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Canadian Investor Protection Fund
China Securities Investor Protection Fund China Securities Investor Protection Fund Corporation LimitedCorporation Limited
Hohhot, Inner MongoliaHohhot, Inner Mongolia
July 31, 2008
China Securities Investor Protection Fund China Securities Investor Protection Fund Corporation LimitedCorporation Limited
Hohhot, Inner MongoliaHohhot, Inner Mongolia
July 31, 2008
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Topics
Background
Canadian Investment Industry
CIPF Authority
Issues of Interest to SIPF
Risk Monitoring Over Securities Companies
Investor Education
Investor Services
May 2008 Compensation Funds Meeting - Paris
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Background:Canadian Investment Industry
No specific mention of securities activities in Canadian Constitution
Securities generally assumed to fall within “property and civil rights” sections of Constitution and therefore under provincial and territorial jurisdiction
Regulations found in 10 provincial and 3 territorial statutes
No national regulatory authority, but provincial and territories authorities work together under the banner “Canadian Securities Administrators” - CSA
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A company cannot trade in a security unless the company is registered as a dealer
Condition of registration includes participation in a Compensation Fund
Background:Canadian Investment Industry (cont’d)
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MUTUAL FUND DEALER
MFDA IPC• registered to trade in units of mutual funds• SRO: Mutual Fund Dealers Association of Canada (MFDA)OTHER DEALERS
Minimal Compensation in some Provinces• financial intermediary• foreign or international• limited market• scholarship plan and security issuer• etc.• direct oversight by provinces
BROKER / INVESTMENT DEALER
CIPF• registered to trade in securities, including mutual funds, in the capacity of principal
or agent• SRO: Investment Industry Regulatory Organization of Canada (IIROC)
Background:Canadian Investment Industry (cont’d)
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CIPF Authority
Canadian Securities Administrators
Broker / Investment Dealers
MOU
CUSTOMER PROTECTIONCustomers
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MOU: Organization
Board must fairly represent all Members and their customers
4 of 10 must be public
Appropriate and timely regional representation
Human Resources including President & CEO
Auditors
MOU: Organization
Board must fairly represent all Members and their customers
4 of 10 must be public
Appropriate and timely regional representation
Human Resources including President & CEO
Auditors
CIPF Authority (cont’d)
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MOU: Funding and Maintenance
Fair and reasonable method of establishing assessments
Maintain appropriate level of assets for protection
Maintain Internal Controls
Meet with CSA at least once per year
MOU: Funding and Maintenance
Fair and reasonable method of establishing assessments
Maintain appropriate level of assets for protection
Maintain Internal Controls
Meet with CSA at least once per year
CIPF Authority (cont’d)
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MOU: Consumer Protection
Policies for Coverage
Appeals
Assistance to IIROC where financial problems at a Member exist
MOU: Consumer Protection
Policies for Coverage
Appeals
Assistance to IIROC where financial problems at a Member exist
CIPF Authority (cont’d)
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MOU: Member Review
Review the business and operations of any Member where a situation has occurred that could result in payments from the Fund
MOU: Member Review
Review the business and operations of any Member where a situation has occurred that could result in payments from the Fund
CIPF Authority (cont’d)
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MOU: Reporting
Respond to all requests from CSA for information on registrants
Immediately advise of situations that could result in payment from the Fund
Details of any insolvencies
MOU: Reporting
Respond to all requests from CSA for information on registrants
Immediately advise of situations that could result in payment from the Fund
Details of any insolvencies
CIPF Authority (cont’d)
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MOU: Reporting (cont’d)
Agreement from CSA that when a registrant requires CIPF intervention, it will take appropriate action to help minimize the risk of loss to customers
Contemplated CSA action is suspension, which permits CIPF to petition its Member into bankruptcy under Part XII of the Bankruptcy and Insolvency Act of Canada - the preferred route
MOU: Reporting (cont’d)
Agreement from CSA that when a registrant requires CIPF intervention, it will take appropriate action to help minimize the risk of loss to customers
Contemplated CSA action is suspension, which permits CIPF to petition its Member into bankruptcy under Part XII of the Bankruptcy and Insolvency Act of Canada - the preferred route
CIPF Authority (cont’d)
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CIPF Authority (cont’d)
CanadianSecurities Administrators
Broker / Investment DealersIIROC
MOURecognition Orders
MEMBER
CustomersCustomer Protection
OVERSIGHT
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Example of IIROC Ontario Recognition Order:
Immediate reporting of “reportable conditions”
Extensive communication on complaints, investigations and disciplinary actions
Annual self-assessment
Information sharing with OSC, CIPF and others listed in order
Example of IIROC Ontario Recognition Order:
Immediate reporting of “reportable conditions”
Extensive communication on complaints, investigations and disciplinary actions
Annual self-assessment
Information sharing with OSC, CIPF and others listed in order
CIPF Authority (cont’d)
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CIPF Authority (cont’d)
CanadianSecurities Administrators
Broker / Investment DealersIIROC
Industry Agreement
MOURecognition Orders
Members
CustomersCustomer Protection
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IIROC / CIPF Industry AgreementIIROC / CIPF Industry Agreement
Governance
IIROC can select a Director for Nomination
Assessments
CIPF discretion to set within framework outlined
Annual limit on amount any Member has to pay
IIROC must collect for CIPF
IIROC / CIPF Industry AgreementIIROC / CIPF Industry Agreement
Governance
IIROC can select a Director for Nomination
Assessments
CIPF discretion to set within framework outlined
Annual limit on amount any Member has to pay
IIROC must collect for CIPF
CIPF Authority (cont’d)
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IIROC / CIPF Industry AgreementIIROC / CIPF Industry Agreement (cont’d) (cont’d)
Regulation
IIROC maintains rules for capital, insurance, business structures, financial reporting, client confirmations and statements and related subjects
30 day notice of any changes
IIROC must enforce rules
Advise of situations likely to give rise to payments from Fund
Information Sharing
IIROC / CIPF Industry AgreementIIROC / CIPF Industry Agreement (cont’d) (cont’d)
Regulation
IIROC maintains rules for capital, insurance, business structures, financial reporting, client confirmations and statements and related subjects
30 day notice of any changes
IIROC must enforce rules
Advise of situations likely to give rise to payments from Fund
Information Sharing
CIPF Authority (cont’d)
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IIROC / CIPF Industry AgreementIIROC / CIPF Industry Agreement (cont’d) (cont’d)
Regulation (cont’d)
Member reviews
– CIPF entitled to second staff to IIROC for training
– CIPF entitled to do independent review where a reportable condition exists
IIROC / CIPF Industry AgreementIIROC / CIPF Industry Agreement (cont’d) (cont’d)
Regulation (cont’d)
Member reviews
– CIPF entitled to second staff to IIROC for training
– CIPF entitled to do independent review where a reportable condition exists
CIPF Authority (cont’d)
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IIROC / CIPF Industry AgreementIIROC / CIPF Industry Agreement (cont’d) (cont’d)
Regulation (cont’d)
Require IIROC to take action against Member
– If IIROC fails to, CIPF can take action
– If action justified, IIROC pays cost
Advertising by Members
Require staff and Members to comply with agreement
IIROC / CIPF Industry AgreementIIROC / CIPF Industry Agreement (cont’d) (cont’d)
Regulation (cont’d)
Require IIROC to take action against Member
– If IIROC fails to, CIPF can take action
– If action justified, IIROC pays cost
Advertising by Members
Require staff and Members to comply with agreement
CIPF Authority (cont’d)
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CIPF Authority (cont’d)
CanadianSecurities Administrators
Broker / Investment DealersIIROC
Industry Agreement
MOURecognition Orders
Member
Oversight
CustomersCustomer Protection
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CIPF Receives
Monthly regulatory capital calculations
Annual audited financial statements
Report of any breaches of Minimum Capital or Early Warning Tests
Communication with Members on Field Examination Results
Communication with Member’s auditor
IIAC Member risk ratings
CIPF Receives
Monthly regulatory capital calculations
Annual audited financial statements
Report of any breaches of Minimum Capital or Early Warning Tests
Communication with Members on Field Examination Results
Communication with Member’s auditor
IIAC Member risk ratings
Risk Monitoring over Securities Companies
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Method of Receiving
Communication - mostly hardcopy or PDF
Financial results - shared industry database called SIRFF
IIROC risk ratings - SIRFF
Method of Receiving
Communication - mostly hardcopy or PDF
Financial results - shared industry database called SIRFF
IIROC risk ratings - SIRFF
Risk Monitoring over Securities Companies (cont’d)
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MemberSIRFFWeb
Database
IIROC
CSAview
Data Entry view
View and approve filings
SIRFF:
Risk Monitoring over Securities Companies (cont’d)
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Background: Why CIPF Gets Information
CIPF has no government backstop
Membership is a “credit ring” where each Member is responsible to “pay-up” if another Member fails
Background: Why CIPF Gets Information
CIPF has no government backstop
Membership is a “credit ring” where each Member is responsible to “pay-up” if another Member fails
Risk Monitoring over Securities Companies (cont’d)
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Background: Why CIPF Gets Information (cont’d)
Historically:
5 Self-Regulatory Organizations with Members participating in CIPF
Each had own rule-book, examination program, etc.
CIPF acted as “quality control” to ensure each SRO implemented consistent rules and met same standard of care in examinations
Now only one SRO, IIROC, but have continued right to receive information so as to mitigate risk
Background: Why CIPF Gets Information (cont’d)
Historically:
5 Self-Regulatory Organizations with Members participating in CIPF
Each had own rule-book, examination program, etc.
CIPF acted as “quality control” to ensure each SRO implemented consistent rules and met same standard of care in examinations
Now only one SRO, IIROC, but have continued right to receive information so as to mitigate risk
Risk Monitoring over Securities Companies (cont’d)
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Example Of What We Use Information For
CIPF is pre-funded
How big should the Fund be?
Fund Size Model - theoretical size of the Fund is the sum of the amount of capital needed for the default of each Member…
Amount of capital is based on the Member’s probability of default and the loss to CIPF if it defaults…
Loss to CIPF if it defaults is based on its customer asset base
Example Of What We Use Information For
CIPF is pre-funded
How big should the Fund be?
Fund Size Model - theoretical size of the Fund is the sum of the amount of capital needed for the default of each Member…
Amount of capital is based on the Member’s probability of default and the loss to CIPF if it defaults…
Loss to CIPF if it defaults is based on its customer asset base
Risk Monitoring over Securities Companies (cont’d)
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Example Of What We Use Information For (cont’d)
Board sets a total annual assessment amount
Each Member pays a percentage of the total annual assessment as follows:
Members advised of risk rating relative to others and how to reduce it
Example Of What We Use Information For (cont’d)
Board sets a total annual assessment amount
Each Member pays a percentage of the total annual assessment as follows:
Members advised of risk rating relative to others and how to reduce it
“Theoretical Fund Size” Capital For MemberTheoretical Fund Size X Total Annual Assessment
Risk Monitoring over Securities Companies (cont’d)
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IIROC
Fund Size Model
Assessment of
Risk Factors
Allocation of
Resources
Assessments
Risk Monitoring over Securities Companies (cont’d)
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FACTOR CIPF
Weight IIROC Weight
Business RiskLevel of Excess Capital 11.75% 12.83%Liquidity 11.53% 11.24%Return on Equity 8.78% 9.39%Return on Assets 8.65% 8.43%Total Equity 5.77% 5.62%Total Revenue 5.77% 5.62%Adequacy of Resources 5.29% 5.86%Financial Reporting 5.29% 5.86%Other 0.76% 6.59%
63.57% 71.42%Risk controlCorporate Governance Effectiveness 14.74% 8.86%Organizational Culture 5.43% 4.93%Quality of Internal Controls 4.07% 3.70%Risk Management Framework 4.06% 3.69%Quality of Internal Audit 4.06% 3.69%Security Segregation Management 4.06% 3.69%
36.43% 28.58%
100.00% 100.00%
Risk Monitoring over Securities Companies (cont’d)
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Investor Education
CSA has broader mandate on assisting investors to make safe sound investment decisions
Quote from CSA Web site
“But the CSA's impact on most Canadians comes through its efforts to help educate Canadians about the securities industry, the stock markets and how to protect investors from investment scams.The CSA provides a wide variety of educational materials on securities and investing. It has produced brochures and booklets explaining various topics such as how to choose a financial adviser, mutual funds, and investing via the internet. All CSA materials are available through your local securities regulator”
CSA has broader mandate on assisting investors to make safe sound investment decisions
Quote from CSA Web site
“But the CSA's impact on most Canadians comes through its efforts to help educate Canadians about the securities industry, the stock markets and how to protect investors from investment scams.The CSA provides a wide variety of educational materials on securities and investing. It has produced brochures and booklets explaining various topics such as how to choose a financial adviser, mutual funds, and investing via the internet. All CSA materials are available through your local securities regulator”
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Investor Education (cont’d)
CIPF Investor Education mandate targeted at increasing investor awareness of CIPF
2008 mandate to educate investment advisor, who in turn will educate their clients
Tools include web-site, brochure and annual report
CIPF responds to all calls and emails from the public on CIPF protection
CIPF Investor Education mandate targeted at increasing investor awareness of CIPF
2008 mandate to educate investment advisor, who in turn will educate their clients
Tools include web-site, brochure and annual report
CIPF responds to all calls and emails from the public on CIPF protection
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Investor Services
CIPF mandate does not include: Compensation is for return of property if a Member fails to do
so because it is insolvent Very few customers have exposure exceeding the CIPF limit of
Cdn $1 million due to Bankruptcy Act pooling of losses Trustee will litigate to optimize size of customer pool
Coverage does not include unsuitable trades, bad advice, etc.
Not aware of any customer compensation fund in Canada with public interest litigation mandate
CIPF mandate does not include: Compensation is for return of property if a Member fails to do
so because it is insolvent Very few customers have exposure exceeding the CIPF limit of
Cdn $1 million due to Bankruptcy Act pooling of losses Trustee will litigate to optimize size of customer pool
Coverage does not include unsuitable trades, bad advice, etc.
Not aware of any customer compensation fund in Canada with public interest litigation mandate
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Investor Services (cont’d)
Arbitration
IIROC offers arbitration for customer complaints with IIROC Member
Independent arbitrator
Member participation mandatory
For disputes up to $100,000
Fee charged, but cost is less than conventional legal action
Arbitration
IIROC offers arbitration for customer complaints with IIROC Member
Independent arbitrator
Member participation mandatory
For disputes up to $100,000
Fee charged, but cost is less than conventional legal action
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Mediation
Offered by Quebec Securities Commission (Autorité des marchés financiers)
For Quebec residents
Participation is voluntary and requires the consent of both the firm and the client
Mediation
Offered by Quebec Securities Commission (Autorité des marchés financiers)
For Quebec residents
Participation is voluntary and requires the consent of both the firm and the client
Investor Services (cont’d)
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Ombudsman for Banking Services and Investments (OBSI) OBSI offers a free, independent and impartial resolution
service for IIROC Member’s clients Claims for a maximum of $350,000 Must first attempt to resolve dispute with Member Members firms are required to participate fully with any
investigation carried out by OBSI All matters are confidential although a summary of
recommendations will be made public should the firm not comply with the recommendations
Ombudsman for Banking Services and Investments (OBSI) OBSI offers a free, independent and impartial resolution
service for IIROC Member’s clients Claims for a maximum of $350,000 Must first attempt to resolve dispute with Member Members firms are required to participate fully with any
investigation carried out by OBSI All matters are confidential although a summary of
recommendations will be made public should the firm not comply with the recommendations
Investor Services (cont’d)
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Customer complaints
Directly to IIROC
To Member, who must report to IIROC
IIROC investigate complaints of regulatory violations and to impose penalties on those who are found guilty of such violations
IIROC monitors client complaints and disciplinary matters to proactively identify emerging regulatory issues at Member firms
Customer complaints
Directly to IIROC
To Member, who must report to IIROC
IIROC investigate complaints of regulatory violations and to impose penalties on those who are found guilty of such violations
IIROC monitors client complaints and disciplinary matters to proactively identify emerging regulatory issues at Member firms
Investor Services (cont’d)
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May 2008 Compensation Funds Meeting - Paris
Attended by Belgium, Canada, Germany, India, Ireland, UK, & USA
Issues discussed:
Benefits of compensation fund meetings - join IOSCO?
Lack of bankruptcy legislation specifically for investment dealers in some EU countries causing delays in customer compensation while the Courts decide issues
Investor Education in India - many new investors
Attended by Belgium, Canada, Germany, India, Ireland, UK, & USA
Issues discussed:
Benefits of compensation fund meetings - join IOSCO?
Lack of bankruptcy legislation specifically for investment dealers in some EU countries causing delays in customer compensation while the Courts decide issues
Investor Education in India - many new investors
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Bankruptcy Legislation
Canada - customer and creditor entitlement different and spelt out in Bankruptcy Act - key concepts:
– Two pools of assets for distribution - customer and general
– Customer pool includes all customer assets and more
– Customer pool used to pay customers, and trustee if general fund not able to do so
– Shortfall in customer pool is allocated to all customers based on their client net equity
Bankruptcy Legislation
Canada - customer and creditor entitlement different and spelt out in Bankruptcy Act - key concepts:
– Two pools of assets for distribution - customer and general
– Customer pool includes all customer assets and more
– Customer pool used to pay customers, and trustee if general fund not able to do so
– Shortfall in customer pool is allocated to all customers based on their client net equity
May 2008 Compensation Funds Meeting - Paris (cont’d)
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Bankruptcy Legislation (cont’d)
Germany - Phoenix insolvency (2005)
– Administrator proposed equal sharing of loss between customers and creditors
– Customer opposed - wants tracing
– Investment dealers opposed - want customers assets to be treated as trust assets
– To date customers not yet compensated
Bankruptcy Legislation (cont’d)
Germany - Phoenix insolvency (2005)
– Administrator proposed equal sharing of loss between customers and creditors
– Customer opposed - wants tracing
– Investment dealers opposed - want customers assets to be treated as trust assets
– To date customers not yet compensated
May 2008 Compensation Funds Meeting - Paris (cont’d)
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Bankruptcy Legislation (cont’d)
Ireland (W&R Morrogh)
– Lack of statutory legislation responsible for a 5 year delay in compensation to customers
– Trustee paid from client assets so delay resulted in larger deficiency
Bankruptcy Legislation (cont’d)
Ireland (W&R Morrogh)
– Lack of statutory legislation responsible for a 5 year delay in compensation to customers
– Trustee paid from client assets so delay resulted in larger deficiency
May 2008 Compensation Funds Meeting - Paris (cont’d)
