The Basics and Need-to-Knows of Investing in the Equities Market
The public and private capital markets in Canada are regulated by the securities commissions/regulatory authorities in each province and territory through securities legislation, regulations, rules and national or multilateral instruments. Securities regulators are responsible for the administration and enforcement of securities laws including the regulation of securities as products and regulation of securities dealers and advisers as market participants.
Working together as the Canadian Securities Administrators (the CSA) provincial/territorial regulators have developed harmonized multilateral or national rules for the securities industry. Key areas where national rules have been enacted include:
- Disclosure and conduct of public companies
- Distribution of securities
- The operation of securities exchange marketplaces
- Registration and compliance obligations of dealers and advisors in capital markets
The National Registration and Compliance Regime
National Instrument 31-103 Registration Requirements, Exemptions and Continuing Obligations (NI 31-103) established a consistent registration and compliance regime across Canada. NI 31-103 harmonized the registration, conduct and ongoing compliance requirements for dealers and advisers across Canada however some local exemptions were retained. One of the most significant changes introduced by NI 31-103 was the introduction of the Exempt Market Dealer (EMD) category of registration in all jurisdictions across Canada.
Unlike the predecessor category of Limited Market Dealer (in Ontario and Newfoundland only), the new EMD category is a comprehensive registration category where firms must comply with the full regulatory requirements of securities dealer regulation, including:
- educational proficiency for its registered individuals and its chief compliance officer minimum capital and excess working capital
- annual audited financial statements
- maintenance of proper books and records
- compliance systems and internal control mechanisms
- disclosure of referral arrangements
- comprehensive policies and procedures manuals
- trade confirmations and regular client statements
- procedures for client complaint handling
- an independent dispute resolution service
- holding client assets in trust and separate from the firm’s assets
- maintaining adequate insurance coverage to protect the firm and its clients.
EMDs must follow the same “Know Your Client” and “Know Your Product” procedures and carry the same “Suitability” obligations as other registered dealers (e.g. investment dealers, mutual fund dealers and scholarship plan dealers). These requirements ensure that each client’s personal, financial and investment profile is understood and confirmed prior to any trading activity. EMDs must also ensure that any security they recommend is suitable for a particular client by considering the particular investment product as well as each individual client’s investment goals and profile.