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Additional investment in investment funds exemption
A type of prospectus exemption that is designed to facilitate additional investments in an investment fund by an existing security holder.
Autorité des marchés financiers (AMF)
The Autorité des marchés financiers (AMF) is the body mandated by the government of Québec to regulate the province’s financial markets and provide assistance to consumers of financial products and services.
Accredited investor exemption
A type of prospectus exemption that applies when securities are distributed to accredited investors.
Audited financial statements
A company’s financial statements which have been prepared and certified by a Chartered Accountant (the auditor).
AML Compliance Officer
See AML Officer.
Accredited investor
Investors who are financially sophisticated and therefore have a reduced need for the protection of prospectus-type disclosure. Accredited investors may include high net worth individuals and institutions.
Account statement
An official summary of account activity that is sent to a client on a periodic basis (monthly, quarterly, annually, etc.).
Approved person
An individual who is a partner, director, officer, compliance officer, branch manager, or alternate branch manager, employee or agent who conducts or participates in the dealer business of the member and who:

  • is registered, licensed or approved in the appropriate category by the securities commission having jurisdiction, and
  • is designated and qualified as such in accordance with the MFDA Rules, or
  • is otherwise subject to the jurisdiction of the MFDA
Asset valuation
The act or process of determining the value of an asset.
AML Officer
The Anti-Money Laundering Officer is a compliance role within a firm who together with the Ultimate Designated Persona and the Chief Compliance Officer is responsible for ensuring that the firm is protected from proceeds of crime.
AMF
See Autorité des marchés financiers.
B
Business continuity planning
A process by which a company establishes a set of procedures to be followed in the event of an unforeseen accident, disaster or emergency.
Breach of contract
When one party fails to perform its obligations under a contract. The party in breach of the contract is liable to pay compensation to the other party for any losses or damages that the latter may have suffered as a result of the breach.
Bonding
An agreement (such as a fidelity bond) under which a bonding or insurance company guarantees payment of a specified sum as damages, in the event one or more of the employees covered in the bond cause financial loss to the insured.
C
Chambre de la sécurité financière (CSF)
The SRO in Québec that regulates mutual fund representatives. The MFDA has a co-operative agreement with the AMF and the CSF which covers matters such as information sharing, inspections, the harmonization of rules and regulations, enforcement and complaints.
Canadian Public Accountability Board
An organization whose mission is to: “To contribute to public confidence in the integrity of financial reporting of reporting issuers in Canada by effective regulation and promoting quality, independent auditing.”
Chief Compliance Officer (CCO)
MFDA Rule 2.5.2 requires every dealer to designate a trading officer as a compliance officer who is, or reports to, a member of senior management (such as the dealer’s chief executive officer, chief operating officer or chief financial officer). This person must be registered and/or licensed in the appropriate category under applicable securities legislation and must have the necessary knowledge of industry regulations and of the firm’s policies to act in this capacity.
Chief Executive Officer
The highest-ranking officer (executive) at an organization; the CEO typically reports to the Board of Directors and has management responsibility for the organization and its employees.
Chief Operating Officer
A senior manager with responsibility for managing a company’s day-to-day operations. The COO may report to the chief executive officer (CEO).
Capital requirements
The standardized requirements in place for registered firms, which determines how much capital is required to be held for a certain level of assets. These requirements are put into place to ensure that they have enough capital to sustain operating losses. Also known as “regulatory capital”.
Conflict of Interest
The divergence of the interests of the related parties (e.g. between the interests of the firm or representative and the interests of the client).
Corporate governance
The system by which companies are directed and controlled.
Corporate charter
A document (or several documents) related to the establishment and ongoing function of a corporation. The corporate charter is filed with a government jurisdiction that has the power to authorize and register the establishment of the business.
Capital adequacy
Percentage ratio of a company’s primary capital to its assets, which is used as a measure of its financial strength and stability.
Civil litigation
A legal dispute (under civil law) between two or more parties that seek money damages or specific performance, rather than criminal sanctions which occur under criminal law.
Civil liability
Potential responsibility to pay damages or other court-enforcement in a lawsuit.
Churning
Any practice whereby a representative recommends a trade which provides little or no economic benefit to the client and which has little or no rationale other than the generation of commissions or other benefits for the representative.
CPAB
See Canadian Public Accountability Board.
CCO
See Chief Compliance Officer.
CEO
See Chief Executive Officer.
COO
See Chief Operating Officer.
D
Deferred sales charge
A redemption charge paid by the unitholder when redeeming mutual fund units sold on a back-end load basis. The deferred sales charge is typically expressed as a percentage and usually decreases each year the fund is held.
Discretionary account
An account for which securities may be bought and sold without the client’s consent. For such accounts, clients must sign a discretionary disclosure, which serves as documentation of the client’s consent.
Detective controls
They do not prevent fraud and error but rather detect them after the fact, or maximize the chance of their detection after the fact, so that corrective action may be promptly taken.
Direct liability
A legal obligation imposed on an individual who has direct responsibility for negligence that results in damage to property, or bodily injury.
Dey Report
A report published in 1994 by a TSX-sponsored committee (also entitled “Where Were the Directors?”). The Dey Report contained 14 recommendations to assist TSX-listed companies in their approach to corporate governance, recommendations that later evolved into best practice guidelines.
Disclosure
Communicating to the client any relevant facts or information as may be required by legislation and regulations. Examples: risk disclosure, conflict of interest disclosure, referral arrangements, etc.
DSC
See Deferred sales charge.
E
Excess working capital (EWC)
Excess capital reserves that registered firms must maintain as prescribed in securities legislation and regulations in order to sustain them from the potential risk of liquidity shortages or insolvency.
Early warning excess (EWE)
An amount used to assess liquidity; EWE is determined using the following calculation: Risk adjusted capital, less total other allowable assets, plus 10% of non-current liabilities.
Exempt market dealer
A dealer who is registered to trade in exempt securities (i.e. those securities distributed under exemptions from prospectus or registration requirements).
Early warning tests
Tests conducted to measure a registered firm’s risk adjusted capital, liquidity and profitability.
Eligibility adviser
A registered investment dealer, or in some provinces, may be a lawyer, chartered accountant, certified general accountant or certified management accountant, provided the person has no relationship with the issuer and certain related persons and did not act for the issuer or related persons within the previous 12 months.
Eligible investor
A person whose net assets or net income before taxes meet eligibility criteria as specified in legislation or regulations; or an accredited investor; or a person that has obtained advice regarding the suitability of an investment from an eligibility adviser.
Exemptive relief
These are exemptions from the requirements of the securities commissions and the SROs regulations that are granted.
Exempt products
Unlike traditional mutual funds, stocks and bonds, exempt products are exempt from rules requiring a prospectus and include, but are not limited to, principle-protected notes, hedge funds, real estate investment trusts (REITs), limited partnerships and flow-through shares. Alternative or “exempt” investment products have been growing in popularity as a way to generate higher returns and provide more diversification in investors’ portfolios.
Exempt security
A security that is distributed under an exemption from the prospectus requirement or the dealer registration requirement.
Early warning
MFDA Rule 3.4 sets out procedures to ensure that the MFDA has early warning that a dealer may encounter financial difficulties. This allows preventive measures to be taken. The preventive measures include closer monitoring by the MFDA, restrictions on the types of payment that may be made by the dealer and possible restrictions on its activities.
EWC
See Excess working capital.
EWE
See Early warning excess.
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F
Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
Responsible for administering the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The Act imposes a number of requirements on mutual fund dealers. Non-compliance with the requirements of the Act can lead to criminal charges involving imprisonment and heavy fines.
Fully managed account
An account is fully managed if the person who makes the investment decisions has full discretion to do so without requiring the client’s express consent to a transaction.
Financial compliance
Financial compliance encompasses the systems, controls and supervision of the registered firm’s operations, financial position and capital.
Financial instrument
A tradeable asset, such as cash, securities, loans, deposits. Derivative instruments are also financial instruments, however they derive their value from the value and characteristics of an underlying entity (asset, index, interest rate, etc.).
Financial statement
A formal record that provides information about a company’s financial position, performance and changes in financial position.
FundSERV
A business-to-business electronic network that serves as an online hub to connect fund companies, distributors and intermediaries, enabling them to buy, sell and transfer investment funds amongst each other.
FINTRAC
See Financial Transactions and Reports Analysis Centre of Canada.
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G
Guaranteed Investment Certificates (GIC)
A deposit instrument paying a predetermined rate of interest for a specified term, available from banks, trust companies and other financial institutions. Also called certificates of deposit (CDs).
General partnership
Under a general partnership, all the partners are “general partners” who have the same rights and obligations and they are all legally liable for the debts, losses, damages or obligations of the partnership (unlimited liability).
Green sheet
A tool used by investment dealers for internal purposes during the product review process. It outlines the new issue for sales staff and gives some direction about the strengths and weaknesses of the offering.
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H
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I
Investment Industry Regulatory Organization of Canada (“IIROC”)
The self-regulatory organization (SRO) for investment dealers.
International Organization of Securities Commissions (IOSCO)
At the global level, securities commissions and SROs work through the International Organization of Securities Commissions (IOSCO), which is the recognized standard setter for securities markets.
International Organization for Standardization (ISO)
A non-governmental organization, ISO is the world’s largest developer and publisher of International Standards.
Investment fund reinvestment exemption
A type of exemption designed to facilitate the reinvestment of dividends and the investment of optional cash amounts in an investment fund by an existing security holder.
Investor Protection Corporation (IPC)
Provides protection to customers in the event of the bankruptcy of an MFDA member.
Initial public offering (IPO)
The first sale of securities by a private company to the public.
Independent Review Committee
Reviews conflict of interest matters referred to it by the manager and to provide its decision to the latter.
Investment Fund Manager
A firm that directs the business, operations or affairs of an investment fund. A firm that manages the business activities of the investment fund other than the function of portfolio management.
Information circular
A document that is usually sent to shareholders along with a proxy, to help prepare them for an upcoming shareholders’ meeting. The information circular may deal with matters such as the election of the Board of Directors, mergers and acquisitions, or financing needs.
Indirect liability
A legal obligation resulting from damages awarded to an injured party because of someone else’s negligent act. For example, a registered firm may be held accountable in the event of negligent behaviour of one of its employees.
Investment Dealer
A dealer who is registered to trade or act as an underwriter in respect of any security. Investment dealers must become members of the Investment Industry Regulatory Organization of Canada (” IIROC”).
Internal control
The MFDA has adopted the definition of internal control in the Handbook of the Canadian Institute of Chartered Accountants:

“Internal control consists of the policies and procedures established and maintained by management to assist in achieving its objective of ensuring, as far as practical, the orderly and efficient conduct of the entity’s business. The responsibility for ensuring adequate internal control is part of management’s overall responsibility for the ongoing activities of the entity.”

Indemnification
When a corporation agrees to indemnify a director or officer, it may mean that the corporation agrees to provide and/or pay for legal counsel for directors for actions they engage in on behalf of the company. In some cases the indemnification may also include paying damages arising as a result of those actions.
Insider trading
The purchase or sale of a security by a person who has access to material information about the security, which is not yet available to the public.
Interest rate
The rate (i.e. amount charged), expressed as a percentage of principal, by a lender to a borrower for the amount borrowed.
Insolvency
In the context of a company’s balance sheet, insolvency means having negative net assets, meaning that company liabilities exceed company assets.
Issuer
A legal entity that develops, registers and sells securities in order to finance its operations. Issuers, which may include governments, corporations or investment trusts, have legal responsibility for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by legislation and regulations.
IOSCO
See International Organization of Securities Commissions.
Issue
An offer of securities to the public either through a stock exchange, or an offer of securities to a select group, usually through a private placement.
IPC
See Investor Protection Corporation.
IPO
See Initial public offering.
IRC
See Independent Review Committee.
ISO
See International Organization for Standardization.
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J
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K
Know Your Product
The responsibility for mutual fund representatives to inform themselves about the products they sell to ensure suitability requirements are met.
KYP
See Know Your Product
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L
Limited market dealer
A category that in Ontario and in Newfoundland and Labrador has been replaced by ‘exempt market dealer’.
Limited partnership
A Limited Partnership has “general partners” but also establishes “limited partners” who do not have obligations or liabilities beyond the amounts they contributed to the partnership. The “limited partners” are not permitted to be actively involved in the business or affairs of the partnership.
Liquidity risk
The risk that the business is unable to generate sufficient cash to meet its commitments as they fall due. In the context of a dealer, it also includes the risk of not satisfying regulatory capital requirements.
Litigation
A multi-step process whereby a person begins a civil lawsuit to seek resolution of a dispute; often the process leads to a trial in court.
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M
Multilateral Instrument 52-110 Audit Committees
Covers the requirement for all reporting issuers to have an audit committee, which is a committee of a Board of Directors to which the Board delegates its responsibility for oversight of the financial reporting process.
Mutual Fund Dealer Association (MFDA)
The self-regulatory organization (SRO) for the distribution side of the mutual fund industry.
Minimum amount investment exemption
This exemption is commonly known as the $150,000 exemption. The exemption applies when securities are distributed to a person and all the following conditions are satisfied:

  • The person buys the securities as principal.
  • The securities have an acquisition cost to the purchaser of not less than $150,000.

The purchaser pays the acquisition cost in cash at the time of the trade. The trade is in respect of a security of a single issuer.

Mutual Fund Dealer
A dealer who is registered to trade only in securities of mutual funds, labour sponsored investment corporations or labour sponsored venture capital corporations, and deposit products such as GICs and PPNs. Mutual fund dealers must become members of the MFDA.
Money laundering
A process whereby criminals conceal illicit funds by converting them into seemingly legitimate income. Dirty money produced through criminal activity is transformed into clean money, the criminal origin of which is difficult to trace. Money laundering transactions include the following:

  • smurfing or structuring
  • commingling illicit funds with those of legitimate businesses
  • nominees
  • big-ticket cash purchases
  • foreign currency
  • currency smuggling
  • gambling in casinos
  • electronic transfer of funds
  • postal money orders
  • credit cards
  • refining
  • value tampering
  • loan back
Market risk
The risk that a change in security prices, exchange rates, interest rates, inflation and other market factors will have a negative impact on the business.
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N
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations
Covers registration requirements for firms and individuals, as well as exemptions, and requirements related to business operations and client relationships and other ongoing registrant obligations.
National Instrument 58-101 Disclosure of Corporate Governance Practices
Covers the requirement for reporting issuers, with certain exceptions, to disclose their corporate governance practices.
National Instrument 45-106 Prospectus and Registration Exemptions
Covers prospectus exemptions including capital raising exemptions, transaction exemptions, investment fund exemptions, employee, executive officer, director and consultant exemptions, and miscellaneous exemptions.
National Policy 58-201 Corporate Governance Guidelines
This Policy applies to all reporting issuers, other than investment funds, and provides non-prescriptive guidelines on corporate governance practices which have been formulated:

  • to achieve a balance between protecting investors and fostering fair and efficient capital markets; and
  • to recognize the evolving nature of corporate governance.
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O
Ombudsman for Banking Services and Investments (OBSI)
OBSI is involved in the resolution of disputes between participating firms and their customers. Participating firms in the mutual fund industry include fund managers, investment dealers and mutual fund dealers. If OBSI decides in favour of the customer, it has the authority to recommend that the firm compensate the customer up to a limit of $350,000.
Offering memorandum exemption
A type of exemption available in most Canadian jurisdictions except Ontario. The application of the offering memorandum exemption is subject to numerous and complex conditions which may vary by jurisdiction.
Outside business activities
Activities with or without compensation, which involve either employment or a business relationship with an entity outside the dealer, that have the potential of resulting in a conflict of interest.
Offering memorandum
A legal document that outlines the objectives, terms and risks related to a private placement. The offering memorandum provides information to buyers and helps to protect the sellers from the liability related to the sale of unregistered securities.
Operational risk
The risk of loss resulting from the failure of internal processes or employees, or from external events such as widespread disasters.

Operational risk, as it relates to a dealer, may be broken down into:

  • dependence on systems
  • errors or misconduct by employees and representatives
Offence
A violation or breach of a law.
Officer
An individual appointed by the Board who performs specific functions for the corporation, such as a Chairperson of the Board of Directors, President, Vice-President, Secretary, Treasurer, Chief Financial Officer, Chief Operations Officer, Chief Information Officer, Chief Compliance Officer, Chief Privacy Officer.
OBSI
See Ombudsman for Banking Services and Investments.
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P
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA)
Federal legislation enacted to implement specific measures to detect and deter money laundering and the financing of terrorist activities and to facilitate the investigation or prosecution of money laundering and terrorist financing offences.
Personal Information Protection and Electronic Documents Act (PIPEDA)
This Act is the federal privacy law applicable to organizations in the private sector. It has been in general application since January 1, 2004 and sets out ground rules on how private sector organizations may collect, use or disclose personal information in the course of commercial activities. The law gives individuals the right to access and request correction of the personal information these organizations may have collected about them.
Policy and Procedures Manual (PPM)
A firm’s written policies and procedures. Regulators may require the inclusion of specific topics in a firm’s PPM.
Principal-Protected Notes (PPN)
A principal-protected note is a debt instrument issued by a creditworthy issuer, the return on which is linked to the performance of another investment known as the underlying asset.
Privacy Commissioner of Canada
Responsible for administering the Personal Information Protection and Electronic Documents Act (PIPEDA).

The Privacy Commissioner has the authority to investigate complaints against organizations, to conduct audits of organizations suspected of not complying with PIPEDA, to report publicly on how organizations handle personal information, and to pursue court action.

Proficiency requirements
Include education and experience requirements for registered individuals, as well as membership in self-regulatory organizations.
Preliminary prospectus
The preliminary prospectus includes a detailed description of the securities offered, along with a profile of the issuing corporation, a summary of its main lines of business and its history. It also includes other relevant details such as a list of the corporation’s officers and directors and details to help potential investors assess the risk of the issue. Firms may use the preliminary prospectus as a marketing tool to assess the demand for the new issue in the marketplace.
Preventive controls
Controls which prevent, or minimize the chance of occurrence of, fraud or error.
Principal regulator
Responsible for reviewing all the materials filed by the firm or individual. It identifies and addresses any deficiencies relating to the registration application and related materials. After completing its review, it determines whether to grant, refuse to grant or impose terms and conditions on the registration or approval being sought.
Proxy solicitation
When a group attempts to obtain the authorization of other members to vote on their behalf.
Portfolio Manager
A firm who advises, invests in, buys or sells any type of security to manage the investments in a portfolio.
Private placement
A private placement is the distribution of a security to a limited group of investors pursuant to an exemption from the prospectus requirement or the dealer registration requirement. Hedge funds and venture capital funds are often distributed by way of private placement.
Primary market
The market in which new securities such as stocks and bonds are issued to investors for the first time. In the primary market, issuers of securities raise capital from the suppliers of investment capital.
Privacy breach
The unauthorized access to, or collection, use or disclosure of, personal information. An activity is unauthorized if it occurs in contravention of applicable privacy legislation, such as PIPEDA or similar provincial privacy legislation.
PCMLTFA
See Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
PIPEDA
See Personal Information Protection and Electronic Documents Act.
Proxy
Written authorization from a shareholder (called ‘principal’) that confers a limited power of attorney on another person, member, or management of the firm (called ‘agent’ or ‘proxy’) to vote on behalf of, and in accordance with the directions of, the principal.
PPM
See Policy and Procedures Manual.
PPN
See Principal-Protected Notes.
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Q
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R
Risk adjusted capital (RAC)
A ratio used to assess the capital adequacy of registered firms.
Referral arrangement
Any arrangement in which a registrant agrees to pay or receive a referral fee. The definition is not limited to referrals for providing financial services or services requiring registration. It also includes receiving a referral fee for providing a client name and contact information to a person or company.
Registered firm
A company that is registered to trade or advise on securities in one of the official registration categories, as established in the Securities Act of each province and territory and in NI 31-103. Categories include Investment Dealer, Mutual Fund Dealer, Exempt Market Dealer, Investment Fund Manager, and others.
Regulatory risk
The risk of non-compliance with applicable legal and regulatory requirements. The current environment of increased scrutiny may reasonably be expected to lead to increasingly stringent interpretation and enforcement of existing laws and rules by regulators.
Reputation risk
The risk that an activity undertaken by a dealer, its employees and representatives, or its business partners will impair its image in the community or lower public confidence in it. This may result in the loss of business, legal action or regulatory enforcement. Possible sources of reputation risk are:

  • operational failures
  • non-compliance with laws and regulations
  • fraud or other forms of inappropriate conduct by a business partner
Risk management
A structured approach to manage risk through a sequence of activities involving:

  • the identification of potential risks
  • the assessment of the probability of occurrence of the identified risks and the potential loss if it does occur
  • the treatment of risk
Risk mitigation
Methods that reduce the severity of a loss or the likelihood of occurrence of a loss.

Risk can be mitigated by:

  • compliance with laws and regulations
  • effective internal controls
  • effective and efficient operation of the business
Risk avoidance
Not performing the activity that carries risk.
Risk retention
Accepting the loss when it occurs. All risks that are not avoided or transferred are retained.
Risk treatment
It is the process of selecting and implementing measures to modify the risk. There are four main methods of risk treatment:

  • risk mitigation
  • risk avoidance
  • risk transfer
  • risk retention
Risk transfer
The risk is transferred to another party. The most common methods are insurance and hedging.
Referral fee
Any form of compensation, direct or indirect, paid for the referral of a client to or from a registrant. It includes sharing or splitting any commission resulting from the purchase or sale of a security.
Registrant
A firm or individual who is registered to trade or advise on securities.
Right
That which a person has claim to, privilege to, entitlement to, etc. provided by law, regulation, etc. (e.g. right of withdrawal, right of rescission)
RAC
See Risk adjusted capital.
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S
Self-regulatory organizations (SROs)
An SRO is an organization that has been given the authority and the responsibility to regulate its members. SROs in Canada include the Mutual Fund Dealers Association of Canada and the Chambre de la sécurité financière.
Short-term debt exemption
A type of prospectus exemption in respect of the distribution of negotiable promissory notes or commercial paper maturing not more than a year from the date of issue, provided that the debt is not convertible into a different type of security and has an approved credit rating.
Suitability assessment
A process in which the features of an investment or investment strategy are compared to a client’s risk tolerance, investment objectives and time horizon to determine whether the investment is suitable for that client.
Suspicious transaction
Involves reasonable grounds to suspect that the transaction is related to the commission of a money laundering offence or a terrorist activity financing offence.
Securities commission
The federal agency primarily responsible for administering and enforcing federal Securities laws.
Standard of conduct
A set of guidelines a firm and its employees follow to ensure ethical behaviour throughout all aspects of the registered dealers’ business activities.
Statutory liability
Directors and officers may be found liable for specific obligations on directors/officers (direct liability) or for obligations of the corporation (indirect liability).
Sarbanes-Oxley Act
Legislation enacted in the United States in 2002 that prescribed a broad range of measures designed to restore the public’s faith in the capital markets in the wake of corporate scandals such as Enron and WorldCom.
Sales compliance
Sales compliance, which is often also referred to as business conduct compliance, is the supervision regime that is focused on the business activities conducted by the registered firm and each individual acting on the firm’s behalf.
Solvency
A company’s ability to meet its short- and long-term financial obligations.
SEDAR
An electronic filing system and a depository for mandatory regulatory filings such as prospectuses. Documents filed on SEDAR are electronically communicated to all CSA members and are available to the public via the SEDAR website.
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T
Toronto Stock Exchange (TSX)
Based in Toronto, the TSX is the largest stock exchange in Canada. It is owned by and operated as a subsidiary of the TMX Group for the trading of senior equities.
Two-tier supervision
A supervisory structure used by mutual fund dealers where controls are implemented both at the head office level and the branch level.
Trade confirmation
A record sent to a client for every trade executed in the client’s account. A confirmation reports the trade date and settlement date, quantity and description of the security, price, commission, sales charges and other details.
TSX
See Toronto Stock Exchange.
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U
Ultimate Designated Person (UDP)
The UDP is responsible for overseeing the effectiveness of the firm’s compliance system and promoting a culture of compliance throughout the firm. They must supervise the compliance activities of the firm and promote compliance with securities and other applicable legislation by the firm and its management and employees
UDP
See Ultimate Designated Person.

 

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