policy statements. They are active on investor education. |
| Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality. | FI | Carry from the 2007 assessment The regulatory agencies have developed codes of ethics. Reporting obligations on investment activities are in place as well as mechanisms to monitor compliance. |
| Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate. | BI | The securities regulators have developed a definition of systemic risk, and a methodology to identify and monitor such risks. There are also mechanisms in place for accountability, including follow up and periodic reporting on progress. However the analysis is still mostly qualitative, and data availability is currently a challenge. The HoA has served as a forum to engage in systemic risk discussions; however there is a need to deepen such coordination, in particular in connection with crisis management. |
| Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly. | BI | The Committee system of the CSA is the main mechanism to identify emerging risks; and their work is supported by internal arrangements within the provincial regulatory agencies—some of which have established emerging risk committees. However, the analysis is currently mainly qualitative, and data availability is a challenge. |
| Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed. | FI | Several areas have been identified where important conflict of interest exist, including trailing commissions. The authorities are currently analyzing regulatory actions. |
| Principle 9. Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities. | BI | Canada makes extensive use of SROs both for the supervision of securities intermediaries (investment dealers and mutual fund dealers and their representatives), as well as for market surveillance. SROs are subject to a strong framework of oversight, starting with the recognition process, and including approval of their rules, periodic reporting and on-site inspections. However, a few challenges remain in connection with their governance structures vis-à-vis their ability to manage conflict of interest. |
| Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers. | FI | Carry from the 2007 assessment The regulatory agencies have broad investigative and surveillance powers over regulated entities. In particular, they can conduct on-site inspections, including of books and records without prior notice; obtain books and records and request data or information without the need for a judicial action; and supervise exchanges and regulated trading systems. |
| Principle 11. The Regulator should have comprehensive enforcement powers. | FI | Carry from the 2007 assessment The regulatory agencies have broad enforcement powers. These include the power to seek injunctions; bring an application for civil proceedings; order the suspension of trading and the freezing of assets; compel information, documents, records and testimony from third parties (non-regulated entities) in the course of their investigations; impose administrative sanctions; seek quasi criminal actions; and refer matters to the criminal authorities. |
| Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program. | BI | Intermediaries are subject to both off site monitoring and on-site inspections. The on-site inspection programs developed by the securities regulatory agencies and the SROs follow a risk-based approach. This approach has resulted in a more focused use of on-site inspections by the regulatory agencies with the largest populations Enforcement by the four provincial regulators analyzed has significantly improved over time and is currently robust. The SROs are taking important steps to ensure timely response by firms to their compliance reports (MFDA) as well as to strengthen the nexus between compliance reviews and the enforcement function (IIROC). Important challenges remain in connection with enforcement by the criminal enforcement authorities. Although, the regulatory agencies have enhanced coordination and taken concrete steps to get the criminal authorities more engaged, the results are mixed, with progress being achieved only in some of the largest jurisdictions. |
| Principle 13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts. | FI | Carry from the 2007 assessment The regulatory agencies have broad authority to share information with both domestic and foreign regulators and have done so even in cases where no memorandum of understanding (MoU) was in place. |
| Principle 14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts. | FI | Carry from the 2007 assessment The four largest regulatory agencies are signatories of the IOSCO MMoU. They also have bilateral MoUs, including a MoU with the U.S. Securities Exchange Commission and the U.S. Commodity Futures Trading Commission. |
| Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers. | FI | Carry from the 2007 assessment The regulatory agencies have authority to assist foreign regulators in obtaining information that is not in their files. |
| Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions. | FI | Carry from the 2007 assessment Issuers are subject to disclosure requirements at the moment of authorization and on an ongoing basis. |
| Principle 17. Holders of securities in a company should be treated in a fair and equitable manner. | FI | Carry from the 2007 assessment The framework for corporations addresses issues of shareholders’ rights, including notice of meetings; and special majorities for the approval of major changes. A mandatory tender offer is required for the acquisition of control of a listed company. |
| Principle 18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality. | FI | Carry from the 2007 assessment Issuers are required to submit financial information in accordance with Canadian Generally Accepted Accounting Principles (GAAPs). Audits have to be conducted in accordance with Canadian Accounting Standards (Canadian AS). |
| Principle 19. Auditors should be subject to adequate levels of oversight. | BI | Auditing firms of reporting issuers are subject to the oversight of CPAB, which is a body independent from the audit profession. CPAB has put in place a robust plan of on-site inspections. CPAB mainly uses recommendations—which implementation is mandatory—to address deficiencies found, and currently it cannot impose fines.. In addition, there are limitations on the level of transparency that CPAB can give to its enforcement decisions, which can impact their deterrent effect. There are also limitations in the information that CPAB can share with audit committees, and the regulatory agencies. Finally, not all provincial statutes provide CPAB with legal protection and non-compellability. |
| Principle 20. Auditors should be independent of the issuing entity that they audit. | FI | The codes of conduct of the provincial accounting bodies, to which all auditors must abide, contain robust provisions on independence. There are several mechanisms in place to monitor compliance with independence requirements, starting at the firm level, and including the audit committees for reporting issuers (i.e. issuers of public offering), and CPAB’s reviews. |
| Principle 21. Audit standards should be of a high and internationally acceptable quality. | FI | Carry from the 2007 assessment Issuers are required to submit financial information in accordance with Canadian Generally Accepted Accounting Principles (GAAPs). Audits have to be conducted in accordance with Canadian Accounting Standards (Canadian AS). |
| Principle 22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision. | BI | There is a designation process in place for credit rating agencies who wish to have their ratings used for regulatory purposes. The requirements for designation are built around the IOSCO Code of Conduct. The designation process followed by the principal regulator was robust. However, a system of on-site inspections is not yet in place. |
| Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them. | FI | Sell side analysts and more generally investment dealers are subject to robust conflict of interest rules in connection with research, which were developed by IIROC. In addition, technical reports for mining issuers and valuations of certain type of transactions concerning issuers are also subject to a framework aimed at addressing potential conflict of interest, including the need that they be prepared by qualified professionals. |
| Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a collective investment scheme. | BI | Operators of CIS (IFMs) as well as their distributors and advisers are subject to registration. Registration requirements are robust In the case of shareholders and directors the system does not require explicitly that they be fit and proper; however information on integrity, solvency and proficiency must be provided by them at the moment of registration and on an going basis and the regulators can seek substantively similar outcomes by way of denying registration of the firm, imposing conditions or even suspending the firm if they believe that the lack of qualifications of a shareholder or director may cause harm to investors. The registration process has important differences across provinces, as in some provinces the review of internal controls and risk management is left to a later stage through the on-site inspection program. IFMs are subject to off-site monitoring and on-site inspections. On-site inspection programs are developed based on a risk based assessment by the regulators. While adequate, the current approach has resulted in a more focused use of on-site inspections in the provinces with the largest populations. |
| Principle 25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets. | FI | Partially carry from the 2007 assessment The legal form and structure of CIS have to be disclosed in the prospectus, along with investors’ rights. There are provisions on separation of assets. Aspects reassessed in 2013 CIS that are offered to the public must have a custodian, which can only be a bank or a trust company. Custody by a related party is not prohibited however there are safeguards in place to mitigate the potential conflict, including the fact that custodians are themselves regulated entities, the obligation of all CIS to have an IRC which must review all transactions involving conflict of interest, and disclosure to investors. |
| Principle 26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme. | FI | Carry from the 2007 assessment CIS are subject to disclosure obligations at the moment of authorization and on an ongoing basis. The regulatory agencies have developed a system to review prospectuses. A continuous obligations review system has been implemented recently. |
| Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme. | FI | Carry from the 2007 assessment CIS are required to value their portfolios at fair value. There are rules for disclosure of prices, subscription and redemption, and best practice regarding pricing errors |
| Principle 28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight. | FI | Operators of HFs are subject to registration, as any other category of IFM. HFs themselves are not subject to registration. The agencies have sufficient powers to require information from IFMs of HFs and to share it both domestically and internationally. IFMs of HFs are subject to the general supervision program of the securities regulatory agencies, which includes off site monitoring and on-site inspections. In addition, the agencies have conducted thematic reviews on the HFs themselves. |
| Principle 29. Regulation should provide for minimum entry standards for market intermediaries. | BI | Firms that provide investment services are required to register. Registration requirements are based on fit and proper criteria. As explained in Principle 24 shareholders and directors are not explicitly required to be fit and proper, but they are required to submit information to this regard and there are remedies that the agencies can seek if the lack of fit and proper requirements of a shareholder or director can cause harm to investors. Also as explained in Principle 24 the processes for reviewing applications for firm registration varies across provinces. |
| Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake. | BI | Capital requirements for all types of intermediaries are based on a net capital formula, although differences exist mainly due to the differences in activities that each category is authorized to conduct. However, a unique feature of the Canadian system is that investment dealers are allowed to use un-invested cash from clients, which arguably constitute deposits. The use of such funds is subject to certain prudential requirements, some of them already imbedded in the capital formula, as well as additional provisions including a leverage ratio, and the fact that IDs must contribute to a compensation fund. The analysis conducted as a result of MF Global insolvency shows the need to strengthen such prudential requirements so that they adequately capture the risks of such “authorization” and therefore ensure adequate investor protection as well as smooth winding down of an ID. |
| Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters. | BI | Securities intermediaries are required to have in place a system of compliance that covers both internal controls and risk management and compliance with laws and regulations. The firms are also required to have in place appropriate policies and procedures to deal with conflicts of interest. In practice, the sole proprietorship feature of the bulk of securities firms may pose challenges to the implementation of robust internal controls and risk management. There are appropriate rules on fair dealing, segregation, know your customer and suitability, and customer information. Intermediaries are subject to off-site monitoring and on-site inspections. The program for on-site inspections is risk based, and overall can be considered adequate. However in the provinces with the largest populations it has resulted in a more focused use of on-site inspections. |
| Principle 32. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. | BI | There are early warning systems in place for IDs and MFDs. For the rest of the intermediaries there are also basic arrangements in place that allow the regulators to monitor their solvency, including quarterly reporting and notification of capital shortfalls. Currently there is no comprehensive protocol to deal with the insolvency of securities firms; in particular a large ID; but a crisis management group was constituted recently, as a result of lessons learned from the insolvency of MF Global Canada. |
| Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. | FI | Carry from the 2007 assessment Exchanges are subject to an authorization regime based on eligibility criteria that include integrity, financial viability, and capacity. ATS are regulated as dealers; however the framework allows the regulatory agencies to regulate them as an exchange once they reach a certain threshold. |
| Principle 34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants. | FI | IIROC and the derivatives exchanges have developed robust automated systems that allow for both real time and post trade surveillance. There is a MoU between IIROC and MX that seeks to ensure collaboration in cross markets surveillance, and in practice referrals do take place. An automated system to further enhance cross market surveillance is being developed. |
| Principle 35. Regulation should promote transparency of trading. | FI | Equity markets are subject to robust pre-and post-trade transparency requirements, including a consolidated tape. While dark orders are allowed, current obligations imposed on them incentivize transparency. Debt markets are subject to pre and post-trade transparency that appear adequate in light of the current market structure. |
| Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices. | FI | Carry from the 2007 assessment The Universal Market Integrity Rules (UMIR) contain provisions that prohibit market manipulation and other unfair practices. Similarly, the MX also has trading rules that cover manipulative or deceptive methods of trading. Practices that RS or MX could not pursue—such as insider trading—are in the framework of the regulatory agencies. Some also constitute criminal offenses (for example insider trading). |
| Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. | FI | Partially carry from the 2007 assessment The Canadian Depository for Securities Limited (CDS) and the Canadian Derivatives Clearing Corporation (CDCC) have developed mechanisms to manage large exposures, including capital requirements for clearing members, margins, collateral and caps on the transactions that can be entered for settlement. New issues assessed in 2003 Mandatory buy in for failed settlement is not required; however rules in place provide sufficient incentive to ensure timely settlement. There are reporting obligations in place for shortselling. |
| Principle 38. Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements that are designed to ensure that they are fair, effective and efficient and that they reduce systemic risk. | Not assessed | |
| Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA) | ||
Summary Implementation of the IOSCO Principles—Detailed Assessments
| “Only principles 1,2,3,6,7,8,9,12,19,20,22,23,24,28,29,30,31,32,34, and 35 have been fully assessed, while principles 25 and 37 were partially reassessed. The summary of key findings for principles 4, 5, 10, 11, 13, 14, 15, 16, 17, 18, 22, 26, 27, 33, 36, and partially from principle 25 and 37 has been carried over from the assessment conducted in 2007in order to provide a complete view.” | ||
|---|---|---|
| Principle 1. The responsibilities of the Regulator should be clear and objectively stated. | BI | Securities markets are regulated and supervised at the provincial level. The responsibilities and mandate of the four regulatory agencies analyzed are clearly established by law. There is a high degree of harmonization of the regulatory framework for securities markets; although a few important differences remain. Different arrangements have been put in place to foster coordination among the provinces (such as the committee system of the CSA) and streamline processes and procedures (such as the passport system for issuers, CIS registrants and CRAs) and to achieve convergence in supervisory practices across the provinces (such as the development of templates, manuals, and training), though there are particular areas where differences in supervisory approaches exist. Vis-à-vis the SROs’ supervision, several coordination mechanisms have been put in place. All such arrangements should continue to be strengthened to ensure that a “full” view of risks is developed. There are also coordination mechanisms with other financial authorities, via the HoA; however there is a need to deepen such arrangements including in connection with crisis management. |
| Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers. | BI | The four regulatory agencies work under a robust framework of independence from the government, both operational and financial. At the same time there are mechanisms for accountability to the Government via the MoF, and decisions of the regulatory agencies are also subject to judicial review. The existence of part time members on the boards of the agencies that have a commission structure, and in particular the possibility currently allowed by the legal framework that they can be directors of issuers and registrants poses concerns vis-à-vis commercial interests. In practice, such concerns are mitigated by the selection processes in place in the respective jurisdictions, which looks at skills, integrity and confidentiality issues and the existence and application of strong conflict of interest rules which require members to recuse themselves from decisions where they face a conflict. In practice the effects of the recusal range from abstaining from voting in a decision, where the conflict is more remote to not receiving any document nor participating at all in the decision, where the conflict is more direct. |
| Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers. | FI | The four regulatory agencies have robust powers to regulate and supervise the markets, including rulemaking authority, registration, recognition and designation authority, power to request information, and conduct on-site inspections and the power to impose administrative sanctions and to pursue quasi-criminal offenses. Resources in the four agencies have increased over time to respond to market growth and the growing regulatory perimeter. The agencies should continue their efforts to recruit staff with specialized expertise. |
| Principle 4. The Regulator should adopt clear and consistent regulatory processes. | FI | Carry from the 2007 assessment The regulatory agencies are subject to a high degree of transparency including public consultation regarding regulations and policy statements. They are active on investor education. |
| Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality. | FI | Carry from the 2007 assessment The regulatory agencies have developed codes of ethics. Reporting obligations on investment activities are in place as well as mechanisms to monitor compliance. |
| Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate. | BI | The securities regulators have developed a definition of systemic risk, and a methodology to identify and monitor such risks. There are also mechanisms in place for accountability, including follow up and periodic reporting on progress. However the analysis is still mostly qualitative, and data availability is currently a challenge. The HoA has served as a forum to engage in systemic risk discussions; however there is a need to deepen such coordination, in particular in connection with crisis management. |
| Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly. | BI | The Committee system of the CSA is the main mechanism to identify emerging risks; and their work is supported by internal arrangements within the provincial regulatory agencies—some of which have established emerging risk committees. However, the analysis is currently mainly qualitative, and data availability is a challenge. |
| Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed. | FI | Several areas have been identified where important conflict of interest exist, including trailing commissions. The authorities are currently analyzing regulatory actions. |
| Principle 9. Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities. | BI | Canada makes extensive use of SROs both for the supervision of securities intermediaries (investment dealers and mutual fund dealers and their representatives), as well as for market surveillance. SROs are subject to a strong framework of oversight, starting with the recognition process, and including approval of their rules, periodic reporting and on-site inspections. However, a few challenges remain in connection with their governance structures vis-à-vis their ability to manage conflict of interest. |
| Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers. | FI | Carry from the 2007 assessment The regulatory agencies have broad investigative and surveillance powers over regulated entities. In particular, they can conduct on-site inspections, including of books and records without prior notice; obtain books and records and request data or information without the need for a judicial action; and supervise exchanges and regulated trading systems. |
| Principle 11. The Regulator should have comprehensive enforcement powers. | FI | Carry from the 2007 assessment The regulatory agencies have broad enforcement powers. These include the power to seek injunctions; bring an application for civil proceedings; order the suspension of trading and the freezing of assets; compel information, documents, records and testimony from third parties (non-regulated entities) in the course of their investigations; impose administrative sanctions; seek quasi criminal actions; and refer matters to the criminal authorities. |
| Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program. | BI | Intermediaries are subject to both off site monitoring and on-site inspections. The on-site inspection programs developed by the securities regulatory agencies and the SROs follow a risk-based approach. This approach has resulted in a more focused use of on-site inspections by the regulatory agencies with the largest populations Enforcement by the four provincial regulators analyzed has significantly improved over time and is currently robust. The SROs are taking important steps to ensure timely response by firms to their compliance reports (MFDA) as well as to strengthen the nexus between compliance reviews and the enforcement function (IIROC). Important challenges remain in connection with enforcement by the criminal enforcement authorities. Although, the regulatory agencies have enhanced coordination and taken concrete steps to get the criminal authorities more engaged, the results are mixed, with progress being achieved only in some of the largest jurisdictions. |
| Principle 13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts. | FI | Carry from the 2007 assessment The regulatory agencies have broad authority to share information with both domestic and foreign regulators and have done so even in cases where no memorandum of understanding (MoU) was in place. |
| Principle 14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts. | FI | Carry from the 2007 assessment The four largest regulatory agencies are signatories of the IOSCO MMoU. They also have bilateral MoUs, including a MoU with the U.S. Securities Exchange Commission and the U.S. Commodity Futures Trading Commission. |
| Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers. | FI | Carry from the 2007 assessment The regulatory agencies have authority to assist foreign regulators in obtaining information that is not in their files. |
| Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions. | FI | Carry from the 2007 assessment Issuers are subject to disclosure requirements at the moment of authorization and on an ongoing basis. |
| Principle 17. Holders of securities in a company should be treated in a fair and equitable manner. | FI | Carry from the 2007 assessment The framework for corporations addresses issues of shareholders’ rights, including notice of meetings; and special majorities for the approval of major changes. A mandatory tender offer is required for the acquisition of control of a listed company. |
| Principle 18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality. | FI | Carry from the 2007 assessment Issuers are required to submit financial information in accordance with Canadian Generally Accepted Accounting Principles (GAAPs). Audits have to be conducted in accordance with Canadian Accounting Standards (Canadian AS). |
| Principle 19. Auditors should be subject to adequate levels of oversight. | BI | Auditing firms of reporting issuers are subject to the oversight of CPAB, which is a body independent from the audit profession. CPAB has put in place a robust plan of on-site inspections. CPAB mainly uses recommendations—which implementation is mandatory—to address deficiencies found, and currently it cannot impose fines.. In addition, there are limitations on the level of transparency that CPAB can give to its enforcement decisions, which can impact their deterrent effect. There are also limitations in the information that CPAB can share with audit committees, and the regulatory agencies. Finally, not all provincial statutes provide CPAB with legal protection and non-compellability. |
| Principle 20. Auditors should be independent of the issuing entity that they audit. | FI | The codes of conduct of the provincial accounting bodies, to which all auditors must abide, contain robust provisions on independence. There are several mechanisms in place to monitor compliance with independence requirements, starting at the firm level, and including the audit committees for reporting issuers (i.e. issuers of public offering), and CPAB’s reviews. |
| Principle 21. Audit standards should be of a high and internationally acceptable quality. | FI | Carry from the 2007 assessment Issuers are required to submit financial information in accordance with Canadian Generally Accepted Accounting Principles (GAAPs). Audits have to be conducted in accordance with Canadian Accounting Standards (Canadian AS). |
| Principle 22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision. | BI | There is a designation process in place for credit rating agencies who wish to have their ratings used for regulatory purposes. The requirements for designation are built around the IOSCO Code of Conduct. The designation process followed by the principal regulator was robust. However, a system of on-site inspections is not yet in place. |
| Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them. | FI | Sell side analysts and more generally investment dealers are subject to robust conflict of interest rules in connection with research, which were developed by IIROC. In addition, technical reports for mining issuers and valuations of certain type of transactions concerning issuers are also subject to a framework aimed at addressing potential conflict of interest, including the need that they be prepared by qualified professionals. |
| Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a collective investment scheme. | BI | Operators of CIS (IFMs) as well as their distributors and advisers are subject to registration. Registration requirements are robust In the case of shareholders and directors the system does not require explicitly that they be fit and proper; however information on integrity, solvency and proficiency must be provided by them at the moment of registration and on an going basis and the regulators can seek substantively similar outcomes by way of denying registration of the firm, imposing conditions or even suspending the firm if they believe that the lack of qualifications of a shareholder or director may cause harm to investors. The registration process has important differences across provinces, as in some provinces the review of internal controls and risk management is left to a later stage through the on-site inspection program. IFMs are subject to off-site monitoring and on-site inspections. On-site inspection programs are developed based on a risk based assessment by the regulators. While adequate, the current approach has resulted in a more focused use of on-site inspections in the provinces with the largest populations. |
| Principle 25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets. | FI | Partially carry from the 2007 assessment The legal form and structure of CIS have to be disclosed in the prospectus, along with investors’ rights. There are provisions on separation of assets. Aspects reassessed in 2013 CIS that are offered to the public must have a custodian, which can only be a bank or a trust company. Custody by a related party is not prohibited however there are safeguards in place to mitigate the potential conflict, including the fact that custodians are themselves regulated entities, the obligation of all CIS to have an IRC which must review all transactions involving conflict of interest, and disclosure to investors. |
| Principle 26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme. | FI | Carry from the 2007 assessment CIS are subject to disclosure obligations at the moment of authorization and on an ongoing basis. The regulatory agencies have developed a system to review prospectuses. A continuous obligations review system has been implemented recently. |
| Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme. | FI | Carry from the 2007 assessment CIS are required to value their portfolios at fair value. There are rules for disclosure of prices, subscription and redemption, and best practice regarding pricing errors |
| Principle 28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight. | FI | Operators of HFs are subject to registration, as any other category of IFM. HFs themselves are not subject to registration. The agencies have sufficient powers to require information from IFMs of HFs and to share it both domestically and internationally. IFMs of HFs are subject to the general supervision program of the securities regulatory agencies, which includes off site monitoring and on-site inspections. In addition, the agencies have conducted thematic reviews on the HFs themselves. |
| Principle 29. Regulation should provide for minimum entry standards for market intermediaries. | BI | Firms that provide investment services are required to register. Registration requirements are based on fit and proper criteria. As explained in Principle 24 shareholders and directors are not explicitly required to be fit and proper, but they are required to submit information to this regard and there are remedies that the agencies can seek if the lack of fit and proper requirements of a shareholder or director can cause harm to investors. Also as explained in Principle 24 the processes for reviewing applications for firm registration varies across provinces. |
| Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake. | BI | Capital requirements for all types of intermediaries are based on a net capital formula, although differences exist mainly due to the differences in activities that each category is authorized to conduct. However, a unique feature of the Canadian system is that investment dealers are allowed to use un-invested cash from clients, which arguably constitute deposits. The use of such funds is subject to certain prudential requirements, some of them already imbedded in the capital formula, as well as additional provisions including a leverage ratio, and the fact that IDs must contribute to a compensation fund. The analysis conducted as a result of MF Global insolvency shows the need to strengthen such prudential requirements so that they adequately capture the risks of such “authorization” and therefore ensure adequate investor protection as well as smooth winding down of an ID. |
| Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters. | BI | Securities intermediaries are required to have in place a system of compliance that covers both internal controls and risk management and compliance with laws and regulations. The firms are also required to have in place appropriate policies and procedures to deal with conflicts of interest. In practice, the sole proprietorship feature of the bulk of securities firms may pose challenges to the implementation of robust internal controls and risk management. There are appropriate rules on fair dealing, segregation, know your customer and suitability, and customer information. Intermediaries are subject to off-site monitoring and on-site inspections. The program for on-site inspections is risk based, and overall can be considered adequate. However in the provinces with the largest populations it has resulted in a more focused use of on-site inspections. |
| Principle 32. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. | BI | There are early warning systems in place for IDs and MFDs. For the rest of the intermediaries there are also basic arrangements in place that allow the regulators to monitor their solvency, including quarterly reporting and notification of capital shortfalls. Currently there is no comprehensive protocol to deal with the insolvency of securities firms; in particular a large ID; but a crisis management group was constituted recently, as a result of lessons learned from the insolvency of MF Global Canada. |
| Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. | FI | Carry from the 2007 assessment Exchanges are subject to an authorization regime based on eligibility criteria that include integrity, financial viability, and capacity. ATS are regulated as dealers; however the framework allows the regulatory agencies to regulate them as an exchange once they reach a certain threshold. |
| Principle 34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants. | FI | IIROC and the derivatives exchanges have developed robust automated systems that allow for both real time and post trade surveillance. There is a MoU between IIROC and MX that seeks to ensure collaboration in cross markets surveillance, and in practice referrals do take place. An automated system to further enhance cross market surveillance is being developed. |
| Principle 35. Regulation should promote transparency of trading. | FI | Equity markets are subject to robust pre-and post-trade transparency requirements, including a consolidated tape. While dark orders are allowed, current obligations imposed on them incentivize transparency. Debt markets are subject to pre and post-trade transparency that appear adequate in light of the current market structure. |
| Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices. | FI | Carry from the 2007 assessment The Universal Market Integrity Rules (UMIR) contain provisions that prohibit market manipulation and other unfair practices. Similarly, the MX also has trading rules that cover manipulative or deceptive methods of trading. Practices that RS or MX could not pursue—such as insider trading—are in the framework of the regulatory agencies. Some also constitute criminal offenses (for example insider trading). |
| Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. | FI | Partially carry from the 2007 assessment The Canadian Depository for Securities Limited (CDS) and the Canadian Derivatives Clearing Corporation (CDCC) have developed mechanisms to manage large exposures, including capital requirements for clearing members, margins, collateral and caps on the transactions that can be entered for settlement. New issues assessed in 2003 Mandatory buy in for failed settlement is not required; however rules in place provide sufficient incentive to ensure timely settlement. There are reporting obligations in place for shortselling. |
| Principle 38. Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements that are designed to ensure that they are fair, effective and efficient and that they reduce systemic risk. | Not assessed | |
| Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA) | ||
Recommended Action Plan to Improve Implementation of the IOSCO Principles
Recommended Action Plan to Improve Implementation of the IOSCO Principles
| Principle 1 | The securities regulators should continue to consider the differences that remain in connection with derivatives, prospectus exemptions, registration exemptions for EMDs in the northwest jurisdictions and registration of non-resident IFMs and work towards achieving further harmonization. The securities regulators should continue to foster convergence of supervisory practices. Consideration should be given to undertaking peer reviews on a more frequent basis as part of the toolkit. Coordination arrangements among the provincial regulators, and the SROs, should continue to be strengthened to ensure that a full view of risks is developed. By the same token coordination with other financial authorities should be strengthened, including crisis management, as described in Principle 32. The Canadian authorities and governments should work towards ensuring a level playing field between all investment products, in particular by ensuring that distribution obligations are applicable and monitored in connection with segregated funds. The securities regulators should continue to pursue arrangements that allow for timely decision making. |
| Principle 2 | The agencies with a commission structure that have not done so should consider adopting internal policies that restrict the possibility that directors of issuers and registrants seat on the board. |
| Principle 3 | The regulatory agencies should continue to hire staff with specialized expertise. |
| Principle 6 | The securities regulators should continue to deepen their framework for systemic risk identification by making more use of quantitative analysis. To this end, a strategy towards data and resources should be devised. The securities regulators should continue to work towards ensuring a two way communication with the SROs. Coordination arrangements with other financial authorities should be strengthened, including crisis management, as described in Principle 32. |
| Principle 7 | The securities regulators should continue to deepen their framework for emerging risk identification by making more use of quantitative analysis. At the same time, the assessor encourages the authorities to review whether the current decentralized structure to look at risks should be further strengthened, for example, by providing more structured means for accountability (as such in place for systemic risk monitoring). The securities regulators should continue to work towards ensuring a two way communication with the SROs. In such context they should also review whether stronger arrangements for identification of emerging risk are also needed at the SRO level. |
| Principle 8 | The securities regulators should continue to give priority to the identification of conflicts of interest. Appropriate regulatory actions should continue to be taken including in connection with the areas identified in this assessment, such as trailing fees. |
| Principle 9 | The securities regulators should continue to focus on governance issues on their oversight of SROs. |
| Principle 12 | The securities regulators should continue to pursue efforts to build cooperative arrangements with the criminal authorities. The MFDA should continue its efforts to ensure timely response of firms with their compliance reviews. IIROC should continue its efforts to strengthen the nexus between their compliance reviews and their enforcement function. The securities regulators should continue to apply tools at their disposal to ensure coordination in enforcement, including via joint investigations and adjudications, as well as reciprocal orders, as necessary and appropriate. |
| Principle 13 | The 2007 assessment included the following recommendation, which was implemented by the authorities: “The AMF and the Government of Québec should work together on defining an efficient procedure for the approval of MoUs”. This recommendation was implemented”. |
| Principle 16 | The 2007 assessment included the following recommendations, which were both implemented. “The assessor encourages the Government of Québec to give prompt approval to the new framework for derivatives markets. The assessor encourages all provincial regulators to expand liability to continuous disclosure obligations”. |
| Principle 19 | The use of different types of enforcement tools by CPAB should be kept under monitoring; at the same time consideration should be given to including fines as part of CPAB’s toolkit, and to strengthen the transparency of disciplinary measures CPAB and the securities regulators should continue to work towards achieving greater sharing of information with the audit committees and the regulators. Changes to the legal framework of the remaining provinces should be made to ensure legal protection of CPAB staff as well as non-compellability. |
| Principle 22 | The regulatory agencies should finalize the implementation of an on-site inspection program for DROs. |
| Principle 24 | The regulatory agencies, in particular those with the largest population of intermediaries, should continue to monitor the efficacy of the risk-based approach with a view towards enhancing the use of on-site inspections (on individual firms and/or thematic inspections) The regulatory agencies should consider to explicitly require integrity and solvency requirements for shareholders and integrity, solvency and experience requirements for directors so that the regulatory authorities have an indisputable authority to refuse shareholders or directors when such requirements are not met. |
| Principle 25 | The 2007 assessment included the following recommendation: “The provincial regulators should require all CIS to have a custodian. Approval of the proposed National Instrument 41–101 would achieve this goal”. This recommendation was implemented as all CIS that offered securities to the public are required now to have a custodian. Consideration should be given to extending custody requirements to all CIS. |
| Principle 29 | The regulatory agencies should consider to explicitly require integrity and solvency requirements for shareholders and integrity, solvency and experience requirements for directors so that the regulatory authorities have an indisputable authority to refuse shareholders or directors when such requirements are not met. The regulatory authorities are encouraged to follow up on the differences in requirements of the PM and EMD categories versus the ID and MFDA categories, and determine the extent to which in light of the findings from their targeted review it is advisable that they be subject to similar requirements in connection with the SRO membership and the contribution to a contingency fund. The AMF should continue to work towards harmonization of the MFD category. |
| Principle 30 | The prudential framework for the use of un-invested cash from clients should be strengthened to ensure that risks are adequately captured. |
| Principle 31 | The regulatory agencies, in particular those with the largest population of intermediaries, should continue to monitor the efficacy of the risk-based approach with a view towards enhancing the use of on-site inspections (on individual firms and/or thematic inspections). |
| Principle 32 | Crisis management arrangements should become more institutionalized, a specific protocol establishing the roles of each party should be developed and simulation exercises be included as a regular plan of the crisis management framework. In addition, given that the largest IDs are part of banking groups it is important that coordination arrangements include OSFI. The securities regulators should work towards implementing portability requirements. |
| Principle 34 | The 2007 assessment included the following recommendation, which was implemented: “The MoU between RS and MX should be finalized”. The securities regulators should continue to give priority to the development of an automated system for cross markets surveillance. |
| Principle 35 | The 2007 assessment included the following recommendation, which has not been implemented: “The provincial regulators should explore whether additional transparency is needed in the government debt market”. The authorities in coordination with IIROC should continue to review the need to establish a minimum size for dark orders. Consideration should be given to expanding post-trade transparency requirements in the corporate bond market. In addition the authorities should consider post trade transparency for the government bond market. |
Recommended Action Plan to Improve Implementation of the IOSCO Principles
| Principle 1 | The securities regulators should continue to consider the differences that remain in connection with derivatives, prospectus exemptions, registration exemptions for EMDs in the northwest jurisdictions and registration of non-resident IFMs and work towards achieving further harmonization. The securities regulators should continue to foster convergence of supervisory practices. Consideration should be given to undertaking peer reviews on a more frequent basis as part of the toolkit. Coordination arrangements among the provincial regulators, and the SROs, should continue to be strengthened to ensure that a full view of risks is developed. By the same token coordination with other financial authorities should be strengthened, including crisis management, as described in Principle 32. The Canadian authorities and governments should work towards ensuring a level playing field between all investment products, in particular by ensuring that distribution obligations are applicable and monitored in connection with segregated funds. The securities regulators should continue to pursue arrangements that allow for timely decision making. |
| Principle 2 | The agencies with a commission structure that have not done so should consider adopting internal policies that restrict the possibility that directors of issuers and registrants seat on the board. |
| Principle 3 | The regulatory agencies should continue to hire staff with specialized expertise. |
| Principle 6 | The securities regulators should continue to deepen their framework for systemic risk identification by making more use of quantitative analysis. To this end, a strategy towards data and resources should be devised. The securities regulators should continue to work towards ensuring a two way communication with the SROs. Coordination arrangements with other financial authorities should be strengthened, including crisis management, as described in Principle 32. |
| Principle 7 | The securities regulators should continue to deepen their framework for emerging risk identification by making more use of quantitative analysis. At the same time, the assessor encourages the authorities to review whether the current decentralized structure to look at risks should be further strengthened, for example, by providing more structured means for accountability (as such in place for systemic risk monitoring). The securities regulators should continue to work towards ensuring a two way communication with the SROs. In such context they should also review whether stronger arrangements for identification of emerging risk are also needed at the SRO level. |
| Principle 8 | The securities regulators should continue to give priority to the identification of conflicts of interest. Appropriate regulatory actions should continue to be taken including in connection with the areas identified in this assessment, such as trailing fees. |
| Principle 9 | The securities regulators should continue to focus on governance issues on their oversight of SROs. |
| Principle 12 | The securities regulators should continue to pursue efforts to build cooperative arrangements with the criminal authorities. The MFDA should continue its efforts to ensure timely response of firms with their compliance reviews. IIROC should continue its efforts to strengthen the nexus between their compliance reviews and their enforcement function. The securities regulators should continue to apply tools at their disposal to ensure coordination in enforcement, including via joint investigations and adjudications, as well as reciprocal orders, as necessary and appropriate. |
| Principle 13 | The 2007 assessment included the following recommendation, which was implemented by the authorities: “The AMF and the Government of Québec should work together on defining an efficient procedure for the approval of MoUs”. This recommendation was implemented”. |
| Principle 16 | The 2007 assessment included the following recommendations, which were both implemented. “The assessor encourages the Government of Québec to give prompt approval to the new framework for derivatives markets. The assessor encourages all provincial regulators to expand liability to continuous disclosure obligations”. |
| Principle 19 | The use of different types of enforcement tools by CPAB should be kept under monitoring; at the same time consideration should be given to including fines as part of CPAB’s toolkit, and to strengthen the transparency of disciplinary measures CPAB and the securities regulators should continue to work towards achieving greater sharing of information with the audit committees and the regulators. Changes to the legal framework of the remaining provinces should be made to ensure legal protection of CPAB staff as well as non-compellability. |
| Principle 22 | The regulatory agencies should finalize the implementation of an on-site inspection program for DROs. |
| Principle 24 | The regulatory agencies, in particular those with the largest population of intermediaries, should continue to monitor the efficacy of the risk-based approach with a view towards enhancing the use of on-site inspections (on individual firms and/or thematic inspections) The regulatory agencies should consider to explicitly require integrity and solvency requirements for shareholders and integrity, solvency and experience requirements for directors so that the regulatory authorities have an indisputable authority to refuse shareholders or directors when such requirements are not met. |
| Principle 25 | The 2007 assessment included the following recommendation: “The provincial regulators should require all CIS to have a custodian. Approval of the proposed National Instrument 41–101 would achieve this goal”. This recommendation was implemented as all CIS that offered securities to the public are required now to have a custodian. Consideration should be given to extending custody requirements to all CIS. |
| Principle 29 | The regulatory agencies should consider to explicitly require integrity and solvency requirements for shareholders and integrity, solvency and experience requirements for directors so that the regulatory authorities have an indisputable authority to refuse shareholders or directors when such requirements are not met. The regulatory authorities are encouraged to follow up on the differences in requirements of the PM and EMD categories versus the ID and MFDA categories, and determine the extent to which in light of the findings from their targeted review it is advisable that they be subject to similar requirements in connection with the SRO membership and the contribution to a contingency fund. The AMF should continue to work towards harmonization of the MFD category. |
| Principle 30 | The prudential framework for the use of un-invested cash from clients should be strengthened to ensure that risks are adequately captured. |
| Principle 31 | The regulatory agencies, in particular those with the largest population of intermediaries, should continue to monitor the efficacy of the risk-based approach with a view towards enhancing the use of on-site inspections (on individual firms and/or thematic inspections). |
| Principle 32 | Crisis management arrangements should become more institutionalized, a specific protocol establishing the roles of each party should be developed and simulation exercises be included as a regular plan of the crisis management framework. In addition, given that the largest IDs are part of banking groups it is important that coordination arrangements include OSFI. The securities regulators should work towards implementing portability requirements. |
| Principle 34 | The 2007 assessment included the following recommendation, which was implemented: “The MoU between RS and MX should be finalized”. The securities regulators should continue to give priority to the development of an automated system for cross markets surveillance. |
| Principle 35 | The 2007 assessment included the following recommendation, which has not been implemented: “The provincial regulators should explore whether additional transparency is needed in the government debt market”. The authorities in coordination with IIROC should continue to review the need to establish a minimum size for dark orders. Consideration should be given to expanding post-trade transparency requirements in the corporate bond market. In addition the authorities should consider post trade transparency for the government bond market. |
A. Authorities’ Response to the Assessment
47. The Canadian securities regulators participating in the FSAP (the regulators) welcome the IMF’s review of the Canadian framework for the regulation and supervision of securities markets. We appreciate the significant time and effort the IMF Mission Team dedicated to complete the assessment, as well as their thoroughness and professionalism in assessing our system against the IOSCO Principles.
48. We 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.” In particular, we are pleased that the IMF recognizes and concludes that in a few areas, such as enforcement, the securities regulators have powers that can be considered at the forefront of securities regulation.
49. The IMF’s recommendations in its 2007 FSAP were carefully considered and we continue to develop and implement reform initiatives consistent with our G-20 commitments and with IOSCO reform initiatives, policies and standards.
50. We will carefully consider the findings and recommendations from this FSAP, and we will continue to improve our oversight and supervision of the securities markets. In fact, several of the IMF’s recommendations are in line with a number of projects we have underway and help to highlight the importance of this work.
We would also like to take this opportunity to comment on certain other aspects of the assessment, as detailed below.
Additional Comments
On-site inspections
51. Over the years, the regulators have devised and implemented an on-site inspection program of regulated firms based on a comprehensive risk-based model. This approach to on-site inspections permits the regulators to efficiently and effectively supervise the conduct of regulated firms. By focusing on the firms and the areas of their operations that are considered to be the highest risk, the regulators use resources more efficiently and more effectively and are able to target problematic conduct on the part of registrants. The regulators are continuously assessing the risks posed by each regulated firm in light of all available information and reviewing the factors utilized in the risk-based model, as well as considering any other enhancements that may be made to the risk-based inspection program.
52. Given the comprehensive nature of the risk-based model, coupled with the continuous review and adjustment process, the regulators believe that the current level of on-site inspections is appropriate. As with all securities regulatory matters, the regulators will continue to assess the efficacy of the on-site inspection program and make justified adjustments as necessary.
Enforcement of criminal laws
53. We welcome the IMF’s conclusion that there has been significant progress in enforcement by the provincial Canadian securities regulators. The regulators are also pleased that the IMF has recognized their increased efforts to support the enforcement of criminal laws by the relevant criminal authorities. While the broadly worded opinion in respect of the effectiveness of the criminal law branch of the Canadian justice system goes beyond the scope of an assessment of the securities sector, the regulators want to emphasize that cases involving criminal activity in the capital markets are in fact prosecuted. As part of regulating the capital markets efficiently and effectively, the securities 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
54. The Canadian securities regulators welcomed the opportunity to provide a comprehensive description of the Canadian securities regulatory regime as part of the IMF’s FSAP assessment and rating of financial market supervision against accepted international standards. In order for such assessments to be viewed as objective, it is important for the IMF to focus on the substantive elements of the securities regulatory regime, as opposed to constitutional and political considerations as to how the responsibilities for implementing the regime have been delineated. As such, the Canadian securities regulators feel comments respecting the observations of the Supreme Court of Canada in a constitutional matter concerning securities regulation go beyond the scope of the assessment against the IOSCO Principles. In addition, the reference to the Court’s decision included in the assessment 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
55. As is evidenced by the IMF’s assessment, the Canadian securities regulators take the risks attached to the existence of conflicts of interest seriously. We 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.
56. In considering and addressing situations where conflicts of interest may arise, the regulators weigh the benefits and risks of permitting situations where a conflict may arise. In respect of the decision on the part of the OSC, BCSC and the ASC to permit, as a matter of law, the inclusion of part-time Commissioners who may be directors of an issuer or registrant, the regulators each engaged in a thoughtful analysis and ultimately decided that the automatic exclusion of otherwise qualified persons on this basis may be detrimental to the ability of those Commissions to effectively and efficiently regulate the capital markets. In respect of the OSC and ASC, the current inclusion of a small number of Commissioners who sit as directors of an issuer, coupled with strong conflicts of interest policies, provides a significant benefit to the collective ability of each Commission to engage in analysis and decision-making. We also note that our 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
57. As a result of much hard work on the part of the Canadian securities regulators, the Canadian securities regulatory regime is highly harmonized. The regulators recognize the benefits to the capital market of having a highly harmonized securities regulatory regime. However, each Commission has the authority to implement non-harmonized securities laws where doing so is of benefit to that jurisdiction’s capital market, given the size, history and geographic realities of Canada. This is an important element and a strength of the Canadian securities regulatory regime. It permits the regulators to, in the vast majority of cases, implement harmonized securities laws while also permitting each Commission to tailor those laws, where appropriate, in order to achieve the overarching objectives of investor protection and efficiency in that capital market. The 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 shareholder and directors of registrants
58. The Canadian securities regulators implemented an oversight regime for registrants that includes ongoing substantive consideration of the integrity and solvency of shareholders of registrants and of the integrity, solvency and experience of directors of registrants. Such matters are given careful consideration at the time of an application for registration and while the registrant continues to be registered. As a result of the regulators’ legal authority to deny registration on such grounds, and the legal authority to attach conditions to suspend or terminate such registration, the regulators already have the requisite indisputable authority over shareholders and directors of registrants.
Regulatory regime for portfolio managers and exempt market dealers
59. The regulators are mindful that there may be a perception by some market participants that an unlevel “playing field” exists. However, in promoting an efficient capital market that provides robust investor protection, the regulators have advised the IMF that we must, and do, consider the differences in permitted activities, standards of care applicable to each category, scope of operations (including custody), business model, and types of clients. Such differences will result in substantively distinct, but equally balanced and fair, regulatory requirements for the affected market participants. While the regulators do not feel that, at this time, Portfolio Managers and Exempt Market Dealers should be required to become members of an SRO or should be required to contribute to a contingency fund, they will continue to assess the appropriate regulatory requirements for such entities.
Conclusion
We wish to thank the IMF assessor, Ms. Ana Carvajal, for her professionalism, openness and availability to discuss thoroughly all aspects of this assessment.
Detailed Assessment
60. The purpose of the assessment is primarily to ascertain whether the legal and regulatory securities markets requirements of the country and the operations of the securities regulatory authorities in implementing and enforcing these requirements in practice meet the standards set out in the IOSCO Principles. The assessment is to be a means of identifying potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation of the existing framework may be necessary and used as a basis for establishing priorities for improvements to the current regulatory scheme.
61. The assessment of the country’s observance of each individual Principle is made by assigning to it one of the following assessment categories: fully implemented, broadly implemented, partly implemented, not implemented and not applicable. The IOSCO assessment methodology provides a set of assessment criteria to be met in respect of each Principle to achieve the designated benchmarks. The methodology recognizes that the means of implementation may vary depending on the domestic context, structure, and stage of development of the country’s capital market and acknowledges that regulatory authorities may implement the Principles in many different ways.
Detailed Assessment of Implementation of the IOSCO Principles
Detailed Assessment of Implementation of the IOSCO Principles
| 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, while Principles 25 and 37 were partially reassessed. The description, 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 have been carried over from the most recent full assessment conducted in 2007 in order to provide a complete view. The selection of the principles that have been reassessed was done by the mission team based on an analysis of the risks and vulnerabilities of Canada, informed by the findings from previous assessments, as well as country work, bilateral, multilateral, and regional surveillance. The process followed for the identification of the principles that needed reassessment did not suggest the need to reassess other principles. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 1. | The responsibilities of the regulator should be clear and objectively stated. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Authority Securities regulation in Canada is a matter of provincial and territorial jurisdiction. Each of the ten provinces and three territories has adopted a Securities Act that is administered and enforced by a local securities regulator. Some have also adopted specific legislation dealing with commodity futures and/or derivatives. With the exception of the AMF, the three other regulatory agencies are specialized regulators; while the AMF is an integrated regulator. In all four cases, the agencies have a legal mandate to protect investors and to foster fair and efficient capital markets. Power to interpret laws and regulations All four agencies have rule making powers; as well as power to issue policy. A consultation process must be followed for rules and in some jurisdictions, for policy. In addition, the agencies have the authority to issue notices. Finally they all have the power to grant exemptive relief from the requirements prescribed by laws and regulations. The four agencies, except the OSC, can grant blanket exemptive relief orders which would apply to a whole category of intermediaries. The OSC may grant exemptive relief orders that apply to a category of intermediary in certain circumstances. The Exemptive relief orders granted are available on the websites of the agencies. Coordination across provinces The Canadian Securities Administrators (CSA) is a non-statutory association constituted by the provincial securities regulators to foster collaboration and coordination. The CSA does not have direct regulatory or supervisory functions. However, under its umbrella the provincial regulators agree on policy and supervisory initiatives, with the overall goal of achieving harmonization in laws and regulations, and streamlining processes and procedures. The CSA has a Chair and Vice-Chair, each of whom is elected by members for a two-year term (one renewal is permitted). The CSA mainly works through committees composed of staff of the provincial regulators that meet periodically. Standing committees include Enforcement, Market Oversight, Registrant Regulation, Investment Funds, Compliance, Systemic Risk and Investor Education. In addition, project committees are formed to work on specific policy projects; for example there are project committees dealing with over-the-counter (OTC) derivatives, securitization and financial innovation, credit rating agencies and takeover bids. The Chairs of each CSA member meet quarterly in person and bi-monthly by conference call. In addition, the CSA established the Policy Coordination Committee (PCC) in August 2003. Its members are the Chairs of eight regulators (British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia). The PCC oversees the CSA’s policy development initiatives and facilitates decision-making. It 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 main function of the Secretariat is to help to keep policy initiatives on track by providing logistical support, including reports on progress, and to manage the national databases. Differences in regulatory requirements or practices across provinces Regulation There are currently 40 national instruments and four multilateral instruments covering a broad range of areas, including (i) issuers; (ii) CIS, (iii) registrants and (iv) marketplaces, which overall ensure that products/entities and markets are subject to a similar set of requirements across provinces. There are three areas where important differences among provinces remain:
Overall stakeholders recognized the progress achieved in harmonization under the umbrella of the CSA. Nevertheless, some market participants expressed particular concern for the differences in connection with registrants (EMDs and foreign IFMs) and the extent to which they are allowing for an unlevel playing field due to the way that they are being used in practice. Finally, a concern remains in connection with timely policy formulation. The authorities have highlighted that at the international level Canada fares similar to other G-20 jurisdictions in connection with the implementation of important policy commitments. In regard to domestic proposals, the authorities have highlighted that in cases where proposals have taken time to be approved such time has been necessary to allow for meaningful consultation with stakeholders and particularly in respect of such policy matters where market participants have strongly held diametrically opposed views; and in these cases, therefore it takes significantly more time, to find a proper balance and allow buy-in from all stakeholders. In addition, time has also been needed to align policy responses with US, given the level of integration of the markets. Registration The provincial regulators have developed a set of arrangements that are aimed at streamlining the registration process. In particular, a passport system was developed for the review of prospectus filings; discretionary relief applications; dealer, adviser and IFM registrations; and credit rating organization designations. All provinces except Ontario have adopted this system. Overall the passport system gives a market participant automatic access to the capital markets in other Canadian jurisdictions by obtaining a decision only from its “principal regulator” and meeting the requirements of one set of harmonized laws. Generally, the market participant’s principal regulator is the regulator of the jurisdiction of its head office within Canada. All CSA members have adopted policies to provide an interface between Ontario and the other Canadian jurisdictions. Under these interface policies, if a market participant’s head office is in Ontario the OSC will act as principal regulator and its decision will be effective in the other Canadian jurisdictions. In addition, market participants based in other Canadian jurisdictions that also want to access the Ontario capital market may generally do so by dealing with their principal regulator. In these situations, the OSC will typically coordinate its review and raise any concerns it may have directly with the principal regulator. Ongoing supervision They have also developed processes and procedure to coordinate ongoing supervision.
As will be further explained in Principle 6, the CSA has created a committee on systemic risk which is in charge of identification and monitoring of systemic risk at a national level. The CSA has developed a definition and a methodology to identify systemic risks. This work relies heavily on the work of the four largest agencies. Enforcement Provincial regulators keep each other informed of important enforcement investigations via the CSA Enforcement committee. This in turn allows them to determine the extent to which a joint investigation and joint hearing should be pursued. In addition, the provincial regulators can also issue reciprocal orders. Use of these mechanisms has been further discussed under Principle 12. Convergence in supervisory practices Several practices have been developed to foster consistent interpretation and convergence in supervisory practices, including:
As will be further explained in Principles 12, 24 and 29, in specific areas supervisory practices across provinces differ. For example, the information to be provided to the regulatory agencies as part of the registration process of a securities firm differs, and so does the level of review conducted. The risk-based frameworks to determine the intensity of supervision are also different, and the frequency of on-site inspections also varies. Differences in requirements across products supervised by different sectoral regulators As per the information provided, the disclosure requirements applicable to segregated funds are similar to the “fund facts” document applicable to investment funds. On the distribution side, some provinces appear to have implemented similar distribution obligations (for example Québec through the Distribution Act) but not all. Many participants expressed concern about this difference in approach and the extent to which in practice this is leading to an unlevel playing field as segregated funds have similar characteristics to CIS. Coordination with SROs There are several mechanisms that the agencies have put in place for purposes of ensuring coordination of their work vis-à-vis- the SROs. These include:
Head of Agencies The major financial regulators in Canada participate in meetings of the Heads of Agency (HoA). The HoA is an informal body which includes the Chairs of the four largest provincial securities regulators in Canada (Alberta, British Columbia, Ontario and Québec), the Governor of the Bank of Canada, the Superintendent of Financial Institutions, and senior government officials from the federal Department of Finance. The HoA serves as a forum for the securities and other financial regulatory agencies to coordinate policy in areas of shared responsibility, including systemic risk. Currently, the HoA’s work is being driven by Canada’s efforts to implement its G20 commitments, which are intended to address issues of systemic risk. The HoA is engaged in discussion and coordination relating to OTC derivatives, shadow banking, hedge funds, and more recently, financial benchmarks. Joint Forum The Joint Forum was established in 1999 by the CSA, the Canadian Council of Insurance Regulators and the Canadian Pension Supervisory Authorities with the objective of helping pension, securities and insurance regulators to coordinate and harmonize the regulation of financial products and services Senior representatives from the three parent organizations meet once a year to discuss cross-sectoral issues. If necessary, they will form working groups to undertake specific projects. An example of work developed under the umbrella of the Joint Forum has been the development of disclosure obligations for insurance companies. MoUs The OSC and OSFI entered into an Accord in 1987 to address potential overlap in the regulation of federal institutions and their subsidiaries and affiliates that engage in securities related activities. In addition, a MoU was signed in 1998. The AMF also signed a MoU with OSFI in 1998 to ensure proper coordination. The authorities informed that in practice the more regular exchange of information takes place with IIROC, as it is the front line supervisor of the IDs. IIROC share with OSFI findings from its on-site reviews. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Broadly Implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | The main reason for the grade relates to the need to continue working on coordination of supervision and to a lesser extent the need to continue harmonization efforts in a few areas, in connection with questions 2a), b) and d of the methodology. Through an incremental approach the provincial regulators have made significant progress in coordinating actions, streamlining processes and procedures and achieving convergence in supervisory practices. On the supervisory front, the passport system is of more recent creation in connection with registrants thus this is an area that the securities regulators should keep monitoring to ensure a robust level of supervision across the provinces. As noted in the description, and further explained in principles 12, 24, 29 and 31, the supervisory regime for securities intermediaries differs in important ways across provinces, and vis-à-vis the SROs. It is important that the regulators and SROs have a common understanding on risk appetite vis-à-vis the actual risks of different categories of participants, to ensure that as much as possible any difference in the intensity of supervision derives from differences in the risks posed by the entities, rather than on availability of resources. The assessor encourages the securities regulators to conduct further analysis on this topic. These issues have been taken into consideration for the grade of principles 12, 24, 29 and 31, as appropriate. Regarding supervisory convergence the securities regulators should consider whether additional tools should be added to the mechanisms to ensure convergence in supervisory practices, such as making more frequent use of peer reviews. In enforcement, as will be further explained in principle 12, the assessor encourages the securities regulators to continue to strengthen arrangements for coordination, including for example by making more use of joint hearings and/or reciprocal orders, or even considering other types of arrangements. In addition, the assessor also notes that several channels have been established to ensure appropriate coordination with the SROs. In this regard, it is key that communication between SROs and the regulatory agencies flows two ways to ensure that (i) both parties have a comprehensive understanding of the risks posed by participants, that is, that not only the SROs provide information to the regulatory agencies, but also that the regulatory agencies share information with them in respect to issues of common interest, and (ii) that the priorities of the securities regulators and SROs are consistent with such view of risks. There are indications that communication is fluid. Thus the recommendation here is to encourage the authorities to consider further ways to ensure robust dialogue, including for example via permanent participation of SROs in different committees, as well as via discussions on strategic priorities. In sum, the assessor encourages further efforts to coordinate supervisory actions not only across provinces but also with the SROs with the main objective of ensuring that a comprehensive and integrated view of risks of the securities markets is developed. Finally, it is important that coordination mechanisms at the financial sector level be strengthened, as further explained in Principle 6. In regard to harmonization, the assessor acknowledges that the principles and methodology require the existence of “similar” not identical requirements. From a substantive perspective any difference should be assessed in the context of the extent to which it can create a gap or unlevel playing field. From that perspective, the assessor acknowledges the progress that the provinces have already made. It is important that the final regulations on OTC derivatives achieved the objective of ensuring that the substance of the rules will be the same across the jurisdictions, and that market participants and derivative products are treated similarly across Canada—as envisioned by the authorities. Finally, it is important that differences that remain in connection with prospectus exemptions and registrants be further reviewed against such objective. From the anecdotal evidence gathered it seems that the differences in registrants raise more concerns from an unlevel playing field perspective. At the CSA level, ensuring responsive policy making should remain a key goal of the CSA. The assessor acknowledges that at the international level Canada fares similar to other countries in connection with the adoption of major global policy initiatives (such as G-20 commitments). Nevertheless, at the national level examples can be found of important policy projects that have taken long (for example initiatives related to mutual fund disclosure, or trailing fees). Indeed, as explained by the authorities such time might have been necessary to allow for meaningful consultation with stakeholders, find a proper balance and allow buy-in from all stakeholders, as well as to align policy responses with US. At the same time, it is key that policy making remains responsive to market challenges. Recent initiatives, as described in Principle 3, such as the project manager and the committee of four to solve differences are steps to ensuring such objective. This issue has not been taken into consideration for the grade. The assessor encourages the Canadian authorities and governments to develop a level playing field in connection to the distribution of investment products by insurance firms. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 2. | The regulator should be operationally independent and accountable in the exercise of its functions and powers. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Independence Legal status of the agencies The four agencies are separate legal entities.
Terms of appointment vary.
All four agencies have similar statutory provisions that protect the board/chair and staff for acts/omissions in the good faith exercise of their functions. In addition, in Québec the statute expressly states that the AMF assumes the defense of the personnel. A similar provision does not exist in the case of the other agencies, but through administrative decisions in all of them the legal defense of staff (including former employees) is assumed by the regulatory agency Mitigation of iInfluence of commercial interests In all the three agencies with a commissioner structure, part time commissioners can carry other professional activities, and can be directors of issuers and registrants. However, in all three cases the respective codes of conduct require them to disclose any conflict of interest and recuse themselves from being part of such decisions. In the case of the OSC and the BCSC, the Commissions have adopted a policy of not permitting Commissioners to act as directors of registrants. It was determined that a different treatment for registrants was necessary given the OSC’s direct oversight of them. Further it was determined that the types of conflicts that may arise in the case of registrants can be more difficult to manage and could result in the Commissioner being in a constant state of recusal. In the case of acting as a director of an issuer, the Commissioner must notify the Chair in advance and obtain the Chair’s approval. Such policy does not exist in the case of the ASC, however senior staff from the ASC emphasized that through the selection process (and the screening for conflicts conducted therein), the agency has achieved the same result. In the case of the OSC three out of its 12 part time commissioners sit on the board of reporting issuers. In the case of the ASC, 3 of its 9 part time commissioners sit on the board of reporting issuers. In the case of the BCSC, currently no commissioner holds a senior or board seat on an issuer or registrant. The BCSC informed that typically commissioners are retired and are not working full time in the private sector. While specific aspects might differ from agency to agency, overall, from an operational perspective, based on the items on the agenda of the board, the member is required to disclose any potential conflict to the secretary of the board. At the time of the board meeting, such conflict would be disclosed also to the board itself. If the member does not recuse him/herself the secretary and/or the chair can request him/her to do so. In all three cases the recusal cover any type of decision where the member has an interest that could affect his/her unbiased position. This means that it is not limited to individual cases (for example enforcement, or approvals of particular actions) but also to policy. The effects of the recusal vary depending on whether the conflict is “direct” or more “remote”. For example, in individual cases where the member might have an interest (for example an enforcement case that involves a client in the case of a lawyer, or that involves the issuer in the case of a board member that seats in the board of an issuer), the recusal would mean that the member does not receive any documentation concerning such case, nor participates at all in such decision. In policy (for example a review of requirements for issuers) the member would participate in the discussions but abstain to vote from the decision. Senior staff from the agencies emphasized also that in the case of policy decisions, additional safeguards are in place as regulations are subject to consultation as well as a approval by the respective Minister. Further, policy in Canada is mostly done through national instruments, which means that in practice the potential influence that an individual member can have is very limited. In the case of the AMF, the head of the AMF pursuant to the Code of Conduct has to perform its functions exclusively unless the Government names or designates him/her to other functions. The only other exceptions is that he is allowed to exercise educational activities for which he can receive remuneration and activities for non for profit organizations with no remuneration. Government involvement in regulatory issues According to the legal framework of the four agencies, the issuance of regulations requires Ministerial approval. In the case of the BCSC such approval is required to initiate a rulemaking proposal (approval in principle), as well as of the final rule. All agencies indicated that it is very rare for the Minister to make substantial changes to the rules proposed by the regulators. They all indicated that there is a good communication with the Ministry office, so that policy initiatives are discussed in advance, so that by the time of the final approval the MOF is well informed and no major issues arise. In addition the OSC, the ASC and the AMF are required to obtain ministerial approval of MoUs for exchange of information.
Other than in those areas, the government does not have a direct role in day to day operation of the regulatory agencies. Funding The four agencies are fully self-funded. Their main source of income is fees paid by market participants.
In recent years two of the agencies (OSC, and BCSC) have been subject to limitations in connection with the salaries that they can pay to staff and/or management.
Accountability In all four cases the agencies are accountable to the Government through the MoF. In each case there are different types of arrangements where such oversight is delineated:
Finally in all four cases their decisions are subject to judicial review. Procedural fairness These issues have been discussed under Principle 3. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Broadly implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | The main reason for the grade relates to the potential for interference of commercial interest resulting from the inclusion of part time members in the agencies that follow a commission structure, in connection with question 1 b) of the methodology. The commission structure allows the agencies to bring to the table different types of expertise that can enrich the decision making process. e Allowing part-time members can potentially enlarge the pool of expertise that the commissions can draw from. At the same time it can give rise to conflict of interest. As detailed in the description these conflicts are managed mainly by two mechanisms. At the entry level, by the selection process established in each of the provinces which emphasizes skills, integrity and confidentiality. On an ongoing basis, by the conflict of interest policies that require a member to recuse themselves in decisions where the conflict is present. In practice such recusal applies not only to individual cases but also to policy, although the effects of the recusal vary. In principle the assessor considers that these two mechanisms can work effectively in connection with part-time commissioners that are not directors of issuers or registrants. For example, a strong selection process should be able to discourage the selection of candidates whose private practice is exclusively composed of regulated entities; so that on an ongoing basis the need for recusal would be relatively limited. The question that remains is whether the potential participation of directors of registrants and issuers should be treated in the same way, and thus address in practice through the same mechanisms. The assessor concurs with the authorities that the potential for conflict is even larger in connection with directors of registrants. In her opinion in those cases a recusal policy would not be sufficient to manage conflicts (and perceptions of conflict) well while at the same time allowing for an effective participation of the member in the board. Thus, the assessor considers that in such cases additional safeguards such as those implemented by the OSC and the BCSC are warranted. The final issue to consider is whether a similar treatment should exist for directors of issuers. The regulatory agencies consider that in such cases the conflicts can be well managed through the conflict of interest policy. There is no clear cut answer to this issue. In principle the assessor considers that directors of issuers should not be members of the regulatory agency, to avoid any perception of conflict, given the fact that issuers are subject to regulations issued by the agencies. If they were to be members of the board, then they should be excluded from participating in any policy decision affecting issuers. The views of issuers can still enrich policy views through the consultation process and the constitution of advisory committees. The assessor wants to emphasize that current management of potential conflicts by the three agencies has worked well, and the assessor did not find any evidence of interference. Thus the broadly implemented grade. . As for the government, the line between independence and accountability is difficult to draw. The assessor notes that the Government (via a Ministry) does not have any role in day to day operations of the agencies, and the approval of MoUs do not seem to interfere with the ability of the agencies to share information both domestically and internationally. Further, staff from all the agencies indicated that the relevant Minister has never rejected a MoU submitted for approval. The role of the Government in setting the level of fees (either directly or because the rules of the agencies require their approval) has not interfered either with their ability to have the necessary stable funding to carry out their functions. Finally the approval of the budget as well as strategic priorities is consistent with an oversight role. However, it is important that the limitations in salaries be monitored. Thus, overall the assessor considers that the current framework strikes an appropriate balance between independence and accountability. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 3. | The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Powers The legal framework for the four agencies provide them with sufficient powers to regulate and supervise the market and its participants (issuers, CIS, SROs and exchanges, and securities intermediaries). Each securities regulator has the authority to:
As indicated in Principle 2, the four regulatory agencies are funded by fees levied on market participants. Market conditions resulted in falling revenues (i.e. annual deficits) at some of the agencies in recent years (chart 1). However, the agencies retain reserves to maintain necessary capacity during periods of market turbulence. Regulator Revenues and Expenses—Chart 1
The table below shows staff headcount by broad functional category for the period 2010 to 2012 for each regulator. In all cases, the number of staff has grown since 2010.
In addition, the two national SROs—IIROC and the MFDA—act as front-line regulators in respect of dealers (including mutual fund dealers). In 2012, IIROC had 422 employees, of which approximately 270 were engaged in enforcement, registration and compliance oversight activities. The MFDA had 171 employees, with approximately 130 engaged in enforcement, registration and compliance oversight activities. Adding these staff figures to the staff at the OSC, AMF, ASC and the BCSC produces a total of 1,876 staff engaged in securities regulation in 2012. Staff of the four agencies indicated that overall the agencies are able to pay competitive salaries. In the case of the OSC, ASC, and BCSC, surveys are conducted to have a benchmark. In the case of the BCSC and the ASC, the salaries are aimed at the 50th percentile of their comparative market. IIROC also conducts surveys, and its salaries are aimed at 75th percentile. Salaries at the AMF are established on the basis of the Québec Treasury Department guidelines given to the AMF when collective contract negotiations are ongoing. The professional staff of the four agencies is comprised of lawyers and accountants, as well as staff with industry experience and expertise, including derivatives, trading, clearing and risk specialists and, in Alberta and BC, specialists in mining, oiling and/or gas. In recent years, the agencies have also hired several economists to enhance their risk and research units. All four agencies have training programs for their staff.
Turnover is low. ASC staff indicated that turnover is somewhat higher than the other regulators due to strong labor market competition from the Alberta oil and gas industry.
Technological resources The agencies collectively spent more than $60,000,000 on information technology in fiscal 2012. In addition, there are several national electronic filings and systems for the official filing of documents by different market participants, including: (i)official filings by public companies and investment funds, (ii) filing of registration forms for dealers and advisers, (iii) filing and dissemination of insiders reports, (iv) a repository of cease trade orders, (v) a disciplined persons list, and (vi) the National Registration Search (NRS), which contains the names of all registrants (individuals and firms) in Canada, with the exception of those registered solely with the OSC. The CSA plans to invest about $100,000,000 to replace the National Systems in phases over the next five years. CSA will integrate the standalone systems into a single, intuitive, secure filing system for regulators and market participants. As part of the renewal, CSA will implement technology advancements, such as XBRL, Web 2.0 and user interface improvements. There are also important “provincial” initiatives including the development by the AMF of a market surveillance system that would allow for automated surveillance across the equity and derivatives markets. Governance and priority setting Provincial level As indicated in Principle 2, the OSC, ASC and BCSC have adopted a Commission structure for their organizations. Under this structure, Commission members, in addition to performing their regulatory responsibilities, also act as the board of directors. As board members, they are responsible for the overall stewardship of the agencies, including setting up their strategic priorities. The AMF has adopted a Superintendent structure for its organization. Under this model, the president is responsible for the overall functioning of the agency, including setting priorities. All four agencies prepare strategic plans (usually with a three year horizon) that outline the priorities of the agencies. With varying degrees the development of such plans not only involves senior management but also staff and consultation with stakeholders. All four agencies have established mechanisms to ensure that day to day operations are in conformity with the strategic direction set up by the governing body.
CSA level The CSA has a Chair and Vice-Chair, each of whom is elected by members for a two-year term (one renewal is permitted). The Chairs of each CSA member meet quarterly in person and bi-monthly by conference call. In addition, the CSA established the Policy Coordination Committee (PCC) in August 2003. Its members are the Chairs of the eight regulators (British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia). The PCC oversees the CSA’s policy development initiatives and facilitates decision-making. It acts as a forum for timely resolution of policy development issues, monitors ongoing issues and provides recommendations to the CSA Chairs for their resolution. In addition, recently a committee of the Chairs of the four largest agencies was formed to serve as a body to solve differences among the provinces. The CSA develops a Business Plan every three years, which identifies common priorities and proposed projects for all members of the CSA, including key deliverables. The CSA recently finalized a Business Plan for 2013-2016. The Business Plan will assist in promoting continued coordination and harmonization in CSA policy initiatives and rules. The CSA established a permanent Secretariat in March 2004 in Montréal. The main function of the Secretariat is to help to keep policy initiatives on track by providing logistical support, including reports on progress, and manage the national databases. A project manager was recently added to the staff, to provide further support to the committees in ensuring that projects are delivered on schedule. The Secretariat currently has 6 staff. The CSA is funded by its members on a per capita basis. Investor Education These issues have been discussed under Principle 4. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully Implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | As many other securities regulators in industrialized countries, the four agencies face resource challenges arisen from the increased complexity of their securities markets. The agencies are aware of this challenge and in recent years have taken steps to add professional staff with different profiles (such as staff with experience on ratings, trading, and more generally staff with market experience, as well as economists to complement the existing cadre of lawyers and accountants) to their respective organizations. This effort should continue so that the agencies are well equipped to understand and identify risks, both at the macro-level and micro-level. At the same time, it is critical that the agencies keep their commitment to operational work, both in the areas of supervision (compliance) and enforcement. In terms of governance, the current structures at the provincial level appear robust. Of particular importance are the efforts of the agencies in the area of enterprise risk management and their connection with their internal audit units. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 4. | The regulator should adopt clear and consistent regulatory processes. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 Overall, all regulatory agencies work under a high degree of transparency that requires them to submit their regulations to public consultation, and their decisions are subject to judicial review. Consultation process Both the OSC and the AMF are subject to a statutory mandated process of consultation with the public of their regulations and policies. Draft regulations and draft policy statements are published in their respective bulletins with a consultation notice, and a notice is also published in the official newspaper. All comments along with the explanation of the position taken by the respective agency are also published in their bulletins. Changes to regulations and policy statements are also subject to the same consultation process. In addition both the OSC and the AMF have made use of consultative committees and groups to gather input for market participants on important issues. They are required by statute to take into account the economic impact of regulations before their adoption. In particular the OSC has made significant progress in this area, through the creation of the Economic Analysis, Strategy and Project Branch whose function is to prepare a cost-benefit analysis for significant policy projects (for example, detailed cost benefit analyses were prepared for proposals regarding auditor oversight; certification of disclosure in issuers’ annual and interim filings; and mutual fund governance). Procedural fairness Both regulatory agencies are required by their legal frameworks to act in a fair manner. AMF is required to provide reasons in the case of unfavorable decisions (Section 319 of the AMF SA and Section 8 of the Act respecting administrative justice), while the OSC must provide written reasons upon request (Statutory Powers Procedure Act). However, as a matter of practice both institutions provide reasons for the major decisions they adopt. Persons directly affected by a decision taken by the AMF—except those taken based on the Distribution Act—can seek review of the decision by an independent tribunal the BDRVM (Section 318 of the AMF SA). SROs can also appeal before this tribunal (Section 322 of the AMF SA). Decisions taken by both the AMF and the OSC are subject to judicial review (Section 324 of the AMF SA; Section 9 of the ONT Act and Section f of the Ontario Commodity Futures Act). Criteria for granting licenses The legal and regulatory framework of both the OSC and the AMF establish the criteria for granting, denying or revoking licenses. Investor education Both regulatory agencies play an active role in investor education. Their investor education programs include community outreach via seminars and presentations; exhibitions at trade shows and events; publishing information brochures and similar publications; preparing investor alerts on hot topics and public advertising. They both have sections on their web sites that highlight educational resources as well contact centers. Finally, they both have investor education funds constituted with resources from administrative penalties, to provide support for various initiatives related to investor education and protection and improving financial literacy. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 5. | The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 Overall, all regulatory agencies have developed a code of ethics and professional conduct for their staff that deals with issues of honesty and integrity; procedural fairness; prevention of conflict of interest and confidentiality. Transactions in securities Under the current framework of both agencies staff can invest in securities; however specific conditions, restrictions and prohibitions do exist (for example staff is prohibited from carrying out transactions on securities that are being investigated; buy securities in margin; and sell securities short). Both regulatory agencies have established certain reporting obligations. In the case of the OSC, commissioners and staff are required to file an undertaking that they understand their obligations and to sign a certificate of compliance annually. This certificate includes a detailed list of investments. In addition, they must report all securities trades, other than in exempt securities, within five days. Directors are required to periodically review trading of the staff under their supervision and provide a certification of their compliance with the OSC Bylaws. The OSC is subject to the provisions of the recently enacted Public Service of Ontario Act 2006 dealing with ethical conduct, and disclosure and investigation of wrongdoing. This Act enables OSC staff to make disclosure of wrongdoing externally to a third party. The OSC is also in the process of setting up a system for the disclosure of wrongdoing within the organization, which will include a process for the investigation of reports under the system. The AMF’s president and personnel with delegated authority are required to provide a detailed report of their assets on an annual basis. This report has to be updated every time that a material change occurs. These reports are analyzed by the secretariat of the CEO. The assessor was informed that in the past on a few occasions the secretariat has given orders to staff in relation to investments, including setting up blind trusts for the management of their investments. Confidentiality The current legal framework for both regulatory agencies contains explicit provisions that require the staff to maintain the confidentiality of information obtained in the course of their functions (OSC By Law No. 2 and Section 16 of the AMF). Investigations of violations of the code of ethics Their respective code of ethics contains the procedures to investigate and resolve allegations of violations of the code. The nature of an investigation or alleged violation of the OSC Code of Conduct or By Law No.2 and the person who will conduct the investigation will depend on the nature and seriousness of the violation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 6. | The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | CSA Systemic Risk Committee The Systemic Risk Committee of the CSA constituted in 2009 serves as the main mechanism for CSA members to identify and monitor systemic risk arising from the securities markets. The SRC is composed by staff of the largest CSA provinces. Thus, in practice the identification of systemic risk is done by a coordinated effort of staff of the largest securities regulatory agencies. The SRC meets via conference calls every two weeks and in person once a year. Definition The SRC’s definition below is the test by which systemic risks are identified and documented by the SRC. Systemic risk is the risk of a shock:
The SRC currently conducts a comprehensive assessment of risks at least once every two years. The SRC process to identify systemic risk is a top-down exercise that starts by identifying all major categories of capital markets activities and participants (e.g. investment dealers, OTC derivatives and clearing houses). Categorization is performed without initial consideration of regulatory responsibilities, to better understand the structure of the markets. This exercise has led to the SRC identifying more than 50 categories of activities and market participants. Each of the categories is then prioritized with a high, medium or low priority rating. Currently such prioritization is mainly qualitative—mainly due to data challenges—and relies on the criteria proposed by the FSB/IMF/BIS report to the G-20 finance ministers and Central Bank Governors in October 2009 (particularly size/significance, level of interconnectedness, and availability of substitutes), with the added criteria of considering the level of regulation in place and the jurisdiction of Canadian securities regulators. That is, the focus of the CSA is on risks that are within the mandate of the securities regulatory authorities. All high and medium priority categories are analyzed in depth by the SRC members, as well as any previously outlined systemic risks (through previous comprehensive assessments). The CSA also hypothesize additional risks and vulnerabilities that could have systemic implications. Each risk and vulnerability are then analyzed and assessed in detail by gathering information, data or reports from academic sources, other regulators or international organizations, such as IOSCO or the FSB. Each category reviewed is also evaluated for systemic importance on a scale of 1 (low) to 5 (high) using the criteria of size/significance, interconnectedness and availability of substitutes. The purpose of this rating is to confirm the relative potential for systemic risk in each category assessed, independent of the level of regulation. The analysis of each category and risk is then discussed by the SRC as a committee. Documented risks and vulnerabilities are evaluated against the SRC’s working definition of systemic risk. Monitoring For each risk, the SRC proposes a risk owner. The risk owner may be another regulatory jurisdiction or a committee within the CSA that is closely tied with the functioning of a particular category. The SRC also monitors progress of risk mitigation by other regulatory agencies through quarterly inter-agency meetings. Those findings, issues or mitigation plans are then incorporated into the SRC’s analysis. Reporting The SRC is accountable to the CSA Chairs.. Similarly, CSA committees that are deemed risk owners and are working on mitigation strategies for outstanding risks are also accountable to the Chairs. The SRC delivers an annual report to the CSA Chairs that documents all risk monitoring findings identified during the most recent risk monitoring cycle. All outstanding risks are reported to the Chairs and recommendations made, if necessary, on steps to either mitigate a particular risk or to monitor it more closely. Practice The SRC identified the repo market as an important source of funding liquidity and a potential conduit of systemic risk. A potential risk identified through the process is the lack of transparency of the repo markets. As a result a number of initiatives are underway to improve the transparency and integrity of this market:
HoA In addition to reporting to the CSA Chairs, the SRC shares findings with other federal financial authorities through the HoA. The HoA serves as a forum for regulators to coordinate policy and discuss matters of mutual interest including systemic risk. The HoA is composed of the Chairs from the four largest provincial securities commissions (Alberta, British Columbia, Ontario and Québec), the Governor of the Bank of Canada, the Superintendent of Financial Institutions, and senior members from the Department of Finance. The HoA is currently chaired by the Governor of the BoC. The HoA meets at least quarterly, or more frequently as necessary, to discuss issues of common concern to the various agencies represented within the HoA. The HoA is supported by a “Sub-HoA” Committee composed of senior staff level representatives. The Sub-HoA also meets regularly and seeks to promote collaboration between the respective financial sector regulatory agencies. Currently, the HoA’s main focus includes ensuring a sound regulatory framework established for OTC derivatives, including trading and clearing of such products. Interagency communication The SRC also participates in inter-agency staff-level calls with the Bank of Canada, Department of Finance (Canada), IIROC and OSFI. The purpose of these calls is to ensure that each regulator has an opportunity to share information related to potential new systemic risks that may cross regulatory boundaries, to inform the other regulators of what developments may be taking place within each regulator’s jurisdiction pertaining to systemic risk (research, publications, econometric and financial model development), and facilitate general discussion and knowledge sharing regarding systemic risk. For example in 2011 four interagency calls took place and staff held discussions on shadow banking, securitized instruments, hedge funds, ETPs, MMFs, the potential shortage of safe assets collateral and global macroeconomic conditions. In this regard a potential systemic risk that has been identified through the inter-agency meetings is the possible future shortage of safe assets for collateral, although neither the SRC nor the other Canadian agencies have concluded that the risk is systemic. The risk is being monitored and analyzed by the Bank for International Settlements Working Group on Bi-lateral Margining and the Committee on the Global Financial System, in which the BoC participates. Expertise The CSA relies on the work performed by the SRC as the primary resource tasked with identifying and monitoring systemic risk within the remit of Canadian securities regulators. The initial focus of the SRC members was to develop a methodology to identify risk in securities markets. To this end, considerable research was conducted on the work of other securities regulators in this area. More recently, SRC members conducted an extensive review of academic literature on funding liquidity risk and market liquidity risk measurement techniques. In practice, as the SRC is composed of staff of the provincial agencies, the expertise on systemic risk is being built at the provincial level, in particular in the largest securities agencies. Furthermore, some of the agencies have constituted units whose functions would contribute to the work of the SRC. For example, the AMF recently created the Strategic Oversight responsible for systemic risk and economic analysis. The unit is currently working on developing a risk dashboard with key indicators for securities markets, and it plans to issue periodic publications on risk. Staff also highlighted that through cooperation of domestic agencies, the SRC is able to leverage additional experience and expertise related to risk measurement and analysis. For example, the development of policies and rules for the clearing of OTC derivatives has been a joint effort between Canadian agencies, which has been supported by quantitative analysis performed by the Bank of Canada. On an international level, the SRC staff participates in IOSCO’s SCRR, which is responsible for developing systemic risk assessment methodologies and to provide a forum for economists and risk analysts of securities regulators. Thus, SCRR provides an opportunity to learn from the expertise of securities regulators outside of Canada. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Broadly Implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | The initial assessments conducted by the IMF under the new methodology focused on the analysis of three high level issues in connection with the existence of a process to identify systemic risk or to review the perimeter of regulation, which is required pursuant to question 1 of the respective principles: (i) whether the arrangements in place allow for a holistic (across products, entities, and markets) view of risk, (ii) whether they allow for periodic reassessment of risk (iii) and whether they allow for proper follow up (actions). The experience gained over the last year allows assessors to delve deeper into these issues, for example, by looking at the type of data and analysis that is used by the authorities to identify such risks, and the degree to which the processes implemented allow for proper accountability. Such rigorous analysis is in line with the recommendations included in the report of the Assessment Committee of IOSCO. Accordingly, and based on question 1 and question 3 in the methodology, this principle has been graded broadly implemented. The regulatory agencies have made a good start in their efforts to contribute to the identifications, management and mitigation of systemic risk. The working definition developed by the agencies focuses on the areas that are under the purview of the securities regulators. While simple, the current methodology allows for a holistic view of risks, as well as its periodic reassessment. The process also involves proper mechanisms of monitoring and accountability. It is important, however, that the current approach which is mainly qualitative, be complemented with more use of quantitative analysis to make the assessment more robust. As stated in the description, the authorities are making efforts in this regard, including for example, the development of a risk dashboard. Further it is important to acknowledge that this challenge is not unique to the Canadian securities regulators, although in their cases an additional challenge has been the limited amount of quantitative data. currently available. The assessor encourages the authorities to consider how to best address current data challenges and data collection—in particular whether it would make sense to have a centralized database at the CSA level—as well as expertise—in particular whether it makes sense to have specialized staff at the CSA level, or whether the current approach base on a network of specialized staff using and sharing common databases and information suffice. In addition, the assessor encourages the authorities to further analyze whether current arrangements allow for an optimal engagement of the agencies with the SROs for purposes of risk identification, and whether the SROs have themselves proper mechanisms in place for risk identification. For example, whether the strategic issues management meetings that IIROC has added to its arrangements—as further described in Principle 7 are sufficient—or whether additional data mining should be considered?. Finally, it is important that coordination mechanisms at the financial sector level be strengthened, both in connection with risk identification—for which data is a challenge—as well as in connection with crisis management and resolution involving the large IDs, as will be further explained in Principle 32 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 7. | The Regulator should have or contribute to a process to review the perimeter of regulation regularly. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Identification of emerging risks The Committee system of the CSA constitutes the primary vehicle used by the securities regulatory agencies to raise within the CSA issues of concern arising from the activities of both regulated and unregulated entities, including emerging risks. The CSA committees are structured by topics; and thus they are integrated by staff from the different provinces with responsibilities in the respective area. Examples of committees that are important for purposes of identifying risks, including those arisen from new products and unregulated entities are the Securitization and Financial Innovation Committee; and the Unregulated Market Service Providers Committee. The concerns raised by committee members can lead to different type of actions, for example agreements on sweeps that would be conducted by one or more provinces (to determine the extent to which a concern is widespread) or policy proposals. In the latter case, a project proposal is sent to the policy coordination committee, for approval via a mandate form that would clearly state the issue that needs to be studied/analyzed/reviewed, and the resources that would be needed. The CSA can introduce requirements under rulemaking powers. If the issue is best addressed through legislative amendments, staff would initiate discussions with provincial government officials to advance the necessary amendments. An example of the former has been the sweeps conducted on EMDs. One example of the latter is the policy proposal on the table in respect of non-bank ABCP—which will be further described in Principle 8. The work of the CSA in turn is supported by arrangements that the provincial regulators are developing in their respective jurisdictions to identify and monitor emerging risks. For example, the OSC has established a Policy Review Committee, an Emerging Risk Committee and a Novel Products, Structures and Financial Innovation Committees. These committees complement the regular informal meetings of executive management where emerging regulatory issues are discussed. The PRC provides a forum to discuss policy priorities and to identify potential overlap or gaps in ongoing policy work. The ERC was established recently to help identify potential emerging risks. The NPSFIC acts as a forum for cross-branch discussions of files or matters that involve new products or market based innovations (e.g. new business structures and/or distribution channels) and acts as a source for identifying potential changes that may be required to the regulatory perimeter. In Québec, the AMF has also structured some internal groups with similar objectives and created a risk management committee last year, which oversees risk identification, monitoring and the AMF’s action plan. Furthermore, a new team was recently created in the market surveillance department that is responsible for identifying new products and market trends. These groups work in collaboration with the newly created department of Strategic Oversight responsible for systemic risk and economic analysis. Identification of emerging risk is also supported by the work of IIROC, which after 2007 holds strategic issues meetings on a monthly basis with the main objective of discussing trends and emerging risks. Review of rules and exemptive relief The CSA committees also review rules, typically a year after a rule has come into force and also as a result of new information coming to light. Such reviews may lead to amendments depending on the experience of working with the rule and its impact. In addition, it is common practice for staff of the agencies to review exemptive relief applications to identify trends and areas that require further policy changes. In addition, CSA members often issue exemptive relief orders containing a “sunset” provision. The sun-setting of the decision promotes a review of the desirability of maintaining the relief. Alternatively, industry participants may bring forward evidence of changing conditions and how past regulatory policy decisions may no longer be addressing a particular issue or how there have been unintended consequences of past decisions. Evidence that circumstances of past decisions have changed may lead to policy changes, if appropriate. For example, a new registration category for IFMs was created after a number of potential risks particular to fund managers were identified. These risks included: (i) incorrect or untimely calculation of NAV; (ii) incorrect or untimely preparation of financial statements and reports; (iii) incorrect or untimely provisions of transfer agency or record-keeping services; and (iv) conflicts of interest between the fund manager and the investors. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Broadly Implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | As stated under Principle 6, the experience gained from the conduction of assessments relying on the new methodology allows assessors to delve deeper into the key elements that the processes in place must meet. Accordingly and based on question 1 of the methodology this principle has been graded broadly implemented. It is important that the agencies deepen their approach for the identification of emerging risks by making more use of quantitative analysis. In addition, as stated on Principles 1 and 6, it is critical that identification of risks be built on a system of two way communication with the SROs, in particular IIROC in light of its broader mandate Finally, the assessor encourages the authorities to consider whether the current arrangements, which largely rely on a decentralized process (via the CSA committees), require further strengthening by, for example, establishing more structured mechanisms for follow up (as was done in the context of systemic risk identification via the CSA Systemic Risk Committee). | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 8. | The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Regulated entities The existing regulatory framework requires regulated entities to put in place mechanisms to identify, monitor and mitigate conflicts of interest. Overall the framework for securities intermediaries is principles based, and establish three type of actions that intermediaries can take to address conflict of interest, avoidance, control and disclosure (see Principle 31). In the case of public CIS additional safeguards were put in place, by requiring all public CIS to establish a IRC, with independent members in charge of reviewing conflicts of interest, with the authority to approve transactions, in some cases, and provide recommendations in others (see Principle 24) Conflict of interest obligations exist also for other type of participants including auditors (Principle 20), credit rating agencies (see Principle 22), sell side analyst (principle 23), and SROs (principle 9). Through the discussions with market participants and the regulatory agencies, a few issues were identified as sources of conflict of interest that require a regulatory action:
In the case of issuers, overall the main mechanism used to address misalignment of incentives is disclosure to the public. For example, the current framework for issuers who offered securities to the public requires that the prospectus includes information on related party transactions, and compensation arrangements for certain executive officers and directors. Through the discussions with market participants and the regulatory agencies, a few issues were identified as sources of conflict of interest that require a regulatory action:
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| Assessment | Fully Implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | As indicated in the description, there are several areas that exhibit important conflicts of interest. It is important that both policy and enforcement actions be taken on a timely manner, as necessary. In the area of trailing commissions it is key that through coordination with other financial authorities a level playing field solution could be adopted; that is that any solution adopted be applicable also to like-products sold by other intermediaries (for example, segregated funds, but also banking products as long as there is also an issue of imbedded trailing commissions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles for Self-Regulation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 9. | Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Existing SROs Canada’s regulatory system makes use of SROs. IIROC and the MFDA are the two key SROs that operate across jurisdictions in Canada and are recognized as such in most jurisdictions (usually they are called the national SROs). They are responsible for regulating the business conduct and setting minimum prudential and other operational requirements for investment dealers and mutual fund dealers respectively. Both IIROC and the MFDA establish rules of eligibility, enforce binding rules of trading, business conduct and qualifications, and establish disciplinary rules and/or conduct disciplinary proceedings. Pursuant to NI 31-103 firms wanting to become an investment dealer or mutual fund dealer must mandatorily become an IIROC and MFDA member respectively and their representatives must be approved by and are subject to the jurisdiction of the applicable SRO—with the exception of MFD in Québec and their mutual fund dealers, which are under the direct supervision of the AMF (the firm) are under the CSF (the individuals). IIROC is recognized by the securities regulators of Ontario, Québec, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island, and operates in all Canadian jurisdictions. It regulates the business and trading conduct of investment dealers and the trading conduct of other participants on equity marketplaces. The MFDA is recognized by the securities regulators of Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and PEI, and operates in all Canadian jurisdictions, other than in Québec. It regulates the business conduct of mutual fund dealers. In Québec, mutual fund dealers are regulated directly by the AMF. Exchanges–other than the equity exchanges and NGX—are also recognized as SROs as they regulate trading by participants on their trading facilities and conduct market surveillance. The operations of the exchange SROs are mainly described in Principle 34. While the three equity exchanges and NGX also have self-regulatory responsibilities, they are not separately recognized as SROs. The three equity exchanges outsource to IIROC for market surveillance and surveillance of members compliance with trading rules. NGX conducts its own market surveillance. In Québec, the CSF is responsible for discipline and regulating and ensuring compliance with continuous training of its members (individuals only) who work as mutual fund dealer representatives and scholarship plan dealer representatives in Québec and is limited to regulating in those areas. It is recognized directly under the Distribution Act (Québec) (Distribution Act) and not by the AMF. Recognition Applicable securities and derivatives legislation give the securities regulators the authority to recognize an entity as an SRO if it would be in the public interest. This is done by the issuance of a RO, which by law can include terms and conditions in addition to those contained in legislation. An application for recognition must set out detailed information sufficient to clearly demonstrate that the entity can meet the criteria for recognition. These are whether the entity:
Recognition Process A recognition process starts with the applicant filing a draft application setting out its ability to meet the above identified recognition criteria and providing any necessary supporting documentation, including documents (such as corporate by-laws), organizational charts, board mandates and board committee charters and their composition, rule books and membership requirements, annual reports and financial statements, and reports of any independent reviews of its critical systems, including technology systems. In the case of IIROC, which was formed by the merger of the Investment Dealers Association of Canada and Market Regulation Services Inc., CSA staff formed a committee comprised of 14 persons from eight commissions to review the merger. The committee met with representatives of the IDA and RS and asked for supporting documentation and information it considered necessary to determine whether IIROC would meet the criteria for recognition. The staff review concentrates primarily on those areas of greatest concern, which typically include corporate governance, management of conflicts of interest, membership and access, the SRO’s ability to perform its regulatory functions and its financial viability. Staff will follow up with the applicant as necessary to seek clarifications on the materials provided or to obtain additional information. Staff will also, as appropriate, discuss issues and seek input from senior leadership within the securities regulatory authority. In the case of IIROC, this review took approximately one year. After all issues are resolved to the securities regulators’ satisfaction, the applicant is asked to file its application in final form. Once approved for publication, the comment period typically lasts 30 days. If significant comments are received or material issues are raised during the comment period, it may result in further revisions to the draft order and a second round of public consultations. When all comments and issues have been resolved to the satisfaction of the securities regulators, a final order recognizing the entity as an SRO will be issued. Recognition of a SRO in Multiple Jurisdictions Where an entity seeks to be recognized as an SRO in multiple jurisdictions, it will file applications with all the relevant securities regulators. Staff from different securities regulators would work closely to coordinate their reviews, by sharing issues, discussing resolution of those issues, harmonizing terms and conditions of recognition, and developing and following a common timeline for processing of the application. For example, IIROC filed its recognition application with eight jurisdictions initially, and staff from these jurisdictions formed a committee to coordinate their reviews. Throughout the review process, the staff committee provided regular updates to the CSA Chairs to keep them informed of issues and their resolution. In the case of the MX, the AMF held hearings over two days in November 2011 on the proposed acquisition of the TMX Group Inc. (the MX’s holding company) by Maple Group Acquisition Corporation. Apart from the public hearing, the process followed in recognizing the MX as an SRO is similar to that set out above. The AMF issued a RO on May 2, 2012. Corporate Governance The terms and conditions of recognition require IIROC and the MFDA to have a fair representation of members on its board of directors and board committees to ensure a diversity of representation and a proper balance between the interests of its different members. In addition, they are required to have a certain number of independent, “public” directors who are not associated or affiliated with the SRO or any of its members (a minimum of 50 percent in the board and then there are also rules for representation of independent directors in different relevant committees). IIROC and the MFDA are also required to ensure that their directors and officers are fit and proper persons, that is, they act honestly and in good faith and are competent to perform their functions. The exchange SROs have similar obligations to promote a fair representation of members in selection of its board of directors and administration of its affairs. For example, the MX board must be comprised of at least 50 percent independent directors and the Chair of the board must be independent. In the case of the CSF, two members of the CSF board are appointed by the Québec Minister of Finance for a term of three years. The other members of the board are elected by its members. Conflicts of interest In general SROs are required to identify and manage their conflict of interest. In addition, their recognition criteria require that the written policies in connection with conflict of interest be filed with the regulators. In addition, SROs are required to periodically assess the effectiveness of their governance arrangements. Changes to the governance structure are subject to prior approval by the recognizing regulators. In addition, the recognition criteria for the SROs require the SRO to have a governance structure that minimizes the potential for conflicts by requiring a minimum number of independent or “public” members of their boards of directors as defined in the entity’s by-laws or by requiring that the board have a proper balance between, and effective representation of, the public interest and the interests of members and the interests of different types of members. In the context of IIROC, the recognition criteria established additional requirements aimed at addressing the concern that TSX, which was a shareholder of RS (one of the predecessor organizations) and which is one of the markets for which IIROC performs market regulation, have a disproportionate role in the governance of IIROC. This was achieved by requiring that the board contain at least one director from a marketplace other than one owned by the TSX. The recognition criteria do not impose conditions in regard to the governance of the enforcement function. The current governance structure of IIROC allows for participation of industry representatives in the hearing panels (which are the adjudicative body for purposes of enforcement), as they are currently composed by two industry representatives designated by the district councils and one independent member. It also allows limited participation of the district councils in the licensing process (as they are required to provide an opinion in connection with the admission to membership). In the case of MFDA, the regional councils also have a role in connection with the enforcement function, as well as policy matters. As will be explained below, in particular in connection with governance arrangements, the AMF has requested improvements to CSF in connection with its relationship with the sections. In addition, some stakeholders expressed concerns about the need for rules to be approved by members of the MFDA. Separation of regulatory functions (for exchanges SROs) The RO of TSX does not require full separation of listing regulation operations from business operations. As part of the ongoing oversight by the securities regulators, the management of conflicts of interest from the listing function was analyzed and recommendations made. MX Regulatory Division’s functions and operations are independent and structurally separated from the for-profit operations of the MX. The Division performs its functions and operations based on the principle of self-financing and shall not be for-profit. Pursuant to the MX’s RO and rules governing the Division, the MX must ensure that the Division is provided with sufficient resources and funds. Furthermore, no regulatory fees, fines or penalties collected by or on behalf of the Division may be distributed or transferred to the MX for commercial purposes or for payment of dividends. The Division funds its programs and activities, including surveillance, investigations and examinations, through distinct regulatory fees assessed directly on approved participants of the Exchange. Regulatory fees collected are for the exclusive use of regulatory operations. Also, under RO, fines and other sums received by the Division pursuant to out-of-court settlements with the Division or disciplinary proceedings are treated under specific provisions. Oversight approach As IIROC and the MFDA are recognized by multiple regulators, the CSA has established oversight committees for each entity to coordinate their oversight and to ensure that issues are identified and resolved in a consistent manner. The IIROC oversight committee is chaired by the OSC and the MFDA’s is chaired by the BCSC. The oversight committees meet quarterly in two sessions, one with just the committee members and one with SRO staff; they also hold ad hoc meetings as appropriate. The purpose of these meetings is to discuss matters relating to the oversight of the SRO, regulation of the SRO’s members and other matters of interests. The oversight committees report annually to the CSA Chairs on their activities. As described in Principle 1 coordination arrangements follow a principal regulator approach whereby one regulator acts as the coordinator to channel all queries to the SRO. These arrangements have been formalized in a MoU (the one for MFDA is awaiting Ministerial approval in Ontario). Oversight Program The oversight program of an SRO includes: (i) approval of rules, (ii) periodic reporting, (iii) periodic meetings (at least quarterly), and (iv) on site reviews. For IIROC and MX, it also includes an automation review program (including Independent System Review (ISR)): An SRO with key technology systems and processes, i.e. IIROC and MX, is also subject to an automation review program (ARP) in order to assess the system’s capability and reliability of an SRO. The key components of an ARP are: (i) Annual independent system review, which requires an SRO to annually engage an independent qualified party to conduct a review of its systems and relevant controls and to report on such review; (ii) notification of material system failure, malfunction or delay; and (iii) Regular reporting on recent and anticipated systems changes. In addition, where there are events that could have a significant impact on investor protection or the capital markets in general, and where SROs have a role to play, CSA staff will liaise with the SROs and monitor how the SROs are dealing with the situation. Examples of these types of events include the MF Global bankruptcy and Penson Canada’s closure of business. In these cases, CSA staff received periodic updates from IIROC to assess the potential impact to the market (e.g. number of clients or number of introducing dealers), any risk with respect to end clients or the market in general, and IIROC’s response. Review of governing instruments and rules Under their ROs, SROs are required to obtain approval of the recognizing regulator(s) for, among other things: (i) changes in the corporate governance or organizational structure; (ii) fees; and (iii) rules, policies and by-laws and amendments to rules, policies and by-laws. As will be further explained in Principle 34 in the case of MX its rules are subject to a self-certification process–which in practice incorporates steps designed to ensure that the AMF reviews the rules and is satisfied with the way the MX has addressed comments by stakeholders during the consultation period. In Ontario and Québec, IIROC rules and by-laws and any amendments are published for public comment. MFDA rules, by-laws and amendments are similarly published for comment in British Columbia and Ontario. Comments received are shared with the other recognizing regulators. For purposes of ensuring efficiency in the review process, the regulators have developed a classification of rules in substantial changes and housekeeping rules. Substantial changes are subject to pre-approval, and consultation; while housekeeping only need to be notified. The regulators can “contest” the classification made of a rule, and the information provided shows that there have been cases where they have done so, thus subjecting a rule initially classified as housekeeping to the full process of a substantial change. Reporting requirements Each SRO is subject to certain periodic reporting requirements. For example, it needs to submit to the recognizing securities regulators, its financial statements, strategic plans, information and statistics about its compliance and enforcement programs. Both IIROC and MFDA are required to undertake a self-assessment of their regulatory functions on an annual basis (IIROC must submit within 90 days, and MFDA within 120 days of the end of the fiscal year). In addition, the ROs establish the authority of the regulators to request ad hoc reporting. An example of this is the MF Global bankruptcy matter. Details of specific reporting obligations are as follows: IIROC IIROC’s ROs contain extensive reporting obligations that include:
The ROs set out extensive reporting requirements, including a requirement for the MFDA to report:
The supervision plan contains disclosure and reporting requirements for the CSF. For example, the supervision plan provides that:
The exchange SROs, equity exchanges and NGX also have specific reporting requirements, including those described in the response to Principle 34. Inspections and periodic reviews For IIROC and the MFDA, the recognizing regulators carry out an on-site inspection at least once every three years. The recognizing regulators perform a risk assessment of all functional areas of the SROs (i.e. all regulatory divisions) and its governance structure and processes and develop an oversight review program to review key, high risk areas. Higher risk areas receive more in-depth reviews, while low risk areas are subject to a more cursory form of review. Key areas of review will include the operation of all regulatory divisions and corporate governance. The review team typically comprises lawyers, accountants and subject-area specialists from the jurisdictions participating in the review. Once the review plan is finalized, the SRO will provide a list of documents requested by the inspection team. The inspections take place in the SRO’s offices in Montréal (for IIROC only), Toronto, Calgary and Vancouver. The review is coordinated among the recognizing securities regulators, with a uniform review program and uniform performance benchmarks. The field work typically lasts four to eight weeks and consists of meetings with the Chair of the board or board committees, members of the board, senior management and staff, and review of documents (including corporate records, agendas and minute books of the board and committees, operational files, and other relevant documents). After the field work is completed, a consolidated report is drafted with the SRO’s responses. A final version of the report is drafted and provided to the recognizing securities regulators for approval. A follow-up plan is developed to monitor the correction of any issues and the implementation by the SROs of recommendations made by the recognizing securities regulators. IIROC For IIROC the first on-site review after the merger was in 2009 and covered the review period for member regulation from 2006-2009 and market regulation from 2004-2009. The inspection was conducted by staff of the OSC, AMF, ASC, BCSC, MSC, NBSC, NSSC and SFSC. The review encompassed the following areas: corporate governance; Fees and resources; Policy; Enforcement (case assessment, investigations and litigation); Business Conduct Compliance; Financial and Operations Compliance (FinOps); Trading Conduct Compliance; Market Surveillance; Trading Review and Analysis; Membership and Business Continuity Planning. In the report, the participating regulators concluded that IIROC was substantially compliance with the terms and conditions of its ROs, though in particular areas it was requested to prepare a plan of action to address deficiencies. For example, a key finding was that the focus of the Enforcement Department’s work remained on Dealer Members’ retail activities (complaints) with relatively few cases sourced from referrals from other IIROC departments, such as the Compliance groups. This issue will be further discussed in Principle 12. Also, in March 2010, staff of the AMF, BCSC and OSC conducted a targeted review of IIROC’s registration functions in light of newly-adopted CSA registration rules. The review was conducted in IIROC’s Montréal, Vancouver and Toronto offices. Staff of the examining regulators found that IIROC was carrying out its registration mandate in accordance with the requirements of the various ROs. The examination made a number of recommendations, mainly with respect to ensuring better communication between IIROC and the commissions of issues with registrants and tracking of public complaints IIROC provided quarterly updates to CSA staff on the status of implementation of the recommendations of the 2009 and 2010 oversight reviews; CSA staff monitored progress in the implementation and held discussions with IIROC management regarding any issues noted. An on-site review of IIROC is planned for early 2014. It is currently in the early planning stages and is intended to be a risk-based review similar to the 2012 MFDA review. MFDA An oversight review of the MFDA was conducted in 2009. In that review, approximately 30 staff from the recognizing regulators reviewed every functional area and each MFDA office. Staff were generally satisfied that, during the review period, the MFDA operated in the public interest and, for the most part, it complied with the respective ROs. However, in particular areas the regulators instructed the MFDA to set up a plan to address deficiencies found. One of these areas has been in connection with the need to ensure timely response from registrants to the findings of compliance reviews. This issue is further discussed in Principle 12. Additionally, the CSA just completed an oversight review of the MFDA. The report covered the period from January 1, 2009 to June 30, 2012. The review was conducted using a new risk-focused assessment and review methodology developed by the CSA for application to the SROs. The new review methodology involved an assessment and risk rating of every aspect of the MFDA’s operations and a determination, based on a predetermined risk analysis, of the areas that required review. The oversight review covered a limited scope in each of the following functional areas that were assessed (utilizing the model) as higher risk: Corporate Governance, Sales compliance; Financial Compliance, Enforcement, Policy, and Membership. CSF Under the supervision plan the AMF inspects the CSF every three years. In the last five years, the AMF conducted two on-site inspections of the CSF. An inspection report was published regarding the first inspection which covered the period from 2004 to 2007. The AMF inspection program includes four major sections: governance structure, including internal rules, policies and procedures; financial allocation assets and allocation budget; activities of the syndic, the discipline committee and their members; and compulsory professional development activities. The main governance issues resulting from the inspection included the lack of supervision, by the CSF, of its sections. The CSF’s members are divided into sections on a territorial basis, as the province of Québec is divided into 20 sections. The sections facilitate the exchange of information between the members and the CSF, as well as access to continuing training activities. They also support the CSF compliance initiatives and organize networking activities.) The AMF also recommended changes to the CFS’s policies and procedures. CSF filed an implementation plan with closing dates for each of AMF recommendations. AMF meets on a regular basis with CSF to discuss various matters, including follow-ups to the implementation plan. Exchange SROs Details of oversight inspections of the exchange SROs, the equity exchanges and NGX are contained in our response to Principle 34. Authority of the regulators Securities regulators retain ultimate jurisdiction over members of an SRO and their representatives as they must be registered with the applicable securities regulators. The securities regulators have the authority to revoke a recognition order or impose terms and conditions if they consider it to be in the public interest. The ROs also require an SRO to cooperate in a substantial manner with each of its recognizing regulators and, further, to provide each recognizing regulator with unrestricted access to the books and records, management, staff and systems. Decisions of IIROC and the MFDA may be appealed to the applicable securities regulators (and in Québec, decisions of the CSF may be appealed to the Court of Québec). In addition, exemptions given to SRO members under NI 31-103 require the exempted party to comply with applicable SRO rules. If the party does not comply, the exemption is not available and the party is directly subject to NI 31-103. Professional standards for the SROs Through the terms of their ROs, SROs are required to follow professional standards of behavior equivalent to those expected of its recognizing regulators relating to confidentiality and procedural fairness. In carrying out its day-to-day operations and in connection with any examination or investigation undertaken by the SRO with respect to its members, the SRO must comply with applicable laws relating to privacy and the collection, use and disclosure of personal information, and to the additional requirement that the SRO provide its recognizing regulators with unrestricted access to its books and records, management, staff and systems. With respect to procedural fairness, an SRO must ensure that:
To mitigate the possibility that SROs may bring enforcement actions for improper purposes, they may only use fines and payments collected in enforcement actions as permitted in its RO. SROs must also use reasonable efforts to ensure that confidential and personal information is maintained in confidence and not shared inappropriately. With respect to use of information, an SRO is expected to follow a high professional standard of behavior. The ROs achieve this by requiring the SRO to:
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| Assessment | Broadly Implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | The reason for the grade relates to the need to continue improving corporate governance of the SROs, in connection with question 6 of the methodology. From the conversations held with both authorities and stakeholders and the files reviewed it can be concluded that the securities regulators have put in place a robust framework for the oversight of each of the SROs, appropriately tailored to the functions that each of them fulfils in the Canadian market. In particular the on-site reviews have revealed areas where conflicts of interest could detract the SROs from fulfilling their mandates. Recommendations have been made, plans of actions have been requested and sufficient follow up has been given to such plans. As for the SROs themselves, as noted in the findings of the on-site reviews, corporate governance and enforcement are particular areas where some of the SROs need further improvement—the latter will be further explained in principle 12. On the former, the assessor acknowledges an evolution towards stricter governance in all SROs. However it is important that additional actions are implemented. In particular in connection with the CSF, the relationship with the sections should be addressed, and the composition of its board with additional members appointed by the Government and/or independent could be considered. In this regard, the authorities highlighted that on June 14, 2013 the Québec National Assembly adopted An Act to amend various legislative provisions, including section 288 and 289 of the Distribution Act, which requires the CSF to be administered by a board comprised of 13 members, 5 of whom will have to be independent. As for IIROC and the MFDA, the assessor encourages the authorities to review the role of membership in the enforcement function and in the case of MFDA in rulemaking too. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles for the Enforcement of Securities Regulation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 10. | The regulator should have comprehensive inspection, investigation and surveillance powers. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 Inspection, investigative and surveillance powers depend on the legal framework of each of the 13 regulatory agencies. Most of the agencies have comprehensive investigation and surveillance powers, including the four largest jurisdictions. Powers Both regulatory agencies have sufficient legal powers to conduct surveillance, undertake investigations, obtain information and take the corresponding enforcement actions on regulated entities. In particular, both regulatory agencies can:
Market participants are subject to book and record keeping obligations both by statute, rules and regulations of the regulatory agencies as well as of the respective SROs. In general the regulations of RS, IDA and the MFDA require members to keep books and records for a period of seven years. NI 21–101 requires market places to keep records also for seven years. Regulated entities are also required to maintain records of clients’ identity, as well as records that permit tracing of funds and securities, both under federal law (Proceeds of Crime and Terrorist Financing Act) and provincial regulation. They are also required to put in place mechanisms to minimize money laundering. Access to information Both regulatory agencies have authority to access the identity of all customers of regulated entities. They both have full access to the information kept by the SROs under the applicable terms of their recognition orders. They can impose terms and conditions on the SROs, and in fact have done so in their respective recognition orders. SROs are subject to similar confidentiality requirements as those applicable to the regulator (Section 16 of the AMF Act). | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Principle 11. | The regulator should have comprehensive enforcement powers. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 Enforcement powers depend on the legal framework of each regulatory agency. Most of the agencies have comprehensive enforcement powers. A few of them have quasi-criminal authority. Both OSC and AMF have the power to conduct investigations to ensure compliance with laws and regulations (Sections 11 and 12 of the OSC Act and Section 12 of the AMF Act). The OSC has also been provided with power to impose administrative sanctions as well as seek quasi criminal sanctions (Section 127 of the OSC Act). In the case of the AMF, most of the administrative sanctions are imposed by an independent tribunal, the BDRVM, upon request by the AMF. For intermediaries governed by the Distribution Act and for specific topics, for example, delays in filing insider trading reports (Section 274.1 of the AMF Act), the AMF has direct enforcement powers. As for quasi criminal sanctions, they are imposed by the provincial court. Both the OSC and the AMF have:
Private persons can seek their own remedies for any misconduct related to securities laws, the main one being a right of action for damages. Both the OSC and the AMF can share information with SROs for the purpose of enforcement. They can also share information that they have obtained in the course of their functions with the police. At least in the case of the OSC, some restrictions apply, however, to the exchange of information obtained under compulsion. (Sections 16 and 17 of the OSC Act). | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | Comments carry from the 2007 assessment: “The assessor considers that the existence of restrictions on sharing with the police information obtained under compulsion should not affect the grade of this Principle. These cases covered information obtained from non-regulated entities (third parties). Thus the assessor believes that the existence of additional safeguards is reasonable.» Comments made in the context of the 2013 assessment After the 2007 assessment the regulators contributed to the enactment of a specific “Fraud-on-the-market” offence which allows them to sanction any person or company who, directly or indirectly, engages in or participates in conduct relating to securities (including derivatives), if the person knows or reasonably should have known, that the conduct perpetrates a fraud on any person or results or contributes to a misleading appearance of trading or an artificial price for a security. Such a provision allows the regulators to increase their ability to deter conduct leading to fraud or misappropriation of funds, without having to refer these types of cases to criminal authorities. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 12. | The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Compliance Pursuant to NI 31-103 registered firm must have a system of controls and supervision to provide reasonable assurance that the firm and each individual acting on its behalf complies with securities legislation, and manages the risks associated with its business in accordance with prudent business practices. Although NI 31-103 provides a principles-based approach in respect of compliance systems, the guidance in 31-103CP outlines that an effective compliance system includes internal controls, day-to-day supervision and systemic monitoring (each of these concepts is expanded upon in the guidance). Specifically, this guidance provides that the regulators and the SROs expect a registrant to have detailed written policies and procedures to:
During full scope registrant inspections, the regulators and the SROs will review the compliance manuals, interview the CCO and the UDP, and review evidence of their supervisory records. On-site inspections As will be described in Principles 24, 29 and 31 the current supervisory regime for registrants includes on-site inspections. Given the current division of responsibilities, such inspections are conducted by IIROC for IDs and MFDA for MFDs (other than in Québec, where MFDs are inspected by the AMF) and directly by the securities regulators for all other types of registered firms. As stated in principle 1, on-site inspections are a responsibility of the principal regulator In practice, this means that roughly 1200 registered firms are under the direct supervision of the securities regulators, 200 under IIROC and 100 under MFDA. Of the 1500 registered firms in Canada, the OSC is the principal regulator for approximately 65 percent of the firms (approximately 975 firms), the AMF is the principal regulator for 14 percent (approximately 210 firms), British Columbia is the principal regulator for 9 percent (approximately 135 firms), and Alberta is the principal regulator for 8 percent (approximately 120 firms) (96 percent of the firms in total). Each of the regulators and SROs has dedicated teams for on-site reviews. Overall the regulators and SROs follow a risk based approach to select the firms that will be subject to on-site inspections. While both use risk frameworks to determine the frequency and scope of the inspections, SROs put all firms on a fixed schedule. In the case of the securities regulators, those with the largest population of registrants will inspect the firms categorized as high risk, and conduct also a limited number of random inspections on medium and low risk firms. In general in both cases, once the inspection is completed, the inspection team will issue a deficiency letter outlining the areas in which the registrant fails to meet the regulatory requirements. Except in the case of the MFDA, the inspection team will also highlight the “significant” deficiencies that pose bigger compliance risks and will require the registrant to address those significant deficiencies sooner. In its response to the deficiency letter, the registrant is required to detail how it plans to address the significant deficiencies or, in some jurisdictions, all of the deficiencies. The regulators will review the registrant’s response, and may test the registrant’s actions at a subsequent inspection. In its deficiency letters the MFDA does not distinguish between significant and other types of deficiencies. Staff of the MFDA consider that this approach might lead to firms not paying sufficient attention to “less significant” findings which might lead to eventually there becoming more substantial problems. When deficiencies are found, the regulators and SROs can refer the cases to the enforcement teams. As indicated under Principle 9, the inspection of MFDA conducted in 2009 concluded on the need to strengthen MFDA follow-up of deficiencies with unresponsive or uncooperative members. Staff identified a few instances where members were unresponsive or uncooperative when dealing with deficiencies identified during the examination process. The regulatory agencies consider that in cases that do not warrant a referral to enforcement, the MFDA lacked the necessary regulatory tools to adequately deal with these members. To address this issue the MFDA has proposed charging fees to firms. Market surveillance and other surveillance techniques As will be described in Principle 36, IIROC and the derivatives exchanges are the front-line supervisors for the purpose of market surveillance. They all have established automated systems that allow for real time as well as post-trade surveillance. In general when anomalous trading is detected, the system would generate an alert that then is followed up by the staff. As the SROs and exchanges can only impose enforcement actions on members, when a breach involves third parties, they make referrals to the securities regulators. Their RO’s have clear provisions in place regarding communication of investigations opened, and referrals to the regulators. At the level of market surveillance, IIROC constitutes the main source of referrals for the securities regulators; that is, the cases built in connection with market trading wrongdoings primarily originate from a referral by IIROC, based on an alert generated by IIROC’s surveillance system. The regulatory agencies also have automated systems, but in their cases they are not designed for real time surveillance in light of this allocation of responsibilities. They complement the systems of the SROs and exchanges. For example, the agencies monitor media and issuer news releases, and assess collected information together with referrals from IIROC, exchanges, and other securities regulatory authorities or law enforcement agencies. In addition, some of the agencies have developed a formal cyber surveillance initiative to mainly counter the illegal solicitation of funds by use of the internet or social networking sites. As an example, the AMF cyber surveillance team, created in 2010, uses enhanced technological tools enabling on-line and live surveillance of over 1000 sites and search engines on the internet. Cyber surveillance tools can also allow regulators to create watch lists. For example, the AMF created a list of repeat offenders or of individuals which were formally warned to cease a specific activity or conduct. In both cases, the AMF can monitor their activities and act rapidly if an offence is committed. Regulators also review recordings of infomercials, and troll websites and other media for advertisements. Intelligence from complaints and alerts All the regulators and SROs have established a Contact or Complaint Center through which complainants may report their concerns via telephone, e-mail, online or through the regulators’ website and in person. Each complaint is acknowledged (generally within two to five business days) and the complainant is provided with contact information of the staff assigned to his complaint. An initial assessment of each complaint is completed by staff of the Contact Centre. If there are substantive indications of a potential violation, the matter will be referred to the appropriate investigation branch for further review and to decide the proper course of action.
Intelligence can also be gathered by the regulators from specialized intelligence units composed of regulators and police forces, such as the Joint Securities Intelligence Units (JSIUs) and, in Québec, the Équipe intégrée de renseignements financiers (ÉIRF). The mandate of these units is to gather information and to develop intelligence on fraudulent securities related activity; to provide the intelligence for enforcement activity by the appropriate law enforcement or regulatory agency, and to use intelligence, where appropriate, to pre-empt planned fraudulent securities related activity. Aside from these joint intelligence units, the regulators have also established processes or in-house teams to ensure that intelligence will be properly gathered, analyzed and disseminated to those who will be able to act upon it. For example, the AMF has established an Intelligence and Analysis Centre, whose function is to gather and analyze intelligence, in order to assist and support the investigations teams and also to facilitate the identification of new trends and threats to the financial sector. Once received by a regulator or an SRO, most intelligence will either be gathered by specialized surveillance units which are part of the enforcement or market regulation divisions, by staff responsible for compliance reviews or examinations or by specialized teams within an SRO such as IIROC, the MFDA or the CSF. Enforcement Enforcement by IIROC Enforcement by IIROC can originate in complaints or on internal referrals. Senior staff from IIROC highlighted that the bulk of enforcement actions come out of complaints, and affect individuals. However staff highlighted that in such cases, in addition to the investigation of the complaint against the individual, IIROC would review whether a problem of supervision or internal controls is also involved, and in such case an enforcement actions would be pursued also against the supervisor and/or the firm. As indicated in Principle 9, the inspection conducted by the securities regulators on IIROC in 2009-2010 (which covered the review period for member regulation 2006-2009 and market regulation 2004-2009) revealed the existence of challenges in connection with the necessary nexus that should exist between their on-site reviews (compliance reviews) and enforcement actions, in particular the extent to which referrals were being made and enforcement actions taken to deal with important deficiencies found during the compliance reviews. These findings were first brought to the attention of IIROC’s management during the field review in 2009. IIROC has taken a series of steps to address this challenge, all of them under the oversight of the CSA. In particular, there was a concerted focus on the approach regarding referrals to enforcement as part of an overall review of the program of the Business Conduct Compliance (BCC). IIROC staff has highlighted that after an annual cycle of inspections, the enhanced process in BCC has led to a significant increase in the number of referrals, as well as in greater depth and complexity of the cases being referred. As per the internal protocol in place, a pre-referral meeting takes place with the enforcement department; to assist the referring department to determine which cases to refer. All internal referrals are investigated by the Enforcement Department.
As can be seen from the statistics above, the bulk of BCC referrals in 2012 and 2013 are still under investigation and/or in the process of being prosecuted, so the results of those matters are still to be determined. However, IIROC staff highlighted that in 2012 and 2013 the nature of FinOps referrals required swift enforcement actions resulting in significant and permanent sanctions against a number of firms, namely suspension/termination of IIROC membership. IIROC has a wide array of enforcement actions at its disposal, including money penalties, remedial actions, and suspensions. Settlements are commonly used, and as in the case of the regulators, they require admission of guilt. IIROC staff highlighted that there has been a rebalancing on the sanctioning strategy, whereby the percentage of cases where firms are sanctioned has steadily increased. In 2010, 84 percent of disciplinary actions relate to individuals, 12 percent to firms and 4 percent to supervisors. In 2012 70 percent refers to individuals, 23 percent to firms and 8 percent to supervisors. In pursuing enforcement action against firms, remedial actions are an important consideration when determining the appropriate action. Where appropriate, remedial actions will serve as a mitigating factor on penalty (if implemented prior to any disciplinary action) and/or form part of the sanction itself. For example in recent cases, in addition to money penalties, firms have been required to submit to a review of their practices by an independent person.
Enforcement by the MFDA As is the case for IIROC, MFDA enforcement actions can originate in complaints and internal referrals. A significant proportion of the enforcement work of the MFDA comes as a result of complaints against individuals. Senior staff of MFDA highlighted however, that in such cases, in addition to the review of the specific complaint against the individual the MFDA reviews whether a problem with supervision or internal controls is involved, and if that were the case, then an enforcement action would be started also against the supervisor, and/or the firm. In connection with referrals stemming from compliance reviews, the MFDA has established criteria to guide the compliance review teams in determining the type of deficiencies that should be referred to the enforcement division. Thus, while the MFDA has not instituted a classification of deficiencies (in material, repetitive, etc.) the criteria developed achieved a similar objective. MFDA staff highlighted that for those deficiencies that are sent to enforcement, the MFDA has similar enforcement tools than those of IIROC, including suspension, monetary penalties and remedial actions (such as the imposition of monitoring). In general, cases end with a settlement, with admission of guilt. MFDA senior staff commented that during the first cycle of on-site inspections the emphasis was on « educating » the firms rather than on imposing disciplinary actions. This approach changed for the second cycle of reviews (2002–2005) when more disciplinary actions were taken. Further during this second cycle a significant number of participants dropped out of the market as they were not able to maintain registration requirements. Senior staff highlighted that the second cycle of inspections, and the corresponding enforcement actions, resulted in significant improvements in internal controls and risk management. As a result the number of referrals for the third cycle of inspections (2009-2011) has decreased. In general in all these cases enforcement actions are directed towards the firm.
Compliance Examination Results Referred to Enforcement MFDA staff informed that during the years 2012, 2011 and 2012, there were referrals to Enforcement from 19 Sales Compliance Examinations, relating to deficiencies identified in Member and Approved Person conduct during the examination.
MFDA estimates that a total of 55 to 60 prosecutions will be commenced in the full calendar year 2013. Enforcement by the provincial regulators Number of resources In all four agencies there are dedicated teams for enforcement composed of lawyers, accountants and forensic accountants, IT specialists and investigators (some of which are former police investigators, CFA members or traders). As the chart below indicates, there has been an increase in the resources dedicated to enforcement.
Some jurisdictions have established specialized investigation teams to address specific cases, tailored to the needs of their markets and investors and the goals of their enforcement program. For example:
The following chart contains information on enforcement activities conducted by all CSA members. In 2012, 83 percent of concluded cases in Canada were concluded by the four agencies under analysis.
Type of proceedings An important number of cases are settled; however in the Canadian contest there is no “no contest-settlement”. This means that there is an admission of wrongdoing by the firm and/or person involved in the case.
Type of sanctions imposed Monetary penalties (for the firms and individuals) and bans (for the individuals) are common sanctions used. Senior staff of the four provinces indicated that the amount of fines has increased. For example staff of the OSC indicated that over the past four years the amount of monetary sanctions assessed by the OSC has increased markedly due to an increase in the number of proceedings taken and concluded; proceedings involving larger and more complex fraudulent schemes; and the imposition by the Commission of sanctions that include administrative penalties and disgorgement, sanctions that were made available by way of legislative amendment in 2005. In addition, as indicated under Principle 3 the four agencies have quasi-criminal authority. In one case (OSC), the agency can directly prosecute the cases, while in another (AMF), there are dedicated prosecutors assigned to pursue them. As indicated in principle 3, these offenses can be sanctioned with imprisonment, without the possibility of conditional sentencing. In practice, the statistics indicate that this power is being used increasingly by the four agencies.
In addition, freeze orders have been imposed, as well as interim cease orders. The Disciplined Persons List established by the CSA allows SROs and the public to obtain information about individuals which have been subject to disciplinary actions, as far back as 2003. Staff sees as an important challenge—which is not unique to the Canadian regulators-the need to increase speed so that “things get done while they are still fresh and relevant for the market”, as the potential deterrent effect increases. Level of Cooperation between provincial regulators As indicated in Principle 1, the regulators share information via the CSA Enforcement Committee. It meets via teleconference monthly and in person twice a year. Its members include the Enforcement Directors of each regulator (or a similar position) plus additional senior staff members, as appropriate. The committee has developed a Multi-jurisdictional Enforcement Guide, which sets out procedures for identifying, investigating and prosecuting multi-jurisdictional cases by members of the CSA, and a Joint Assessment Committee has been established with a view to identifying potential multijurisdictional cases, and ensuring a coordination effort so that the use of resources is optimized and duplication of efforts avoided. Also, a new case-sharing database facilitates the identification of multi-jurisdictional cases. The agencies provide a number of examples where joint investigations have been conducted. For example, in 2010 the AMF, OSC and IIROC collaborated closely in investigations into the asset backed commercial paper market. In another case, related to an Alberta company, the ASC has received assistance from the BCSC and AMF in summonsing witnesses for interviews, as well as assistance from international regulators, including the US SEC, the FSA and the SCB (Securities Commission of The Bahamas). In practice, the number of joint investigations and hearings is limited. The agencies highlighted that this is a result of the limited number of extraterritorial cases and is not as a result of a lack of coordination. Further, staff indicated that in practice, in light of the level of integration of the Canadian and the US market, many times assistance is more critical from the US SEC. In addition, provincial regulators are making use of reciprocal orders, which allow them to extend an order given in a province to another. In this case, the investigation is conducted by one jurisdiction. Upon the discretionary orders being issued by that jurisdiction, other jurisdictions, at a hearing, but without the need to conduct their own investigations, can rely upon the decision and orders of the originating jurisdiction to obtain reciprocating orders. . Below are statistics on the use of reciprocal orders.
Staff have highlighted that in their experience it is not typically the case that a malfeasor will move from province to province breaching their respective laws, until orders are issued in these other provinces. However, in cases where there is a real and demonstrable concern that a malfeasor may carry out activity that may cause harm in other provinces, they will typically issue reciprocal orders to ensure the matter is fully addressed. Finally, staff highlighted that all orders are public via a national database on disciplined persons, which in practice makes the “local” orders have a “national” impact. For example, an applicant for registration in one province would likely be refused, if they were disciplined in another province. Further, this list allows for proper monitoring of activities. If a malfeasor crosses to another province, he/she can be efficiently detected and would be subject to immediate attention. Finally, the CSA Enforcement Committee adopts priorities to enhance the enforcement effectiveness of CSA members on a yearly basis. Level of cooperation with law enforcement bodies and crown prosecutors Generally, the RCMP and local and provincial police bodies investigate securities-related criminal offences. Collaboration at this time is achieved through IMET groups within the RCMP, comprised of specialized investigators, which also investigate capital market offences), Joint Securities Intelligence Units (JSIUs or the ÉIRF in Québec), various local, regional and provincial police forces and the Prosecutor’s Affiliation. Different stakeholders considered that the efforts on criminal enforcement have had mixed results, and that this is still an area where significant challenges remain. Some of the challenges mentioned relate to the autonomy of the police to decide what cases to pursue, vis-à-vis the attorney general offices (which have equal autonomy to decide what cases they will prosecute); limited skillfull resources dedicated to financial crime, including at the court level (as there are no dedicated courts). Current limitations to the information that can be shared by the securities regulators with the criminal authorities was also mentioned as an issue that needs to be addressed. However there is a recognition that in a few provinces the securities regulators have been able to build strong cooperative arrangements with the police, and with the prosecutors’ offices although the number of “successful” cases is still limited. IMETS In 2003, the federal government created IMETs to investigate and prosecute capital market fraud that is of national significance and that involves actions of publicly traded companies. IMET units are comprised of RCMP investigators, legal advisers from the Public Prosecution Service of Canada, and other staff investigators from the regulators that help to support the investigation of capital market fraud. Currently, there are ten IMET teams operating in Vancouver, Calgary, Toronto and Montréal. As of 2012, the IMET program had charged, since its creation, 47 individuals with Criminal Code offences. Thirteen individuals had been convicted, receiving sentences ranging from 18 months to 13 years. Seven cases remained before the courts. Overall stakeholders interviewed considered that while there have been efforts to improve the functioning of IMETs, their performance remained mixed; although there are a few provinces where they seems to be more effective. In this regard, for example, in Québec, the AMF and RCMP cooperate through an agreement where the AMF has assigned two of its investigators on a full-time basis to the Montréal IMET. Since September 2010, the AMF has established a joint investigation unit task force with the Sûreté du Québec (SQ): the Comité sur les crime contre les marchés financiers (CCMF), which is similar to the IMET. Both organizations have 10 members who work at the SQ office. The DPCP also participates in this unit. In relation with this partnership and with the partnership which the AMF has with the IMETs, the AMF created two different committees: the first one analyzes cases that the AMF wants to transfer to law enforcement bodies for the purpose of a criminal investigation and the second one, to which the Public Prosecution Service of Canada also participates, decides which task force (IMET or CCMF) will investigate the case. The structure is subject to a protocol that was adopted by all parties. In 2012–2013, criminal proceedings were pending regarding three cases through the CCMF while two others were the object of criminal investigations. JSIU The OSC and RCMP are partners in the Joint Securities Intelligence Unit (JSIU), whose mandate is to collect, disseminate and investigate international, inter-provincial, and provincial securities frauds, thefts and forgeries. The provincial securities commissions and key regulatory stakeholders participate in the JSIU. The primary objectives of the JSIU are to gather information and develop intelligence on fraudulent securities-related activity, to provide the intelligence for enforcement activity by the appropriate law enforcement or regulatory agency and to use intelligence, where appropriate, to pre-empt planned fraudulent securities-related activity. For the year ending March 31, 2011, 109 JSIU investigative files were opened. For the year ending March 31, 2012, the JSIU opened 27 cases. This decrease was largely due to a reorganization at the OSC whereby files are now more often opened within the Commission’s Case Assessment area. The AMF has also created an integrated team composed of staff from the provincial police forces, the RCMP and the AMF (ÉIRF). The mandate and primary objective are the same as stated by the OSC for its partnership with the RCMP. For the year ending March 31, 2011, the ÉIRF opened 178 investigative files and responded to numerous requests for information and intelligence. Again in 2012, the EIRF responded to many requests for information and intelligence and opened 146 investigative files. Since April 2012, 72 investigative files have been opened. Prosecutors Affiliation The National Securities Fraud and Economic Crime Prosecutors Affiliation (Affiliation) was instituted in 2007 with the specific mandate of examining and making recommendations as to the best way to investigate and prosecute large economic crime cases. Its membership includes senior staff from most of the provincial Attorneys General offices and senior staff from each major securities regulator. The Affiliation, among other things, provides a venue for identifying, reviewing and arranging for the research of complex practical legal issues of common concern and possible innovative reforms to Canadian investigation and prosecution practices. Training sessions are also held. The Affiliation members now hold regular conference calls with the aim of rapidly identifying matters in which collaboration could be warranted and discussing issues of common interest, such as information sharing. A website will be created shortly to foster increased discussion between members. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Broadly implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | The grade is mainly a result of remaining challenges in enforcement, in connection with question 9 of the methodology. To a lesser extent the grade also takes into consideration issues related to the intensity of supervision, in particular in connection with the securities intermediaries that are under the direct supervision of the provincial regulators, which relates to question 1 of the methodology. Based on the conversations held with both regulators and stakeholders and the data provided, the assessor concludes that there has been significant progress in enforcement by provincial regulators, and in particular by the four agencies analyzed. This has been the result of a sustained commitment of resources as well as the development of a clear strategy towards enforcement which seeks to use all tools at the disposal of the regulators to incentivize correct behavior and deter wrongdoings. Indeed on one hand there is more use of guidance as a way to ensure that regulated entities understand what is required and expected from them, and at the other end, the agencies are imposing more significant fines in their administrative proceedings and using their quasicriminal powers to a greater extent. In this regard a credible threat of imprisonment plays a key deterrent role. Thus, especially in a context where criminal enforcement still shows mixed results the use of this authority cannot be overstated. Given the type of intermediaries that are directly under the supervision of the SROs (i.e. those that cater to retail investors more directly), it is key that SROs also have in place a strong enforcement strategy. Based on the conversations held with the authorities and SROs, and the information provided by them, the assessor concludes that the SROs have taken important steps to strengthen their enforcement strategy. In this regard, significant efforts have been made by IIROC to strengthen the nexus between its compliance reviews and its enforcement activity. Such efforts appear to be bearing fruits as demonstrated mainly by the increase in referrals, and in the enforcement actions against supervisors and firms. Such efforts should continue. More generally, it is also important that regulators continue to actively oversee enforcement strategies by the SROs and whether they are achieving their deterrent effect by an effective use of the wide array of tools at their disposal. Finally, it is important that efforts by the SROs be effectively communicated to the public. In this regard, the assessor encourages the development of detailed statistics of the use of enforcement actions in connection with compliance reviews, as well as on the imposition of sanctions against firms and individuals, as this is an area where stakeholders might not be fully aware of all the efforts undertaken. As indicated above criminal enforcement is still in need of improvement. The assessor acknowledges the efforts made by the largest regulatory agencies to coordinate with law enforcement agencies. For example, several members of JSOT have been designated as special constables by the Ontario Provincial Police, which will allow access to offences and tools in the Criminal Code when working in conjunction with the police and in Québec a similar unit exists. However, as described in this Principle the results are still mixed, although in some provinces criminal enforcement does exhibit progress. That has been the case, especially, in provinces where there has been a clear strategy to create integrated teams that even assess cases together to ensure coordination of efforts. To some extent, the use of quasi criminal authority mitigates some of the limitations observed in criminal enforcement, especially in the provinces where the regulatory authority can directly prosecute the case (OSC, ASC and AMF). However, in some provinces prosecution is still dependent on the priorities of the attorney general’s office—which can be challenging. Also, the fact remains that the investigation of the most egregious cases, such as boiler rooms, major frauds and repeat offenders, should be prosecuted by the criminal authorities, and that certain extraordinary powers (such as wiretapping) that could be useful in particularly complex cases are only available to the criminal authorities. Finally, there is a perception that additional coordination in enforcement is needed at the provincial level. At the outset this perception appears to be validated by the limited number of joint investigations and reciprocal orders—although in the latter case the use of reciprocal orders is increasing overtime. The authorities have provided valid arguments that contradict such perception. It would be important, however, to conduct further analysis on whether in practice malfeasors tend not to relocate. The findings from such analysis could help to eradicate any unfounded perception. In the meantime, the assessor encourages the authorities to continue to leverage on the existing arrangements and tools, including joint inspections and reciprocal orders and evaluate whether additional arrangements could be established. On supervision, the assessor acknowledges that a risk based approach constitutes a reasonable and acceptable approach to implement an inspection plan for securities intermediaries, when it is sufficiently robust (i.e. sources for risk identification are themselves robust; there is back testing of risk assumptions; and there are mechanisms to take into consideration the effect of the accumulation of small clusters of risks across a particular sector or industry). Taking the supervisory program for all intermediaries as a whole (including both the intermediaries under the supervision of the SROs as well as those under the direct supervision of the securities regulators) the program can be considered adequate. However, the use of on-site inspections especially by the jurisdictions with the largest population of registered firms is more focused. This is an aspect that it is important that the regulatory authorities follow up on given the role that on-site inspections have for risk identification. In the assessor’s view, on-site inspections (whether on individual firms or thematic) are a key tool—perhaps the most important tool—to uncover poor conduct practices early on, as supervisors are able to look through individual investors’ files to see how obligations are being complied with in practice. Signals of such poor conduct do not usually manifest in regular reporting by firms, and emerge only in a partial way through indirect means such as complaints (that could trigger for cause inspections) or other intelligence. A similar argument could be made in connection with prudential requirements, as on-site inspections are a better tool—than desk reviews of financial statements and capital calculations—to detect operational risks, including weaknesses in governance, internal controls and risk management. This also applies to the connection between prudential requirements and conduct obligations, as on-site inspections can reveal to what extent internal compliance and other control procedures are in fact working in accordance with a firm’s formal documented procedures. This is particularly important in critical conduct areas such as selling practices and compliance with suitability requirements, and transparency to clients. Thus the assessors recommend that the securities regulators continue to consider measures to increase the number of on-site inspections and refine their risk-based approach. Finally it is important that efforts by the MFDA to ensure that members address deficiencies found in its compliance reviews in a timely manner continue and that the tools devised to this end be effectively implemented. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles for Cooperation in Regulation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 13. | The regulator should have authority to share both public and non-public information with domestic and foreign counterparts. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 Both regulatory agencies have been provided with the authority to share information with both domestic and foreign regulators (Section 153 of the OSC Act and Section 297 of the AMF SA). There are no limitations on the type of information that they can share, and thus, they can share information in connection with authorization and licensing, surveillance, market events, client identification, regulated entities, listed companies and companies that go public. This information can be shared without the need for external approval. Moreover, the existence of a MoU is not a precondition for sharing information and thus both regulatory agencies can share information even in the absence of a MoU with the jurisdiction that has requested the information. Existence of an independent interest—i.e. the case under investigation by the foreign authority also constitutes a misconduct in Canada—is not a precondition for the exchange of information. Both the OSC and the AMF can share information on an unsolicited basis. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 14. | Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 Both regulatory agencies have the authority to enter into MoUs to establish the conditions for the exchange of information and cooperation. However, in the case of the OSC, MoUs both with local and foreign authorities have to be approved by the Minister (Section 143.10 of the OSC Act). In the case of the AMF, approval is required for the signature of the MoU at the local level. (Section 3.8 of the Act respecting the Minister du Conseil executif). The AMF informed that it is currently exploring ways to streamline the authorization process. Both regulatory agencies, as well as the regulatory agencies in Alberta and British Columbia, are signatories of the IOSCO MMoU. In addition, both authorities have signed bilateral MoUs with many regulatory agencies including the US SEC. Both the IOSCO MMoU as well as the bilateral agreements contain provisions to protect the confidentiality of the information shared between the signatories. MoUs are published in their respective bulletins. The OSC is the jurisdiction that receives the largest number of requests for information. The OSC Surveillance team is responsible for responding to requests for information and assistance from local and foreign regulators. In the fiscal year 2005–2006 it has responded to approximately 16,000 requests for information, of which 775 were from foreign regulators. In addition, there were nine ongoing enforcement related investigations of mutual interest to the OSC and other regulators. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | Comments carried from the 2007 assessment: “Only the four largest jurisdictions are signatories of the MMoU. However the assessor believes this is sufficient since in almost all cases foreign regulators would be able to channel their requests to Canada via these regulators”. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 15. | The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 Both the OSC and the AMF are able to provide assistance to foreign regulators in obtaining information that is not already in their files. This information includes records of brokerage accounts, and in particular client records for securities and derivative transactions that identify the name of the account holder; the name of the person authorized to transact business; the amount purchased or sold; the time of the transaction; the price of the transaction; the individual and the bank or brokerage house that handled the transaction. The provision of banking account information obtained under compulsion is subject to the limitations stated under Principle 9. Ontario is the jurisdiction that receives the largest number of requests for assistance. During last year the OSC provided assistance in over 45 cases. In roughly 10 of those cases there was no MoU with the jurisdiction that requested the assistance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles for Issuers | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 16. | There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 The regulatory framework for public offerings (“distribution of securities” in the Canadian system) has been harmonized via a set of National Instruments. The main instruments include: NI 41–101 Prospectus Disclosure Requirements; 44–101 Short Form Prospectus Distributions, NI 44–102 Shelf Distributions; NI 45–106 Prospectus and Registration Exemptions; NI 51–102 Continuous Disclosure Obligations; NI 71–102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers. Under the current framework, distribution of securities is not permitted until the regulator has issued a receipt for the prospectus. Overall, the prospectus must include: general business and financial information about the issuer, details about the terms of securities the issuer is offering, use of the proceeds and the risk factor associated with the purchase of securities. Continuous disclosure requirements include:
Under the MRRS, issuers who want to raise capital in more than one jurisdiction are assigned a “principal regulator” based on the location of their head office. The principal regulator is in charge of carrying out the review of the prospectus. The other jurisdictions have the right to opt out of the decision made by the principal regulator. For that purpose they have a five-day deadline to provide comments. However, the non-principal regulators can opt out at any time before the receipt for a prospectus has been issued. The authorities noted that the number of “opt outs” has decreased to very few or no cases at all. Under the umbrella of the CSA, the 13 provinces have also developed guidelines for the review of the prospectus to ensure that a similar type of review is done by all the provinces in their function as principal regulator. OSC and AMF All prospectuses filed at the OSC and the AMF are subject to some level of review. Both use a risk-based approach for reviewing the preliminary prospectuses. At the OSC a senior lawyer and an accountant determine the level of review that is suitable, which could be a full review, an issue oriented review or a basic review. A full review is carried out on all initial public offerings (IPOs) as well as other prospectuses identified using the risk based approach. The AMF conducts two types of review: a full review for IPOs and new issues when the AMF is the principal regulator and for novel structures or issues when the AMF is a non-principal regulator; and a limited review for other prospectuses. Continuous disclosure review Provincial regulators created the CSA Continuous Disclosure Review Committee in 2000 to coordinate and streamline the review of issuers’ continuous disclosure obligations. Under the continuous disclosure review system (CDRS) the principal regulator is in charge of the review of all documents submitted by issuers under their disclosure obligations (annual financial statements, quarterly financial statements, Annual Information Forum (AIF), material changes). The goal set by CSA members is to review 25 percent of the large issuers and 10 percent of the smaller issuers (by number)—the AMF has set up stricter goals: a three year cycle for the 30 largest issuers, 25 percent of the remaining large issuers that are all to be covered on a four-year cycle and a ten-year cycle for the rest. Provincial regulators have also conducted cross jurisdictional peer review as part of the CDRS program. In addition they have conference calls every two weeks to discuss any issue of concern. Jurisdictions have also coordinated targeted reviews, for example on issues such as disclosures and accounting of related party transactions and implementation of the audit committee requirement. OSC and AMF Both regulatory agencies have two mechanisms in place for the review of issuers’ compliance with continuous disclosure obligations:
Responsibility for the information in the prospectus and for continuous disclosure Liability provisions have not yet been harmonized across the provinces. However all provinces do have liability provisions for issuers and underwriters for the prospectus. Issuers are subject to a system of strict liability while underwriters are subject to a due diligence regime. In the case of Ontario, Alberta and Québec (new legislation adopted November 9th, 2007), recent legal amendments have extended liability to continuous disclosure obligations. Other provinces are in the process of adopting similar provisions. Derivatives Currently new products are subject to approval by the AMF. However the AMF informed that there is legislation under consultation that would change the system to a system of “self certification” of products by the derivatives exchange | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully Implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | Comments made as part of the 2013 assessment As per data provided by the regulators, the level of capital raised in the exempted markets is significant. Thus it is critical that the regulators exercise close monitoring of these markets. The inclusion of this monitoring as part of the strategic priorities of the BCSC for 2013 is welcome. In addition, the OSC regularly monitors the reported activity in the exempt market, as well as actively oversees the registrants in the exempt market using a risk-based approach. The assessor notes the existence of a policy proposal that seeks to update the framework for exempted markets. The assessor emphasizes the importance that a careful balance be sought. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 17. | Holders of securities in a company should be treated in a fair and equitable manner. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 The majority of the issues related to shareholders’ rights have not been harmonized via a National Instrument; thus, they have to be assessed in relation to the provincial framework for corporations. However the authorities informed that a significant number of the issues are treated in a similar manner throughout the provinces. In addition the framework for takeover bids and proxies are highly harmonized The framework for corporations in Ontario and Québec contains explicit provisions that deal with the fair treatment of shareholders.
Both the framework for issuers in Ontario and Québec have disclosure obligations for substantial and insider holdings. A person that directly or indirectly beneficially owns, or has control or direction over 10 percent (it drops to five percent if a formal bid is outstanding) or more of an issuer’s voting securities must file a press release and issue a report when they reach 10 percent and each time they or a person controlled by them acquires an additional two percent (early warning requirements). Directors and officers are insiders with the following disclosure obligations:
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| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | Comments made in the context of the 2013 assessment The assessor notes the existence of a policy proposal to streamline and tailor disclosure and governance requirements for venture issuers. The assessor emphasized the importance that a careful balance be maintained. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 18. | Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 The regulatory framework for accounting and auditing has been harmonized in NI 52–107 Acceptable Accounting Principles, Auditing Standards and Foreign Currency. Under the current framework, issuers have to prepare their financial statements according to Canadian GAAP that are issued by the Accounting Standards Board (ASB). Canadian GAAP provides a comprehensive set of standards for preparing financial statements. In the past the goal of the ASB was to seek convergence with U.S. GAAP; however this goal was reassessed and now the goal is to minimize differences with and implement International Financial Reporting Standards (IFRS) by 2011. Convergence with IFRS does pose certain challenges for the Canadian market given that IFRS does not address specific standards for oil, gas and mining/extraction activities. Under the current framework, audits have to be prepared in accordance with Canadian AS issued by the Audit and Assurance Standards Board (AASB) of the Canadian Institute of Chartered Accountants. However, the AASB’s goal is to adopt the international auditing standards. Auditor’s independence NI 52–108 Auditors Oversight and NI 52–110 Audit Committees have put in place mechanisms to ensure auditors’ independence:
In addition, if a regulatory authority believes that the financial statements of an issuer do not comply with the accounting standards, it can order the issuer to amend the statements. In addition, it can suspend trading of an issuer and impose sanctions on it. Also both the OSC and the AMF make public the list of issuers with deficiencies in their reporting obligations. Once the issuer corrects the deficiency, it is removed from that list. In Ontario, if the deficiency is identified as a result of a continuous disclosure review the issuer is placed on an errors and refiling list. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles for Auditors, Credit Ratings Agencies, and Other Information Service Providers | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 19. | Auditors should be subject to adequate levels of oversight. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Requirements for auditors Pursuant to provincial legislation, the provincial professional accounting bodies govern accountants including those providing auditing services to reporting issuers (i.e. issuers that offer securities to the public). They govern the use of the applicable professional designation and grant licenses to practice as public accountants. They are also responsible for setting up ethical standards, including the quality control environments in which auditors operate. Each provincial accounting body sets minimum requirements for education and practical experience for accountants. Individuals wishing to become accountants must (i) complete an undergraduate university or college degree; (ii) complete several specified courses sponsored by the applicable provincial accounting body or university, (iii) meet a minimum time of practical experience ranging from 24 months to 36 months and (iv) complete specified comprehensive examinations. Also, each provincial accounting body requires a member to complete a minimum of 120 hours of professional development in a three-year cycle. These requirements are also applicable to the auditors that want to audit reporting issuers. Provincial bodies exercise a first level of oversight over accountants/auditors and have established quality control reviews to that effect. CPAB Pursuant to NI 52-108 auditors of reporting issuers are subject to the oversight of CPAB. CPAB is a federally incorporated, not-for-profit corporation constituted in 2003. CPAB is independent from any other professional or regulatory body and from the auditing profession. CPAB’s by-laws establish two classes of members: (i) Council of Governors; and (ii) Provincial Audit Regulator Members. Council of Governors The Council of Governors votes on CPAB’s by-law amendments, has the primary oversight responsibility over the CPSB board of directors and appoints CPAB’s directors, and also selects the board Chair and Vice-Chair. The Council of Governors can also remove any directors that it has appointed. The Council of Governors comprises six members: the Chair of the CSA, the Chair of the OSC, the Chair of the AMF, the Superintendent of Financial Institutions of Canada, a fifth governor selected by the CSA and a person selected by the other five Governors, (upon consultation with the Provincial Audit Regulator Members) who is a professional accountant and has audit oversight experience. The Council of Governors carries out a high-level assessment of CPAB’s board of directors against its duties and objectives on an annual basis. While the Council is the primary body in charge of the oversight of CPAB, some of the provinces have enacted statutes for CPAB that have made it accountable to their respective governments. The first province was Ontario, with the enactment of the Ontario Canadian Public Accountability Board Act, and now six provinces also have a similar provision. In practice such accountability is taken the form of a certification by the Council to the MoF that CPAB is fulfilling its mandate. It is expected that other provinces will follow the same approach. Provincial Audit Regulator Members The Provincial Audit Regulator Members vote on CPAB’s by-law amendments, appoint CPAB’s external auditor, and receive CPAB’s annual financial statements and the auditor’s report. Provincial Audit Regulator Membership is available to provincial audit regulators who oversee audit firms whose aggregate Canadian audit fee revenue from reporting issuers in the province is at least $7,000,000 and whose disciplinary processes and codes of ethics meet standards established by the board of directors. Board of Directors The board is appointed by the Council of Governors and has the overall responsibility for managing and supervising the management of CPAB’s activities, and affairs. In accordance with CPAB’s by-laws, the board of directors consists of 11 directors who have been appointed based on the following criteria:
CPAB’s funding structure CPAB’s fees are established by the board. CPAB’s management annually prepares a strategic plan and budget and proposes an Annual Participation Fee percentage designed to enable CPAB to recover its annual operating costs. The Annual Participation Fees are allocated by the board amongst the participating audit firms in proportion to such firms’ total fees charged to their reporting issuer clients in respect of audit services. This fee is currently 2.0 percent of the audit fees charged by each participating audit firm to its reporting issuer clients (firms in certain foreign jurisdictions are charged a rate of 0.2 percent). Fees are mandatory for participating audit firms, and while CPAB invoices audit firms for the fee, the firms in turn bill their reporting issuer audit clients. The participating accounting firms are also required to pay a one-time flat fee, upon becoming a participating firm, which is calculated based on the number of reporting issuer clients that they audit. This fee is administrative in nature; the more substantial source of ongoing funding is the annual participation fee. Authority CPAB derives its oversight authority through “Participation Agreements” with auditing firms, which auditing firms are required to enter into under NI 52-108. In addition, CPAB’s By-law No. 1 requires each participating audit firm to co-operate with CPAB, and comply with all of CPAB’s by-laws, rules and any requirements, restrictions and sanctions that may be imposed by CPAB. As indicated above, some provinces have enacted specific laws for CPAB, for example Ontario, Québec and British Columbia. Such Acts provide CPAB staff with legal protection against suits for actions/omissions conducted as a result of their functions and include a provision on non-compellability—so that staff cannot be obliged to provide confidential information. Responsibilities and Powers CPAB conducts its oversight in accordance with its rules and by-laws which set out the specific responsibilities, powers and duties of CPAB pertaining to its oversight function. CPAB’s rules generally give the board powers to:
Following each inspection, CPAB sends the audit firms a private report that includes its findings, recommendations and other observations. CPAB staff highlighted that recommendations are not voluntary that is, auditing firms are obliged to implement them to CPAB’s satisfaction within a prescribed period of time—normally 180 days. However, depending on the severity of the findings, the deadline for implementing CPAB’s recommendations may be shorter than 180 days. CPAB’s recommendations generally entail one or more of: performing additional audit work in the current year, adding evidence to the audit file with respect to work that was carried out, but not properly evidenced, or changing the audit approach in future audits to remedy the deficiency. Usually CPAB requests a plan of action and follows up on it on an on-going basis, so that if there is an issue they would not wait until the next inspection to request its correction. Failure to implement the recommendations to CPAB’s satisfaction could give rise to disciplinary action on the audit firm or designated professional in the form of a requirement, restriction or sanction. In more serious situations, CPAB may impose requirements, restrictions or sanctions on an audit firm. Pursuant to CPAB’s Rule 601 requirements, restrictions or sanctions may include one or more of the following:
In spite of confidentially provisions in Section 11 of the Ontario Canadian Public Accountability Board Act, Section 13 of CPAB Act allows CPAB to provide information to securities regulators if it has reasonable grounds to believe that there has been a beach of laws. Staff indicated that CPAB is currently working on a MoU with CSA members to further clarify the provision of cooperation and information sharing between CPAB and CSA members. Process for regular reviews CPAB has developed a program of quality-control reviews that covers all firms who audit reporting issuers. These reviews cover audit procedures performed on specific files, as well as the general quality control practices of the accounting firms. All firms are covered on a cyclical basis ranging from one to three years. CPAB’s Rule 403 and Rule 404 specify the required frequency of inspections:
To determine the number of audit files to inspect at each firm, CPAB uses a risk-based approach which considers reporting issuer’s information, such as liquidity, solvency, earnings, and quality of assets. In the selection of files to review from an auditing firm CPAB seeks to stratify the population, to make sure that it is getting a good coverage of the risks (for example, in the case of inspections on the big four, they select files from the regional offices, and select files from small issuers). Additional issues are included if specific concerns have arisen in regard to a particular set of issuers. For example, recently issuer’s exposure to particular countries that are under stressed, has been a factor included in the risk assessment framework. Also recently in light of concerns regarding issuers from emerging countries, the CPAB conducted a sweep specifically targeted to engagements for such type of issuers. On an annual basis, CPAB publishes a report highlighting inspection findings from the previous year, which is available on its website. Reliance by CPAB on the provincial bodies While CPAB performs most of its own inspections, it has entered into MOUs with certain provincial accounting bodies that perform inspections of some of the smaller audit firms (generally those with five or fewer reporting issuers). The MOUs set forth the mutual commitments of CPAB and the provincial accounting bodies. As other stakeholders, CPAB staff considers that there is room for improvement in the overall quality of the oversight work conducted of the provincial bodies. However, in connection with the reviews of reporting issuers, CPAB staff highlighted that it maintains control over the scope of the auditing firms reviewed by providing a reporting issuer risk ranking analysis to the provincial accounting SGBs on a quarterly basis to assist them in identifying those reporting issuer files that CPAB is most interested in having the provincial accounting SGBs inspect. In addition, CPAB receives the review report and thus is able to satisfy itself that the matters reviewed by the accounting SGBs during an inspection are substantially similar to the scope of the matters that CPAB would review during an inspection. The provincial accounting bodies also provide timely access to all related working papers. CPAB’s Director of Interprovincial Affairs reviews the provincial inspection reports and CPAB can supplement a provincial inspection with its own direct review. CPAB can, at any time, choose to perform its own direct reviews of the smaller audit firms. The actions and measures taken by the provincial accounting bodies do not constrain CPAB from pursuing its own outcomes and taking its own actions with respect to the same audit firm. Practice CPAB has 42 accountants directly involved in inspections (4 staff in Montreal, 7 in Vancouver and 26 in Toronto and 5 contractual). CPAB staff highlighted that a significant effort on recruitment of qualified staff has been made and became more visible after 2010. CPAB staff highlighted that it has been able to recruit professionals with a significant number of years of experience, including retired partners from national and regional firms. CPAB staff considers that at this moment is has sufficient resources to fulfill its mandate. Overall stakeholders share a similar view on the quality of its staff. Staff is subject to rules on conflict of interest, which among other things include rotation (typically on 3-4 year cycle for team leaders, and the staff that reviews the firms). Stakeholders indicated that these rules are respected in practice. In terms of its own, site review program, below is a summary of current market share for 2011
As a result of its 2011 inspections, CPAB has required action plans including from some of the big eight firms. CPAB staff stated that there is now a more continuous follow up of actions plans (and 1–2 staff are designated to that effect) CPAB staff indicated that firms are not contesting the recommendations; but working on their implementation. In addition CPAB placed a requirement on seven firms—in addition to the cases where it has required a plan of action to address recommendations. One of those requirements was converted into a restriction in 2012 because the firm did not comply with the requirement. During 2011, CPAB did not place a sanction on a participating firm and there were no review proceedings or any other proceedings conducted in respect of CPAB’s disciplinary decisions in either 2011 or 2010. There were no appeals, applications for judicial review or arbitrations in respect of decisions made by a review panel during the year. A summary of results for the preceding four years is provided below:
All the information provided indicates that action plans are the most frequent enforcement tool used by CPAB. CPAB staff commented that especially in connection with the big firms’ reputation is a strong motivator to ensure compliance. Stakeholders interviewed considered that the quality of CPAB’s inspections has improved over the years and that inspections are thorough and the staff is generally experienced enough. Comments also ratified the fact that follow up on actions plans is now more continuous. There was also agreement that rules of conflict of interest were respected. As to the effectiveness of CPAB’s actions, stakeholders indicated that some firms are internally affecting compensation of partners based on the results of CPAB’s inspections; but that is not the case for all. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Broadly Implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | The grade is mainly due to the enforcement issues described below in connection with question 7 of the methodology. Based on the conversations held with CPAB and stakeholders the assessor concludes that the quality of CPAB inspections is robust. The area that raises some questions is enforcement. First, as indicated above CPAB has relied mainly on recommendations especially for the largest firms, only in a few cases has imposed requirements (such as a third party review) and only in one case has used restrictions. The question that this raises is whether this approach is strong enough, or whether CPAB should make more use of the tools at its disposal, and whether pecuniary sanctions should also be part of the toolkit—as is the case in many other jurisdictions. From the information gathered it appears that the continuous monitoring that CPAB is exercising is delivering results, in terms of changes in processes but more importantly in the quality control “culture” of some of the large auditing firms. However, use of other tools beyond recommendations might be more important for the smaller firms, as in those cases reputation might not be in itself a strong incentive to change. Finally, the limited transparency given to enforcement actions can affect their deterrent effect. Second, there is a need to improve the sharing of information with audit committees and the regulators. The assessor acknowledges that there is currently dialogue between the regulators and CPAB aimed at addressing these limitations. Finally, the assessor encourages the provinces that have not addressed the issue of legal protection and non compellability of CPAB staff to do so. As is the case for securities regulators, lack of adequate legal protection may have a chilling effect on staff making necessary decisions, and be a disincentive to their taking robust action, especially in difficult or complex situations. That is why this is a key requirement for supervisory agencies, under Principle 2 of the Methodology. As CPAB is the supervisory agency for purposes of supervision of external auditors, this requirement should be in place for it. The assessor notes that this issue is mitigated by the fact that some of the largest jurisdictions have already made these changes. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 20. | Auditors should be independent of the issuing entity that they audit. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Independence requirements As indicated above, securities legislation requires that annual financial reports be accompanied by an auditor’s report prepared in accordance with Canadian Generally Accepted Auditing Standard which includes compliance with the rules of professional conduct. Each applicable provincial accounting body in the four jurisdictions has built independence standards into their applicable rules of professional conduct/code of ethics. Financial, business and other relationships The applicable rules of professional conduct contain detailed requirements for members and audit firm independence addressing financial interests, loans and guarantees, close business relationships, family and personal relationships, employment with a reporting issuer audit client, recent service with an assurance or audit or review client, serving as an officer or a member of the board of directors of a reporting issuer audit client, religious associations, social clubs, and long association with senior personnel with a reporting issuer audit client. The rules of professional conduct describe circumstances and activities which members and firms must avoid when performing an assurance engagement, because adequate safeguards do not exist that would, in the view of a reasonable observer, eliminate a threat or reduce it to an acceptable level. Accordingly, the member or firm will not be independent of the client as required for an assurance engagement, and therefore will be prohibited from performing the assurance engagement. The requirements to avoid these circumstances and activities are referred to as “prohibitions”. Some prohibitions apply to all assurance engagements while others only apply to audits of reporting issuers Prohibitions applicable to all assurance engagements include:
Self interest Professional conduct rules contain prohibitions in respect of self-interest including direct or indirect financial interest in a reporting issuer audit client, loan or guarantee, close business relationships and employment with an audit client. Other specific threats of self-interest, which are referred to in the rules, or supporting documentation from the provincial accounting bodies, include dependence on fees, undue concern about losing the engagement and compensation for non-audit services to an audit client. Self review The rules contain prohibitions in respect of self-review situations, including when there is an officer or director relationship, an employee is able to exert direct and significant influence on the engagement, or on a member or firm providing other services impacting the engagement or preparing original data impacting the engagement. Advocacy The rules contain prohibitions in respect of advocacy, including dealing in or promoting shares or securities of a reporting issuer audit client, or acting as an advocate on behalf of a reporting issuer audit client in litigation or otherwise in resolving disputes with third parties. Familiarity The rules contain prohibitions in respect of familiarity, including when a person on the engagement team has:
The rules address the threat of intimidation. Examples may include the threat of being replaced due to a disagreement, or the application of pressure to inappropriately reduce the extent of work performed or reduce or limit fees. Non audit services The independence standards which are built into the rules of professional conduct for each provincial accounting body also contain prohibitions and guidance related to non-audit services. For example, there are specific prohibitions respecting providing services to reporting issuer audit clients respecting:
In addition, in the case of reporting issuers NI 52-110 Audit Committees requires an issuer’s audit committee to pre-approve all non-audit services to be provided to the issuer or its subsidiary entities by the issuer’s external auditor. Appearance The independence standards require an auditor to continuously be, and be seen to be, independent of the entity being audited. This includes what some provincial accounting bodies refer to as “independence of mind” and “independence in appearance”. The rules specify that the assessment of independence should be considered from the “view of a reasonable observer.” Rotation Rotation is mandatory at partner level after seven years, and requires a five year lag [what about team members?]. Compliance with independence requirements Review by the own firm Canadian Standard on Quality Control 1—Quality Control for Audit Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance Engagements (CSQC 1) and Canadian Auditing Standard 220—Quality Control for an Audit of Financial Statements (CAS 220) require auditors to have controls in place to address threats to independence. In particular, CSQC 1 requires auditors to identify and evaluate circumstances and relationships that create threats to independence, and to take appropriate action to eliminate those threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the engagement. CAS 220 requires an engagement partner to form a conclusion on compliance with independence requirements that apply to the audit engagement and specifically do the following: obtain information from the firm and network firms to identify and evaluate circumstances and relationships that create threats to independence; evaluate information on identified breaches, if any, of the firm’s independence policies and procedures to determine whether they create a threat to independence for the audit engagement; and take appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards or withdraw from the audit engagement. CAS 260 Communication with Those Charged with Governance requires an auditor to confirm the independence of the auditor. Audit Committee NI 52-110 Audit Committees requires the audit committee of a reporting issuer (other than an investment fund) to have specific responsibilities including the following:
NI 52-110 requires the external auditor to report directly to the audit committee, as opposed to management. NI-52-110 requires audit committees to be made up of independent members (except for the venture issuers). As in many other countries, stakeholders consider that there is room for improvement in connection with the role that audit committees especially for the smaller issuers. In this regard, stakeholders consider that for the larger issuers (top 400-500) there is sufficient engagement from the audit committee, for mid size firms the quality of engagement is mixed, while for the smaller firms, audit committees are considered ineffective. In all cases stakeholders consider that there is room for audit committees to move from overseeing the quality of the audit to more actively evaluating the quality of such work. CPAB staff informed that it has worked on the development of tools to assist audit committees to perform this more active role. NI 81-107 Independent Review Committee for Investment Funds and NI 81-102 Mutual Funds require an IRC for a mutual fund (an investment fund under NI 81-102) to approve the change of auditor for the fund. Other controls In addition, Canadian companies that are registered under the Canada Business Corporations Act must follow certain legal provisions concerning auditors. This includes:
Reviews by CPAB CPAB’s reviews, as described in Principle 19, include evaluating whether the audit firms have adequate processes in place to assess the appropriateness of undertaking non-assurance services for audit clients, the identification of threats to independence and factors which mitigate such threats, and more generally, their compliance with the various features of Rule 204 Independence Standards. Resignation NI 51-102 requires a reporting issuer to notify a change of auditor, including information about the reasons for the resignation or reassignment. It must also include information about any modified opinion expressed by the predecessor auditor, any difference of opinion and any unresolved issues. Finally, the notice must include a summary of advice from the successor auditor and the predecessor auditor if the issuer consulted with the successor auditor about a financial reporting matter. The notification must be approved by the audit committee or board of directors of the reporting issuer and be filed with the securities regulatory authority within 30 days after the date of a termination or resignation of the auditor and upon 30 days after the appointment of a successor auditor 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 should be of a high and internationally acceptable quality. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Assessed in 2007 The regulatory framework for accounting and auditing has been harmonized in NI 52–107 Acceptable Accounting Principles, Auditing Standards and Foreign Currency. Under the current framework, issuers have to prepare their financial statements according to Canadian GAAP that are issued by the Accounting Standards Board (ASB). Canadian GAAP provides a comprehensive set of standards for preparing financial statements. In the past the goal of the ASB was to seek convergence with U.S. GAAP; however this goal was reassessed and now the goal is to minimize differences with and implement International Financial Reporting Standards (IFRS) by 2011. Convergence with IFRS does pose certain challenges for the Canadian market given that IFRS does not address specific standards for oil, gas and mining/extraction activities. Under the current framework, audits have to be prepared in accordance with Canadian AS issued by the Audit and Assurance Standards Board (AASB) of the Canadian Institute of Chartered Accountants. However, the AASB’s goal is to adopt the international auditing standards. Auditor’s independence NI 52–108 Auditors Oversight and NI 52–110 Audit Committees have put in place mechanisms to ensure auditors’ independence:
In addition, if a regulatory authority believes that the financial statements of an issuer do not comply with the accounting standards, it can order the issuer to amend the statements. In addition, it can suspend trading of an issuer and impose sanctions on it. Also both the OSC and the AMF make public the list of issuers with deficiencies in their reporting obligations. Once the issuer corrects the deficiency, it is removed from that list. In Ontario, if the deficiency is identified as a result of a continuous disclosure review the issuer is placed on an errors and refiling list. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assessment | Fully implemented | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principle 22. | Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Use of ratings Securities legislation includes numerous references to credit ratings. In many cases, a credit rating may confer differential treatment upon market participants. For example:
Pursuant to NI- 25-101 any credit rating organization that wishes its ratings to be eligible for use for regulatory purposes must be registered as a designated rating organization (DRO). The regulatory requirements for a credit rating organization applying to become a DRO are set out in NI 25-101. Staff from the agencies commented that a goal when developing this NI was to be internationally consistent (in order to allow for recognition of the local CRAs by the European authority −ESMA. The provisions listed in NI 25-101 are based substantially on the IOSCO Code and require a DRO to establish, maintain and comply with a code of conduct which includes policies and practices related to the following:
Quality and integrity of ratings Appendix A to NI 25-101 provides that a DRO must comply with the following requirements related to the quality and integrity of the rating process:
Appendix A to NI 25-101 includes the following requirements:
Section 13 of NI 25-101 requires a DRO to keep books and records for a period of seven years from the date the record was made or received, whichever is later; in a safe location and a durable form; and in a manner that permits it to be provided promptly to the securities regulator upon request. Resources Appendix A to NI 25-101 provides that a DRO must comply with the following requirements related to the quality and integrity of the rating process:
Appendix A to NI 25-101 provides that a DRO must comply with the following requirements related to independence and conflicts of interest:
Appendix A to NI 25-101 provides that a DRO must comply with the following requirements related to independence and conflicts of interest:
Section 3.9 Appendix A to NI 25-101 provides that a DRO will publicly disclose the general nature of its compensation arrangements with rated entities. In addition:
Timely distribution of ratings Section 4.1 of Appendix A to NI 25-101 provides that the DRO will distribute in a timely manner its ratings decisions and any updates regarding the entities and securities it rates. Non selective disclosure Appendix A to NI 25-101 provides that a DRO must comply with the following requirements related to the transparency of ratings disclosure:
Appendix A to NI 25-101 provides that a DRO must comply with the following requirements related to the transparency of ratings disclosure:
Information on past performance Section 4.13 of Appendix A to NI 25-101 provides that the DRO will publicly disclose data, on a yearly basis, about the historical default rates of its rating categories and whether the default rates of these categories have changed over time. The requirement also provides that the information will include verifiable, quantifiable historical information about the performance of its rating opinions, organized and structured, and, where possible, standardized in such a way so as to assist investors in drawing performance comparisons between different DROs. Protection of non public information Appendix A to NI 25-101 provides that a DRO must comply with the following requirements related to the treatment of confidential information:
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