CSC Ethics and Professional Conduct 2 — Questions and Answers
Question 1: What constitutes insider trading under Canadian securities law?
- Trading securities based on publicly available research reports
- Trading securities based on material non-public information obtained through a position of trust or confidence (Correct answer)
- Purchasing securities before a company's quarterly earnings are announced
- Trading large blocks of shares that influence the market price
Correct answer: Trading securities based on material non-public information obtained through a position of trust or confidence
Insider trading involves buying or selling securities based on material information that has not been publicly disclosed, obtained through a privileged or confidential relationship.
Question 2: What is 'front-running' in securities markets?
- Being the first firm to underwrite a new securities offering
- A dealer trading for their own account ahead of executing a large client order, knowing the client's order will likely move the market price (Correct answer)
- Processing client orders on a first-come, first-served basis
- Submitting buy orders before the market opens each day
Correct answer: A dealer trading for their own account ahead of executing a large client order, knowing the client's order will likely move the market price
Front-running is the prohibited practice of a dealer or advisor executing trades in their own account ahead of a pending client order, exploiting advance knowledge that the client's large order will affect the security's price.
Question 3: What does 'best execution' require of a registered investment dealer?
- Executing all trades on the Toronto Stock Exchange regardless of price
- Taking reasonable steps to achieve the most advantageous execution terms for the client considering price, speed, likelihood of execution, and other relevant factors (Correct answer)
- Always obtaining the lowest commission rate available in the market
- Executing only buy orders before sell orders on any given day
Correct answer: Taking reasonable steps to achieve the most advantageous execution terms for the client considering price, speed, likelihood of execution, and other relevant factors
Best execution requires dealers to take reasonable steps to achieve the most favorable outcome for the client when executing orders, considering multiple factors such as price, speed, and likelihood of execution.
Question 4: Under CIRO's complaint handling rules, within what maximum timeframe must a registered firm provide a substantive response to a client complaint?
- 30 calendar days
- 60 calendar days
- 90 calendar days (Correct answer)
- 180 calendar days
Correct answer: 90 calendar days
CIRO rules require registered firms to provide a substantive written response to client complaints within 90 calendar days of receiving the complaint.
Question 5: Which organization provides independent dispute resolution services for Canadian investors who cannot resolve complaints with their investment dealer?
- The Financial Consumer Agency of Canada (FCAC)
- The Ombudsman for Banking Services and Investments (OBSI) (Correct answer)
- The Canadian Investor Protection Fund (CIPF)
- The Investment Industry Association of Canada (IIAC)
Correct answer: The Ombudsman for Banking Services and Investments (OBSI)
OBSI is an independent, not-for-profit organization that investigates and helps resolve disputes between investors and their investment firms when internal complaint processes have been exhausted.
Question 6: What ethical obligation requires an advisor to deal with clients honestly, fairly, and in good faith?
- The principle of prudent investment
- The fair dealing obligation (Correct answer)
- The best interests standard
- The arm's length principle
Correct answer: The fair dealing obligation
The fair dealing obligation requires registrants to deal with clients honestly, fairly, and in good faith, ensuring that client interests are given appropriate consideration in all dealings.
Question 7: What is 'market manipulation' in the context of Canadian securities regulation?
- Using leverage to amplify investment returns
- Engaging in transactions or conduct intended to create a false or misleading appearance of trading activity or market price (Correct answer)
- Adjusting portfolio allocations in response to market conditions
- Making large trades that naturally impact market liquidity
Correct answer: Engaging in transactions or conduct intended to create a false or misleading appearance of trading activity or market price
Market manipulation involves intentional conduct designed to create an artificial appearance of supply, demand, or market price for a security, which misleads other investors and distorts market integrity.
CSC Ethics and Professional Conduct 2
What constitutes insider trading under Canadian securities law?