RESP Dealers Association Of Canada
Sales Representative Proficiency Course
August 2007
RESP Dealers Association of Canada Sales Representative Proficiency Course
FOREWORD
These course materials have been prepared by the RESP Dealers Association of Canada as part of the Association’s ongoing effort to establish the highest standards of knowledge and conduct among those who distribute scholarship plans in Canada.
This course includes materials from several sources. We would like to thank:
• The members of the RESP Dealers Association of Canada • The British Columbia Securities Commission • The Canadian Securities Administrators • Canada Revenue Agency • Human Resources and Skills Development Canada • Ken Goodwin, C.A. • Dean Holley, CMC Capital Market Consulting Corp.
These course materials are the property of the RESP Dealers Association of Canada and are not to be reproduced with prior permission.
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TABLE OF CONTENTS
1. INTRODUCTION ...... 5 A. Who is this course for?...... 5 B. What will be covered in the material...... 6 C. The RESP Dealers Association of Canada ...... 6 2. DEFINITIONS...... 8 3. CODE OF SALES PRACTICES...... 13 A. Purpose of the Code ...... 13 B. Standards...... 14 C. Breach...... 18 4. SAVING FOR EDUCATION...... 19 5. REGISTERED EDUCATION SAVINGS PLANS...... 22 A. Introduction of the RESP...... 22 B. Registration of a Plan ...... 22 C. Types of RESP...... 23 D. RESP Distributors ...... 24 E. RESP Eligible Investments...... 24 F. RESP Rules ...... 26 6. GRANT PROGRAMS...... 30 A. Canada Education Savings Grant (CESG)...... 30 B. Additional Canadian Education Savings Grant (ACESG) payments for first $500 ...... 32 C. Canada Learning Bond (CLB) ...... 32 D. Alberta Centennial Education Savings (ACES) Plan (Alberta residents ONLY)...... 34 7. KEY BENEFITS OF RESPS ...... 36 8. HOW SCHOLARSHIP PLANS WORK ...... 40 A. Structure of Scholarship Plans ...... 40 B. Administration of Scholarship Plans ...... 42 C. How Scholarship Plans Derive Value ...... 44 D. Investment Mandate of Scholarship Plans ...... 45 E. Investment Strategies...... 46 9. SCHOLARSHIP PLAN DISCLOSURE DOCUMENTS ...49
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A. The Prospectus ...... 49 B. Financial Statements...... 50 C. Other Scholarship Plan Information...... 55 D. Accessing Disclosure Documents ...... 55 10. FEES AND EXPENSES ...... 56 A. Enrolment or Membership Fees ...... 56 B. Enrolment Fee Refunds...... 57 C. Withdrawal Fees...... 58 D. Administration and Management Fees...... 58 E. Other Charges...... 59 F. Completion Insurance ...... 59 11. SCHOLARSHIP PLAN DEALERS...... 60 A. Role of the Scholarship Plan Dealer...... 60 B. Internal Policies and Procedures...... 61 C. Supervisory Systems...... 61 12. ROLE OF THE SALES REPRESENTATIVE ...... 64 A. Registration ...... 65 B. Knowledge of Securities Laws...... 65 C. Compliance with Dealer Policies ...... 66 D. Compliance with the Code of Sales Practices...... 66 E. Fair Dealing ...... 66 F. The Know Your Client (KYC) Rule ...... 67 G. The Suitability Rule ...... 70 H. Completing an Application Form ...... 70 I. Trade Confirmation...... 70 J. Disclosure...... 71 K. Confidentiality of Client Information...... 72 L. Record Keeping...... 72 M. Cold Calling ...... 73 N. Selling Out of Province/Country ...... 74 O. Transfers ...... 74 P. Plan Adjustments ...... 75 Q. Withdrawals...... 76 R. Commission Rebates ...... 78
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S. Client Complaints ...... 78 13. ADVERTISING ...... 80 A. Role of Advertising ...... 80 B. Definition of Sales Communication and Advertising ...... 80 C. National Instrument 81-102 ...... 80 D. Misleading Sales Communications and Advertising ...... 82 E. Performance Data ...... 82 F. Business Cards and Letterhead ...... 83 14. FEDERAL REGULATION...... 85 A. Income Tax and CESG Legislation ...... 85 B. Proceeds of Crime Legislation...... 85 C. Competition Act ...... 91 D. Criminal Code...... 91 15. SECURITIES REGULATION IN CANADA ...... 93 A. Securities Regulators ...... 94 B. Securities Law ...... 97 C. Regulations, Rules, Instruments and Policies ...... 99 D. Forms, Notices, Decisions and Settlements...... 100 E. Investigations and Enforcement ...... 101 F. Registration ...... 103 G. Prospectus Requirements ...... 110 H. National Policy 15...... 114 I. National Instrument 33-102 ...... 120 16. THE ECONOMY...... 124 A. Understanding the Economic Environment ...... 124 B. Measuring the Economy...... 124 C. Inflation...... 127 D. Economic policy ...... 127 17. UNDERSTANDING FINANCIAL MARKETS ...... 131 A. Understanding Securities ...... 131 B. Other Financial Products...... 146 C. Understanding Investment Risk...... 148 18. APPENDICES ...... 152
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1. INTRODUCTION
A. Who is this course for?
The RESP Dealers Association of Canada has This course is the initial developed this Sales Representative Training Program training and proficiency as the initial training and proficiency requirement for new requirement for all new sales representatives. The Association’s goal is to have sales representatives of this course accepted by the securities regulators in each scholarship plan dealers. province and territory as the educational prerequisite to licensing as a sales representative for a scholarship plan dealer.
People who invest in scholarship plans expect excellent service, expert knowledge and absolute trustworthiness from sales representatives and dealers. You will be entering into long-term relationships with your clients and they will be relying on you when making important investment decisions. Your clients and your dealer must always have confidence in your integrity. To meet these expectations, you must have proper training and a through understanding of your regulatory and ethical obligations.
This is a self-study course. To successfully complete it, Plan to spend 20-30 you must obtain a grade of at least 70% on a final two- hours studying this hour examination. You should expect to devote a material. significant amount of time – about 20 to 30 hours – to studying and reviewing the material.
The final examination must be completed within three months of registration in the course. Of course with hard work and diligence, you may complete the course and the exam in a much shorter timeframe. Sample examination questions have been included in the material (see Appendix I) to reinforce important concepts and to illustrate the scope of the knowledge required to successfully complete the course.
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B. What will be covered in the material
This course will cover:
The RESP Dealers Association’s Code of Sales Practices.
The rules governing RESPs and the CESG program, the Canada Learning Bond (CLB) and the Alberta Centennial Education Savings Plan (ACES)
The general design of scholarship plans.
The various disclosure documents provided by scholarship plans.
Scholarship plan fees and expenses.
The role of the scholarship plan dealer.
Responsibilities of sales representatives.
Advertising practices and regulations.
The regulatory framework.
An overview of the economic and financial environment in Canada.
C. The RESP Dealers Association of Canada
The RESP Dealers Association of Canada represents its Mission of the members with the provincial securities commissions that RESPDAC: to establish rules and regulate the sale of securities and the federal agencies procedures for self- that oversee the RESP and Canada Education Savings regulation and improve Grant (CESG) legislation. Its aim is to establish rules understanding of and procedures for self-regulation and to improve the scholarship plans. understanding of scholarship plans by the investing public, regulators and the media.
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The Association was formed in 2000 by a group of institutions that specialize in the education savings business. The current members are:
• Heritage Education Funds Inc.: distributing the Heritage and Impression Plans.
• C.S.T. Consultants Inc.: distributing the Canadian Scholarship Trust Plans.
• Children’s Education Funds Inc.: distributing the Children’s Education Trust of Canada Plans.
• USC Education Savings Plans Inc.: distributing the USC Education Savings Plans.
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2. DEFINITIONS
Advertisement A sales communication that is published or designed for use on a display, sign, billboard or other public media, newspaper, magazine or other periodical, radio, television or the Internet.
Assisted Contributions RESP contributions for which CESG has been or will be paid.
Beneficiary A student designated by a RESP subscriber as the person who will receive Educational Assistance Payments. Sometimes called a “nominee”.
Best Practices Recommended practices that may exceed minimum regulatory requirements and that increase efficiency, improve client service or reduce risks.
Branch Office A location (including a residence but not the dealer’s chief place of business in the province) where the dealer carries on business directly or through one or more salespersons. If there are three or fewer salespersons at the branch office, the branch office will be considered a sub-branch, which may be supervised by another branch or by head office in the province.
Canada Learning Bond A grant available to children whose families (CLB) are eligible for the National Child Benefit Supplement.
Canada Revenue Agency Canada Revenue Agency, formerly known as (CRA)) Canada Customs and Revenue Agency.
Canada Education A grant paid by Human Resources and Savings Grant (CESG) Social Development Canada to the RESP trustee for deposit into individual RESP accounts on behalf of the beneficiary.
Code of Sales Practices The code of conduct published by the RESP Dealers Association and adopted by each of its members.
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CSA Canadian Securities Administrators - a forum for the 13 securities regulators of Canada's provinces and territories to coordinate and harmonize regulation of Canada’s capital markets.
Designated Educational A university, college or other educational Institution institution that has been designated by an appropriate governmental agency under the Canada Student Loans Act, the Canada Student Financial Assistance Act or similar legislation. A master list of designated educational institutions is published by Human Resources and Social Development Canada and can be found at www.canlearn.ca.
Distribution The sale by an issuer of its own securities or the sale of securities from the holdings of a “control person”.
Educational Assistance Any amount paid or payable from CESGs or Payment (EAP) income earned in an RESP to a beneficiary to assist with post-secondary education costs.
Grant Contribution Room Since 1998 or their date of birth (whichever is later), each child under age 18 who is resident in Canada accumulates CESG “grant contribution room” of $2,500 per year up to and including the year of their 17th birthday.
Misrepresentation An untrue statement of material fact or an omission to state a material fact that is required to be stated or necessary to prevent a statement that is made from being false or misleading.
National Registration A web-based system that permits scholarship Database (NRD) plan dealers and other security dealers to file sales representative registration forms on-line with the securities commissions.
Post-Secondary Can be: Educational Institution • A university, college or other Canadian educational institution that has been recognized for the purposes of the Canada Student Loans Act, the Canada Student Financial Assistance Act or the Quebec Student Loans and Scholarships Act. • A Canadian educational institution certified by the Minister of Human Resources and
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Skills Development as providing occupational skills courses. • A university, college or other educational institution outside Canada that provides post-secondary level courses, provided the beneficiary is enrolled in a course running at least 13-consecutive weeks.
Promoter An organization that establishes and offers RESPs to the public.
Prospectus The comprehensive disclosure document that discloses all of the material facts regarding a security that is being distributed to the public.
PTO The Provincial Trading Officer for a scholarship plan dealer.
Registered Education An education savings plan registered under the Savings Plan (RESP) Income Tax Act that provides certain tax advantages to the subscribers (or “members”) who are saving money for a child’s post- secondary education.
RESP – Non-Family Plan A Non-Family (or Individual) RESP can have only one beneficiary. The beneficiary does not have to be related to the subscriber and can be any age when named. Contributions to an individual plan can be made for up to 22 years after the plan is established.
RESP – Family Plan Family plans can have one or more beneficiaries, but each must be connected by blood or adoption to each subscriber. Beneficiaries must be under 21 when named. Contributions can only be made until a beneficiary turns 21.
RESP – Group Plan Group plans are operated on a pooling principle. Subscribers contribute funds to the plan and income earned on those contributions is contributed to the pool. The subscriber’s beneficiaries can receive EAPs from the pool when they enrol in a qualifying program. If a subscriber’s beneficiary fails to qualify for EAPs (e.g. does not pursue post-secondary education), then the income that was earned on the subscriber’s contribution is distributed to others in the plan who do qualify.
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RESPDAC The RESP Dealers Association of Canada.
Registrant An individual or business entity registered, or required to be registered, under a Securities Act.
Sales Communication Any oral or written communication by a dealer or its salespersons to a subscriber or potential subscriber.
Scholarship Plans Group RESPs administered by not-for-profit foundations and distributed by scholarship plan dealers.
Scholarship Plan Dealer An organization registered with one or more securities commissions to trade in scholarship plan securities.
Securities Regulator The securities commission or securities registrar that administers securities legislation in a particular province or territory.
Securities Legislation The Securities Act, rules and regulations that apply in any jurisdiction.
Securities Include common shares, stock options, bonds, debentures, scholarship plan units, investment contracts and other investment instruments.
Subscriber A person (or “member”) who enters into an RESP contract with the promoter and agrees to contribute to the plan on behalf of one or more beneficiaries.
Supervisor Dealer personnel who have supervisory obligations under securities legislation or the dealer’s policies. Supervisors may include senior management, Provincial Trading Officers, Compliance Officers, Enrolment Directors, Associate Enrolment Directors, District Managers and Branch Managers.
Telemarketing The use of the telephone to promote the supply or use of a product or to promote any other business interests or to gain approval for an appointment.
Trade The disposition (sale) of a security for valuable consideration, as well as any act, advertisement, solicitation, conduct or
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negotiation directly or indirectly in furtherance of a trade.
Trustee The corporation, licensed as a trustee, that holds the funds contributed to an RESP.
Unassisted Contributions RESP contributions for which no CESG has been or will be paid.
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3. CODE OF SALES PRACTICES
Preface The following Code of Sales Practices has been endorsed by members of the RESP Dealers Association of Canada, an association of organizations whose primary activity is the provision of Registered Education Savings Plans to fund post-secondary education for children.
The Code applies to sales practices used in the marketing and presentation of RESP products by active RESPDAC members and their sales forces to the ultimate consumer who invests in education savings plans. The Code reflects the RESPDAC’s commitment to upholding the Rules and Regulations established by Federal and Provincial Regulators.
Members of the RESPDAC have agreed to abide by the Code in conducting themselves corporately and through their sales representatives.
A. Purpose of the Code
(i) Establish and Codify Uniform Standards of Behavior – which recognize the primacy of acting in the public interest by adhering to the highest standards of integrity and ethical business practice.
(ii) Ensure broad awareness of these Standards – with sales personnel, Regulators and the investing public.
(iii) Act as a reference document – in evaluating sales practices with respect to compliance with the Code and applicable laws.
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(iv) Establish and build awareness of consequences – in the case of a breach of the Code.
B. Standards
General a) Act in the Public Interest – A representative has a fiduciary duty to his Clients to act honestly, in good faith and in the best interest of the Client. The representative must be objective when his Client or any potential Client asks him for information. He must express opinions and make recommendations objectively and impartially, without considering his personal interest.
b) Compliance with Laws – All persons acting on behalf of Member organizations shall comply with the laws and regulations governing its business in each jurisdiction in which it operates. Salespersons must be licensed by and in good standing with the appropriate regulator.
c) Supervision – Officers and managers, both corporately and in field sales organizations, are responsible for ensuring that employees and representatives under their supervision are made aware of, and comply with, the laws, regulations and guidelines related to their specific activities, especially with regard to securities registration.
d) Training and Proficiency – All sales representatives will have taken a training program in preparation for passing a proficiency examination that will enable them to hold a valid license for trading in Scholarship Plans. The examination must be accredited by the RESP Dealers Association of Canada and the applicable Securities Commission. Sales Representatives are required to undertake ongoing training to ensure product knowledge and market awareness remains current.
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Approaching Prospects/Clients a) Respect of Privacy - The salesperson shall not be intrusive. The right of the customer to refuse further discussion shall be scrupulously respected. Contacts with prospective customers shall be made during reasonable hours.
b) Telephone Solicitation – activities must be conducted consistent with applicable securities legislation and Bill C-20, specifically: - There can be no false or misleading statements. - There must be disclosure in a fair and reasonable manner at the beginning of each telephone communication of the identity of the person and the company (Scholarship Plan Dealer), on behalf of whom the phone call is being made, the nature of the product (or business) being promoted and the purpose of the communication. - There is a prohibition against promises of a "free" gift if they buy or enroll.
c) Advertising claims – all representations made in advertisements are to be truthful, balanced and clearly written; with the basis for claims made available upon request, e.g., performance claims. Further: - No advertisement shall contain exaggerated statements or misrepresentations. - No advertisement shall contain guarantees regarding employment, income, yield, investment returns, risk or future values. - Financial performance claims must be based on generally accepted accounting measures.
Presenting to Prospects/Clients a) Disclosure - Representatives will provide full, true and plain disclosure in presenting the product at all times, including the delivery of the most current approved Prospectus at the time of sale.
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b) Accuracy of Information – The representative shall not, in the course of a sales presentation, or completion of the sales contract with any consumer, make any statement or take any measures which, directly or by implication, omission, ambiguity or exaggeration, is likely to mislead the consumer with regard to the term of the offer. Further, the representative shall not: - Commit to a future value for the RESP being sold. - Hold out enticements, which may cause a consumer to invest beyond their financial capability.
c) Jurisdiction – The representative shall advertise to attract or pursue potential Clients who are within the appropriate provincial jurisdiction (i.e., province where representative is licensed).
Suitability/Know Your Client a) It is required that each representative shall determine the general investment knowledge, needs, risk tolerance and objectives of each Client and shall ensure that every recommendation and proposed purchase of sale is appropriate and suitable for the Client.
b) Documentation of this information will be reviewed by the Agency Director/Branch Manager and maintained by the Scholarship Plan Dealer.
Transferring of Business a) RESPDAC Members agree that transfers out of Group plans, to another Group plan, that have been enrolled for more than 60 days, may not be in the best interest of subscribers and accordingly, RESPDAC Members will not directly or indirectly promote the transfer of plans from other Group plans. This is due to the potential forfeiture of Enrolment/Membership fees and accrued interest.
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b) RESPDAC Members recognize and respect that subscribers are legally permitted to transfer from one Group plan to another. Should a subscriber wish to do so, in addition to compliance with the practices set out herein, the receiving RESPDAC Member will require the subscriber to acknowledge in writing the financial implications of such transfer, using the Plan Transfer Disclosure Form endorsed by the RESPDAC, a signed copy of which shall be provided to the sending RESPDAC Member. In addition, the receiving RESPDAC Member will ensure that the subscriber fully understands the implications of such transfer.
Confidentiality a) A representative must treat all personal information of Clients as confidential, applying proper safeguards to protect that confidentiality. This information is to be used only to determine the suitability of the investment. A representative must ensure there are tight controls on access to Client information.
b) A representative must not disclose personal or confidential information, except with the Client’s written consent or in accordance with Securities Laws and must not use that information to the detriment of his Client or to obtain advantage for himself or for another person.
Claims against competitors a) Organizations and their representatives must not, directly or indirectly, make comments of any kind, which are false, misleading, inaccurate or incomplete about another representative, organization, product, or service.
b) A representative must be objective and fair in any discussion of any competitors or their competing products, and must not make derogatory statements. The representative should also present balanced
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information about the merits, risks and potential tax consequences of other investments.
c) A representative shall only utilize written product information approved by the RESPAC firm, and on such member firm’s letterhead.
C. Breach
Consequences a) Failure to comply with the Code may be grounds for a warning, revision of responsibilities, suspension or dismissal without further notice, depending on circumstances. Failure to comply with certain sections of this Code may also be a violation of securities laws and may be punishable accordingly.
b) All employees, licensed representatives, officers or directors have a duty to report any contravention of this Code which comes to their notice, and to co- operate with Corporate officials or Securities Commission personnel in the investigation of possible breaches of the Code.
c) Any perceived breaches of this Code, together with all supporting information, are to be reported to the Compliance Officer of the member organization in breach. Member organizations in breach are to rectify breaches of this Code and respond to the original organization about the action taken.
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4. SAVING FOR EDUCATION
Rising costs and the increasing benefit of post-secondary education are two key factors that underline the importance of saving for education.
1. Rising cost of post-secondary education
The cost of post-secondary education in Canada is high and rapidly getting higher. Consider these facts from Statistics Canada:
• In 2002, the estimated cost of a four-year university education away from home was $58,527.
• Since 1990-91, the average tuition has increased by more than 100%.
The Canadian government estimates that the cost of a University/college education could cost university or college education in 2018 could be as high $100,000 by 2018. as $100,000.
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While most Canadian parents hope their children will go on to post-secondary education, only 41% of parents in Average student 1999 had savings for college or university. Student debt debt level has rose from an average of $8,700 per student in the early increased to over $25,000. 1990s to over $25,000 in 2002, according to the Federal Government.
Without a sound program of saving for education, a post- secondary education could become out of the reach for most Canadian families.
2. Increasing benefit of post-secondary education
In recent years a post-secondary education has become critical to success in the Canadian society. The number of jobs available for those without a post-secondary education is dropping, while the number of opportunities for those with a post-secondary education continues to increase.
The Link Between Knowledge, Skills, and Jobs
A post-secondary education is increasingly important in the job market.
[Courtesy of USC Education Savings Plans Inc.]
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Here are the facts from Statistics Canada:
• Two of every three new jobs in Canada require a post-secondary education. Two-thirds of new jobs require a post- • In 1999, 167,000 jobs in Canada disappeared for secondary people with no more than a high school education. education. Meanwhile, 431,000 jobs were created for workers with post-secondary education.
• College and university grads are more likely than less educated people to find jobs, keep jobs and earn more money.
• Graduates with university degrees earned an average of $61,823 in 2001, $25,545 more than high school graduates.
According to Employment and Immigration Canada, a university graduate will earn $1.6 million more in their lifetime than will a high school graduate, and this amount could triple by 2015.
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5. REGISTERED EDUCATION SAVINGS PLANS
Savings plans designed specifically to deal with the rising cost of education date back to the early 1960s. Originally, the plans were strictly a savings arrangement, similar to a bank account, where investment income was taxed in the hands of the subscriber and the students received the after-tax income from the plan.
A. Introduction of the RESP
In 1974, retroactive to 1972, the Federal Government enacted changes to the Income Tax Act to encourage people to save for their children’s education. The changes allowed education savings plans to become “registered” and to serve as tax shelters - RESPs.
In an RESP, the subscriber contributes funds to the plan Primary benefit of to help pay for future educational costs incurred by the RESPs: income earned is sheltered beneficiary. While the contributions to an RESP are not from tax for several tax-deductible, the income earned on those contributions years and is usually is sheltered from tax until withdrawal. So long as the taxed at a low rate on funds are withdrawn to pay for eligible post-secondary withdrawal. education costs, the income that has been earned in the plan is taxed in the hands of the beneficiary (the student), rather than the subscriber. The student will generally be attending school full-time and will be earning little or no income. As a result, the income that the student receives from the RESP will be subject to a very low tax rate.
B. Registration of a Plan
RESPs are regulated from an income tax perspective by the Federal Government and administered by the Canada Revenue Agency (CRA). RESPs must be reviewed and In order for an education savings plan to be established approved by CRA. as a “Registered Education Savings Plan”, the plan must be reviewed and approved by CRA. CRA’s role is to
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review the terms and conditions of the plan and ensure that the appropriate trust arrangements are in place and that the Income Tax Act has been followed. Specimen plan documents are filed by the plan’s promoter with CRA and once approved, the plans are given a registration number under which they are allowed to operate.
C. Types of RESP
There are three basic types of RESPs:
Individual (or Non-Family) Plans: An individual RESP can have only one beneficiary.
Family Plans: Family plans can have one or more beneficiaries, but all must be connected by blood or adoption to the subscriber.
Group Plans: Usually offered by not-for-profit scholarship plan foundations, Group plans pool the contributions made by subscribers and invest them to earn income. When the plan matures, the subscriber’s contributions are returned and the income that has been earned is distributed to qualifying beneficiaries in the form of Educational Assistance Payments (EAPs) or scholarships. If a subscriber’s beneficiary fails to qualify for EAPs (e.g. does not pursue post-secondary education), the income that was earned on the subscriber’s contribution is distributed to others in the plan who do qualify. Subscribers’ contributions are Most scholarship plan typically administered on an “age group” or “maturity dealers offer date” concept (e.g. all contracts for beneficiaries who are individual, family and group plans. expected to attend post-secondary school in the same year would be administered together).
Scholarship plan dealers generally specialize in Group plans, although most offer Family and Non-Family (Individual) plans as well.
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D. RESP Distributors
RESPs have grown tremendously in popularity over the last few years, particularly since the introduction of the CESG program (discussed below). RESPs are now offered by almost all major financial institutions, including banks, trust companies, credit unions, mutual fund companies, investment dealers and scholarship plan dealers.
Most financial institutions offer ”self-directed” Non-Family In self-directed and Family RESPs where the subscriber decides what RESPs, the subscriber chooses the investment will be made in the RESP. In many cases, investment. subscribers to self-directed RESPs will pay annual administration fees and may also pay commissions or similar fees when they buy or sell securities within the plan.
Some institutions also offer “managed” RESPs where a professional adviser determines the investments that will be made within the subscriber’s plan. In managed RESPs, subscribers are typically charged fees for the advisory services and the administration of the account. Scholarship plans are managed RESPs; a Scholarship plans are managed plans in which the funds professional adviser contributed by subscribers are placed in a pool that is chooses the professionally managed at the direction of the plan’s investments. adviser. Subscribers to scholarship plans can expect to be charged enrolment fees, which are deducted from early contributions, and fees related to the ongoing management and administration of the plan. (See Chapter 10: Fees and Expenses.)
E. RESP Eligible Investments
Section 146.1 of the Income Tax Act (Appendix A) describes the types of investments that qualify to be held in RESPs. With the exception of certain annuity contracts, the investments that qualify for an RESP are the same as those that qualify for a Registered Retirement Savings Plan (RRSP), as described in section 204 of the ITA.
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RESP “qualified investments” include:
• Money and deposits,
• Guaranteed Investment Certificates issued by a trust company,
• Bonds and other obligations of the Government of Canada, a province, a municipality or a Crown corporation,
• Shares listed on prescribed stock exchanges in Canada or in a foreign country,
Investments that • Bonds and other debt obligations of a corporation qualify for RESPs are whose shares are listed on a prescribed stock mostly the same as exchange in Canada or in a foreign country, those that qualify for RRSPs. • Segregated fund policies,
• Prescribed investments (certain mortgages, units or shares of a mutual fund and shares of small business organizations),
• An investment acquired by the RESP trust prior to October 28, 1998.
Unlike RRSPs, RESPs have no restrictions on foreign content.
Provincial and Note that scholarship plans are subject to certain territorial regulators additional investment restrictions imposed by provincial also place restrictions and territorial securities regulators. Under these on RESP investments. restrictions – discussed in more detail in Chapter 15 – scholarship plans must generally invest subscribers’ funds in secure debt instruments such as guaranteed investment certificates, government bonds and debentures and certain mortgages.
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F. RESP Rules
Changes to the RESP provisions of the Income Tax Act have been implemented over the past several years. The RESP rules appear primarily in sections 146.1, 118.6 and 204 of the Act (Appendix A). The essential regulations include:
Contribution Limit: A subscriber may contribute up to $50,000 in total, per beneficiary. Annual limits no longer Maximum contribution apply. is $50,000 per student. Non-Family RESPs: Contributions to a Non-Family RESP (single beneficiary) can be made for up to 21 years. The beneficiary does not have to be related to the subscriber and can be any age when named. The subscriber in a Non-Family RESP can also be the beneficiary.
Family RESPs: Contributions to a Family RESP (where more than one child is named as a beneficiary) can be made only until the beneficiary turns 21. Each beneficiary must be connected by blood or adoption to each subscriber (e.g. brother, sister, child, grandchild). All named beneficiaries in a Family plan must be under 21 when named.
Mandatory Termination: An RESP must be collapsed at the end of the 25th year following the year in which it is established.
Subscribers: Subscribers’ contributions to an RESP are not tax-deductible, but they are not subject to taxation when withdrawn from the plan. Subscribers who are individuals (cannot be trusts or corporations) must provide a Canadian Social Insurance Number and must Subscribers and be resident in Canada at the time of enrolment of the beneficiaries must beneficiary. A child care agency can be a subscriber have a Social Insurance Number. provided it is taking out a plan for a child under care of that agency. Contributions can also be made on behalf of a subscriber (for example by an employer) and qualify for grants. Spouses can be joint subscribers. Control of the
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subscriber’s contributions remains with the subscriber, rather than the beneficiary. EAPs, however, are paid directly to the qualifying beneficiary.
Beneficiaries: A Social Insurance Number must be provided for each beneficiary. A person can be named as the beneficiary of more than one plan, subject to annual and lifetime contribution limits. The named beneficiaries of a plan can be changed or replaced (subject to conditions in the RESP contract), although there may be tax consequences if the change results in an over-contribution for the beneficiary. Effective January 1, 2004, beneficiaries must reside in Canada while contributions are being made to the plan.
Educational Assistance Payments (EAPs): EAPs are distributions to a beneficiary of the income earned (and Some part-time students may be Canada Education Savings Grants. EAPs include all eligible to receive grants (CLB , ACES and CESG) in an RESP to assist the EAPs. beneficiary to further his or her post-secondary education. For a payment to qualify for an EAP, the beneficiary must be enrolled full-time in a qualifying educational program at a recognized (designated) post- secondary institution, or be enrolled part-time if the beneficiary has a documented mental or physical impairment that prevents full-time enrollment or be enrolled part-time in a non-group plan.
A “qualifying education program” is defined in section 118.6 of the Income Tax Act and means a post- secondary program at a designated educational institution of not less than three consecutive weeks duration that provides that each student taking the program spend not less than 10 hours per week on course of work in the program. For part-time students who spend less than 10 hours per week, but at least 12 hours per month, EAPs to a maximum of $2500 are allowed for each 13 week semester of part-time study. Apprenticeship programs qualify for EAPs as well.
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A “designated educational institution” is also defined in section 118.6 of the Income Tax Act and includes a university, college or other educational institution that has been “designated” by an appropriate governmental agency under the Canada Student Loans Act, the Canada Student Financial Assistance Act or similar legislation. A master list of designated educational institutions is published by Human Resources and Skills Development Canada and is available at www.canlearn.ca.
Note that a beneficiary who pursues full-time post- secondary education outside of Canada can still qualify for EAPs but will not be entitled to receive any CESG funds that have accumulated in the plan if not deemed a Canadian resident..
For plans entered into after 1998 (except for certain ‘grandfathered’ plans), EAPs cannot exceed $5,000 before the beneficiary has completed 13 consecutive weeks in a qualifying educational program. EAPs are subject to taxation in the hands of the beneficiary and not the subscriber.
Accumulated Income Payments and other Withdrawals:: The subscriber’s contributions to an RESP may be withdrawn without tax penalty. The income earned in an RESP is typically withdrawn in the form of EAPs but can sometimes also be withdrawn by the subscriber, subject to restrictions, in the form of Accumulated Income Payments (AIPs).
Subscribers may withdraw income in the form of an AIP If not used for post- providing that: secondary education, accumulated income can often be contributed to • The plan has been in existence for at least 10 the subscribers RRSP. years,
• All beneficiaries have reached age 21 and are not eligible to receive EAPs,
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• The subscriber is a resident of Canada, and
• The plan is not a Group plan or under other restrictions on withdrawals.
AIPs may be transferred to the subscriber’s RRSP (or a A 20% tax penalty may be levied on income spousal RRSP) to the extent of any unused RRSP withdrawn from an contribution room to a maximum of $50,000 per RESP for non- subscriber. Any portion of an AIP that is not contributed educational purposes. by the subscriber to an RRSP will be taxed as income in the hands of the subscribers and will be subject to an additional 20% penalty tax (12% in Quebec) in the year of withdrawal.
Note that the withdrawal of a subscriber’s contributions at a time when a beneficiary does not qualify for EAPs will result in the repayment of any CESGs to the Federal Government.
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6. GRANT PROGRAMS
A. Canada Education Savings Grant (CESG)
In 1998, the Federal Government launched the Canada CESG program was Education Savings Grant (CESG) program to provide launched in 1998 to further incentive for parents to save for the post- encourage parents to secondary education of their children. save for post-secondary education. The CESG program is administered by Human Resources and Social Development Canada (HRSDC) and provides a grant of up to $600 per year (with a lifetime maximum of $7,200) to the RESP of qualifying beneficiaries ($500 from CESG program plus $100 from Additional CESG program as per 6B). The grant money is held in the plan for distribution in the form of EAPs to assist the beneficiary with post-secondary education expenses.
The key CESG rules are:
Qualifying Contributions: Annual RESP contributions (after 1997) of up to $2,500 per beneficiary qualify for the CESG. The beneficiary must be a Canadian resident with a valid Canadian Social Insurance Number at the time of the contributions. The CESG must be applied for within 3 years of the date of deposit. Qualifying contributions can be made up to December 31st of the year in which the student turns 17 years of age.
Special Contribution Rules: Beneficiaries who are ages 16 and 17 are subject to other special rules. The CESG is only available if a minimum of $2,000 of RESP contributions were made before the year in which the beneficiary turned 16, or a minimum of $100 of annual RESP contributions were made, and not withdrawn, for the beneficiary in at least any four years before the year in which the beneficiary turned 16.
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Amount of the Grant: The CESG program will normally pay (see Section B – Additional CESG for exceptions) an additional 20% of the subscriber’s qualifying contribution to the RESP for the beneficiary. Maximum cumulative CESG is $7,200 per beneficiary. The CESG amounts are not included in the calculation of the annual and lifetime limits of the RESP.
Carry Forward Contribution Room: Even if a subscriber does not make an RESP contribution in a given year, the beneficiary will still earn $2,500 of CESG eligible contribution room for that year ($2,000 contribution room per year prior to 2007). Unused contribution room can be carried forward to produce a maximum annual grant of up to $1,000 per student, in any given year.
Reallocation of CESGs: Subject to certain limits, CESGs CESGs can sometimes paid into a Family plan on behalf of a particular be reallocated to other beneficiary can be used for the educational expenses of beneficiaries in Family other beneficiaries. and Group RESPs. Repayment Provisions: The CESG must be repaid to the Government if the beneficiary of an RESP does not pursue qualifying post-secondary education.
When contributions are withdrawn from an RESP that contain the CESG, and the beneficiary is not eligible to receive an Educational Assistance Payment, the RESP trustee will be required to make a CESG repayment equal to 20 per cent of the withdrawal. The CESG would also be repaid if the beneficiary is replaced, except when the beneficiary is replaced with a new beneficiary who is under 21 and a brother or sister of the original beneficiary, or if both a brother or sister of the original beneficiary, or if both the old and new beneficiaries are under 21 and are related to the subscriber.
Repayment of the CESG would also be required if the RESP was terminated, its registration was revoked, an AIP is made to the subscriber, or there was an ineligible transfer from one RESP to another.
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B. Additional Canadian Education Savings Grant (ACESG) payments for first $500
ACESG payments will apply to RESP contributions made on and after January 1, 2005.
ACESG percentages beyond 20% are available on the first $500 of deposits depending on the child’s family’s net income as follows:
Child’s family’s net income CESG percentage on first $500
< $36,378 40% Between $36,378 and $72,756 30% > $72,756 20%
These income amounts are indexed and change each year.
The next $1500 in annual deposits will attract the 20% An application for the CESG as per usual. An application for the ACESG ACESG must be made amount of 40% or 30% must be made by the child’s on behalf of the child. primary caregiver (custodial parent) or their spouse/common law partner. Without this consent, the CESG rate for all deposits will be at the regular 20% rate. Note that the custodial parent and primary caregiver may be two separate entities.
The additional rate on the first $500 will only apply on deposits in a given year. There is no carry-forward of the ACESG.
The maximum CESG available remains capped at $7200.
As is the case for the CESG, the ACESG must be applied for within 3 years of the date of deposit.
C. Canada Learning Bond (CLB)
The CLB is available to children born on January 1, 2004 or after and available to those families eligible for the
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National Child Benefit Supplement (NCBS) in that year. At birth or the first year the family is eligible for the NCBS, whichever comes first, $500 is paid to the beneficiary.
In each subsequent year that the family is eligible for the Total grant money per NCBS, $100 is paid until the student is 15. Therefore the child can be up to grant money paid to a child can be as much as $2000. $2,000. Human Resource and Social Development Canada (HRSDC) will also provide $25 towards any up front fees associated with establishing an RESP bringing the total initial contribution to $525.
Designed for low and middle income families the Canada Learning Bond (CLB) will be delivered by HRSDC into an RESP for the child in the same manner as the Canada Education Savings Grant (CESG) is currently handled.
The primary caregiver makes the request for a CLB on behalf of the child. If a child is entitled to a CLB payment in a year, but it was not requested, it would carry forward in a manner similar to the CESG. When it is requested the child can receive CLB entitlements from previous years. However, a request for a CLB must be made before the child turns 18.
If the CLB that they were entitled to from previous years has not been requested for the child by the age of 18, the child (now adult) may still access it by opening an RESP for themselves if they do so by age 21. However if the CLB recipient has not transferred CLB monies to their own RESP by age 21, these monies will be forfeited.
The student pays tax on The CLB amounts will not be included as part of the income earned in the RESP annual and lifetime contribution limits, nor will it be program. eligible the CESG. CLB and income earned in the Program will be issued as part of the Education Assistance Payments and taxable in the hands of the student.
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The CLB not used by the original student in an RESP must be returned to the HRSDC. It cannot be pooled and shared with others in the plan, nor can it be transferred to another student or sibling.
D. Alberta Centennial Education Savings (ACES) Plan (Alberta residents ONLY) The ACES grant can total $800 per eligible From January 1, 2005 and onward, children born to or child. adopted by an Alberta resident (or become resident) are eligible to receive a grant of up to $800 toward their post- secondary education from the Alberta government.
An initial grant of $500 is available along with three subsequent grants of $100 each for a total of $800.
The ACES program is jointly administered through the federal government’s Canada Education Savings Grant (CESG) program and the Alberta government. The Plan can be applied for through financial institutions or a RESP provider.
The application for the initial ACES Grant must be completed within six years of the child's birth date. Depending on the RESP provider chosen by the parent or guardian (the “subscriber”), some money may be required from the subscriber to open the RESP account to access the grant money.
Subsequent grants of $100 each are available when the Each subsequent grant child turns 8, 11 and 14 and is attending an Alberta must be applied for. school. Each additional grant must be applied for separately. A parent or guardian residing in Alberta can be the subscriber of the Plan for any child.
For the subsequent ACES Grants the application must be completed within six years of the applicable birthday and evidence that at least $100 has been deposited to a RESP on behalf of the child within one year of the particular application. A beneficiary doesn’t have to have received previous grants to get subsequent grants.
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Sales representatives must note the specific types of documentation to prove Alberta residency on the ACES grant application form for both the initial and subsequent grants.
As part of the Educational Assistance Payment (EAP), EAPs are paid to the the ACES Grant is paid out to the eligible beneficiary eligible beneficiary or named on the RESP or to a sibling if there has been a their sibling, if there has change of beneficiary on the RESP of that beneficiary. been a change of Beneficiary on the An EAP may only be paid to a beneficiary who is enrolled RESP. in a qualifying educational program at a designated post- secondary institution inside or outside Canada. Courses taken to acquire or improve occupational skills (including apprenticeship courses) are also eligible.
Should the grant not be withdrawn through an EAP, the funds must be repaid to the Government of Alberta or depending on the type of RESP chosen, the funds may be transferable to a sibling.
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7. KEY BENEFITS OF RESPS
1. RESPs provide a tax-sheltered means for subscribers to accumulate savings specifically for the post- secondary education costs of the plan’s beneficiaries. Tax shelter: a means of organizing business 2. The subscriber’s contributions to an RESP are not affairs to minimize or defer the payment of tax-deductible, but the income earned on those tax. contributions can accumulate tax-free until the money is withdrawn from the plan.
3. On withdrawal, the subscriber’s contributions are not taxed and the income that has been earned on those contributions will generally be taxed in the hands of the beneficiary at very low rates.
4. The benefits of saving for post-secondary education in an RESP include:
• Compound interest: Income earned on RESP contributions is not taxable until withdrawn and can compound tax-free for up to 25 years.
The benefit of compound interest can be seen in the following example:
Investor A contributes $2,500 per year to an RESP for a period of 18 years. In addition, CESG of $500 is also received until the $7,200 maximum is received. The RESP earns an average return of 7% over the period. At the end of 18 years, the RESP has a value of $107,024.
Investor B contributes the same total amount ($45,000) but does so immediately. In addition, CESG of $500 is received in the year of contribution. The RESP earns an average return of 7% over the period. At
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the end of 18 years, the RESP has a value of $153,787.
Maximizing contributions early will result in higher value at the end of the period, even if the CESG is not received.
• Tax Free Compounding: The benefit of tax-free compounding can be seen in the following example:
Investor A contributes $2,500 per year to an RESP for a period of 18 years. In addition, CESG of $500 is also received until the $7,200 maximum is received. The RESP earns an average return of 7% over the period. At the end of 18 years, the RESP has a value of $107,024.
Investor B contributes $2,500 per year for 18 years to a non-registered savings account that earns 7% interest, but must pay tax of 38.5% on the income earned (leaving an after-tax return of 5% per year). At the end of 18 years, Investor B’s account has a value of $73,848.
Paying tax on the investment income, as well as not receiving the CESG (and the investment income that can be earned on it), makes it much more difficult to accumulate value.
• Tax relief: When income is paid out as an Educational Assistance Payment (EAP) or scholarship, it is taxed in the hands of the beneficiary, not the subscriber. The beneficiary In many cases, students pay little or no income tax will usually be taxed at a lower rate than the on EAPs because of their subscriber and in many cases will pay little or no low income level. income tax on the EAPs received.
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To continue the example above:
Investor A can withdraw the principal of $45,000 from his RESP free of tax. Assuming his beneficiary is a full time student who pays no tax, the $62,024 of income that has been earned in the plan can be paid out to the beneficiary over time for educational expenses without tax.
The tax on investor B’s saving account has already been paid, but he earned after-tax interest of only $28,848 which is $33,156 less than Investor A and his beneficiary received.
• Savings enhanced by CESG: The Federal Government will add to savings with the Canada CESG contributions Education Savings Grant (CESG) equal to 20% of can add $20,000 to the value of an every eligible dollar contributed to an RESP up to RESP. $2,500 contributed per year (CESG of $500) and a lifetime limit of $7,200 per student. This amount plus the income earned on the CESG can add significantly to the funds saved.
Assume Investor A contributes $2,500 per year for 18 years to an RESP that earns 7% per year. Investor A does not claim the CESG. At the end of the period, the RESP will have a value of $90,947.
Investor B contributes the same amount to an RESP for the same period, but does claim the CESG. At the end of 18 years, Investor B’s RESP has a value of $107,024. The CESG made a difference of $16,077.
Note: This example is based on the 20% CESG. However, Additional CESG as well as the Canada Learning Bond (CLB) and
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the Alberta Centennial Education Savings (ACES) Plan may be available to some subscribers and their beneficiaries. If they qualify additional grant money will be available to them. See Chapter 6 “Grant Programs for details.
• Flexibility: In the past, if a student didn’t pursue Subscribers in Individual or Family Plans no longer risk post-secondary education, the subscriber risked losing investment income if losing all of the income that had been earned on the student doesn’t pursue their investment. Today, when the student does post-secondary education. not qualify for EAPs, a subscriber in an Individual or Family plan may transfer income earned in the RESP to their RRSP or withdraw the income and pay tax on it, including a 20% penalty tax. The same benefit is usually not available to subscribers in Group plans.
• Education incentive: When subscribers start saving towards post-secondary expenses, they provide incentive to their beneficiaries to pursue further education. The beneficiaries have the confidence that someone planned ahead for them and that financial resources are being made available for their education. Lack of financial resources is the number one reason why students do not continue education after high school. This is greater than all other reasons combined.
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8. HOW SCHOLARSHIP PLANS WORK
A. Structure of Scholarship Plans
In scholarship plans, subscribers’ contributions are held by the plan’s trustee in a pool that is invested collectively on the instructions of the plan’s adviser. While the funds are managed and invested collectively, the plan’s administrator tracks each subscriber’s contributions, CESGs and share of investment returns separately. The income earned on contributions is pooled with the income of other qualifying beneficiaries who are expected to start post-secondary school at the same time.
Historically, scholarship plan foundations have specialized in offering Group plans, although many also offer subscribers the option of investing in pooled Family multiple student plans or pooled Non-Family (Individual) plans in which contributions are managed collectively by the plan’s trustee and advisers. Some foundations allow transfers from Group plans to Non-Family or Family plans under certain circumstances.
Family and Non-Family Plans In certain cases, subscribers may not wish to participate in a Group plan. The subscriber may not feel confident that their beneficiary will pursue post-secondary A Group Plan may not education and therefore will not be eligible for all of the be the best choice if the EAPs available. With a Group plan, a subscriber could subscriber is unsure if the student will pursue forfeit some, if not all, of the investment income earned if post-secondary their beneficiary did not pursue post-secondary education. education.
Non-Family (Individual) plans and Family plans are education savings plans that do not participate in a group allocation, but rather maintain their own individual investment accounts. The subscriber invests funds and the investment income earned by the subscriber’s contributions, along with the CESGs, is later available to the named beneficiaries for the purposes of EAPs. The
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subscriber may also, under certain circumstances, withdraw the investment income earned as an AIP.
In Family or Non-Family plans, subscribers are not entitled to share in any income earned by other RESP investors. If none of the beneficiaries in a Family If the subscriber’s beneficiaries do not pursue post- or Non-Family Plan pursue post-secondary secondary education, the subscriber must repay the education, the CESGs to the Government but may be able to: subscriber must return the CESGs to the • Transfer the income that was earned in the plan Federal Government. (including the income earned on CESG funds) to an RRSP if the subscriber has unused RRSP contribution room, or
• Withdraw the income as an AIP and pay income taxes and the 20% tax penalty specified in the Income Tax Act.
Group Plans In Group plans, the amount of money that may be available to beneficiaries in the form of EAPs (or scholarships) will depend on the income that has been earned in the plan and on the number of other beneficiaries in the group who qualify for scholarships.
If a subscriber’s beneficiary fails to qualify for EAPs (e.g. Subscribers in Group does not pursue post-secondary education or later drops Plans risk losing the income earned on their out), the income that was earned on the subscriber’s investment if their contribution is made available for distribution to other beneficiary doesn’t beneficiaries who do qualify. Obviously, this represents a pursue post-secondary substantial potential benefit for those beneficiaries who education. do pursue post-secondary education, but it also represents a risk for those subscribers whose beneficiaries who do not continue post-secondary education.
In Group plans, subscribers’ contributions are typically administered on an “age group” or “maturity date” concept, where all contracts for beneficiaries who are
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expected to start post-secondary school at the same time would be administered together.
Subscribers to a Group plan agree to buy “units”, either through a lump sum contribution or through a series of periodic payments. The units are scheduled to mature when the beneficiaries are ready to begin their post- secondary education.
The amount that must be contributed for each unit is Investment income determined by the plan’s actuary and depends on the earned per unit is frequency of the contributions made and the number of approximately equal years before maturity. Payments are structured so that, for all units maturing in no matter when a subscriber starts to contribute, all units the same year. have earned an approximately equivalent amount of income by the time they mature.
Typically, the accumulated investment income earned at maturity is frozen and this pool is used to determine the base EAPs or scholarships to be paid. The base amount Accumulated income is determined by the investment income earned as well is frozen at maturity as the number of beneficiaries from the pool who actually and serves as the base for EAPs. continue their post-secondary education. Those who do not pursue post-secondary education leave their share of EAPs to those that do.
Investment income earned on the pool after maturity is normally accumulated in a general fund (often called the Income Account or Enhancement Fund), which may be used to pay certain expenses of the plan and to “top-up” or add to EAPs.
B. Administration of Scholarship Plans
Scholarship plans are typically sponsored by not-for-profit Scholarship plans are foundations that are responsible for the plans’ structure, set up and administration and prospectus. administered by not- for-profit foundations. They are distributed by These foundations appoint distributors to distribute units for-profit scholarship in the plans to subscribers. The distributors must be plan dealers. registered (licensed) as scholarship plan dealers in each province and territory in which they plan to sell the plans.
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The distributor’s sales representatives must also be Scholarship plan registered as scholarship plan salespersons in each distributors and sales jurisdiction in which they do business. representatives must be registered in each jurisdiction in which In most cases, the foundation that sponsors a plan and they do business. the dealer that distributes it are closely related. Securities regulations require that clear distinctions be drawn between sponsoring foundations and distributors to ensure that the public will not be misled about the for- profit nature of the distributors.
The foundation must also appoint a trustee (typically a The trustee holds trust chartered bank or trust company) who has primary assets and disburses responsibility to hold the trust assets in accordance with funds. the scholarship agreement. Regulations generally require that the trustee agrees to act as administrator for the plan in the event that the sponsoring foundation is unable to do so.
The foundation is responsible for the administration of the plan accounts, although that function may be contracted to a third party. The administrator must keep all The foundation is necessary information for the plan accounts and responsible for administer all financial activity, such as: administration of accounts but may contract that function • Tracking deposits made, out. • Allocating investment income and expenses,
• Administering scholarship payments, and
• Preparing necessary regulatory reports, prospectus renewals and financial statements.
Most scholarship plans appoint a depository, usually a chartered bank, to receive subscriber’s contributions, to maintain records of subscribers’ contributions, withdrawals, deductions and income, and to remit deposits to the plan’s trustee.
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C. How Scholarship Plans Derive Value
Scholarship plans offer subscribers the same benefits as other types of RESPs, including:
• Tax-free compounding of the interest earned on contributions,
• Reduced taxation of the income earned when it is withdrawn in the form of EAPs, and
• CESG enhancements.
Subscribers in Group Plans may derive additional value In Group Plans all from their pro-rata share of the CESGs and investment investment income is income earned by beneficiaries from the same pool who allocated to those do not pursue post-secondary education. beneficiaries who pursue qualifying post- secondary education. Generally speaking, Group plans have the highest returns for those beneficiaries who pursue post- secondary education for a long enough period to receive all of the available EAPs.
Subscribers whose beneficiaries do not pursue post- secondary education may forfeit a considerable amount of income to be allocated to others in the pool. For example, a subscriber who invests $2,000 per year for 15 years at an average return of 7% would earn more than $34,500 in income and CESGs over the period. If their beneficiary does not pursue post-secondary education, that amount could be allocated to other participants. The redistribution of these funds can be a very significant benefit to those participants in a Group plan who do qualify for EAPs. If 10% of the participants in the pool do not qualify for EAPs, those who do qualify could see their EAPs grow by 11%. If 20% of the participants do not qualify, those who do could see their EAPs grow by 25%. However, most subscribers who discontinue participation in an RESP do so well before the maturity date.
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D. Investment Mandate of Scholarship Plans
As RESPs, scholarship plans are subject to certain investment restrictions imposed by the Income Tax Act.
Scholarship plan units are also securities, and as such Scholarship plan units are subject to provincial securities laws that are are securities and are administered in each jurisdiction by a securities subject to the securities laws of each province commission or similar agency. and territory. Scholarship plans and scholarship plan dealers must comply with special requirements set out in the securities legislation and in the policies adopted by the securities regulators. One of these policies is National Policy 15, which, among other things, defines the nature of the investments that may be held in a scholarship plan. Generally speaking, scholarship plans must invest primarily or exclusively in low risk, interest-bearing securities that are issued or guaranteed by the government or a government agency.
Currently, the list of allowable investments includes:
• Mortgages and mortgage-backed securities where the mortgages are insured under the National Housing Act or by an insurance company registered under the Insurance Companies Act.
Scholarship plans must • Government of Canada treasury bills. invest in low risk, interest-bearing • Bonds, debentures and short-term notes, including securities, most of which are issued or guaranteed variable-rate debt securities, issued or guaranteed by a government or by the federal or a provincial government. government agency. (Restrictions apply as to the amount and concentration of variable-rate securities that can be owned.)
• Guaranteed Investment Certificates (GICs), including variable-rate GICs, and other acknowledgments of indebtedness of Canadian Deposit Insurance Corporation member
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institutions. (Restrictions apply as to the amount and concentration of variable-rate GICs that can be owned.)
• Corporate debt securities that meet specific credit- rating standards set out by the securities regulators in National Instrument 81-102. (Restrictions apply as to the amount and concentration of these types of securities.)
It is the responsibility of the scholarship plan’s investment managers to use their knowledge and experience to direct the investment of subscribers’ funds prudently and in accordance with the stated investment strategy of the plan. The goal is to attain the highest return available given the investment criteria and low tolerance for risk that apply to scholarship plans.
While scholarship plans are generally focused on investing in low-risk, income-producing securities, there can still be differences – sometimes significant differences – in the rates of return earned by different plans. These differences may be the result of several factors, including:
• Different investment objectives of the plans,
• The relative performance of each plan’s The foundation’s investment manager, and Investment Committee defines the investment • Different administrative cost structures. mandate, while the investment manager determines the Most scholarship plan foundations will appoint an investment strategy. Investment Committee to define the specific investment mandate for the scholarship plan and to monitor the performance of the plan’s investment managers.
E. Investment Strategies
Various strategies and considerations may be applied by a plan’s investment manager to minimize the risks and maximize the returns earned in a plan. A few of the
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many strategies and considerations are discussed below. The comments are focused on fixed income (bond) investment strategies since scholarship plans are primarily invested in these types of investments.
Investment managers will often review various economic Investment strategies indicators to assess expected future changes in short- may be affected by term, mid-term and long-term interest rates. There is an expected changes in interest rates or in the inverse relationship between interest rates and bond economy generally. prices. As interest rates increase, bond prices tend to decrease, and an increase in interest rates will tend to have a greater effect on long-term bond prices than on short-term bond prices. Bond pricing and interest rates are discussed further in Chapter 17.
Expected changes in interest rates may cause an investment manager to change the mix of the plans’ investments. An anticipated increase in long-term interest might, for example, lead to a reduction in the plan’s holdings of long-term bonds and an increase in the plan’s holdings of short-term bonds or cash.
Diversification (not putting all of the plan’s eggs in one Diversification of a basket) is always an important consideration in the portfolio can help to administration of the plan’s portfolio. Diversification is a reduce risk and very commonly used risk management strategy. In maximize potential structuring the plan’s portfolio, investment managers will return. want to ensure that the plan’s holdings are not overly concentrated in the securities of a particular issuer or in one geographical area, and that the investments will not all mature at the same time.
Investment managers may have to decide whether to actively trade the securities held in the portfolio or simply Holding an investment to maturity may reduce to hold them to maturity. Holding a fixed income security some risks but may also to maturity can reduce transactions costs and reduce increase the short-term some risks, but it may lead to increased volatility of the volatility of the portfolio. portfolio in the short-term.
Investment managers will also try to structure the plan’s portfolio so that funds will be available in the future when
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the plan expects to make distributions to subscribers and beneficiaries. They will also try to match the duration of the plan’s assets to the future liabilities that the plan expects.
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9. SCHOLARSHIP PLAN DISCLOSURE DOCUMENTS
A. The Prospectus
The prospectus is the single most important disclosure document concerning a scholarship plan. The prospectus is required by law to provide full, true and plain disclosure of all material facts concerning the The prospectus scholarship plan’s securities and it must be given to provides full, true every subscriber at or before the time of their investment. and plain disclosure about The purpose of the prospectus is to provide the the scholarship subscriber with all the information needed to make an plan’s securities. informed decision about the purchase. The prospectus will include detailed disclosure about:
• The foundation sponsoring the plan,
• The plan’s distributing dealer,
• The terms and conditions of each type of enrolment option available,
• The plan’s investment policies and the types of securities in which the plan will invest,
• The enrolment process,
• Subscription and withdrawal fees,
• The process for becoming eligible for EAPs,
• Administration fees charged to the plan,
• The plan’s trustee and depository,
• Risks associated with investment in the plan,
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• The laws concerning Registered Education Savings Plans and the Canada Education Savings Grant,
• Tax considerations relevant to subscribers, and
• Financial statements and auditor information for the plan.
A sample prospectus is included as Appendix B.
Sales representatives must study the prospectus for their plan very carefully to ensure that they have detailed You must be able knowledge of its contents and can clearly and accurately to clearly explain explain the plan to potential subscribers. You must never your plan’s make representations to subscribers that are inconsistent prospectus. with the disclosure in the plan’s prospectus.
Scholarship plans may not be distributed to the public in any jurisdiction where the securities commission has not reviewed and “receipted” a prospectus for the plan. Prospectuses are generally renewed each year and subscribers must be given a copy of the plan’s current prospectus.
When a scholarship plan files a prospectus in a Canadian province or territory, the plan becomes a reporting issuer in that jurisdiction. Securities laws require all reporting issuers to provide timely and accurate disclosure to the public regarding their business and financial affairs on an ongoing basis. This is known as the continuous disclosure system.
B. Financial Statements
Under the continuous disclosure system, scholarship plans must provide regular disclosure regarding the plans’ financial results and financial condition. Financial statements for the plan are prepared on an interim and annual basis, with the annual financial statements subject to independent audit. Complete financial statements are included in each prospectus. Please review the financial
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statements included with the sample prospectus at Appendix B.
Currently, scholarship plans provide three primary financial statements: the Statement of Net Assets, the Statement of Changes in Net Assets and the Summary of Scholarship Agreements.
Statement of Net Assets The Statement of Net Assets provides a snapshot of the financial position of the scholarship plan at a particular The Statement of point in time. In a more traditional corporate setting, this Net Assets is like the scholarship plan’s statement would be considered the plan’s balance sheet. balance sheet. It includes information about the plan’s assets and liabilities. The plan’s assets less its liabilities (the plan’s net assets) represents the net value of the fund.
The Assets section of the statement provides summary information of the various significant types of assets held, such as cash, securities holdings and accounts receivable. The securities holdings are valued at their market value and the cost, amortized cost and other pertinent information will be explained in the notes that accompany the financial statements. Other details regarding the plan’s investments may also be provided in the Notes to the Financial Statements.
The Liabilities section of the statement discloses the plan’s debts or other financial commitments that are still outstanding. These liabilities can include general accounts payable, maturity amounts payable, EAP payables and unclaimed subscriber funds. If a particular liability is unusual or material it may be explained in more detail in the Notes to the Financial Statements. The Net Asset position is the difference between a plan’s assets and liabilities.
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The difference between the plan’s assets and liabilities – its Net Asset position – is broken down to highlight the significant components, typically comprised of:
• Accumulated interest
• CESG deposits,
• Accumulated income on the above, and
• The General Fund and any other surplus funds
The Notes to the Financial Statements will usually describe the purpose of the General Fund and any activity in that account.
Statement of Operations The Statement of Operations shows the investment income activities over a period of time.
The income includes interest earned on the plan’s portfolio during the period as well as any realized gains/
The expenses includes various costs charged to the plan such as administration fees, investment counsel fees, trustee and custodial fees.
Changes in unrealized investment gains/
Statement of Changes in Net Assets
The Statement of The Statement of Changes in Net Assets shows the Changes in Net significant financial activity (inflows and outflows of Assets shows the capital) in the plan over a period of time. plan’s inflows and outflows of capital. The major inflows to the plan are typically subscriber assets from operations, CESG received, and any amounts transferred from other plans.
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The major outflows from the plan are typically payments to subscribers and students (including repayment of fees and EAPs paid) and CESG activity.
Statement of Investment Portfolio The Statement of Investment Portfolio provides detailed information regarding each of the investment holdings . Information included is description of the instrument, coupon rate, par value (1), maturity date, cost and market value.
Statement of Scholarship Agreements The Statement of Scholarship Agreements provides, for each year of eligibility, a breakdown of the number of units outstanding, subscribers’ deposits and accumulated income. Subscriber deposits and accumulated income may be shown in total or separately by category (principal, accumulated income) for each year of eligibility.
The Statement of This statement provides the reader with details of the Scholarship amount of funds on deposit for each “year of eligibility” Agreements shows pool. At maturity the amount of funds available per unit is the amount of funds on deposit for each expected to be the same for all units in a pool. This year of eligibility. statement provides important information about the timing of the plan’s potential liabilities to subscribers and beneficiaries in future years.
Notes to the Financial Statements The Notes to the Financial Statements are an integral part of the financial statements. The Notes generally include information about such things as the plan’s accounting policies, extraordinary events, contingent liabilities, investments, related party transactions and its General Fund.
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Significant accounting policies: The Notes will describe the accounting policies that are applied in recording the plan’s financial affairs. They will describe the method used to value the plan’s investment assets (cost, amortized cost, market value, etc.), the policies applied in recognizing investment income (cash, market, amortized realized and/or unrealized capital gains/losses) and any other significant information about the plan’s accounting procedures.
Investments: The Notes will contain detailed information about the plan’s investment holdings, including the types of investments held, the carrying value and market value of the assets and the profile of the portfolio’s term to maturity. Accounting standards dictate that investments should generally be "carried" at market value. That value is often different than the cost of the investment, due to changes in interest rates and other market factors.
Related Party Transactions. The Notes will discuss any material transactions between the plan and any persons who are not at arm’s length, such as the plan’s foundation, its administrator, its distributor or its directors and officers.
General Fund: The Notes will describe the Investment income characteristics of the plan’s General Fund and any earned after a pool’s restrictions that apply to it. Typically, all investment maturity date goes income earned by the plan after a pool’s maturity date is into the General credited to the General Fund and may be used to offset Fund, which offsets some plan expenses and supplement scholarship (EAP) plan expenses and supplements EAPs. levels. Financial Disclosure Proposals In 2002, the Canadian Securities Administrators proposed more rigorous financial reporting requirements for scholarship plans and other investment funds. The objective was standardized financial reporting for all types of investment funds. The key features of the standard, set out in proposed National Instrument 81- 106, are:
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• The introduction of Annual and Quarterly Management Reports of Fund Performance,
• Revised requirements for annual and interim financial statements, and
NI 81-106 • Changes to current filing and delivery requires more requirements rigorous financial reporting for scholarship plans As a result of National Instrument 81-106 being adopted and other types of more detailed and more uniform financial reporting by investment fund. investment funds has been implemented.
C. Other Scholarship Plan Information
A Statement of Scholarships Paid to Qualified Students is often provided either as part of the Notes to the Financial Statements or as a separate statement. This statement provides information about the number of units or agreements that have received payments from the group The Statement of Scholarships Paid to plan and the amount paid in scholarships or EAPs for Qualified Students each unit. This information can be useful to subscribers details the number of in assessing the potential value of units. The values units that have should be used with some caution, however, since there received payments are many factors that affect the ultimate scholarship and the amount paid in EAPs. payments available. Subscribers must keep in mind that past investment performance is not indicative of future expected returns.
D. Accessing Disclosure Documents
Sales representatives, subscribers and the general public www.sedar.com provides free on-line can obtain copies of a plan’s disclosure document access to through the plan’s distributor or by visiting the website of prospectuses, financial the System for Electronic Document Analysis and statements and other Retrieval (SEDAR) at www.sedar.com. reports published by Canadian issuers, including scholarship SEDAR provides free on-line access to a corporate plans. profile for every reporting issuer and to each issuer’s prospectuses, annual reports, financial statements and other significant filings required by securities law.
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10. FEES AND EXPENSES
A. Enrolment or Membership Fees
The subscriber will incur certain sales charges when enrolling in a scholarship plan. These fees generally take the form of enrolment fees (or membership fees) that are paid to the distributing dealer to cover the costs of distributing the plan and providing service to subscribers.
Enrolment fees generally range from $50 to $200 per unit. National Policy 15 restricts enrolment fees to no more than $200 per unit. While the size of the unit differs The Enrolment Fee among RESP dealers, all dealers charge at the same cannot be more than rate. $200 per unit. The enrolment fee is normally collected over the early deposits made by the subscriber. Most scholarship plans allocate 100% of the subscriber’s initial payments towards the enrolment fee until 50% of the total fee is paid. They then allocate 50% of subsequent deposits to the enrolment fee until it is paid in full. If the scholarship plan is funded by a lump sum payment, as opposed to a monthly contribution, the enrolment fee is paid from the subscriber’s lump sum contribution.
Because enrolment fees are paid when the subscriber first invests in the plan, they are referred to as “front-end” fees (or a “front-end load”).
Sales charges are not unique to scholarship plans. Investors who trade in stocks pay sales commissions when they buy and when they sell, and mutual fund investors are generally subject to sales charges that are paid when they first invest in the fund (“front end load”) or when they redeem the fund (a “back end load” or “deferred sales charge”). Front-end load mutual funds typically charge from 2% to 9% of the amount invested, while deferred sales charges generally range from 7% to 0%, depending on how long the investor has held the
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fund (the deferred sales charge usually declines to zero over five or six years).
Scholarship plan enrolment fees have been subject to criticism in the past as being high in relation to the fees charged on other investment products. Those who hold this view sometimes fail to consider that:
• Scholarship plans are designed to be “lifetime” investments where subscribers are not subjected to recurring transaction fees that are charged to investors who regularly trade their stock or mutual fund portfolios.
• Scholarship plan investments typically involve many years of ongoing service to the subscriber and the administration of numerous payments from the subscriber and to the beneficiary over the life of the contract.
• Despite the complexity of administering RESPs, CESGs and EAPs on behalf of subscribers and beneficiaries, the administration fees charged by scholarship plans are low and compare very favourably to management fees charged by less complex investment funds.
B. Enrolment Fee Refunds
If a subscriber elects to withdraw from a scholarship plan within 60 days of enrolment, the subscriber will be Subscribers who entitled to a full refund of enrolment fees. In most cases, withdraw from a plan a subscriber who withdraws from a plan after 60 days will within 60 days of signing the contract forfeit some or all of the enrolment fees paid. are entitled to a full refund of fees. In addition to these refund provisions, some scholarship plans offer subscribers a full or partial return of enrolment fees, or an amount equivalent to the enrolment fee, where the subscriber has fully completed the enrolment contract. Check the prospectus for your scholarship plan for details.
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C. Withdrawal Fees
If subscribers withdraw after the 60-day withdrawal period described above, they will usually forego some or all of their enrolment fees and may also be subject to other fees, including withdrawal fees and depository fees (specified in the prospectus). Subscribers who opted to insure their plan should also expect to forfeit any insurance premiums paid.
D. Administration and Management Fees
Enrolment fees cover the costs of marketing and distributing the plan, but there are other costs associated with the ongoing operation of the plan. These recurring administration and management costs are sometimes Scholarship plans pay the charged directly to the subscriber’s account and administrator, the sometimes charged against income the plan has earned. investment manager and The amount of the fees and the method of collection will the custodian of the plan’s vary from one plan to the next. You should carefully investments. review the prospectus for your plan for details.
• Depository fees – pay for the cost of depository and banking services used by the plan. These fees are usually charged annually to the subscriber’s account and will vary, depending on the number of transactions in the subscriber’s account.
• Administration fees – pay for the general administration of the plan and subscribers’ accounts and management of the EAP process. These fees may be charged to the subscriber or paid from the income earned on the plan’s portfolio. The plan’s investment management fees are sometimes included under the heading of administration fees. Typically range from ½% to 1½% of the plan’s assets, annually.
• Investment management or council fees – pay for professional management of the plan’s investment portfolio. If paid separately from
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administration fees, typically amount to ½% or less of the plan’s assets, annually.
• Custodial/Trustee fees – pay the costs of holding and safekeeping of the plan’s investment assets. Typically a fraction of 1% of the plans’ assets, paid annually from the income earned on the portfolio.
E. Other Charges
Subscribers may also be subject to other miscellaneous fees and charges related to the operation of their account. For example, they may be charged for such things as NSF cheques, replacement cheques or transfers of funds. These fees will vary from one plan to the next, but will be described in detail in each plan’s prospectus.
F. Completion Insurance
Many plans also offer subscribers “completion insurance”. These are insurance policies issued by insurance companies and designed to complete the subscriber’s payments under the enrolment contract in the event of the subscribers death or disability. In some plans, completion insurance is an option; in other plans it is a built-in feature. For optional policies, premiums will vary depending on the size of the contract and the circumstances of the insured subscriber.
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11. SCHOLARSHIP PLAN DEALERS
A. Role of the Scholarship Plan Dealer
Scholarship plan dealers are for-profit entities that are separate and distinct from the foundations that sponsor the plans.
As discussed in more detail in Chapter 15, dealers and sales representatives who trade or advise in securities must be registered in each province and territory in which they do business. Sales representatives will not be Both dealers and sales registered unless they are retained to act on behalf of a representatives must be registered dealer. Since scholarship plan units are registered to sell securities, this registration requirement applies to you scholarship plan units. and to your dealer.
Dealers are subject to detailed regulations regarding their business structure, management, working capital, record keeping and business practices.
Among other things, dealers are:
• Required to establish prudent written policies and procedures for dealing with clients.
• Obliged to deal fairly, honestly and in good faith with their clients.
• Responsible for ensuring that their sales representatives are qualified and properly registered in each appropriate jurisdiction.
• Required to diligently supervise the activity in their clients’ accounts and the conduct of their sales representatives and other staff.
• Obliged to create and maintain detailed records of all their business activities.
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• Obliged to maintain adequate capital and bonding to minimize insolvency risks.
B. Internal Policies and Procedures
All scholarship plan dealers have developed internal policies and procedures that cover a wide range of operational and conduct standards – from new business processing and staff recruitment to sales practices and supervisory duties.
In part, these policies are designed to fulfill the dealer’s Your dealer will have obligations under securities legislation to establish and internal policies and procedures that help apply prudent written business procedures for dealing meet obligations set by with clients. The policies also serve as important internal securities regulators. controls to protect the dealer, its staff and its clients.
Compliance with the internal policies and procedures of a dealer is generally a term and condition of employment and it is important that all staff members understand and abide by the dealer’s policies.
C. Supervisory Systems
To fulfill their supervisory duties, dealers typically establish a tiered supervisory structure consisting of:
• Head Office Compliance Department,
• A Provincial Trading Officer (PTO) in each jurisdiction, and
• Several branch managers in each jurisdiction.
The Compliance Officer Head Office Compliance: Typically managed by the ensures the dealer and dealer’s designated Compliance Officer, the Head Office its employees comply Compliance Department is responsible for ensuring that with the law and internal policies and procedures. the dealer and its personnel comply with the law and with the standards of conduct established by the dealer.
The Compliance Officer and his or her support staff will:
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• Monitor client account activity,
• Review and deal with client complaints,
• Update internal compliance policies,
• Monitor changes in regulatory requirements,
• Oversee the supervisory activities of PTOs and branch managers, and
• Handle internal disciplinary actions.
Typically, the Head Office Compliance Department will rely heavily on PTOs and branch managers for front-line supervision and compliance in each region.
Provincial Trading Officers: Securities law in many jurisdictions requires each dealer to appoint a PTO as the senior person responsible for the dealer’s compliance The PTO monitors with the law in that jurisdiction. PTOs must: compliance in a particular province or • Oversee the dealer’s business activity in the territory. jurisdiction,
• Ensure that salespersons are properly supervised either by a designated branch manager or by the PTO,
• Ensure that the firm’s policies and procedures are followed by all personnel in the jurisdiction,
• Maintain the required records of the dealers business activities and supervisory reviews in the jurisdiction,
• Ensure that client complaints are properly reviewed, recorded and addressed, and
• Oversee the supervisory efforts of designated branch managers in the region.
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Branch Managers: Also referred to as agency directors Any business location or enrolment directors, branch managers are appointed with more than three registered sales by the dealer. The branch manager will supervise, on- representatives must site, each business location where more than three have a branch manager. registered sales representatives work. Where a dealer has smaller branches (called “sub-branches”), the dealer must generally appoint a branch manager at another location to supervise the sub-branch.
Branch managers have both supervisory and business development responsibilities.
In terms of supervision, branch managers are responsible for ensuring that the branches and sub- branches assigned to them operate in compliance with the law and with the dealer’s policies and procedures.
Branch managers are expected to:
Reviewing and • Promptly review and, if appropriate, approve all approving new new subscriptions (new subscriber accounts) subscriptions is a opened through the branch, primary responsibility of branch managers. • Conduct regular (daily and monthly) reviews of all business activity conducted through the branch,
• Maintain reasonably detailed records evidencing those reviews,
• Ensure compliance with the dealer’s policies and procedures, and
• Generally supervise the conduct of branch personnel.
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12. ROLE OF THE SALES REPRESENTATIVE
As a sales representative, you will play a central role in Your most important the relationship between the plan, the dealer and the responsibilities are to subscriber. You will be the primary contact person for understand your client’s the subscriber. It is imperative that you fully understand needs and ensure that the needs of the subscriber and ensure that the the investments you recommend are suitable product(s) being offered will be suitable in their situation. for them. As a registrant, you will have a number of obligations to both your clients and your dealer. You will be expected to conduct your business with the highest standards of ethics and integrity, and you will be expected to have expert knowledge of the products that you are offering to subscribers.
Among other things, you must as a sales representative:
You must have extensive knowledge of • Ensure that you are properly registered in each the products you are jurisdiction in which you do business (i.e. in each offering. jurisdiction in which your clients reside) before engaging in any trading or advising in securities.
• Have a sound working knowledge of the securities laws and other laws that apply to you.
• Know and comply with all of the policies and procedures established by your dealer.
• Know and comply with the RESPDAC’s Code of Sales Practices.
• Deal fairly, honestly and in good faith with your clients and with all other clients of the dealer.
• Learn and record the essential facts about every one of your clients, including the general
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investment needs and objectives of each client (the Know Your Client Rule).
By following the Know • Recommend only those investments that are Your Client and suitable for your client and in keeping with the Suitability rules, you can client’s investment needs and objectives, financial ensure the investments circumstances and risk tolerance (the Suitability you sell are appropriate for your clients. Rule).
• Provide complete, accurate and balanced information to subscribers regarding the terms and conditions of the plan, its fees and its risks.
A. Registration
The requirements for registration and the mechanics of the registration process are discussed in detail in Chapter 15.
It is your responsibility to provide complete and accurate Make sure that your responses in every registration application and to ensure registration is current and that it is renewed that your registration has been made effective before you annually. engage in any activity that would constitute trading or advising in securities. Trading or advising without being registered is an offense.
You must also report any changes in the information contained in your registration application form, and you should take care to ensure that the annual renewal of your registration (and the payment of fees) is completed.
B. Knowledge of Securities Laws
Securities laws are complex and are changing constantly. You will probably never become an expert in securities law, but you must understand the fundamental requirements that apply to you, your dealer and the scholarship plan(s) you are offering to your clients.
Your dealer will send out notices from time to time regarding important developments in the law. You are expected to study these notices and to revise your
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practices in response to changing legal requirements. You should also check the website of the securities commission in your jurisdiction from time to time for important notices or proposals that may affect your business. Copies of the legislation, policies, decisions and notices are available on-line in many jurisdictions.
Your branch manager, your provincial trading officer and Head Office Compliance staff can be important resources in keeping up with the law. If you are uncertain about the regulations, obtain advice before proceeding.
C. Compliance with Dealer Policies
Your dealer will provide you with a copy of its internal policies, procedures and forms. It is important that you take the time to read and understand these materials. They are designed to protect you and your clients, as well as the dealer, and will help you process business efficiently and professionally.
Again, your branch manager, provincial trading officer and Head Office compliance staff can help you with any questions you have. Compliance with internal policies and procedures is generally a condition of your employment and will be considered by regulators if a concern is ever raised about your conduct.
D. Compliance with the Code of Sales Practices
The Code of Sales Practices at Chapter 3 has been adopted by all of the members of the RESP Dealers Association of Canada. You must study the Code and must at all times comply with the standards of ethical and professional conduct that it proscribes.
E. Fair Dealing
Every sales representative and every dealer has a duty under the law to deal fairly, honestly and in good faith with every client. The regulators and the courts interpret this obligation quite broadly, as will your clients.
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In every service business, clients expect to be given balanced and accurate information about the product they are considering. They also expect the advice offered to them to be objective and to be based on their best interests and not the best interests of the representative, the dealer or the foundation.
Honesty and fairness and a commitment to serving the interests of your clients are essential to building long- term relationships with your clients and to building your business.
F. The Know Your Client (KYC) Rule
Securities legislation in every jurisdiction requires that you know your client. This is one of the cardinal rules in the securities industry.
Your most important The Know Your Client rule dictates that you must make responsibility is to enquiries to learn the essential facts about every client Know Your Client. including:
• The identity of the client,
• The credit worthiness of the client (if applicable),
• The reputation of the client, if you have information that causes doubt about the client’s business or financial reputation, and
The Application Form • The financial circumstances, investment needs usually provides the tool and objectives of the client. for collecting Know Your Client information. In most cases, your dealer’s Application Form will provide the template to be followed when collecting and documenting KYC information. The information collected may vary slightly with each dealer but must include at least the following:
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• Full name, address and telephone number of the subscriber,
• Personal information of the subscriber, including birth date, and Social Insurance Number and any other information required by CRA,
• Financial information about the subscriber, which may include such things as primary occupation, employment status, family income, net worth and It’s your responsibility to number of dependants, and keep KYC information current for every client. • The subscriber’s signature.
Obtaining and recording detailed KYC information is a legal obligation but it is also the foundation of service to subscribers. Your objective is to ensure that you, your branch manager and your dealer understand who the client is, what the client wants to achieve, what the client can afford and how much risk the client is willing and able KYC information helps to take. All of these factors are important in determining you determine if an the suitability of any investment for the client and will give investment is suitable you a reasonable foundation on which to base your for your client. advice.
From time to time, prospective subscribers may question the need for such detailed KYC information and may, at least initially, be reluctant to provide it. However, most subscribers will cooperate if they are reassured that:
• You are obliged under securities law to obtain detailed KYC information, and the law does not entitle the client to waive this obligation.
• The information is essential for you to properly advise them and to ensure that they are eligible to contribute to the plan.
• You and your dealer are obliged by securities legislation and internal policies to hold the subscriber’s personal information in confidence.
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Remember, you will not be able to open an account for a subscriber who is not prepared to provide essential KYC. You must update KYC information any time you become aware of a significant change in the information previously recorded. Changes to important subscriber information – such as changes of objectives, address, employment and banking detail – should be provided by the subscriber to the foundation in writing.
Banking Detail Change: When there is a change in banking detail, the information should be sent to the foundation in the form of a void cheque. This will allow verification of the information and ensure that the bank account, transit number and branch number get entered in the proper order to prevent any future errors. Where possible, documentation (marriage Name Change: When changing a name, perhaps due to license, birth certificate marriage or divorce, the foundation requires the proper etc.) should be sent to legal documentation to verify the authenticity of the verify the change. change.
If the change is simply to correct a typographical error (i.e. was entered as Parry and should be Harry), the change can be made without additional documentation. The correction request should, however, be made in writing.
Student Name Change: To designate a new beneficiary, the subscriber is required to complete a “Change of Student” form (the name of the form may vary by dealer) and follow the proper procedures and provide the required documentation. The request must be made in writing, accompanied by a copy of the child’s birth certificate and Social Insurance Number.
If an existing beneficiary undergoes a legal name change, the foundation may require proof of the name change to ensure that the change does not reflect the appointment of a new beneficiary.
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G. The Suitability Rule
As a registrant, you are bound to recommend to your client only those investments that are consistent with the client’s investment needs and objectives. This is known as the Suitability Rule and it is the second cardinal rule of the securities industry.
You may be required by You are also expected, and in some jurisdictions required law to advise clients by law, to make reasonable efforts to advise your clients against unsuitable transactions. against any transaction that you consider unsuitable for them.
You should ensure that the acceptance of any new subscription or a change in any existing agreement is not only in the interests of the client but is within the bounds of prudent business practice.
H. Completing an Application Form
The Application Form for new business is the primary record of the relationship between dealer and subscriber. It contains important information for establishing the account and properly documenting any subscription. See Appendix H for a Sample Application Form.
After you and your client After you have worked through the Application Form with have completed the the subscriber, your branch manager must review and Application Form, your branch manager will approve the opening of the accounts before the review and approve it. transaction can be processed. The review helps ensure that know-your-client procedures have been followed, that the proposed subscription is appropriate for the subscriber and that the documentation is complete.
I. Trade Confirmation
Following the sale of a scholarship plan contract, your dealer Once the transaction is is obliged to send the subscriber a written confirmation of the approved, your dealer sends the client written purchase setting out the following information: confirmation of the purchase details. • A description of the security,
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• The quantity purchased (number of units),
• The price at which it the units were purchased,
• The dealer’s commissions or enrolment fees for the transaction,
• The date of purchase, and
• The name of the representative who made the sale.
This trade confirmation is typically included in the “welcome package” described below.
J. Disclosure
In addition to completing the Application Form, you are expected to explain fully to the subscriber the terms and condition of the plans being offered. This would include an explanation of:
• How deposits are made,
• When funds can be withdrawn,
• Any restrictions, fees and charges to be paid either from the deposits or the fund,
• Costs and ramifications of early withdrawal,
• Ability to transfer to other plans,
• The subscriber’s right to receive a prospectus and to withdraw from the enrolment, without cost, within 60 days, and
• Any other information about the investments or the plan that is significant to the subscriber.
You must provide a copy of the prospectus to the Make sure clients are subscriber upon enrolment, and you should encourage familiar with the fees and expenses associated with your plan.
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the subscriber to review the material in detail prior to the end of the 60-day initial period. Particular attention should be paid to the Fees and Expenses section of the prospectus to ensure that the subscriber fully understands the terms and conditions of the plan.
Upon enrolment, the subscriber will receive from your dealer a copy of the education savings plan contract and other information in the form of a “welcome package”. You may wish to review this material with the new subscriber to confirm their understanding of the plan. You may not make promises about the future value of the You must not provide the subscriber with any promises, subscriber’s investment. guarantees or undertakings about the future value of their units or the rate of return that will be earned on the plan’s investments.
You should clearly explain to the subscriber that the provincial securities commission does not endorse, recommend or guarantee the scholarship plan offered in the prospectus.
K. Confidentiality of Client Information
You must keep client As noted in Chapter 15: National Instrument 33-102 information confidential requires registrants to hold information about retail clients and disclose it only as in confidence, disclosing it only as permitted by law or permitted by law or with with the client’s prior consent. the client’s consent. You and your dealer must control access to confidential subscriber records, including computer software, subscriber files and transaction information. Your dealer should have a specific policy on this matter and you must ensure that the policy is followed.
L. Record Keeping
Your dealer is obliged by corporate, tax and securities legislation to keep records in a certain way. Securities Comprehensive records legislation requires dealers to keep at its chief place of must be kept at the business in each province a complete and accurate dealer’s main provincial record of all of the business transactions and financial office.
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affairs that it conducts in the province. It is generally acceptable to maintain records in electronic form, providing that they are complete and properly secured.
Files must provide a means for making the information available in an accurate and intelligible form within a reasonable time to any person lawfully entitled to examine the records.
Your dealer will specify the records you must maintain. These will usually include copies of:
• All Application Forms for the subscriber,
• All written correspondence between you and the subscriber,
• Any internal notes or memoranda concerning the subscriber or their transactions,
• Any notes of conversations with the subscriber, and
• Any prospecting materials or referrals that led to contact with the subscriber.
M. Cold Calling
Cold calling is the practice of contacting people with whom you have no business relationship for the purpose of soliciting new business. Most cold calling occurs on the phone but can entail door-to-door soliciting as well.
Regulators in all jurisdictions have the right to impose restrictions on cold calling and to take other enforcement action if the privilege of calling on individuals is abused. Some of the more common abuses include:
• Repeated and persistent calls,
• Calls at inappropriate times of the day,
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• Calls that incorporate abusive, unduly assertive or high-pressure sales tactics,
• Misrepresentations about the nature and purpose of the call (e.g. disguising the sales call as a survey).
Inappropriate marketing practices can have a serious Review any plans for impact on your reputation and the reputations of your prospecting programs dealer and the plans it distributes. You must review your with your branch manager to ensure the marketing strategies with your branch manager and you plan meets the rules and must ensure that the programs you have planned are makes business sense. fully compliant with the regulations and your dealer’s policies.
N. Selling Out of Province/Country
You may only sell scholarship plans in the jurisdictions in which you are registered. If an existing subscriber moves to another province or country after enrolling in the plan it may be necessary to reassign the subscriber to another representative who is licensed in the jurisdiction that the subscriber moved to. Your dealer will have specific procedures for transferring accounts out of province or country.
O. Transfers
From time to time, subscribers may want to transfer from one representative to another, or from one scholarship plan to another.
Transfers Between Representatives: If a new account is transferred to you from another sales representative at If you receive a your dealer you must apply the same Know Your Client transferred account, you standards that you would for any other new client. You must “Know Your Client” will be expected to review the subscriber’s existing KYC and update the file as data and discuss it with the subscriber to ensure that it is necessary. still current. You will also want to understand the reason for the transfer and the nature of the service and advice that the subscriber is expecting from you.
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Transfers Between Plans: Most Group plans allow subscribers to transfer the deposits and accumulated income from their group plan to an individual plan at some point prior to, or at maturity of the scholarship plan. This option may be attractive if the subscriber is not sure if their beneficiary will continue post-secondary education. Individual plans sometimes apply less stringent criteria in qualifying beneficiaries for EAPs. In addition, Individual plans may permit the subscriber to withdraw the accumulated income in the plan, either as a Front-end fees are often rollover to an RRSP or as taxable income. credited to Individual Plans when transferring from a Group plan. In many cases, enrolment fees paid for the Group plan will be credited towards any similar fees for the Individual plans.
The RESP Dealers Association of Canada has endorsed The standard disclosure form informs the a standard disclosure form to be used in the case of a subscriber about the Plan Transfer between scholarship plans. A copy of the transfer and informs the form is included in Appendix F. One of its purposes is to government for CESG ensure that the subscriber has received adequate tracking. disclosure of the transfer and its implications. As discussed in the Code of Sales Practices, the RESP Dealers Association does not promote transfers between Group plans.
The CESG program administrators also require documentation of transfers between plans. Consult your dealer’s policy manual for information about the specific procedures to be followed for plan transfers.
P. Plan Adjustments
Plan Adjustments are used to:
• Reactivate an agreement, To make a Plan Adjustment, send a • Convert to another method of contribution (annual, quotation to your client and get them to sign single deposit etc.), off on it. • Reduce the number of units,
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• Change a Maturity Date.
Plan Adjustments are handled in two stages:
• Sending a quotation to the subscriber(s),
• Processing the quotation after it is signed by the subscriber(s).
Q. Withdrawals
The withdrawal of funds from a scholarship plan can occur in several circumstances:
Within 60 days: Subscriber may choose to withdraw from the plan at any time within the first 60 days after enrolment. If they do, they are entitled to a full refund of any deposits made.
After 60 days but prior to maturity: A subscriber may cancel their participation in the scholarship plan at any time, even after the initial 60-day withdrawal period has expired. The subscriber must provide written notice of cancellation and will be entitled to receive a refund of the principal contributed to the plan. This is the total contribution less the enrolment fees, depository fees and insurance premiums (if applicable). In the case of Group plans, income earned on the subscriber’s contributions will be retained for other eligible students in the pool. CESGs would be returned to the Federal Government but income earned on the CESG deposits would be retained for eligible student in the pool.
In the case of Individual plans and Family plans, the subscriber may transfer the income earned on contributions to an RRSP or withdraw the income and pay income tax and a 20% penalty tax on it if certain criteria are met:
• The subscriber is a resident of Canada,
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• The beneficiary has reached the age of 21,
• The beneficiary is not continuing post-secondary education,
• The plan has existed for 10 years.
When Individual or Family plans are cancelled prior to maturity, CESGs are returned to the Federal Government.
RESP legislation specifies that a terminated plan may not be reactivated, but it may be possible for the subscriber to enter into a new enrolment.
Subscribers may At maturity: Most scholarship plans provide for the withdraw the net withdrawal of the subscriber’s net deposits as soon as deposits at maturity the plan matures. These amounts are not taxable since and are not taxed on these withdrawals. the subscriber already paid tax on the funds prior to contributing them to the plan. However, if the subscriber does not provide proof that their beneficiary is enrolled in a qualifying post-secondary education program at the time of withdrawal, the CESGs accumulated in the plan will be returned to the Federal Government.
As Educational Assistance Payment payments: Once the plan has matured, the student must meet certain Students must attend an criteria to participate in the pool of investment income eligible educational earned and CESGs accumulated. The qualifications institution full time to differ depending on which plan is purchased, but require receive EAPs. full time attendance at an eligible post-secondary institution. The CESG payments are made along with the Educational Assistance Payments.
As return of fees paid: In many scholarship plans, an amount equivalent to the enrolment fee is returned to the student as an additional payment, either at maturity or along with one or all of the Educational Assistance Payments. This supplement may add value to the scholarship plan over that which might be received under
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an individual plan. The plan’s prospectus will describe the terms and conditions of any available refund.
R. Commission Rebates
You are not allowed or entitled to provide financial incentives to subscribers to induce them to invest. That means you may not offer to reduce or pay the subscriber’s enrolment fees, you may not offer to rebate a portion of your commissions and you may not give the subscriber a gift in order to secure an enrolment.
S. Client Complaints
From time to time, you or your dealer may receive client complaints, either verbally or in writing. Many complaints will concern administrative matters rather than misconduct, but all complaints must be recorded and should be dealt with promptly and professionally. Your dealer will have specific policies and procedures concerning investigation and resolution of complaints.
Complaints are normally recorded by the Provincial All client complaints must be documented. Trading Office and by Head Office in Complaint Logs that show:
• The name of the complainant,
• The date and time that the complaint was received, and the name of the person who received it,
• The nature of the alleged problem,
• The steps taken to review and resolve the issue, and
• Whether or not the complainant was satisfied with the proposed resolution.
In most cases, the branch manager will be assigned responsibility to investigate and address the complaint. If
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the complaint alleges serious misconduct, responsibility for the internal investigation may be assigned to the Head Office compliance department.
If the investigation establishes fault attributable to the dealer or the dealer’s personnel, the person responsible for the investigation will generally make recommendations to Head Office about the steps that should be taken to resolve the issue and to minimize the risk of future occurrences.
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13. ADVERTISING
A. Role of Advertising
Scholarship plans use advertising to attract new business prospects and maintain good relations with existing subscribers or to attract new sales representatives.
Your duty to deal fairly, honestly and in good All dealers have written advertising policies and you must faith with clients extends adhere to the policies of your dealer. Only advertising to advertising. material approved or prepared by Head Office can be distributed to the public.
It’s also important to know that you must only do business in the name of your registered dealer. You cannot use any other trade name in the course of your sales activities without prior permission from your branch manager and Head Office compliance officer.
B. Definition of Sales Communication and Advertising
A sales communication is any type of oral or written communication used to solicit or induce the purchase of a scholarship plan. There are slightly different rules for advertising and sales An advertisement is a sales communication that is communications. published or designed for mass distribution through public media.
Some documents – such as prospectuses, statements of account and trade confirmations – are not considered to be sales communications. This is an important distinction because of the specific rules governing sales communications and advertising.
C. National Instrument 81-102
Part 15 of National Instrument 81-102 deals with advertising and sales communication for mutual funds. While this National Instrument does not specifically apply
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to scholarship plan dealers, it provides guidelines that RESPDAC dealers generally follow.
The relevant standards set out in the Instrument are:
• Sales communications may not conflict with information in the prospectus.
• All performance data in a sales communication should be at least as large as 10-point type.
• When comparing your investment to other similar If you are making a investments, you must include all pertinent facts comparison with another investment, you must and present data from the same time periods for include all the data from each item being compared, as well as the same time periods. explanations of any differences in the investments being compared.
• A sales communication must not refer to a performance rating or ranking of an investment vehicle unless a third party prepares the ranking.
• A sales communication must not refer to a credit rating of securities on an investment vehicle unless that rating is current and prepared by an approved credit rating organization.
• All advertising and written sales communications must display the name of your scholarship plan dealer and indicate that important information is provided in the prospectus, which should be read prior to any purchase. The communication must be in at least 10-point type to ensure readability.
• If a sales communication is not an advertisement, it must contain the date it was first published.
• If a sales communication includes a rate of return or a mathematical table, you must include a statement that clearly indicates that the information is to be used for illustration purposes
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only and is not intended to reflect future values or returns.
• There are restrictions on the use of the term “no- load”.
• There are also specific rules for communicating performance data. See Section E, below, for details.
D. Misleading Sales Communications and Advertising
The guiding principle of any advertising and sales communication is that it cannot be misleading. It must be clear, accurate and balanced.
Some examples of misleading communication include:
• Representations of past or future investment performance that are not justified.
• Statements about characteristics of the plan that only speak to benefits and do not give equal prominence to risks or limitations.
• Statements that make exaggerated or unsubstantiated claims.
1. Incompletely explained comparisons with other investment vehicles.
E. Performance Data
There are specific rules Performance data often differs depending on the governing how investment vehicle and the method of presentation of the performance data may information. For this reason, it is critical that any be presented. communication of performance data provided in advertisements and sales communications follows the strict standards endorsed by the RESP Dealers Association of Canada for scholarship plan performance measurement.
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In addition to the general standards set out below, the RESPDAC has developed specific statistical methods to be used in calculating and presenting performance data.
• Whenever performance data is provided, the communication must describe the general assumptions used to calculate the data.
• Where available, it must be calculated for one, three, five and ten-year periods (plus annualized returns from inception if less than 10 years) ending no more than 180 days prior to the date of the communication.
• Any comparisons between scholarship plans or other similar investments must be for the same You must not use time periods and provide all of the same another organization’s comparative information. name in a comparison without having their permission. • Names of other organizations may only be included in the comparison provided permission has been obtained from the other company.
• A disclosure statement must be provided which indicates that all performance data represents past performance and is not necessarily indicative of future performance.
National Instrument 81-106, described in Chapter 9, includes some specific proposed requirements for the calculation and publication of performance data.
F. Business Cards and Letterhead
Business cards and letterhead are useful sales tools. To ensure that accurate information is communicated clearly, there are rules governing the information Business cards must contain accurate presented on business cards and letterhead. qualifications, designations and Business cards cannot mislead investors about addresses. qualifications or designations and must disclose the full
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legal name of the scholarship plan dealer as well as your name, title and registered address of the branch or sub- branch. Any business address included on the business card or letterhead must be registered as a “business location” with the appropriate securities commission(s).
Only titles authorized by the scholarship plan dealer may be utilized. As noted above, you cannot use any other trade name in the course of their sales activities without prior permission from your branch manager and Head Your dealer will have Office compliance officer. specific rules about the design of stationery. On letterhead and business cards, the sponsoring scholarship plan dealer’s name must be disclosed prominently. The scholarship plan dealer may allow some flexibility in the design, or they may require that all business cards and letterhead follow a standard design.
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14. FEDERAL REGULATION
A. Income Tax and CESG Legislation
Sections 118.6, 146.1 and 204 of the Income Tax Act contain the key provisions of the tax law governing RESPs (Appendix A). The Department of Human Resources Development Act and accompanying regulations contain the rules under which the Canada Education Savings Grant (CESG) program is administered.
The Canada Revenue Agency (CRA) administers the CRA determines whether an education RESP program. In order for an education savings plan to savings plan is be established as a “registered education savings plan”, “registered”. the plan must be submitted by the plan’s promoter and reviewed and approved by CRA. CRA’s role is to review the terms and conditions of the plan to ensure that the appropriate trust arrangements are in place and that the Income Tax Act has been followed. Specimen plan documents are filed with CRA and when those are approved, the plan is given a registration number under which it is allowed to operate.
B. Proceeds of Crime Legislation
Federal legislation to address the problems of global Proceeds of Crime money laundering has been in place since 1993. Recent legislation seeks to revisions expanded the scope of the law to cover terrorist deter money financing as well. The legislation is called the Proceeds laundering and terrorist financing. of Crime (Money Laundering) and Terrorist Financing Act. It is administered by a new agency called the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Scholarship plan dealers and sales The Act applies to a wide range of financial service representatives must providers, including banks, credit unions, trust take measures to avoid being used for companies, life insurance companies, securities dealers money laundering or (including scholarship plan dealers), casinos and foreign terrorist financing.
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exchange dealers. Among other things, it requires these entities:
• Verify the identity of the clients in accordance with specific regulations,
• Maintain specified records concerning each client account,
• Create and file with FINTRAC records of every large (>$10,000) cash transaction,
• Report suspicious transactions to FINTRAC,
• Establish supervisory procedures and reviews to ensure that the legislative requirements are being met.
What is Money Laundering? The United Nations has described money laundering as “any act or attempted act to disguise the source of money or assets derived from criminal activity.” It is the process of transforming “dirty money” from criminal activity into “clean money”, the origin of which is difficult to trace.
In Canada, a money laundering offence includes concealing or converting property or the proceeds of property knowing or believing that these were derived from the commission of a designated offence (such as drug trafficking, bribery, fraud, forgery, murder, robbery, counterfeit money and stock manipulation).
Anti-Terrorism Regulations In 2001, Canada passed the United Nations Suppression of Terrorism Regulations. These regulations:
The United Nations • Provide for a list of individuals or entities believed publishes a list of those thought to be to be involved in or associated with terrorist associated with activity. terrorist activity.
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• Make it an offence for anyone in Canada, or any Canadian outside Canada, to provide or collect funds if they know these would be for use by anyone on the list.
• Make it an offence for anyone in Canada, or any Canadian outside Canada, to deal in any way with property if they know it is owned or controlled by anyone on the list. This includes any financial service or transaction relating to such property. It also includes making property available to anyone on the list.
• Require that Canadian financial institutions (including banks trust companies, credit unions, Scholarship plan dealers insurance companies and securities dealers) must report monthly to the Securities determine on a ongoing basis whether they have Commission about their possession or control of property owned or involvement with anyone controlled by or on behalf of anyone on the list. on the list. Each institution must report monthly to their principal regulatory body (e.g.. securities commission) about their possession or control of any property described above.
• Require anyone in Canada, as well as Canadians outside Canada, to disclose to RCMP and the Canadian Security Intelligence Service (CSIS) the existence of any property in their possession or control that they believe is owned or controlled by or on behalf of anyone on the list.
Record Keeping and Identity Verification Proper record keeping and verification of client identities FINTRAC has have been key aspects of anti-money laundering published guidelines legislation since its introduction. for record keeping and identity verification requirements. Record Keeping Requirements For every account that a dealer opens, it must keep records including signature cards, account operating agreements, account applications and copies of corporate documents for non-individual clients.
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Client Signature Card: The dealer must keep a signature card, an account operating agreement or an account Dealers must keep application that shows the signature of the individual who signature cards, is authorized to give instructions for the account. This account operating agreements, “signature record” must also include the account number applications and of a bank, credit union or trust company account that is in corporate documents the individual’s name or that the individual is authorized for all accounts. to give instructions for.
Corporate accounts: If a dealer opens an account for a corporation, it must keep a copy of the corporation’s records (typically the “articles of incorporation”) that empower the corporation to maintain and operate the account.
Non-corporate accounts: For non-corporate accounts, the dealer must keep a record of the name, address and principal business of the individual or entity for which the account is opened.
Business Records: The dealer must keep all of the following normal course business records:
• New account applications,
• Confirmations of purchase or sale,
• Guarantees, Business records, including account • Trade authorizations, applications, correspondence and account statements, • Powers of attorney and joint account agreements, must be kept for five years after the account • All correspondence about the operation of is closed. accounts,
• Every statement of account that is sent to the client.
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Signature cards, account operating agreements, account application forms and other required records must generally be kept for up to seven years from the day of closing of the account to which they relate.
Failure to comply with record keeping requirements can lead to criminal charges.
Identity Verification Under Canada’s anti-money laundering regulations, Canadian dealers and financial institutions must generally verify the identity of every person authorized to give instructions for an account. Identity can be verified by viewing the person’s birth certificate, driver’s license, passport or similar record issued by the provincial, territorial or federal government. Identity can also be verified by confirming that the person has an account in their own name with a Canadian bank or savings institution.
The strict identification However, the legislation exempts dealers from the verification requirement to verify the identity of persons authorized to requirements do not give instructions on registered plan accounts, including apply to the opening of RESPs, RRSPs, locked-in retirement plans and group registered accounts. registered retirement savings plans.
If you only enter into transactions concerning RESPs, you do not need to follow the strict identity verification requirements of the Proceeds of Crime legislation. Remember though, that you are not exempt from the Know Your Client requirements of the securities legislation or from obtaining the client identification necessary for RESP and CESG participation.
Suspicious Transaction Reporting Since November 8, 2001, securities dealers (including scholarship plan dealers) and other financial institutions have been obliged to report “suspicious transactions” to FINTRAC. These are transactions for which there are reasonable grounds to suspect that the transaction is
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related to the commission of a money laundering offence or the commission of a terrorist financing activity offence. You must report “suspicious Suspicious transaction reports must be filed with transactions” to your FINTRAC in electronic form within 30 days of the dealer dealer; and your become aware of the facts giving rise to the suspicion. dealer must report them to FINTRAC within 30 days. If you suspect that a transaction may be related to money laundering or terrorist financing you must bring the facts to the attention of your dealer’s compliance officer immediately.
For additional information about suspicion transactions and the reporting requirements, see FINTRAC’s Guideline 2: Suspicious Transactions at www.fintrac.gc.ca.
Large Transaction Reports Dealers are also required to report to FINTRAC:
You must report any • Large cash transactions involving amounts of cash transactions of $10,000 or more. $10,000 or more. • The import to or export from Canada of negotiable monetary instruments (cash and other financial instruments in bearer form) with of value of $10,000 or more.
Inform your branch As a sales representative, you should inform your branch manager or PTO of manager or your dealer’s compliance staff if you become any reportable transactions. aware of any reportable transactions, particularly any transactions in which subscribers seek to make large contributions in cash.
In order to complete the required report to FINTRAC, you must make detailed inquiries of the person prior to accepting the transaction. For this reason reportable transactions should be processed only by your branch manager or by other people within your dealer who are thoroughly familiar with the requirements of the legislation.
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Additional information is available in FINTRAC’s Guideline 7: Submitting Large Cash Transaction Reports at www.fintrac.gc.ca.
C. Competition Act
The federal Competition Act governs many different trade practice and restraint of trade issues. Among other things, the legislation addresses marketing and advertising conduct. Section 52, for example, says in part: The Competition Act prohibits you from 52. (1) No person shall, for the purpose of promoting, directly or making false or indirectly, the supply or use of a product or for the purpose of misleading promoting, directly or indirectly, any business interest, by any means statements. whatever, knowingly or recklessly make a representation to the public that is false or misleading in a material respect.
Violation of the trade practice standards set out in the Competition Act can lead to fines and prosecution.
D. Criminal Code
The Criminal Code The Criminal Code of Canada is federal legislation. It deals, among other contains a number of provisions that relate to financial things, with theft, fraud, products and services, including prohibitions on theft, forgery, fraud, forgery, misrepresentation and money laundering. misrepresentation and money laundering. Two of the sections most relevant to the sale of securities are sections 380 and 400. 380. (1) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,
(a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding ten years, where the subject-matter of the offence is a testamentary instrument or the value of the subject-matter of the offence exceeds five thousand dollars; or
(b) is guilty
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(i) of an indictable offence and is liable to imprisonment for a term not exceeding two years, or
(ii) of an offence punishable on summary conviction,
where the value of the subject-matter of the offence does not exceed five thousand dollars.
400. (1) Every one who makes, circulates or publishes a prospectus, a statement or an account, whether written or oral, that he knows is false in a material particular, with intent
(a) to induce persons, whether ascertained or not, to become shareholders or partners in a company,
(b) to deceive or defraud the members, shareholders or creditors, whether ascertained or not, of a company, or
(c) to induce any person to
(i) entrust or advance anything to a company, or
(ii) enter into any security for the benefit of a company,
(d) [Repealed, 1994, c. 44, s. 26]
is guilty of an indictable offence and liable to imprisonment for a term not exceeding ten years.
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15. SECURITIES REGULATION IN CANADA
Securities markets are important elements of every Securities markets allow modern market economy. They provide the means for people to invest savings, allocating savings to productive investment opportunities, spread economic risks and for spreading economic risks and for changing the change the ownership of ownership of business organizations. Given the businesses. importance and the complexity of securities markets, a system of regulation has been developed to promote their fair and efficient operation and to protect investors from fraud and abuse1.
The securities industry is one of the most highly regulated sectors of the economy. Each province and territory in Canada has its own legislation that regulates the underwriting and distribution of securities, including Each province and scholarship plans. The legislation is typically comprised territory has its own of a Securities Act and Securities Regulations and is securities legislation, supplemented by various local and national rules, forms, which varies little orders, interpretation notes and policies. across the country.
While there is some variation in the securities legislation that has been adopted in each province or territory, the regulatory system is fairly uniform across Canada and, although there is no federal securities regulator in Canada, the regulatory scheme is generally similar to that in the United States.
Securities legislation in Canada has four broad objectives:
Securities legislation seeks to keep • To ensure that investors have access to the investors informed, information they need to make informed promote fair play, investment decisions, maintain standards and protect the • To provide rules of fair play for the markets, integrity of the market.
1 With thanks to the British Columbia Securities Commission and its educational publication, “Your Guide to Regulation of Securities”.
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• To establish qualifications and standards of conduct for people registered to advise investors and to trade on their behalf, and
• To protect the integrity of the capital market and the confidence of investors. Securities commissions have broad powers to Securities legislation is administered and enforced in apply and enforce securities legislation each province or territory by a securities commission or within their province or securities administrator that is appointed by the provincial territory. or territorial government. These agencies – also referred to as the regulators - have broad powers to apply and enforce the legislation. Their funding is derived from fees charged to registrants and issuers who do business or raise capital in the jurisdiction.
A. Securities Regulators
The provincial and territorial securities regulators are:
British Columbia Securities Commission 1200 - 701 West Georgia Street Vancouver, B.C V7T 1L2 Telephone: (604) 899-6500 Fax: (604) 899-6506 http://www.bcsc.bc.ca
Government of Yukon, Registrar of Securities 2134 Second Avenue P.O. Box 2703 Whitehorse, YT Y1A 3C6 Telephone: (867) 667-5314 Fax: (867) 393-6251
Alberta Securities Commission 4th Floor, 300 – 5th Avenue S.W. Calgary, AB T2P 3C4 Telephone: (403) 297-6454 Fax: (403) 297-6156 http://www.albertasecurities.com
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Saskatchewan Securities Commission 601-1919 Saskatchewan Drive Regina, SK S4P 4H2 Telephone: (306) 787-5645 Fax: (306) 787-5899 http://www.sfsc.gov.sk.ca
Manitoba Securities Commission 500-400 St. Mary Avenue Winnipeg, MB R3C 4K5 Telephone: (204) 945-2548 Fax: (204) 945-0330 http://www.msc.gov.mb.ca
Northwest Territories Registrar of Securities Department of Justice 4903 – 49th Street 5th Floor, Court House, P.O. Box 1320 Yellowknife, NWT X1A 2L9 Telephone: (867) 920-6418 Fax: (867) 873-0659 http://www.gov.nt.ca
Government of Nunavut, Legal Registries Division P.O. Box 1000, Station 570 1st Floor, Brown Building Iqualuit, NU X0A 0H0 Telephone: (867) 975-6190 Fax: (867) 975-6194 http://www.gov.nu.ca
Ontario Securities Commission Suite 1903 20 Queen Street West Toronto, ON M5H 3S8 Telephone: (416) 593-8314 Fax: (416) 593-8122 http://www.osc.gov.on.ca
Quebec Securities Commission 800, square Victoria, 22e etage C.P. 246, Tour de la Bourse Montreal, QC H4Z 1G3 Telephone: (514) 395-0337 Fax: (514) 873-3090 http://www.lautorite.qc.ca
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New Brunswick Securities Commission P.O. Box 5001 85 Charlotte Street, Suite 300 Saint John, NB E2L 2J2 Telephone: (506) 658-3060 Fax: (506) 658-3059 http://www.nbsc-cumnb.ca
Prince Edward Island Department of Community Affairs & Attorney General Securities Office Consumer, Corporate and Insurance Services Division Office of the Attorney General P.O. Box 2000 Charlottetown, PE C1A 7N8 Telephone: (902) 368-4569 Fax: (902 368-5283 http://www.gov.pe.ca/securities
Nova Scotia Securities Commission Joseph Howe Building 2nd Floor, 1690 Hollis Street, P.O. Box 458 Halifax, NS B3J 2P8 Telephone: (902) 424-7768 Fax: (902) 424-4625 http://www.gov.ns.ca/nssc
Securities Commission of Newfoundland and Labrador 2nd Floor, West Block P.O. Box 8700 St. John’s, NF A1B 4J6 Telephone: (709) 729-4189 Fax: (709) 729-6187 http://www.gs.gov.nf.ca
Canadian Securities Administrators (CSA)
The CSA is an These provincial and territorial securities commissions informal association of and administrators have established an informal national all of Canada’s association called the Canadian Securities Administrators securities (CSA). The CSA’s goal is to enhance cooperation commissions and administrators. among the regulators and to foster market efficiency through greater harmonization of the rules and regulations. The CSA website address is www.csa- acvm.ca.
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Industry Self-Regulatory Organizations Three private organizations - the Investment Dealers Association of Canada, the Mutual Fund Dealers Association of Canada and Market Regulation Services Inc. - also play important roles in securities regulation. They have been recognized in most jurisdictions as self- regulatory organizations (SROs) and carry out regulatory functions under the general supervision of the securities commissions. None of these SROs, however, are directly involved in the regulation of scholarship plans dealers or scholarship plans salespersons.
Since its formation in 2000, the RESP Dealers Association of Canada has been fostering and developing heightened standards of conduct and proficiency for its member firms and their staff. The Association is a trade association and has not applied for recognition as a self-regulatory organization.
B. Securities Law
Securities legislation applies to every trade and to every person who trades in securities or exchange contracts in Canada. Sales representatives must be familiar with, and must comply with, the sections of the securities legislation that apply to them and to their dealers in the jurisdictions in which they do business. In many jurisdictions, the legislation and policies are available online through the securities commissions’ websites.
Among other things, securities legislation governs:
Registration: Everyone who trades in, advises on or underwrites securities or exchange contracts must be registered (licensed) by the securities commission(s) to engage in that activity, or be able to rely on a specific exemption from the registration requirement.
Trade is defined to include, among other things, the sale of a security, the receipt by a registrant of an order to buy or sell a security, and any act, solicitation or negotiation in furtherance of a trade.
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Distribution of securities: Everyone who distributes securities must give investors a detailed disclosure document – a prospectus – describing the investment, or be able to rely on a specific prospectus exemption. The law requires that every prospectus provide full, true and plain disclosure of all material facts relating to the securities being distributed.
A “distribution” is the sale of any security that has not been previously issued or the sale of a security from the holdings of a control person.
Continuous Disclosure: All reporting issuers must provide timely disclosure to the public of important financial and business information.
An issuer can become a ‘reporting issuer’ in several ways but the most common way is to file a prospectus.
Insider Reporting: Insiders (directors, senior officers and those who hold more than 10% of a reporting issuer’s voting shares) must report their trading activity within 10 days of each trade.
Take Over Bids: All take-over bids and issuer bids must be conducted according to specific rules.
Sales and Business Practices: Dealers and registered salespersons must comply with detailed regulations in areas such as:
• Minimum capital requirements for dealers, Securities legislation governs many aspects • Record keeping requirements, of a scholarship plan dealer’s business. • Supervisory obligations,
• Prohibited sales practices,
• Know Your Client duties,
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• Conflict of interest provisions, and
• Client disclosure obligations.
Deceptive Practices: No person may engage in deceptive or unfair securities business practices, such as making misrepresentations in disclosure documents, trading on “inside” information or manipulating the market for a security.
Exemptions: The legislation provides a number of specific statutory exemptions from the registration, prospectus and take-over bid requirements. The legislation also authorizes the securities commissions to grant discretionary exemptions from certain regulatory Securities requirements. commissions have the power to investigate Investigative and Enforcement Powers: The securities conduct, hold hearings and impose sanctions. commissions are granted broad powers to investigate conduct in the markets and to hold hearings and impose sanctions.
Offences: The courts are empowered to imprison and to fine those who commit offences under the legislation.
Keep in mind that while the legislation is generally similar across the country, there may still be significant differences from one province to the next.
C. Regulations, Rules, Instruments and Policies
In most jurisdictions, the Securities Act is supplemented by other regulations and rules. Some of these relate to the operation of the regulatory agency and some contain detailed regulatory requirements for those who participate in our capital markets.
Most jurisdictions have established rules that govern registration procedures, capital and record keeping requirements for registrants and the duties of registrants to their clients, as well as the financial and continuous disclosure obligations of issuers, prospectus and
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registration exemptions, take-over bids and issuer reactivations. National Instruments are rules that have National Instruments are rules that have been adopted been adopted by on a uniform basis by securities regulators across securities regulators Canada. National Instruments are in place to govern across Canada. such things as:
• SEDAR - Canada’s electronic securities filing system (SEDAR) (NI 13-101),
• The operation of stock exchanges and trading systems in Canada (NI 21-101),
• Activities of registrants (NI 33-102),
• Underwriting conflicts (NI 33-105),
• Prospectus disclosure requirements (NI 41-101), and
• Mutual fund sales practices (NI 81-105).
Multilateral Instruments are uniform rules adopted by several, but not all, other jurisdictions in Canada.
Policy Statements Policy Statements are issued by the regulators to tell explain how regulators market participants how the regulators interpret the will interpret legislation or how they intend to exercise their discretion legislation. under the legislation. Local Policy Statements apply in a single jurisdiction. Multilateral Policy Statements have been adopted in some, but not all, Canadian jurisdictions, and National Policy Statements apply uniformly across the country.
D. Forms, Notices, Decisions and Settlements
Several other types of instruments are issued under the legislation and are important to the regulatory process:
Forms set out the required content of disclosure documents and other filings.
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Notices and Interpretation Notes (NINs) inform the market about new regulatory proposals and policies and about the regulator’s interpretation of legislative requirements.
Discretionary Exemption Orders are case-specific exemptions that can be given by the regulators in instances where, for example, strict application of the legislation would preclude a reasonable business Regulators can grant arrangement or would conflict with the legal requirements exemptions to of an issuer’s primary jurisdiction. Exemptions may be registration and prospectus requirements given in respect of registration and prospectus in some circumstances. requirements, take-over bid rules and filing requirements.
Blanket Orders and Rulings (BORs) are orders made by a regulator that apply to everyone who meets the conditions of the order. BORs often provide relief from specific registration or prospectus requirements of the legislation.
Enforcement Orders and Decisions are issued by the regulators to enforce the legislation and protect the public interest. Enforcement orders may be made on a temporary basis, when necessary, but final enforcement orders may be made only after any person directly affected has the opportunity of a hearing before the regulator.
Settlement Agreements are another way in which enforcement actions can be resolved. In cases that are settled, those who are the subject of the proceedings enter into a written agreement with the commission staff, waive their right to a hearing and consent to appropriate enforcement orders or other sanctions.
E. Investigations and Enforcement Securities regulators can impose Securities legislation gives the regulators broad powers administrative to investigate conduct in the securities markets and to sanctions to protect the public and enforce impose administrative sanctions to protect the public and securities law. enforce compliance with regulatory requirements. Those
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subject to enforcement proceedings have a right to a hearing and are provided with certain rights of appeal to the courts.
Investigation Powers The regulators have the power to compel registrants, directors, issuers and others involved in the industry to provide records and information to staff. The legislation also provides powers under which the regulators can compel others to give evidence and produce records and may also allow the regulators to enter the business premises of registrants and other market participants.
Freeze Orders and Receivers In certain circumstances, the regulators may also be authorized to freeze funds, securities or other property and to apply to the court for the appointment of a receiver, receiver-manager or trustee of a person’s property.
Enforcement Orders Regulators can cancel The regulators have a range of powers aimed at ensuring registration, order compliance with the legislation. They may, for example, someone to cease trading and impose suspend or cancel a person’s registration, order that a large financial person cease all trading in securities, deny a person penalties. access to any of the exemptions in the legislation or prohibit a person from acting as a director or officer of a securities issuer. In some jurisdictions, the regulators are also authorized to impose financial penalties of $100,000 or more.
Prosecution Securities legislation also authorizes the prosecution of specified offences such as misrepresentation, trading Persons convicted of without registration, distributing securities without a offences can face fines prospectus, illegal insider trading and market of over $1 million and manipulation. Prosecutions are conducted before the imprisonment. courts and penalties on conviction may include fines of over $1 million and imprisonment for several years.
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Rights of Appeal A person directly affected by a decision of a regulator will generally have the right to appeal the decision to the courts. Decisions of the courts are subject to normal appeal procedures to higher courts.
Civil Remedies The regulators typically do not have the power to order compensation or restitution to investors, although that may change in the future. The legislation does, however, create statutory rights of action for those who have suffered loss as a result of certain types misconduct, such as failure to deliver a prospectus, misrepresentations in prospectuses or trading on Investors may have undisclosed “inside” information. the right to sue for losses caused by a These statutory civil remedies are in addition to other sales representative’s rights of action that may be available at common law. misconduct. They are important elements of the regulatory scheme and enable investors to protect themselves by seeking restitution through the courts.
F. Registration
Securities legislation requires that all persons who trade or advise in securities be registered in each province in which they do business. That means that you must be registered in each province or territory in which your clients reside.
The legislation provides certain exemptions from the general registration requirements but these registration exemptions are very limited and generally do not apply to sales representatives of scholarship plan dealers.
Successful completion of The legislation also establishes proficiency standards this course is part of that must be met by every applicant for registration. In your requirements for registration. addition to the training mandated by your dealer, you will be expected to successfully complete an approved proficiency examination (based on this course) prior to submitting an application for registration.
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Significant Requirements of Registration For you to be registered, your dealer must submit a registration application form. In all Canadian jurisdictions, applications for registration are submitted electronically on Form 33-109F4 – Registration Information for an Individual. Both forms are included in the materials at Appendix C.
These application forms include questions about your identity and qualifications along with questions about Providing false your prior employment and your regulatory, civil or information on a criminal history. It is your responsibility to provide registration application complete and accurate information for your registration form could lead to application. Errors in the completion of an application prosecution. form inevitably result in processing delays. Failure to provide complete responses to the questions will generally result in the rejection of your application. Failure to respond truthfully to the questions will almost certainly result in termination of your relationship with the dealer and could also result in prosecution or administrative enforcement proceedings against you.
Your branch manager and other supervisory staff at your dealer will review your registration application before it is submitted but it is your responsibility to provide correct and detailed information for the application.
Regulators will carefully Regulators will generally conduct detailed reviews of any review applications that disclose past refusals for application that discloses such things as: registration, disciplinary actions, bankruptcy or • Past refusals by any government body or SRO to criminal convictions. grant registration or to license the applicant to deal in financial products or otherwise to deal with the public,
• Disciplinary actions against the applicant by any securities commission, SRO or similar regulatory body,
• Past criminal or quasi-criminal convictions,
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• Bankruptcies or proposals to creditors,
• Any civil judgments or garnishments.
Your registration is not effective until your application has You may not conduct been reviewed and approved by the relevant regulatory trades until your agencies. No trading activity can be undertaken until application has been reviewed and approved. registration has been confirmed.
Registration application forms are submitted electronically through the National Registration Database System, however in some cases, supporting documents must still be submitted in physical form.
The National Registration Database The NRD accepts registration applications In early 2003, the securities regulators in each province on-line. and territory, except for Quebec, introduced a new electronic registration system for individuals. In 2005, the Quebec regulators introduced the same system in their province. Multilateral Instrument 31-102 made use of the National Registration Database (NRD) mandatory for all individual registration applications, changes to registration and terminations of registration after March 30, 2003, in all provinces except Quebec, and after December 31st, 2004, in Quebec.
The NRD allows people The NRD is a web-based system that permits dealers to to register in multiple file registration forms on-line. It replaced the paper- jurisdictions with one based application system that had been used in the past. application form. NRD was designed to harmonize and improve the registration process across most of the jurisdictions of Canada. Electronic filing allows for automated screening of common deficiencies prior to submission of applications to the regulator and reduces the movement of paper. It also allows registrants to submit one application to register in multiple jurisdictions.
New registration procedures and the new registration forms that have been developed for NRD are set out in Multilateral Instrument 33-109 (MI 33-109), included at
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Appendix D. A detailed NRD Filer Manual is available for NRD users at www.nrd-info.ca.
NRD Forms: Form 33-109F1 – Notice of Termination Form 33-109F2 – Change or Surrender of Individual Categories Form 33-109F3 – Business Locations other than Head Office Form 33-109F4 – Registration Information for an Individual Form 33-109F5 – Change of Registration Information
Once a dealer is registered as an NRD participant, it Only Authorized Firm appoints a Chief Authorized Firm Representative (the Representatives (AFRs) Chief AFR) who may, in turn, appoint other Authorized may submit applications Firm Representatives (AFRs) who are authorized to to the NRD. submit applications through the NRD on behalf of the dealer.
AFRs may grant limited NRD access to other individuals within the dealer to allow them to complete application forms on-line. Once completed, your application form will be reviewed by an AFR and, when accepted, submitted by the AFR to the NRD. Only AFRs can submit applications to the NRD.
When your application is submitted on-line, your dealer makes payment to the NRD by way of electronic funds transfer.
When the NRD was introduced, basic information about All sales representatives every individual who was registered at the time was will have to complete an entered into the system. Each of those registrants will be NRD application form required, however, to complete a detailed on-line NRD registration application form at some point in the months following March 2003. A lengthy transition period has been established. Consult your Chief AFR for details.
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Residency Generally you must be a resident of Canada for at least one year before the regulators will register you to sell Usually, to be eligible for scholarship plans. Some exceptions are made, most registration, you must often for sales representatives who held a securities have been a resident of license in the United States for more than one year. Canada for at least one year. The normal requirement is that you reside in the province for which registration is sought. Exemptions from this requirement are possible in some provinces. For example, you may be able to obtain registration in Quebec if you are already licensed in Ontario and residing in a border city/town.
Part-Time Sales Representatives In some provinces, you will not be granted registration Some provinces do not allow registration of part- unless you work for your dealer on a full-time basis. This time sales is true for New Brunswick, Nova Scotia, Prince Edward representatives. Island and Alberta.
Part-time sales representatives are allowed, subject to conditions, in Ontario, British Columbia, Newfoundland, Saskatchewan, Manitoba, Quebec, North West Territories and Nunavut, although some scholarship plan dealers have company policies that restrict this practice.
Part-time employment will typically be allowed by the regulators where:
• Your other employment is in a field that would not interfere with your duties as a sales representative or give rise to conflicts of interest,
• You hold a license as a life insurance agent.
Dual Licensing Dual licensing is holding both a securities license Most jurisdictions will allow you to hold both a securities and an insurance license. license and an insurance license. In doing so they impose obligations on your dealer and your branch manager to properly supervise all of your financial
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service activities that are not subject to regulation under the insurance regime.
You must provide written If you plan to pursue dual-registration, you will have to confirmation that your meet the proficiency requirements of, and apply for dealer is aware of your registration to, both the insurance and the securities dual licenses. regulators in the jurisdiction. In addition, you will be required to provide a written statement with your registration application confirming that your dealer is aware that you are seeking to be a dually licensed.
Amending a Registration Once you are registered as a sales representative, you are obliged by law to report to regulators any change in the information provided in your original registration application form.
In Quebec, changes must generally be reported within You must report ten days. changes to application form information Changes must be reported through NRD within five days, promptly. with some exceptions. Changes to the information in Item 3 (Personal Information) and Item 8 (Proficiency) of Form 33-109F4, need only be reported within one year of the change.
Some examples of common changes that must be reported promptly:
• Change in your name, residential address or address for service,
• Change in the dealer for whom you work,
• Suspension, cancellation or restriction of your registration in any jurisdiction,
• Regulatory sanctions or disciplinary measures against you,
• Offences under the law,
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• Civil actions or judgments against you,
• Bankruptcy, or
• New or changed outside business activities.
Note that amended information can cause regulators to reconsider your suitability for registration, particularly if the change relates to bankruptcy or civil, criminal or regulatory misconduct.
If you later seek appointment as a branch manager or partner/director/officer of a dealer, you must file a separate application for change of status. In NRD, the appropriate application form is Form 33-109F2 – Change or Surrender of Individual Categories.
Reporting Terminations Your dealer must promptly notify the regulators any time Your dealer must file a a registered sales representative leaves the dealer, report whenever a whether through resignation or dismissal. In NRD a sales representative Form 33-109F1 – Notice of Termination (Appendix E) quits or is dismissed. must be filed within five days. In the Notice of Termination, the dealer discloses the reason for the termination and includes details of any unresolved client, internal or regulatory problems.
Renewal of Registration All registrations are Registrations in all jurisdictions renew on December 31 of renewed annually, with each year. Beginning with December 31st, 2005, Quebec fees paid through the NRD. will join the other jurisdictions in the same uniform renewal date. Registration fees are applied annually and are paid by the dealer through the NRD.
Transfer of Registration If you decide to leave one dealer to join another, your current dealer must submit a Notice of Termination and your new dealer will be required to submit an application
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for transfer of registration. In NRD, the application to transfer registration is made on-line by an AFR of the new dealer. If you leave one dealer for another, the regulator must Once you have terminated your relationship with one approve the change before dealer, you cannot trade or advise in securities until the you may trade or advise in securities regulators have approved the transfer of your securities. registration. That means that you may not solicit or accept subscriptions, advise clients on investments, transfer accounts or advertise your services until your registration at your new dealer has been approved and acknowledged by the relevant securities regulators.
G. Prospectus Requirements
Regulators believe that one of the best ways to protect Distribution of the investors is to ensure that they have access to accurate prospectus is critical because it’s the best way and up-to-date information about any company, of keeping investors investment fund or scholarship plan in which they might informed about a security. invest. That is one of the underlying principles of Canadian securities law and the reason that securities issuers – like corporations, mutual funds and scholarship plans – are required to prepare prospectuses whenever they plan to issue securities to the public.
Prospectus Contents The prospectus must, by law, provide full, true and plain disclosure of all material facts relating to the securities being issued.
A typical prospectus includes, among other things:
• The history of the issuer and a description of its operations,
• Audited financial statements for the previous three years,
• A description of the issuer’s business and investment plans,
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• A description of the intended use of proceeds from the securities offering,
• A summary of the major risk factors affecting the issuer,
• Information about the issuer’s management and its principal shareholders (those who own more than 10%), and
• A description of the legal rights of investors to withdraw from a purchase, or to sue for rescission (the return of their investment) or damages if the prospectus contains a misrepresentation.
The prospectus includes certificates signed by the senior officers of the issuer, the promoters and underwriters of the securities attesting to the accuracy of the information in the prospectus.
The Filing Process When an issuer decides to offer securities to the public, it first prepares a preliminary prospectus and files that document with the securities regulators for review.
Once the preliminary prospectus has been properly filed, the issuer can begin to solicit “expressions of interest” from potential investors, provided that it gives each potential investor a copy of the preliminary prospectus and complies with other legal requirements. When regulatory review of the document is complete and any comments have been addressed, the issuer prepares and files a final version of the prospectus and the regulators issue a receipt for it.
The fact that a prospectus has been filed with and The receipt of a receipted by the regulators is not a regulatory seal of prospectus by regulators is not a seal of approval. approval and is not an assurance that the securities are a worthy investment. In fact, the front page of every prospectus must state that: “No securities commission or
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similar authority in Canada has passed on the merits of these securities…”
Once the prospectus receipt has been issued, the issuer can begin to distribute the securities.
To ensure that the information given to investors is A prospectus is not valid current, every prospectus has a lapse date (an expiry beyond its lapse date. date). Beyond the lapse date, the prospectus is no longer valid and no securities may be sold under it.
Most corporations issue securities only periodically. They will file a prospectus allowing for the sale of a fixed number of securities and stop distributing when those securities are sold. It may be years before the corporation files another prospectus.
You must be sure the Mutual funds and scholarship plans, however, engage in prospectus you are the continuous distribution of their securities, constantly distributing is the current issuing new securities and redeeming old ones. To allow one. this, mutual funds and scholarship plans regularly update (generally annually) and resubmit their prospectus for regulatory approval so that they always have a current and accurate prospectus available for delivery to investors. As a sales representative, you must ensure that the prospectus that you provide to subscribers is the current prospectus and that a receipt for it has been issued by the securities regulators in your jurisdiction.
Delivery Requirements The law requires every dealer who sells securities under a prospectus to deliver to every purchaser a copy of the latest (and currently valid) prospectus, and any amendment to it, no later than midnight on the second business day after entering into a purchase agreement.
You must give the To satisfy this obligation, the prospectus can be either be purchaser a prospectus personally delivered or mailed to the purchaser. If mailed by midnight on the by ordinary mail, receipt by the purchaser is deemed to second business day occur on the seventh day after mailing. If mailed by after the purchase is registered mail, receipt by the purchaser is deemed to made.
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occur on the earlier of the seventh day after mailing or on the day that receipt is acknowledged.
Withdrawal Rights The law allows every investor who acquires securities under a prospectus to withdraw from the purchase, without cost, by delivering to the dealer written notice of his or her intention to withdraw within two business days of receiving the latest prospectus.
This right of withdrawal is one of the rights that must be clearly set out in the every prospectus.
Note that the right of withdrawal runs for two business days after the purchaser receives the prospectus. If the dealer or the salesperson fails to promptly deliver the appropriate prospectus to the subscriber, the subscriber will have an ongoing right to cancel his or her purchase. For scholarship plans, withdrawal rights apply Pursuant to National Policy No. 15, the securities for an extended period - 60 days. regulators require that scholarship plans extend this right of withdrawal for subscribers from two days to 60 days.
Civil Remedies In addition to withdrawal rights, investors who acquire securities that are sold under a prospectus have certain civil remedies available to them. A purchaser who does not receive a prospectus A purchaser who was not sent a prospectus that they or receives an incorrect were entitled to has a right of action for damages or prospectus has the right rescission against the dealer or offeror who failed to send to sue. the prospectus.
In the event that a prospectus contains a misrepresentation, a person who purchased securities under that prospectus:
• Is deemed to have relied on that misrepresentation, and
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• Has the right to sue the issuer, as well as the directors, promoters and underwriters of the issuer for damages.
Parties other than the issuer may be able to rely on the “due diligence defence” if they can prove that they conducted a reasonable investigation to establish reasonable grounds for belief that there had been no misrepresentation.
Civil actions for rescission of a purchase can generally be undertaken within 180 days of the purchase, while actions for damages may be undertaken within three years.
H. National Policy 15
In National Policy 15, (to be renumbered 46-102) the National Policy 15 governs many aspects of Canadian Securities Administrators have set out certain scholarship plan dealers’ standards that must be followed by any scholarship plan operations. before the regulators will issue a receipt for the plan’s prospectus.
The Policy is an important one and deals with many key aspects of the plan’s sales and operations including disclosure requirements, registration requirements, administration of the plan’s assets, investment restrictions, limits on fees, extended rights of withdrawal and suitability issues.
Note that the Policy sets out the regulators’ general expectations for scholarship plans. Exceptions to the policy are not uncommon. The prospectus for each plan sets out the specific terms and conditions that apply to its operations.
National Policy 15 - Conditions Precedent to Acceptance of Scholarship or Educational Plan Prospectuses.
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The sale of contracts or plans commonly referred to as "university scholarship plans" or "scholarship agreements" must be subject to the following conditions before the prospectus will be acceptable for filing:
1. A very clear distinction must be drawn between the A prospectus must make "foundation" (which is described as a body without a clear distinction any profit motive or desire for pecuniary gain) and the between the foundation and the distributor. distributor (the registered distribution agency who sell the plan under a commission arrangement often described as an "enrolment fee") in order that the public will not be induced into the error of believing that there are no sales charges or other commissions.
2. The scholarship plan distributors and salesmen, of course, must hold registration under the specific Sales representatives provincial acts. The use of such expressions as may not be referred to "education counsellors", "scholarship counsellors or as “counselors”. advisers", "enrolment counsellors" is viewed as misleading and should not be used.
3. The funds received from the subscribers must be deposited with a Canadian chartered bank or a provincially licensed trust company or other similar financial institution whose accounts are normally insured by the Canada Deposit Insurance Corporation or La Regie de l'assurance-depots du Quebec. Where a subscriber's account is not afforded the protection of insurance by the Canada Deposit Insurance Corporation or La Regie de l'assurance-depots du Quebec, the fund administrator must ensure that such subscriber's account is considered to be assets under administration in the hands of the depository.
4. The fund administrator, which is usually the "foundation", will secure the best interest rate possible on the deposits, and the interest paid on the subscriber's capital shall be transferred to a trust fund held by the same depository which in turn will be administered for the benefit of the beneficiaries of the plans. In securing the best interest rate possible the
Plans may invest in mortgages, with limitations.
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fund administrator may, where not contrary to the scholarship agreement, cause the subscriber's deposits to be invested in mortgages provided that such mortgages are:
a. First mortgages on residential properties of 8 units or less located in Canada and having a maturity not exceeding 5 years, provided that first mortgages may be on residential properties of more than 8 units when the following conditions are met:
(i) the scholarship plans under administration have total net assets of at least $50,000,000;
(ii) the mortgages are insured under the National Housing Act (Canada) or any similar provincial statute or are insured by an insurance company registered or licensed under the Canadian and British Insurance Companies Act (Canada), the Foreign Insurance Companies Act (Canada), or any similar statute of a Canadian province or territory; and
(iii) not more than 20 percent of the funds from sources described in 4(h)(i) and 4(h)(ii) below are invested in such mortgages on residential properties of more than 8 units;
b. an amount which is not more than 75% of the fair market value of the property securing the mortgage, except when:
(i) such mortgage is insured under the National Housing Act (Canada) or any similar act of a province; or
(ii) the excess over 75% is insured by an insurance company registered or licensed under the Canadian and British Insurance
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Companies Act (Canada), the Foreign Insurance Companies Act (Canada) or insurance acts or similar acts of a Canadian province or territory;
c. acquired from a lending institution with which the fund, the administrator of the fund, the trustee(s) and the distributor of the fund are dealing at arm's length;
d. purchased and sold at fair market value, i.e. that principal amount which produces at least the yield prevailing for the sale of comparable fully serviced mortgages as established by major mortgage lenders under similar conditions;
e. fully funded, serviced and not in arrears at the date of acquisition;
f. not on a property in which: Plans may not invest in mortgages of properties (i) the administrator, the trustee or the associated with the dealer. distributor of the fund or any senior officer or director thereof, or
(ii) any person or company who is a substantial security- holder of the administrator, a trustee or the distributor of the fund, or
(iii) any associate or affiliate of persons or institutions mentioned in subparagraphs (i) and (ii), has an interest as mortgagor or as an associate of a mortgagor;
g. limited in amount, in respect of any one mortgage, to $75,000 for funds having less than $5,000,000 in net assets; and to the lesser of$50 0,000 or 2.5 per cent of its net assets where they exceed $5,000,000 but are less than $50,000,000; and to the amount not exceeding 1.0 percent of its net assets for funds having
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$50,000,000 or more in net assets, and for the purpose of this paragraph, a series of mortgages on one condominium development shall be considered as one mortgage;
h. restricted in total to an amount not greater than 75% of
(i) funds arising from new contracts sold to subscribers pursuant to a prospectus which contains disclosure of the arrangements in respect of mortgage investment and which has been accepted for filing by the Administrator; and
(ii) funds held on behalf of subscribers who, after receipt of an information circular which has first been filed with and accepted by the Administrator, have agreed in writing to permit their plan contracts to be included in the mortgage investment arrangement;
i. on properties appraised by a qualified appraiser such as a bank, trust company, loan company or insurance company, or other person or company which makes appraisals and whose opinions are relied upon in connection with lending or servicing activities, and who in the judgment of the management company or trustee of the specific fund is properly qualified to make such a determination.
j. not on raw land or undeveloped land.
5. The depository must maintain an accounting system which will permit it to determine the total amount of deposits made by each subscriber, all deductions from such deposits and the amount of interest produced by the deposits of each subscriber.
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6. The trust funds shall be administered pursuant to a trust indenture or deed in accordance with the terms detailed in the prospectus, and must contain a provision under which a licensed trust company agrees to act in the place of the foundation in the event that the foundation refuses to or is unable to act.
7. The fees charged, including the commissions of the distributor and its salesmen, must not exceed $200 per plan. The first $100 paid under the plan may be applied against this fee and the balance may be deducted at a maximum rate of 50% of each of the further contributions.
8. From these fees sufficient funds must be set aside in trust to pay the future costs of administering the trusts established under 6. These funds shall not be used directly or indirectly for any other purpose. The costs of distribution must be borne fully by the distribution company. Any additional sums rebated or otherwise paid by the depository to assist in the payment of the charges for administration of the funds shall be held in trust by the foundation solely for this purpose and shall not be paid directly or indirectly for any other purpose.
9. The plan must grant the subscriber the right to withdraw from the plan without any cost to the subscriber within 60 days from the execution of the contract.
10. Where the subscriber wishes to withdraw from a plan after 60 days from the date of the execution of the contract, the subscriber shall not be obliged to pay any fees in addition to those already paid, but may lose the total amount of fees paid to that point.
11. It is considered contrary to the public interest to accept for filing a scholarship plan which calls for the complete forfeiture of the capital and accumulated
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interest in cases where the plan is abandoned before its maturity. The same shall apply to so-called ``special'' plans which consist of the simple deposit by the subscriber of an amount equivalent to the interest, without any right to reimbursement.
12. The schedule of instalment payments must be equitable for all children enrolled. In the setting of the schedules, accounts must be kept of the age of the children and the number of instalments foreseen so that there is an actuarial equivalent between the instalments foreseen for each age and each plan. Accordingly the so-called ``family plans'' are not acceptable.
13. All beneficiaries must participate equally in the advantages of the plan. The foundation or trustee must make provision in the trust indenture for the payment of equivalent scholarships for each of the eligible participants.
14. Scholarship plan agreements must be filed with the preliminary prospectus (or prospectus as the case may be) as part of the supporting material together with a copy of the trust agreement.
15. The prospectus shall clearly indicate on its front page the speculative nature of the scholarship plans and the real cost of participation in the plan to the subscriber.
I. National Instrument 33-102
The regulators adopted National Instrument 33-102 in August 2001,entitled “Regulation of Certain Registrant Activities” (Appendix F). It deals in part with issues of tied selling that can arise for dealers affiliated with financial institutions but it also sets out requirements of
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broad application concerning leverage risk disclosure and confidentiality of client information.
National Instrument 33-102
PART 2 LEVERAGE DISCLOSURE
2.1 Leverage Disclosure When a client borrows money to purchase a 1. When a registrant opens an account for a retail client security, you must inform or when a registrant makes a recommendation to a them in writing of the retail client to purchase securities using in whole or in risks of investing this part borrowed money, or otherwise becomes aware of way. a retail client's intent to purchase securities using in whole or in part borrowed money, the registrant shall deliver to the retail client, before the retail client purchases those securities, a written disclosure statement in substantially the following words:
Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.
2. Before executing an order on behalf of a retail client purchasing securities who to the knowledge of the The client must registrant is using in whole or in part borrowed money acknowledge that they in connection with the purchase, the registrant shall have read the leverage risk disclosure statement. obtain an acknowledgement from the retail client that specifically refers to the written disclosure statement required by subsection (1) and confirms that the retail client has read the written disclosure statement.
3. A registrant is not required to comply with subsections (1) and (2) if:
a. the registrant has delivered the written disclosure statement required by subsection (1) to the retail client and the client has delivered an
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acknowledgement within the six month period prior to the registrant making the recommendation for purchasing securities by using in whole or in part borrowed money, or otherwise becoming aware of a retail client's intent to purchase securities using in whole or in part borrowed money, or
b. the registrant is subject to and complies with the leverage disclosure by-laws, rules, regulations or policies of a recognized SRO.
PART 3 DISCLOSURE OF CONFIDENTIAL RETAIL CLIENT INFORMATION 3.1 Application of this Part – This Part does not apply to a registrant registered under securities legislation in Québec with respect to its dealings with retail clients in Québec.
3.2 Consent Required - A registrant shall hold all information about a retail client confidential and shall not disclose the information to any third party, except as expressly permitted or required by law or the by-laws, rules, regulations or policies of a recognized SRO, unless, before disclosing the information,
(a) the registrant provides at least the following information to the retail client to whom the information pertains:
(i) the name of the third party or a description of the class of third party to which the information will be disclosed;
(ii) the nature of the relationship between the registrant and the third party;
(iii) the nature of the information that will be disclosed;
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(iv) the intended use of the information by the third party, including whether the third party will disclose the information to others;
(v) a statement that the retail client has the right to revoke the consent referred to in paragraph (b), and the effect of the revocation; and
(vi) a statement that the retail client's consent under paragraph (b) is not required as a condition of the registrant dealing with the retail client, except in circumstances described in section 3.3; and
(b) the retail client provides consent to the specified disclosure of the confidential client information.
3.3 Prohibition to Require Consent as a Condition - No registrant shall require a retail client to consent to the registrant disclosing confidential information regarding the retail client as a condition, or on terms that would appear to a reasonable person to be a condition, of supplying a product or service, unless the disclosure of the information is reasonably necessary to provide the specific product or service that the retail client has requested.
3.4 Consent not Required – Despite section 3.2, a registrant does not need to obtain retail client consent to disclose confidential retail client information
(a) for audit, statistical or record-keeping purposes;
(b) to a law enforcement agency, securities regulatory authority or self-regulatory organization;
(c) for the collection of a debt owed by the client; or
(d) to a barrister or solicitor for the purpose of obtaining legal advice.
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16. THE ECONOMY
A. Understanding the Economic Environment
All business and investment activity can be affected by changes in the Canadian and global economic environments. Productivity, employment, inflation, international trade and exchange rates are among the many factors that can impact personal wealth, interest rates and the costs of goods and services in the future. Understanding these concepts can help you and your clients gain insight into the factors that may affect savings and investment plans.
The economy generally moves in cycles, expanding rapidly in some periods and contracting in others. A period of at least six consecutive months of economic contraction is generally called a recession.
B. Measuring the Economy
Gross Domestic Product (GDP) GDP is a way of Gross Domestic Product (GDP) is a popular indicator measuring a country’s used by countries to estimate the value of their economic economic activity. activity. It is a measure of the total value of goods and services produced in a country during a given period and includes everything from personal expenditures on food, clothing, rent, haircuts and movies to government expenditures on roads, military hardware, business investments and net exports (exports minus imports).
GDP also accounts for the money businesses invest in new factories or buildings. It does not include transfer payments such as old age pensions, employment insurance and welfare payments. To avoid double counting, it excludes the purchase of raw materials and services used by businesses to produce the final products that consumers purchase.
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We can assess the performance of Canada’s economy by looking at changes in the country’s GDP and also by comparing our GDP growth to the GDP growth of other countries.
Statistics Canada In calculating the GDP, Statistics Canada measures the calculates GDP by output of many different segments of the economy. This measuring the output allows economists and business people to analyze the of different industries. performance of specific industries, such as manufacturing, telecommunications, construction, computers and peripherals, mining, etc.
Capacity Utilization and Productivity Even when the economy seems to be strong, economists are reviewing other indicators for signs of long-term encouragement or potential problems. The capacity utilization rate compares an One measure of an economy’s strength is the extent to industry’s potential which it operates at full capacity—its capacity utilization output to its actual output. rate. This rate compares the potential output of any given industry or company with its actual output.
Industries operating near full capacity are usually more efficient, but as they reach their production limits the price of the goods produced tends to increase, resulting in inflation. Investment in additional production capacity can often ease these inflationary pressures by allowing for both expanded production and more efficiency in production. As productivity rises, wages tend to Productivity is another useful economic indicator. increase and prices tend to decrease. Increases in productivity can indicate improvements in important areas such as production techniques, technology and knowledge. Improvements in productivity are often reflected in higher salaries and wages and lower prices for goods and services.
International Trade and the Balance of Payments Canada is a trading nation and international trade is an extremely important part of our economy.
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Increased exports of goods to our trading partners means increased sales for Canadian industries and increased demand for Canadian dollars to pay for those goods. An increase in imports into Canada means that Canadians are spending their money elsewhere.
Canada’s international trade is affected by many things, including our competitiveness and our productivity, exchange rates, interest rates and the health of our trading partners’ economies.
In 1994, Canada, the United States (by far our largest trading partner) and Mexico entered into the North American Free Trade Agreement (NAFTA). Its purpose was to encourage trade through the elimination of tariffs on goods and services and the reduction of other barriers to trade. NAFTA seeks to increase efficiency and The objective of NAFTA is to encourage freer trade in a offer consumers better products and lower larger and more integrated North American economy to prices by allowing for increase efficiency and provide benefits to consumers freer trade. from heightened competition, better products and lower prices.
The balance of payments system is used to record transactions between Canada and its trading partners around the world. It measures the funds flowing into Canada from international sources and the payments made by Canadians to non-residents.
The current account balance sheet measures international trade in goods and services, and investment income earned by Canadian firms and by Canadian- based operations of foreign firms.
The capital and financial account measures the direct investment by Canadians in assets and property in other countries as well as the investment by Canadians in foreign stocks and bonds.
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C. Inflation
Inflation is the general increase in prices across the economy over a period of time. It is most commonly The CPI calculates the price of certain products measured by changes in the Consumer Price Index each month and is a (CPI), which is calculated on a monthly basis by measure of inflation. determining the cost of a fixed basket of products that are typically purchased by Canadian consumers.
When inflation is high, consumers have to live with the knowledge that the things they buy this year will likely cost significantly more next year. That may encourage them to consume more now, rather than save their money. But buying more now leads to increased demand for products and that tends to push prices even higher in what can become an inflationary spiral.
Keeping inflation under control is important to a strong The Bank of Canada and stable economy, and controlling inflation is one of the seeks to keep inflation under control, which objectives of the Canada’s government-owned central stabilizes the economy. bank, the Bank of Canada.
The Bank of Canada sets inflation control targets to help it determine what policy actions are necessary in the short- and medium-term to maintain a relatively stable price environment. These inflation control targets help businesses and investors set expectations of future inflation, which in turn affects their business and investment decisions.
The Bank’s target inflation rate is generally between 1% The Bank of Canada and 3%. If these annual targets are exceeded, the Bank manages the inflation rate by adjusting interest rates. can try to reduce demand for goods and services by raising interest rates. If inflation is running lower than 1%, the Bank can reduce interest rates to help stimulate consumer and business spending. Since 1992, Canada’s inflation rate has averaged 1.5%.
D. Economic policy
Economic policies are the tools available to the government to stimulate, slow down or stabilize the
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economy or particular segments of the economy. The two key forms of economic policy are fiscal policy and monetary policy.
Fiscal Policy Fiscal policy refers to the way that governments can When governments influence the economy through budgetary decisions, influence the economy particularly decisions to increase or decrease through budgets, this is government spending or to increase or decrease fiscal policy. taxation.
In Canada, the government is a very significant consumer. By deciding to substantially change its pattern of spending on health, education, public safety, social programs or infrastructure for instance, the government can create or reduce the level of employment and the demand for goods and services.
Governments can In addition to controlling its own spending, the influence consumer and government can influence the level of spending by commercial spending by business and consumers by changing the levels of changing taxation rates. taxation either across the board or for specific groups. Increasing the level of taxation tends to extract money from the economy and decreases the amount of money available to consumers for spending or saving. Decreasing the level of taxation puts money back in the hands of consumers and tends to stimulate the economy.
Unfortunately, the impact of these and other types of fiscal policies is neither immediate nor certain. There can be lengthy delays between government fiscal policy decisions and the resulting impact on the economy. In addition, the complex nature of national and global economics can mean that fiscal policies may not have the impact that had been expected.
The government will often use both fiscal policy and monetary policy together to foster stable economic growth and control inflation.
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Monetary Policies The Bank of Canada is Canada’s central bank. It is a crown corporation wholly owned by the federal government. Its role is to promote Canada’s economic and financial well-being by:
• Promoting the safety and efficiency of Canada's financial system
• Supplying Canada’s bank notes
• Providing funds-management services to the government
• Conducting monetary policy to foster confidence in the value of money.
When the Bank of Monetary policy refers to the measures that can be taken Canada influences the by the Bank of Canada to influence the economy by economy by regulating regulating the amount of money in circulation. The the amount of money in circulation, this is primary goal of the Bank’s monetary policy is to foster a monetary policy. healthy economy and higher living standards by achieving low and stable inflation.
The Bank implements monetary policy primarily through its influence on short-term interest rates, which in turn affects consumer and business borrowing and investment and the exchange rate for the Canadian dollar.
Lower interest rates Lower interest rates, for example, tend to increase increase spending and spending and reduce savings, and a lower dollar can reduce savings; higher boost exports and hold back imports. Conversely, higher rates curb spending and encourage savings. interest rates tend to curb domestic spending and a higher dollar tends to curb exports and encourage imports. Strong demand for Canadian goods and services puts upward pressure on prices if it exceeds the economy's capacity. It usually takes about 2 years for monetary policy changes to make There are usually lags of from 18 months to 24 months an impact. between monetary policy changes and their effects on
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inflation and the economy. As a result, the Bank must try to anticipate the direction of the economy and apply monetary policy on a forward-looking basis.
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17. UNDERSTANDING FINANCIAL MARKETS
A. Understanding Securities
Liquidity - Expected Return - Risk This section2 provides an overview of some common types of securities in terms of three basic characteristics – liquidity, expected return and risk.
Liquidity (or marketability): is the ease with which an investment can be turned into cash quickly and at or near the current market price. Some securities, such as mutual funds, offer liquidity by allowing investors to An investment that is redeem their securities (return them to the issuer) on liquid can be quickly turned into cash at short notice. For non-redeemable securities, liquidity will about the market price. depend on the owner’s ability to sell the securities to other investors in the open market. Listing on a stock exchange may help, but does not guarantee liquidity.
With some securities, investors may be restricted by law or contract from reselling the securities for months or The rate of return earned on an investment, minus even years, or they may find that there is no market for the rate of inflation, is the securities when they want to sell. referred to as the “‘real rate of return”. Expected Return: is the overall profit that an investor might expect to receive from an investment -- either as income, in the form of interest or dividends, or as capital gains (or losses) resulting from changes in the market value of the security. The higher the expected rate of return of a security, the greater the risk.
Risk: is the degree of uncertainty about the expected return from an investment, including the possibility that
2 with thanks to the Canadian Securities Administrators and its educational publication “Characteristics of Various Types of Securities”.
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some or all of the investment may be lost. With some securities (e.g. Canadian government treasury bills) there is very little risk that investors will lose any of their initial investment. With some other securities, the risk of loss can be very substantial.
In addition to considering these factors, investors and Income tax implications their advisers must carefully consider the investor’s should be carefully financial needs and objectives, their tolerance for risk and considered because this other issues, such as taxes, before making any will affect the net return investment decision. from an investment.
Income tax considerations are important because they will affect the investor’s net return from an investment. Interest, dividends, capital gains and capital losses are all treated differently for tax purposes. For example, if the return on an investment is in the form of:
• interest, it will generally be treated as ordinary income for tax purposes and taxed at the same rate as the investor’s employment earnings.
Because dividends are • dividends from a Canadian corporation, the paid to shareholders investor will generally be able to claim a dividend from the after-tax income tax credit that will result in the dividend income of the corporation, tax being taxed more favourably than interest or other legislation allows investors to claim a ordinary taxable income. dividend tax credit to ensure that this income • capital gains, the investor will generally be entitled is not taxed twice. to exclude a portion of the capital gain from his or her income for tax purposes.
• capital losses, the investor will generally only be able to use the capital loss to offset capital gains.
Canadian tax legislation provides some significant tax benefits for individuals who make qualifying investments through tax-deferral plans such as RRSPs, Registered Retirement Income Funds (RRIFs) and RESPs.
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Some types of securities – like units of labour-sponsored funds and flow-through shares – also take advantage of special tax incentives provided by the federal or provincial governments. The tax implications of these securities for individual investors can be complex and expert advice should always be sought.
Evaluate investments Remember though, that tax implications should not be based on their merits, the only factor considered when making an investment impact on the portfolio and the fit with decision. Each potential investment should be analyzed financial objectives. first on its own merits, on how it will affect the risk and expected return of the investor’s financial portfolio, and on how well it fits the investor’s personal financial objectives and investment time horizons.
Asset Classes Financial assets are generally divided into three Asset mix is how cash, categories: cash and cash equivalents, fixed income and fixed income securities equities. The combination of these three types of and equities are products in a portfolio is called the asset mix. combined in a portfolio. Cash and Cash Equivalents: In addition to cash, this category includes treasury bills, commercial paper, banker’s acceptances, provincial and municipal short term paper money market securities (often referred to as money market products) along with government savings bonds and other bonds or short-term debt instruments with a maturity date of less than one year.
Fixed Income Securities: Include bonds, debentures and some preferred shares that are designed to produce a predictable and consistent series of interest or dividend payments for the investor.
Equities: are ownership interests, usually in the form of common shares or preferred shares, in a company or enterprise.
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Characteristics of Securities The descriptions of securities that follow are not exhaustive but are intended to provide a general comparative framework for various investment products.
Common Shares Common shares represent ownership of a company. As owners, common shareholders have the right to elect directors and to vote on certain major corporate decisions. They are also entitled to share in any residual assets of the company if it is wound up.
Liquidity: Many common shares are traded on stock exchanges or in organized over-the-counter markets between dealers. For some common shares, however, there may be no market or the shares may be subject to legal restrictions on resale.
Expected return: Return on common shares may take the form of dividends and capital gains (or losses). Many The expected rate of larger, established companies try to pay regular return of common shares can vary dramatically as dividends to shareholders. Others may not pay share prices fluctuate. dividends, either because they are not profitable or because they choose to retain earnings for reinvestment. Companies may also change their dividend policies from time to time. In many cases, returns will depend mainly on changes in the share price (leading to capital gains or losses when the shares are sold). The common share prices of all companies can go up and down, in some cases rapidly and substantially.
Risk: Moderate to Very High. Risk will depend on many factors such as the size, profitability and financial stability The size, profitability and of the company, the capabilities of its management and financial stability of a its exposure to general economic downturns, foreign company determine the risk of investing in its exchange risks and new competition. Common common shares. shareholders are the last in line (behind tax authorities, employees, creditors and preferred shareholders) to claim on the assets of the company in the event of insolvency.
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Preferred Shares Preferred shares typically give shareholders the right to receive a fixed dividend before any dividends can be paid to the company’s common shareholders. Preferred shareholders are also entitled to a portion of the residual assets of the company if it is wound up. Holders often do not have voting rights, but in many cases are offered Preferred shareholders special features such as the right to redeem their shares are paid dividends at certain times or convert them into common shares at a before common predetermined price. shareholders are. Liquidity: Comments concerning Common Shares apply.
Expected Return: Dividends on preferred shares are generally fixed, but the company may reduce or suspend dividend payments if, for instance, it fails to make adequate profits or needs to preserve its capital. The capital gains potential of preferred shares is usually less than for common shares of the same company, although conversion privileges, redemption privileges or other special features may enhance the potential for share price increases.
Risk: Moderate to High. Comments concerning common shares apply. Dividend payments may be reduced or suspended for various reasons (e.g., the company is not sufficiently profitable) and any reduction or expected reduction of dividends can have a significant impact on share prices. An increase in the rate of return offered on other investments can also affect preferred share prices as the fixed dividend of the preferred share becomes relatively less attractive. Preferred shareholders are in line behind tax authorities, employees and creditors in claiming on the assets of the company in the event of insolvency.
Flow-Through Shares Flow-through shares are a special type of common share that may be issued by oil and gas companies or mineral exploration companies. These shares allow certain tax deductions for qualifying exploration, development and
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property expenditures to “flow through” from the company to shareholders.
Liquidity: Comments concerning Common Shares apply.
Expected Return: Returns will depend on the potential tax benefits to the investor, and the capital gains or losses that may result from the success or failure of the exploration program. Potential tax benefits will be Flow-through shares greater for those in the highest tax brackets. provide investors with special tax deductions Risk: High. Resource exploration and development but, usually, higher risk. programs are generally high risk. In addition, there are risks that the company’s expenditures may not meet the strict requirements of the tax legislation and tax deductions may be disallowed. Flow-through shares are most suitable for experienced investors who can take maximum advantage of the tax benefits and who can withstand the loss of some or all of their investment.
Savings Bonds Savings bonds are issued in a number of forms by the federal and some provincial governments. They are Savings bonds offer a evidence of a loan by the investor to the issuing fixed rate of return and government and are backed by the general credit and very low risk because taxation powers of the government. Savings bonds are they are issued by the usually offered for sale to individual investors at regular government. times each year. Purchase limits often apply.
Liquidity: Savings bonds are generally not transferable. Some savings bonds may be redeemed by the holder at any time, while others may only be redeemed at specified intervals (e.g., every six months) or are not redeemable before maturity.
Expected Return: Most savings bonds guarantee a fixed rate of return for each year to maturity or specify a minimum rate of return that can be adjusted upward by the issuer if market conditions demand.
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Risk: Very Low. Federal or provincial government backing of savings bonds means there is virtually no risk of default.
Bonds Bonds are evidence of a loan by the investor to the government or company that issues the bond. The issuer generally promises to pay a specified rate of interest to the bondholder and to repay a certain amount (the face value of the bond) at maturity. Bonds may be sold at prices higher or lower than their face value. Corporate bonds are typically secured by a pledge of Bond and debenture prices are affected by specific assets. Some bonds offer holders the right to changes in prevailing convert their bonds into common shares. interest rates. As interest rates go up, Liquidity: Bonds are generally not traded on stock bond and debenture exchanges, but many bonds can be sold through prices tend to go down. investment dealers in an over-the-counter bond market. Some government bonds (such as Canada Savings Bonds) also offer redemption privileges.
Expected Return: Interest on bonds is usually paid at a fixed rate. (See comment on “yield” below)
Bond values will fluctuate as returns offered on competing securities change. If interest rates go down, for instance, the market value of a bond would normally go up because its fixed interest payments would become more attractive to investors. The market value of a bond may also be affected by changes in the credit rating of the issuer. Conversion privileges enhance the potential for capital gains on a bond.
Risk: Low to High. The risk of a bond will depend mainly on the risk that the issuer will default on its payment obligations (default risk) and the risk that prevailing interest rates will increase, pushing the value of the bond downward (interest rate risk). Junk bonds offer high yields but have a Some bonds, commonly called “junk bonds”, offer greater risk than other unusually high yields – typically because there is thought bonds.
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to be greater risk that the issuer will default on its payment obligations.
Debentures Debentures are debt securities, similar to bonds, but typically not secured by the pledge of specific corporate assets. They may, however, be secured by a ”floating charge” on the issuer’s assets generally.
Liquidity: Some debentures are listed on stock exchanges while some others trade in the over-the- counter market. In some cases, there may be no established market for a debenture or it may not be transferable.
Expected Return: Comments concerning Bonds apply. The actual rate of return, or “yield”’, that you earn on a bond or debenture will depend on the price you pay for it and the time remaining until it matures. For example, a debenture paying a 7% nominal rate of interest will pay you $70 per year for each $1000 (face value) debenture. If you are able to buy that debenture for only $950, the actual rate of return you receive will be higher than 7%.
Risk: Low to High. Comments concerning Bonds apply.
Treasury Bills (T-Bills) Treasury bills are short-term (less than one year to maturity) debt securities issued by the federal and some provincial governments. They do not pay interest but instead are sold at a price below their value at maturity. T-bills are issued by the government regularly and are typically sold in large denominations. T-bills are very low risk because there is almost Liquidity: T-bills are not redeemable but usually can be no risk of default and sold quickly through investment dealers. their short term minimizes the impact of changing interest rates. Expected Return: Return will be determined by the difference between the purchase price and the value of the T-bill at maturity. Market values may be affected somewhat by changing market interest rates.
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Risk: Very Low. There is virtually no risk of default and the short term nature of T-bills limits risk of significant changes in market value caused by changing market interest rates.
Guaranteed Investment Certificates (GICs) GICs are deposit certificates issued by financial institutions. Most GICs pay specified rates of interest to maturity, although some base the returns to investors on the performance of a benchmark such as a stock A stock exchange index, exchange index. such as the S&P/TSX index®, is a statistical tool Liquidity: Most GICs must be held to maturity, but some that measures the performance of a basket of offer limited redemption privileges. stocks listed on the exchange. Some indices Expected Return: GIC returns are often fixed, but in are designed to reflect the some cases are tied to the performance of a stock overall market, while others market index or some other benchmark. measure the performance of specific industry sectors. Risk: Low to Moderate. GICs are guaranteed by the issuer and the principal is insured (subject to certain limits) by a deposit insurance agency such as the Canada Deposit Insurance Corporation. As a result there is very limited risk that the principal will not be repaid. If the GICs returns are tied to a benchmark, however, there may be risk that interest payments will be lower than anticipated or there may be no interest payments at all.
Shares or Units of Mutual Funds The expected returns from any type of Mutual fund shares or units represent part ownership of a investment fund will also pool of investments that is managed by a professional be affected by the fees money manager. Ownership will be in the form of shares and expenses charged if the mutual fund is organized as a corporation, or units if for the management and the fund is organized as a trust (the most common form). operation of the fund. Holders have the right to vote.
Liquidity: Mutual funds are not traded on stock exchanges but investors may return their shares or units to the fund at any time for redemption and will receive a
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cheque for their pro-rata share (the Net Asset Value per Share, or NAVPS) of the value of the fund’s portfolio.
Expected Return: Returns can include distributions to investors of dividends, interest, capital gains or other income earned by the fund. Returns may also include increases or decreases in the value of the fund’s shares or units. Returns will depend on the fund’s investment objectives, described in the fund’s prospectus, and on its success in achieving them.
Risk: Low to Very High. Risk will depend on the type of securities or other assets that the fund invests in (e.g. bonds, equities, real estate). The majority of mutual funds are not insured against investment losses, although recently the industry has begun to offer “protected mutual funds” that insure the return of at least the principal invested at a specified date in the future (e.g. five years). However, if you must redeem your investment before the specified date, you can still lose money on a protected mutual fund.
Closed-end Investment Funds Closed-end funds are similar to mutual funds, except that they do not issue or redeem shares or units on an ongoing basis. Closed-end funds issue a finite number of shares or units and often list them on a stock exchange so they can be traded among investors. Closed-end funds are similar to mutual funds in terms of how widely they Liquidity: Liquidity will generally depend on whether or can vary in expected not the fund is listed on a stock exchange and on the return and risk. volume of trading activity in the fund’s securities.
Expected Return: Comments concerning Mutual Funds apply.
Risk: Low to Very High. Comments concerning Mutual Funds apply.
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Scholarship Plan Units Scholarship plan units represent the unitholder’s interest in a pool of investments managed by a professional money manager and held by a trustee in a Registered Education Savings Plan. RESPs are administered by not-for-profit foundations and distributed by scholarship plan dealers.
Liquidity: Scholarship plan units are not traded on stock exchanges but investors may redeem their units at any time and withdraw their original investment, less applicable redemption fees.
Expected return: Funds are invested primarily in secure income-producing instruments that offer moderate returns. Investors may forego any return on their investment if their beneficiaries do not attend a qualifying post-secondary education program. The income earned by those investors is generally distributed among other plan participants whose beneficiaries do pursue post- secondary education, thereby increasing their potential investment returns.
Risk: Variable. The risk of capital loss is low. The return on investment can, however, depend on the rate of return earned on the plan’s portfolio and on whether or not the investor’s beneficiary pursues qualifying post-secondary education. When considering the purchase of any investment Segregated Funds fund, investors should consider the potential impact Segregated funds are a special form of insurance that any redemption fees contract with benefits based on the performance of a and deferred sales charges professionally managed pool of assets owned by an could have on the liquidity and the expected returns of insurance company but “segregated” from its other the investment. assets. Unlike mutual funds, segregated funds offer a limited guarantee protecting at least part (typically 75 - 100%) of the original investment.
Liquidity: Segregated funds are not traded on stock exchanges but investors may redeem their units at any time at current market value.
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Expected return: Comments concerning Mutual Funds apply.
Risk: Low to High. Risk will depend on the type of securities or other assets that the fund invests in (e.g. bonds, equities, real estate). Unlike most mutual funds, segregated funds offer a guarantee that most or all of the principal invested will be returned on a specific maturity date (e.g. 10 years) or on your death. You can still lose money on a segregated fund, however, if you must redeem your investment before then.
Labour-Sponsored Investment Funds These are common shares of investment funds sponsored by labour organizations under federal and provincial legislation that establishes certain investment Labour-sponsored criteria and provides tax incentives for investors. investment funds are not highly liquid, carry a Liquidity: Shares in labour-sponsored investment funds variable rate of return and are generally redeemable only once a year, and then have a high risk. only a limited number of redemptions may be permitted. Redemption of a labour-sponsored investment fund before a specified time may have tax implications for investors.
Expected return: Labour-sponsored investment funds invest in new businesses. Returns will depend on the performance of the fund’s investments and on the potential tax benefits available to investors.
Risk: High. Limited liquidity and the speculative nature of the fund’s investments make labour-sponsored investment funds most suitable for investors who are able to make long term investments and who can withstand the loss of some or all of their investment.
Limited Partnership Units Limited partnerships usually invest in a Limited partnership units represent interests in a specific industry and partnership consisting of a general partner, who offer “flow through” tax manages the partnership, and limited partners, who benefits to investors.
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provide the investment capital. The liability of limited partners is generally limited to their initial investment, provided that they do not become involved in management. Limited partnerships will typically invest in a specific industry sector (such as real estate or oil and gas) and often provide for some tax benefits to ”flow through” from the partnership to the limited partners.
Liquidity: There is often no established market for these securities and in many cases they are subject to legal restrictions on resale. In some cases, the general partner may offer limited redemption privileges. If the partnership is dissolved, the assets and securities remaining after all debts have been paid are distributed among the limited partners.
Expected return: Returns will depend on the success or failure of the business projects undertaken by the partnership and on any tax benefits that may be available to investors.
Risk: Moderate to Very High. The risks associated with the partnership’s business venture, combined with limited liquidity, make many limited partnerships suitable only for certain qualified investors. There may also be a risk that anticipated tax benefits will be disallowed.
Trust Units Trust units represent interests in the net assets and net income of a trust. These trusts are generally set up to invest in assets such as real property (real estate investment trusts), royalties from oil and gas production (royalty trusts) or the income generated by one or more businesses (income trusts). Many are designed to offer tax advantages to investors.
Liquidity: Some trust units are listed for trading on a stock exchange. For others there may be no established market.
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Expected return: Returns will depend on the profits received by the trust from the assets it holds and on the tax benefits, if any, available to investors.
Risk: Low to High. Risk will depend on the type and performance of the assets held by the trust. Trust investors are not insured against investment losses.
Options Options are securities that give the holder the right to buy (a ”call” option) or sell (a “put” option) an asset at a specific price for a specific period of time. Many options on common shares, other financial products and commodities are traded on exchanges. The holder of an exchange-traded option may sell it, exercise it to buy the underlying asset or let it expire.
Liquidity: Exchange-traded options can usually be sold or exercised on short notice. Some options are not traded on an exchange and may not be transferable.
Expected return: Options do not pay dividends or interest. Returns will depend mainly on changes in the market value of the underlying asset. The market value of an option will tend to decline as it approaches its expiry date.
Risk: Moderate to Very High. Options are a form of leverage and option values will generally fluctuate much more than will values of the underlying asset. Options can also, however, be used as hedging tools to reduce the risk of existing investments.
Warrants Warrants give the holder the right to acquire from the issuer a specific number of other specified securities at a specified price for a specified time. They are typically offered to investors in conjunction with the sale of another security, like a common share.
Liquidity: Comments concerning Options apply
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Expected return: Comments concerning Options apply.
Risk: Moderate to Very High. The market value of warrants, like options, will generally fluctuate much more than will the value of the underlying security.
Rights In a rights offering, a company gives its shareholders the right to buy additional shares from the company at a specified price within a specified period of time. Rights are issued in proportion to the number of shares already owned by each shareholder.
Liquidity: Some rights are listed for trading on a stock exchange and may or may not trade actively. In some cases, rights may be subject to resale restrictions or holders may be subject to restrictions on their ability to exercise the rights to acquire additional shares.
Expected return: Comments concerning Options apply.
Risk: Moderate to Very High: Comments concerning Warrants apply.
Futures Contracts Futures contracts are agreements in which the seller agrees to deliver to the buyer a specified quantity of an asset at a specified price on a given date. Exchange- traded futures contracts (often called exchange contracts) trade on standardized terms and transactions are settled by a clearing agency.
Liquidity: Not all futures contracts are traded on an exchange. For those that are, liquidity will depend on the type of underlying asset and on the exchange on which the contract is traded.
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Expected return: Returns on futures contracts will depend mainly on changes in the value of the underlying asset.
Risk: Very High. Futures contracts can be very risky and they are generally suitable only for very sophisticated investors. Futures contracts are often used by commercial enterprises as “hedging tools” that can reduce the risk of expected future purchases or sales of the underlying asset.
B. Other Financial Products
Insurance Products Life insurance is intended to provide financial protection to family members and other dependants in the event of the death of the policyholder. Should the policyholder die, the proceeds of the life insurance will assist the beneficiaries (typically the spouse and children) to maintain their lifestyle.
Permanent life insurance provides insurance protection The main types of permanent life insurance for the lifetime of the policyholder, and also, over time, are whole life, universal can accumulate a cash surrender value, which the life and variable life. policyholder may borrow against or may recover if the policy is cancelled. Variations of permanent life insurance include whole life, universal life and variable life policies.
Whole life policies are the traditional life insurance policies that guarantee the level of premiums, the death benefit and the growing cash values in the policy.
Universal life policies are a form of interest rate sensitive policies where premiums may be adjusted from time-to- time in response to changes in prevailing interest rates. Universal life policies have a life insurance component and an investment account component and allow the policyholder some flexibility to increase or decrease premiums and the associated death benefit. The
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earnings on the investment component of the policy may not be guaranteed.
Variable life policies typically offer a fixed premium but a cash surrender value that varies with the performance of an investment fund or index. Death benefits in a variable life policy may also vary with the fund’s performance.
Term insurance, on the other hand, provides life Term insurance only insurance coverage for a specified period but have no provides coverage for a investment component or cash surrender value. As a specified period and is therefore less expensive result, premiums are lower than for permanent life than permanent life policies. Term insurance policies are generally available insurance. for terms from one to twenty years and have fixed premiums for the term of the policy.
Life insurance policies are not securities. They sold through licensed insurance agents who are governed by provincial insurance legislation and, in most jurisdictions, are also regulated by insurance self-regulatory organizations.
Annuities An annuity is a contract, usually sold by life insurance Annuities pay income to companies, that guarantees to provide the investor with the investor at regular intervals. periodic income payments over a period of time. The payments are a combination of repayment of principal and payment of income earned on the principal.
Annuities can be fixed or variable rate. In a fixed annuity, the periodic payments to the investor are predetermined and constant over the life of the annuity. In a variable rate annuity, the periodic payments can increase or decrease depending on the rate of return earned on the principal.
Annuities can be immediate annuities, where the payments begin once the annuity is purchased, or deferred annuities, where the payments do not begin for some time in the future.
Deferred annuities may suit the needs of investors saving for education.
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Educational savings can be accumulated in deferred annuities, with the investor contributing capital in exchange for a promise of payments sometime in the future when the student is expected to attend post secondary schooling. Funds invested in this type of annuity can be made in a lump sum or as a series of periodic payments that end before the income is paid out.
C. Understanding Investment Risk
What is risk? In the investment arena, risk is the degree of uncertainty about the expected return from an investment, including the possibility that some or all of the investment may be lost.
Risk is an essential consideration in every investment decision. You cannot assess the merits of a potential investment without having some understanding its risks. It follows that you cannot properly advise your clients unless you understand the risks of the investment being considered.
There is nothing inherently wrong with risk in investments. Investors earn a return on their investment for two reasons: first, they are paid for the use of their money and second, they are paid a “risk premium” for assuming some of the risk of the venture. Any investor who wants to earn a rate of return higher than the risk- free-rate must be prepared to assume some risk to get it.
The Risk-Reward Relationship Risk and expected return are very closely correlated. The relationship can be illustrated in a simple graph.
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14 12 10 8 6 4 2 0 Risk
Investors cannot expect high returns without a Simply put, the higher the risk of an investment, the greater degree of risk. greater the expected return will have to be in order to attract investors. No prudent investor would invest in a high-risk venture that offered a low rate of return. An investor who wants to earn higher returns must be prepared to assume some risk as well.
The Components of Risk Investment risk can have a number of components, including:
Business or Default Risk: This is simply the risk that the business of the company is not profitable or not as profitable as expected, possibly even leading to bankruptcy. When interest rates rise, investment values often fall. Change in interest Market Risk: Common shares on stock exchanges have rates is a risk. a tendency to move together. When the market declines it can tend to bring down the prices of almost all stocks, even those companies that are otherwise doing well.
Interest Rate Risk: Generally speaking, when interest rates go up, investment values go down and when interest rates go down, investment values go up.
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Changing interest rates affect some investments, like long-term bonds, more than others. Equity investments are also affected, but not as predictably as fixed-income investments.
Political Risk: This is the possibility that some new legislation or some other political decision or event will impact the value of an investment.
Inflation Risk: Inflation risk is also referred to as “buying power risk”. Inflation pushes prices up, reducing the amount of goods and services your dollar will buy in the future. If the return on an investment isn’t keeping pace with inflation, then the investor will be slowly losing buying power.
Currency Risk: Also called exchange rate risk, this is the risk that changes in the exchange rates will affect the value of a foreign investment when it is converted into domestic currency in the future.
Misconduct Risk: This is the risk that fraud or misconduct by a participant or intermediary will affect the interests of the investor.
Risk Tolerance A person’s risk tolerance is generally a function of their ability to withstand risk financially and their willingness to accept risks psychologically.
An investor’s risk Risk tolerance can be affected by many things, including tolerance is both the investor’s age, health, income, net worth, financial financial and emotional. needs and investment knowledge. It is also affected by the person’s emotional response to risk and their need for financial security. The fact that an investor has the financial means to withstand losses is irrelevant if the investor loses sleep at night when the value of their investments decline.
Assessing an investor’s tolerance for risk is an important part of Knowing Your Client, but it can be a challenge.
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Many investors have never really thought about how much risk they are prepared to take and relatively few Your clients will likely rely on you to inform investors have the technical skills to evaluate the risk of a them about risks. particular investment.
Most clients will rely heavily on their financial advisers to inform and educate them about risks and to objectively consider the risks associated with any investment that is proposed. Proper and diligent consideration of risks is an important part of your suitability obligations to your clients.
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18. APPENDICES
A. Income Tax Act – sections 146, 204
B. Sample Prospectus. Children's Education Funds Inc. C.S.T. Consultants Inc. Heritage Education Funds Inc Heritage Plan Impression Plan
USC Education Savings Plans Inc.
C. Registration Applications - Form 33-109F4
D. Multilateral Instrument 33-109.
E. Notice of Termination – Form 33-109F1.
F. National Instrument 33-102.
G. Plan Transfer Form.
H. Sample Application (Enrolment) Form. a. Children's Education Funds Inc.
b. C.S.T. Consultants Inc. i. Family Application Form ii. Group Application Form
c. Heritage Education Funds Inc. i. Heritage ii. Impression
d. USC Education Savings Plans Inc.
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