RESP Dealers Association of Canada. Sales Representative Proficiency Course

Transcription

1 RESP Dealers Association of Canada Sales Representative Proficiency Course

2 2011, RESP Dealers Association of Canada All rights reserved. No part of this publication may be reproduced, stored or transmitted in any form, whether electronic, mechanical, photocopied or otherwise, without the prior written consent of the RESP Dealers Associations of Canada. Applications for written consent should be made to RESPDAC, 2221 Yonge Street, Suite 210, Toronto, ON M4S 2B4 July 2011 ii

3 Contents Introduction... 1 Who is This Course For?... 2 Course Requirements... 2 What Does This Course Cover?... 3 Helpful Hints Saving for Education... 5 Rising Costs... 5 Increasing Benefit of Post-Secondary Education Registered Education Savings Plans What is an RESP? Registration of a Plan Three Types of RESPs RESP Distributors RESPs and the Income Tax Act Subscribers Beneficiaries Contribution Limits Mandatory Termination Transfers Tax on Over-Contributions Payments from RESPs Grant Programs Canada Education Savings Grant (CESG) Additional Canada Education Savings Grant Payments Canada Learning Bond Alberta Centennial Education Savings (ACES) Plan Quebec Education Savings Incentive (QESI) Key Benefits and Potential Risks of RESPs Benefits of RESPs Potential Risks of RESPs iii

4 5. How Scholarship Plans Work How Individual, Family and Group Plans Differ Administration of Scholarship Plans How Scholarship Plans Derive Value Investment Mandate of Scholarship Plans Investment Strategies Scholarship Plan Disclosure Documents The Prospectus Financial Statements Notes to the Financial Statements Other Scholarship Plan Information Additional Financial Disclosure and Oversight Accessing Disclosure Documents Fees and Expenses Enrolment or Membership Fees Enrolment Fee Refunds Completion Insurance Withdrawal Fees Administration and Management Fees Other Charges Scholarship Plan Dealers Role of the Scholarship Plan Dealer Internal Policies and Procedures Supervisory Systems Responsibilities of the Sales Representative 95 The Sales Representative s Responsibilities Code of Ethical Business Conduct Marketing and Advertising Role of Marketing and Advertising Definition of Sales Communication and Advertising Approval Requirement iv

5 Misleading Sales Communications and Advertising Standards for Advertising and Sales Communications Performance Data Business Cards and Letterhead Cold Calling and Telemarketing Federal Regulation Income Tax and CESG Legislation Proceeds of Crime and Terrorist Financing Act and Regulations Disclosure Provisions Securities Legislation Securities Regulation in Canada Introduction to Securities Securities Regulators Securities Law Regulations, Rules, Instruments and Policies Investigations and Enforcement Registration Prospectus Requirements National Policy The Economy Understanding the Economic Environment Measuring the Economy Economic Policy Understanding Financial Markets Understanding Securities Tax and Other Considerations Understanding Investment Risk Three Types of Assets Characteristics of Securities Other Financial Products v

6 Appendix A: Glossary Appendix B: Keeping Up with the Jones Appendix C: Sibling Rivalry Appendix D: Plan Transfer Form Appendix E: Excerpts: Competition Act vi

7 Introduction Introduction This course has been prepared by the Registered Education Savings Plan Dealers Association of Canada (RESPDAC) as part of its ongoing effort to establish the highest standards of knowledge and conduct among those who distribute Scholarship Plans in Canada. RESPDAC was established in 2000 with the following mandate: Proudly advocate the concept and benefits of saving for postsecondary education through Registered Education Savings Plans; Develop, maintain and enforce standards of professionalism and ethical conduct by all member companies, their employees and representatives; Represent the group RESP industry in dealings with regulatory, government and political organizations and individuals in a proactive, responsible and cooperative manner; and Ensure cooperative relations among member companies, with the ultimate goal of serving the needs of subscribers first and foremost and maintaining the high standards of the group RESP industry. RESPDAC is recognized by regulators, political decision-makers, the financial industry, media and the public as the foremost advocacy group for RESPs in Canada. Our focus is on promoting the concept of education saving to Canadian families, and to working cooperatively with provincial regulators in ensuring professional, efficient and ethical operations for the security and benefit of our subscribers. The members of RESPDAC are: C.S.T. Consultants Inc.: distributing the Canadian Scholarship Trust Plans. Global RESP Corporation: distributing the Global Educational Trust Plan. 1

8 Introduction Heritage Education Funds Inc.: distributing the Heritage and Impression Plans. Knowledge First Financial Inc.: distributing the Knowledge First Education Savings Plans. Universitas Management Inc.: distributing the Universitas, Reflex and Individual Plans. Who is This Course For? The Sales Representative Proficiency Course is the mandatory educational prerequisite for people seeking registration as a sales representative of a Scholarship Plan Dealer in Canada. 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 knowledge and integrity. To meet these expectations, you must have proper training and a thorough understanding of your regulatory and ethical obligations throughout your career. The objective of this course is to provide the knowledge you need to: Understand and comply with your legal, regulatory and ethical obligations as a registered sales representative, and Provide your clients with informed, prudent and objective advice about the importance of saving for education, their educational savings options, how RESPs work, available grant programs and all of the investment products you are offering. Course Requirements Some important facts you need to know before you get started: This is a self-study course. 2

9 Introduction To successfully complete it, you must obtain a grade of at least 70% on a final two-hour examination. You should expect to devote 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 (you may complete the course and the exam in a shorter timeframe). Sample examination questions have been included at the end of each chapter to reinforce important concepts and to help you understand what you need to know to successfully complete the course. An online practice exam module is also available for the student at under Student Services. Most Scholarship Plan Dealers require that sales representatives take a product knowledge exam. Check with your dealer to ensure you have the proper study materials. What Does This Course Cover? In the Sales Representatives Proficiency Course, you will learn about: The costs and benefits of post-secondary education in Canada, The rules governing RESPs and government grant programs, The general design of Scholarship Plans, Scholarship Plan disclosure documents, Scholarship Plan fees and expenses, The role of Scholarship Plan Dealers, Responsibilities of sales representatives, RESPDAC s Code of Ethical Business Conduct, 3

10 Introduction The regulatory framework, and An overview of the economic and financial environment in Canada. Helpful Hints Each chapter begins with an Overview and ends with a Summary of content covered. Each chapter includes Test Your Knowledge questions that review information discussed in that chapter. Looking for a definition? The Glossary, found in Appendix A, is a handy resource that defines some key terms used in the industry. More Online: This icon indicates where there are links to websites where you can access more detailed information or check for updates. This course can serve as a reference guide keep it handy after you ve written the exam. You can find the course materials, along with additional reference materials and access to a practice exam module online at under Student Services. Once you have successfully completed your course and exam, you will have access to this course material online for your reference. Your student ID only expires if you don t successfully complete the course and exam by the prescribed date. 4

11 1 Saving for Education 1. Saving for Education CHAPTER 1 OVERVIEW This chapter covers the two key factors that underline the importance of saving for education: The rising costs of post-secondary education in Canada, and The increasing advantages of post-secondary education. Rising Costs The cost of post-secondary education in Canada is high and rapidly getting higher. Consider these facts from Statistics Canada: Tuition fees have been growing much faster than inflation. Tuition fees in Canadian universities have seen an average annual increase of 4.4% between 1998 and 2008, compared to an average annual inflation rate of 2.3%. For students entering university in 2009, the estimated cost of a four-year university education away from home was about $68,000. Children born in 2010 are expected to face costs of more than $116,000 for the same four-year program when they start university. See the following Table 1.1 for estimated future university costs by year of birth. Undergraduate tuition fees at Canadian universities rose by an average of 21.5% from 2002 to The largest increases in that period were seen in professional fields such as law, medicine and dentistry, where tuition fees increased by as much as 65%. 5

12 1 Saving for Education Table 1.1 Projected Costs of a University Education Year of Birth Year of School Entrance Estimated Cost of Total Tuition for a 4-Year Program*(At Home) Estimated Cost of Total Tuition and Accommodation for a 4-Year Program* (Away from Home) $81,118 $129, $76,751 $122, $72,619 $116, $68,709 $111, $65,010 $105, $61,510 $100, $58,199 $95, $55,066 $90, $52,101 $86, $49,296 $81, $46,642 $77, $44,131 $73, $41,755 $70, $39,507 $66, $37,380 $63,428 * Based on Statistics Canada figures, the increase from 1995/1996 to 2006/2007 in total tuition cost was 5.69% and the increase in the cost of accommodation over the same period was 4.53%. Source: Heritage Education Funds, Inc. RESPS IN THE REAL WORLD Braden was born in His parents, Ray and Marie, are university graduates and want to save for his education. They discover that a fouryear university education is expected to cost more than $90,000 in 2020 when Braden finished high school. They come to you for advice about how they can best save to meet that target. 6

13 1 Saving for Education Savings matter: a much higher percentage of youth for whom savings had been set aside for their education (either by themselves or by their parents) went on to college or university compared to youth for whom there were no savings, according to the Statistics Canada 2006 Back to School Factbook. More students are working: about 46% of students worked in the school year compared to just 28% in You can t count on academic or sports scholarships and awards: while the parents of 40% of children 18 years old and younger expected their children would receive a scholarship or award to help finance their post-secondary education, only 15% of students reported receiving such an award in 2002, according to Statistics Canada. Students are graduating with more debt: more than half (59%) of college and university graduates had student debt at graduation in 2006, up from 45% in The average amount owing for an undergraduate student was over $24,000 in 2006, a Canada Millennium Scholarships Foundation study found. In addition to tuition, post-secondary education costs include student fees, living expenses and books. More details are available on the CanLearn website. This online resource about post-secondary education offered by Human Resources and Skills Development Canada could be a useful source of information for you and your clients. MORE ONLINE: While most Canadian parents hope their children will go on to postsecondary education, only 50% of parents in 2002 had savings for college or university. 7

14 1 Saving for Education Increasing Benefit of Post-Secondary Education In recent years a post-secondary education has become critical to success in 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. College and university graduates are more likely than less educated people to find jobs, keep jobs and earn more money, according to a 2009 study, The Value of a Degree: Education, Employment and Earnings in Canada by the Canada Millennium Scholarship Foundation. The study finds: Canadians without a high school diploma are two-and-a-half times more likely to be unemployed than those with a university degree. A university degree holder earned $18,000 more per year than a high school graduate in 2005; those with a graduate degree earned $29,000 more than a high school graduate. A college graduate will earn $394,000 more than a high school graduate over 40 years, while those with a university degree will earn an additional $745,800. Table 1.2 Median 2005 Earnings for Full Year, Full-Time Earners Age 25 64, by Education and by Region Less than high school $32,029 High school $37,403 Trades or apprenticeship $39,996 College $42,937 University degree $56,048 Source: Statistics Canada, Income and Earnings Highlight Tables, 2006 census. Statistics Canada Catalogue no XWE

15 1 Saving for Education Statistics Canada also finds that education translates into jobs and the earnings gap widens over time. Two of every three new jobs in Canada require a post-secondary education. The unemployment rate for 25- to 29-year-olds with less than high school was 15% in 2004, compared to 9% for high school graduates, 6% for college or trade graduates, and 7% for university graduates. As outlined in the following Table 1.3, the earnings gap increases over time, based on education level. The annual average income of people aged 15 to 24 without a university degree ( Certificate/diploma below Bachelor level ) and those with a Bachelor s degree in 2006 were not far apart at about $11,000 and $15,000 respectively. By the age of 35 to 44, university graduates were earning, on average, more than $21,000 more than those without a post-secondary degree or diploma. The earnings gap is largest for 45- to 54-year-olds, with university graduates outpacing the earnings of those without a university degree by $30,000. Table 1.3 Average Employment Income, By Age Group and Education Level, Canada, Certificate/ diploma below Bachelor level $11,119 $29,62 7 $37,744 $41,281 $34,493 $15,515 Bachelor s degree University certificate/ diploma or degree above Bachelor s $15,028 $39,555 $59,146 $71,355 $61,871 $33,985 $15,086 $42,88 2 $72,058 $86,28 4 $78,501 $42,964 Source: 2006 Census of Population, Statistics Canada. 9

16 1 Saving for Education CHAPTER 1 SUMMARY Tuition fees have been growing faster than inflation. A four-year university degree (living away from home) is expected to cost more than $122,000 for a child born in Young people are more likely to pursue a post-secondary education if their parents have savings, but only about half of parents today have education savings. Job opportunities for Canadians without a post-secondary education are dropping but rising for those with higher education. People with post-secondary education are more likely to find a job, keep it and earn substantially more money than people without a post-secondary education. 10

17 1 Saving for Education Test Your Knowledge Chapter 1 1. How have tuition fee increases compared to the inflation rate in recent years? (a) Tuition fees are rising more slowly than the inflation rate. (b) There is no relationship between tuition fees and the inflation rate. (c) Tuition fees have been rising faster than the inflation rate. (d) Tuition fees are protected from the inflation rate by federal law. 2. What does the government estimate that the cost of a four-year university or college education living away from home could be for a child born in 2008? (a) $109,500 (b) $14,000 (c) $204,000 (d) $123, While most parents hope their children will go on to postsecondary education, how many have a specific savings program for education? (a) 25% (b) 50% (c) 75% (d) 99% 4. What percentage of new jobs in Canada requires a postsecondary education? (a) Half (b) A quarter (c) Two-thirds (d) Three-quarters 5. How does education level affect earnings over time? (a) University and college graduates typically earn less money than those with a high school diploma. (b) There is no noticeable difference. 11

18 1 Saving for Education (c) Earnings of those with post-secondary education outpace those with less than high school as they age. (d) By their 50s, those with less than high school education have earnings roughly equal to those with post-secondary education. Answers: 1.C 2.D 3.B 4.C 5.C 12

19 2 Registered Education Savings Plans 2. Registered Education Savings Plans CHAPTER 2 OVERVIEW In this chapter you will learn about: The origins of RESPs in Canada, How Plans are registered, The three types of RESPs, How Plans are distributed (sold), What investments are RESP-eligible, and The rules for RESPs. What is an RESP? An RESP is an investment plan for post-secondary education. The subscriber (often a parent or grandparent) contributes funds to the plan to help pay for future educational costs incurred by the beneficiary. Contributions to an RESP are not tax-deductible, but the income (e.g., dividends, interest, capital gains) earned on those contributions is sheltered from tax until it is withdrawn. As long as the funds are withdrawn to pay for eligible post-secondary education costs (described in more detail later in this chapter), the income that has been earned in the RESP is taxed in the hands of the beneficiary (the student), rather than the subscriber. Since the student will generally be attending school full-time and earning little or no income, the income that the student receives from the RESP will typically be taxed at a very low tax rate. 13

20 2 Registered Education Savings Plans The ability to defer taxes on the income earned is one of the key advantages of RESPs. Other benefits are discussed in subsequent chapters. RESPS IN THE REAL WORLD Two families save for their children s education by putting away $3,000 at the beginning of each year for 10 years. In both cases, the subscribers are subject to the same marginal tax rate of 40%. The Smiths puts the money in non-registered high interest account that earns 4% annual interest. Each year they pay income tax on the income earned in the account. At the end of 10 years, the Smiths have paid $2, in tax and have $34, saved in the account. The Jones put their money in an RESP and earn the same 4% annual interest. They do not have to pay tax on the income earned in the account. At the end of 10 years, the Jones have paid no tax on the income earned and have a total of $37, in their Plan. The Jones have accumulated almost $3,200 more in income than the Smiths on their $30,000 contribution and that does not include the significant government grants that would also have been available to the Jones on their RESP contributions (grants are covered in Chapter 3). The $7, in income earned in the Jones RESP will be subject to tax when it is withdrawn, but it will be taxed at the low rate (or zero) that applies to their student at the time. The Smiths found it difficult keeping up with the Jones without the tax deferral benefits of an RESP. See the details of these calculations in Appendix B. Education Savings Plans (ESPs) 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. 14

21 2 Registered Education Savings Plans In 1974, the Federal Government enacted changes to the Income Tax Act to encourage people to save for their children s post-secondary education. The changes allowed Education Savings Plans to become registered and to serve as tax shelters RESPs. Registration of a Plan RESPs are regulated from an income tax perspective by the Federal Government and administered by the Canada Revenue Agency (CRA). To be established as a Registered Education Savings Plan, the Plan must be approved by CRA. CRA reviews the terms and conditions of the Plan, and ensures 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. Once approved, the Plans are given a registration number under which they are allowed to operate. Approval from CRA does not mean CRA endorses the merits of an RESP or a Scholarship Plan s investment; it simply means that the Plan has been registered as required under the Income Tax Act. Three Types of RESPs The three basic types of RESPs are: 1) Individual (or Non-Family) Plans: An Individual RESP can have only one beneficiary. 2) Family Plans: Family Plans can have one or more beneficiaries, but all must be connected by blood or adoption to the subscriber. 3) Group Plans: The subscriber designates one beneficiary in a Group Plan. Usually offered by not-for-profit Scholarship Plan Foundations, Group Plans pool the contributions made by subscribers and invest them to earn income. 15

22 2 Registered Education Savings Plans Subscribers contributions to Group Plans are typically administered on an age group or maturity date concept. This means that the contributions for beneficiaries who are expected to attend postsecondary school in the same year are administered together and invested so the money is readily available when those students are likely to need it. Most Scholarship Plan Dealers generally specialize in Group Plans, although most offer Family and Individual (Non-Family) Plans as well. RESP Distributors RESPs are 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 Individual and Family RESPs where the subscriber decides what investments will be made in the RESP. In many cases, subscribers who choose a Self-Directed RESP will pay annual administration fees as well as 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. Subscribers are typically charged fees for these advisory services and the administration of the account. Scholarship Plans are managed Plans in which the funds contributed by subscribers are placed in a pool that is professionally managed at the direction of the Plan s advisers. Subscribers to Scholarship Plans can expect to be charged an enrolment fee, which is deducted from early contributions, and fees related to the ongoing management and administration of the Plan. (See Chapter 7: Fees and Expenses for more details.) 16

23 2 Registered Education Savings Plans RESPs and the Income Tax Act Important rules that govern the operation of RESPs appear in sections 118.6, and 204 of the Income Tax Act. MORE ONLINE: These and other rules that govern the operation of RESPs change over time. As a registered Scholarship Plan representative, you will be expected to stay informed of changes and comply with them. The rules described below are current as of June RESP-Eligible Investments Section of the Income Tax Act describes the types of investments that can be held in RESPs. With a few exceptions, investments that qualify for an RESP are the same as those that qualify for a Registered Retirement Savings Plan (RRSP). RESP qualified investments include: Money and deposits, Guaranteed Investment Certificates (GICs) 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, Bonds and other debt obligations of a corporation whose shares are listed on a prescribed stock exchange in Canada or in a foreign country, 17

24 2 Registered Education Savings Plans Segregated fund policies, Prescribed investments (certain mortgages, units or shares of a mutual fund and shares of small business organizations), and An investment acquired by the RESP trust prior to October 28, Scholarship Plans are subject to additional investment restrictions imposed by provincial and territorial securities regulators. Generally, these require that Scholarship Plans invest in secure debt instruments such as GICs, government bonds and debentures, and certain mortgages. These restrictions are discussed in more detail in Chapter 13: Securities Regulation in Canada. Subscribers Subscribers must be individuals (not trusts or corporations), must provide a Canadian Social Insurance Number and must be resident in Canada at the time of enrolment of the beneficiary. A child care agency can be a subscriber provided it is taking out a Plan for a child under the agency s care. (This relates more to Self-Directed Plans than Group Plans). Contributions to an RESP can be made on behalf of a subscriber (for example, by an employer). Those contributions can also qualify for grants (see Chapter 3). Spouses, or common law partners, can be joint subscribers to an RESP. MORE ONLINE: For Canada Revenue Agency s definitions of spouses and common law partners: ncm-tx/rtrn/cmpltng/prsnl-nf/mrtl-eng.html Control of the subscriber s contributions remains with the subscriber, rather than the beneficiary. Education Assistance Payments (EAPs), however, are paid directly to the qualifying beneficiary. 18

25 2 Registered Education Savings Plans For Individual Plans (one beneficiary): o The subscriber can contribute for up to 31 years. o The beneficiary does not have to be related to the subscriber and can be any age when named. o The subscriber can be the beneficiary. For Family Plans (more than one beneficiary): o Subscribers can name beneficiaries who are under 21 when named, and can make contributions only until the beneficiaries turn 31. o Each beneficiary must be connected by blood or adoption to the subscriber(s). For this purpose, a blood relationship includes a parent, brother, sister, child and grandchild of the subscriber; an adopted child is connected to his or her adopting parents and grandparents; and step-children are connected to their stepparents. A subscriber s niece, nephew, aunt, uncle and cousin are not considered to be connected by a blood relationship. Acceptable relationships are defined in section 251 (6) of the Income Tax Act. o The subscriber may not be the beneficiary in a Family Plan. For Group Plans (one beneficiary): The rules vary from one Scholarship Plan dealer to another, but generally: o Subscribers name beneficiaries, which may be restricted with respect to age and/or timing of eligibility of withdrawals. o The beneficiary may be required to be connected to the subscriber. o The subscriber is not typically the beneficiary. 19

26 2 Registered Education Savings Plans Beneficiaries A Social Insurance Number must be provided for each beneficiary. Beneficiaries must reside in Canada while contributions are being made to the Plan. A person can be named as the beneficiary of more than one Plan, subject to contribution limits (outlined below). 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 new beneficiary. Contribution Limits Since 2007, the Income Tax Act has allowed a subscriber to contribute up to a lifetime maximum of $50,000 to an RESP per beneficiary. There is no annual limit for contributions, but there have been limits in the past. Historically, the annual limits have been: Prior to 1990: No annual limit, For 1990 to 1995: $1,500, For 1996: $2,000, and For 1997 to 2006: $4,000. Historically, the limit on lifetime contributions has been: For years before 1990: no limit, For 1990 to 1995: $31,500, and For 1996 to 2006, $42,

27 2 Registered Education Savings Plans Mandatory Termination An RESP must be collapsed 35 years after it is established. Transfers An RESP can be transferred to another RESP. The effective date of the first RESP is applied to the continuing Plan after the transfer. So if the original Plan was started in 1990 and a transfer was made in 2000, the RESP must still be collapsed 35 years after it was started, which is in Excess contributions (and applicable penalty taxes) could result for beneficiaries of the receiving Plan. Penalty tax would not apply if: An individual was a beneficiary under the transferring Plan and the receiving Plan just before the transfer date, or A beneficiary under the transferring Plan is a sibling of a beneficiary under the receiving Plan, provided that the beneficiary under the receiving Plan is under 21 years of age just before the transfer. Tax on Over-Contributions An over-contribution occurs when the total of all contributions made by all subscribers to all RESPs for a beneficiary exceeds the lifetime limit for that beneficiary. Payments into the Plan from federal and provincial grant programs (discussed in Chapter 3), as well as insurance premiums, are not counted towards the over-contribution. If there is an over-contribution to an RESP, the subscriber is taxed on the over-contribution at the rate of 1% per month on any overcontribution that is not withdrawn by the end of the month. This tax is payable within 90 days after the end of the year in which there is an over-contribution. 21

28 2 Registered Education Savings Plans Payments from RESPs The money that accumulates in an RESP consists of: The subscriber s contributions, Grant money that the subscriber has received (see Chapter 3), and Income that has been earned over time on the Plan's investments. There are rules that dictate how that money can be withdrawn from the RESP, whether any of it must be repaid to the government and whether or not any tax penalties could apply. Refund of Contributions The contributions made by a subscriber to an RESP will always be returned to the subscriber, less any applicable fees (i.e. enrolment fees, depository fees and insurance premiums).in most cases, the net contributions are withdrawn when the beneficiary attends postsecondary education and is used, along with the income and grant money that has accumulated in the Plan, to help with educational expenses. While subscribers in Group Plans do not choose their investment options, subscribers in Self-Directed RESPs can choose to invest in a wide range of securities, including some with considerable risk. It is possible to suffer losses on RESP investments that erode the value of the subscriber's contribution. There is no guarantee that all of the subscriber's contributions will still be there when the subscriber wants to withdraw them. Selecting appropriate investments for any RESP is very important. Withdrawal of Grant Money and Income Earned in an RESP The ability to withdraw the income and grant money that an RESP has earned is governed by legislation and by the contractual terms of each Plan. There are four ways funds can be withdrawn from RESPs: 22

29 2 Registered Education Savings Plans 1) EDUCATION ASSISTANCE PAYMENTS (EAPS) This is the most common method of withdrawing the income and grant money that has been accumulated in an RESP. To qualify for an EAP, a beneficiary must be: A resident of Canada (in order to receive any provincial or federal grant portion of an EAP), Enrolled full time in a qualifying educational program at a designated post-secondary educational institution, or At least 16 years old and enrolled part-time in a specified educational program. Enrolled in a part-time program that is at least 12 hours of study per month for at least three consecutive weeks in Canada or 13 consecutive weeks outside Canada, or Afflicted by a documented mental or physical impairment that prevents full-time enrolment. Qualifying educational program (s.118.6, Income Tax Act): is a postsecondary 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. A program at an educational institution outside of Canada must last at least 13 weeks. Designated educational institution (s , Income Tax Act): 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. Human Resources and Skills Development Canada has also approved additional educational institutions in Canada that offer non-credit courses that develop or improve skills in an occupation. Universities, colleges or other educational institutions outside of Canada that have courses at the post-secondary school level are allowed as long as the student is enrolled in a course that lasts at least 13 consecutive weeks. An updated Master List of Designated 23

30 2 Registered Education Savings Plans Educational Institutions is available at Specified educational program: (s.146.1, Income Tax Act): is a program at post-secondary school level that lasts at least three consecutive weeks and requires a student to spend not less than 12 hours per month on courses in the program. Apprenticeship program qualify for EAPs as well. MORE ONLINE: EAP Application Process While each RESP provider may have slightly different requirements, there are a number of forms and information that will be required: Payment Application: This form is completed by the beneficiary and includes questions about their education program and where the EAPs should be deposited. Proof of Registration: This form identifies the beneficiary, the program that the beneficiary is enrolled in, and details such as length of the program and whether the student is full or part-time. It must be signed and stamped by the Registrar of the educational institution. Proof of Progress: Some Group Plans require proof of progress in an educational program. The beneficiary is required to submit their transcript from the Registrar confirming successful completion of the previous academic level(s). EAPs are subject to taxation in the hands of the beneficiary, not the subscriber. Limits on EAPs For full time students, EAPs cannot exceed $5,000 before the beneficiary has completed 13 consecutive weeks in a qualifying educational program. After that, there is no limit on the amount of EAPs that can be paid if the student continues to qualify for them unless there is a 12 month period in which the student is not enrolled 24

31 2 Registered Education Savings Plans in a Qualified Education Program for a minimum of 13 consecutive weeks. Should this occur, the $5,000 maximum applies again. For part-time studies, the EAP is limited to $2,500 for each 13 week semester of part-time studies. MORE ONLINE: pymnts/p-eng.html For EAPs up to $20,000 (indexed annually), Canada Revenue Agency will not assess the reasonableness of each expense item as long as the conditions permitting an EAP are met. 2) ACCUMULATED INCOME PAYMENTS (AIPS) 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 in the form of AIPs. Subscribers may withdraw income as an AIP providing that: The payment is made to, or on behalf of, a subscriber who is a resident of Canada, The payment is made to, or on behalf of, only one subscriber of the RESP, and Any one of the following three conditions apply: o The AIP is made not less than 10 years following the year the RESP was entered into, o Each individual (other than a deceased individual) who is or was a beneficiary has reached 21 years of age and is not currently eligible to receive an EAP, or o The AIP is made in the 35 th year following the year the RESP was entered into. Subscribers may also withdrawn income as an AIP if all beneficiaries named under an RESP are deceased. 25

32 2 Registered Education Savings Plans While most Group Plans are not eligible for AIPs, some have selfdirected options that allow AIPs. Generally, AIPs are payable only to the subscriber. AIPs may be transferred to the subscriber s RRSP (or a spousal RRSP) to the extent of any unused RRSP contribution room to a maximum of $50,000 per subscriber. Any portion of an AIP that is not contributed by the subscriber to an RRSP will be taxed as income in the hands of the subscriber and will be subject to an additional 20% penalty tax (12% in Quebec) in the year of withdrawal. 3) TRANSFERS TO OTHER RESPS As described earlier in this chapter under the heading Transfers. 4) DONATIONS TO EDUCATIONAL INSTITUTIONS When an RESP is left with a small amount of cash after the subscriber withdraws contributions and the requirements for Accumulated Income Payments (AIPs) aren t met, that money is sometimes donated to a designated educational institution. 26

33 2 Registered Education Savings Plans CHAPTER 2 SUMMARY The subscriber contributes funds to the Plan. Contributions to an RESP are not tax-deductible, but the income earned on those contributions is sheltered from tax until withdrawal. As long as the income earned in the Plan is withdrawn to pay for eligible post-secondary education costs when the student is enrolled in school, it will be taxed in the hands of the beneficiary (the student) in the year it s withdrawn. The student will generally be subject to a very low tax rate. Registered Education Savings Plans were recognized by the Federal Government in 1974 through changes to the Income Tax Act. To be registered, an RESP must be approved by the Canada Revenue Agency. The three types of RESP are Individual, Family and Group Plans. RESP-eligible investments are generally the same as those eligible for RRSPs. Subscribers may contribute up to $50,000 per beneficiary. Subscribers and beneficiaries must have a Canadian Social Insurance Number. Subscribers can withdraw net RESP contributions without tax penalty. The income earned within, and grants paid to, an RESP can be withdrawn by beneficiaries, in the form of Educational Assistance Payments, to pay for eligible post-secondary education costs. If a beneficiary does not pursue a post-secondary education, the subscriber may still be able to withdraw the income earned in the RESP in the form of Accumulated Income Payments (AIPs), subject to certain restrictions and potential tax penalties. 27

34 2 Registered Education Savings Plans Test Your Knowledge Chapter 2 1. Why are RESPs described as tax shelters? (a) Contributions are tax-deductible. (b) Income earned on contributions is sheltered from tax until withdrawal. (c) Contributions are not subject to GST. (d) After-tax income is not subject to tax. 2. How does an Education Savings Plan become a Registered Education Savings Plan? (a) It is reviewed and approved by CRA. (b) Its prospectus is receipted by a securities commission. (c) It refers to itself as an RESP. (d) It adheres to the RESPDAC Code of Ethical Business Conduct. 3. Do the following describe a Group Plan or a Family Plan? Contributions are pooled for investment purposes. Investment income goes to others in the pool if a beneficiary doesn t go on to college or university. Only offered by not-for-profit entities. Contributions are administered on an age group concept. (a) Group Plan. (b) Family Plan. 4. What are not RESP-eligible investments? (a) Money and deposits. (b) Corporate or government bonds. (c) GICs. (d) Commodity futures. 5. What is the current RESP contribution limit per beneficiary? (a) No annual limit and $50,000 in total. (b) $2,000 per year and $42,000 in total. (c) $4,000 per year and $42,000 in total. (d) There is no limit. 28

35 2 Registered Education Savings Plans 6. Until what point can contributions be made to a Family RESP? (a) One of the beneficiaries turns 31. (b) One of the beneficiaries begins post-secondary education. (c) The youngest beneficiary turns What are the rules for beneficiaries? (a) Each beneficiary must maintain an A average in high school. (b) A person can be named as the beneficiary of more than one Plan. (c) A beneficiary must be under the age of 12 when the Plan is established. (d) A beneficiary must pledge eternal gratitude to the subscriber. 8. Which of the following is NOT true about EAPs? (a) To qualify for EAPs, the beneficiary must be enrolled full-time in a qualifying educational program. (b) EAPs consist of income earned on subscriber contributions and grants such as the Canada Education Savings Grant. (c) EAPs are taxed based on the income of the beneficiary, not the subscriber. (d) Funds can be transferred from EAPs for a down payment on a first home. Answers: 1 B, 2 A, 3 A, 4 D, 5 A, 6 A, 7 B, 8 D 29

36 2 Registered Education Savings Plans 30

37 3 Grant Programs 3. Grant Programs CHAPTER 3 OVERVIEW This chapter outlines important information about federal and provincial grants available to RESP subscribers. Your clients will expect you to be knowledgeable about these opportunities to receive money from the government to help build their RESPs. The grant programs covered in this chapter are: The Canada Education Savings Grant (CESG), Additional Canada Education Savings Grant payments, The Canada Learning Bond (available to families who qualify for the National Child Benefit Supplement), The Alberta Centennial Education Savings Plan, and The Quebec Education Savings Incentive. Canada Education Savings Grant (CESG) The Federal Government launched the Canada Education Savings Grant (CESG) program in 1998 to provide further incentive for parents to save for the post-secondary education of their children. Human Resources and Skills Development Canada (HRSDC) pays a basic grant of 20% of annual contributions made to eligible RESPs for a qualifying beneficiary. The annual maximum is $500 for each beneficiary; the cumulative lifetime maximum of all CESG is $7,200. The CESG is deposited directly into the RESP. The HRSDC service standard is to make this payment within 65 days of the subscriber 31

38 3 Grant Programs making a contribution. The grant money is held in the Plan for distribution in the form of EAPs to assist the beneficiary with postsecondary education expenses. The key CESG rules are: Qualifying contributions: Annual RESP contributions of up to $2,500 ($2,000 for 1998 to 2007) per beneficiary qualify for the CESG. The beneficiary must be a Canadian resident with a Canadian Social Insurance Number at the time of the contributions. The CESG must be applied for within three years of the date of deposit. Qualifying contributions can be made up to December 31 st of the year in which the student turns 17. Beneficiaries ages 16 and 17: 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 in at least any four years before the year the beneficiary turned 16. Amount of the grant: The CESG program pays an additional 20% of the subscriber s qualifying contribution to the RESP for the beneficiary to a maximum of $7,200 per beneficiary. The exception is the Additional CESG program, described on the next page. CESG amounts are not included in the calculation of the 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 still accumulates $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. 32

39 3 Grant Programs RESPS IN THE REAL WORLD In Chapter 2, we saw how the Smiths discovered they couldn t keep up with the Jones without the tax deferral benefits of an RESP. Let s see what happens when the Jones have the additional benefit of the CESG. We know that the Smiths save $3,000 a year for 10 years and earn annual interest of 4%. At the end of 10 years, the Smiths have paid $2, in tax and have $34, saved in the account. The Jones receive CESG of $500 each year. At the end of 10 years, their RESP is worth $43, Their education savings outpace the Smiths by more than $9,400 due to CESG ($5,000), additional interest earned ($1,563.41) and tax savings ($2,839.52). See the calculations in Appendix B. Acceptable Use: If the beneficiary does qualify for EAPs, the CESG amounts are included in those EAPs. Reallocation: CESGs and income earned on CESGs can be shared with other beneficiaries in a Family Plan as long as no beneficiary receives more than $7,200 in CESGs. Repayment: The CESG (but not the interest earned on it) must be repaid to the Federal Government if the beneficiary of an RESP does not pursue qualifying post-secondary education. When contributions are withdrawn from an RESP that received CESGs 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% of the withdrawal. The CESG would also be repaid to the government if the beneficiary is replaced, unless the replacement beneficiary is under 21 when named and is connected by blood or adoption to each subscriber. For this purpose, a blood relationship includes a parent, brother, sister, child and grandchild of the subscriber; an adopted child is connected to his or her adopting parents and grandparents; and step-children are connected to their step-parents. 33

40 3 Grant Programs Repayment of the CESG is also required if: o The RESP is terminated, o Its registration is revoked, o An AIP is made to the subscriber, or o There is an ineligible transfer from one RESP to another. Additional Canada Education Savings Grant Payments To provide further support for moderate and low income families, the Federal Government introduced Additional Canada Education Savings Grant (ACESG) payments in ACESG payments are available on the first $500 of contributions made by qualifying subscribers. The availability and amount of the ACESG will depend on the family s income level: Family s net income Basic and Additional CESG on first $500 Less than $41,544 40% Between $41,544 and $83,088 30% Greater than $83,088 20% These income amounts are for 2010; they are updated annually and can be found on the Government of Canada s CanLearn website. MORE ONLINE: The next $2,000 in annual deposits will attract the 20% CESG as usual. 34

41 3 Grant Programs The key provisions of this program are: An application for the Additional CESG must be made by the child s primary caregiver (custodial parent) or their spouse/common law partner. Without this application, 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 people. Application forms are available on the HRSDC website for use by RESP providers, who apply for the CESG, the Additional CESG and the Canada Learning Bond on behalf of subscribers. The subscriber is required to provide information to identify the Primary Caregiver and Custodial Parent. Unlike basic CESG amounts, there is no carry-forward of the Additional CESG. The maximum CESG (basic and additional) available remains capped at $7,200 per beneficiary. As with the CESG, the ACESG must be applied for within three years of the date of a qualifying contribution. Canada Learning Bond The Canada Learning Bond is a grant offered by the Government of Canada to low and moderate income families to help them save for their children s post-secondary education. Some of the important features of this program that you should know about: To qualify for the Canada Learning Bond, the subscriber must be eligible to receive the Canada Child Tax Benefit, which includes the National Child Benefit Supplement. Canada Learning Bonds are available only to beneficiaries born after December 31, MORE ONLINE: Find out about the Canada Child Tax Benefit and the National Child Benefit Supplement at: In the first year of eligibility, the Canada Learning Bond will pay $500 into the subscriber s RESP. Human Resources and Skills Development Canada (HRSDC) will also provide $25 at that time 35

42 3 Grant Programs towards any up-front fees associated with establishing an RESP. In each subsequent year that the family is eligible, $100 is paid until the student reaches the age of 15, for a maximum total Canada Learning Bond of $2,000. The subscriber does not have to make separate contributions to the RESP in order to qualify for the Canada Learning Bond. Many, but not all, Canadian financial institutions offer the Canada Learning Bond for RESP subscribers and will submit the application on behalf of eligible subscribers (see canlearn.ca for details of the institutions that offer Canada Learning Bonds). The funds will be deposited directly into the RESP. If a child is entitled to a Canada Learning Bond 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 Canada Learning Bond entitlements from previous years. If Canada Learning Bond payments from previous years have not been requested by the time the beneficiary turns 18, the beneficiary may still obtain them by opening an RESP for themselves. Any Canada Learning Bond payments that have not been deposited into an RESP by the time the beneficiary reaches the age of 21 will be forfeited. Canada Learning Bond payments will not be included as part of the RESP annual and lifetime contribution limits, nor will they be eligible for the CESG. Canada Learning Bond payments and the income earned on them can be withdrawn in the form of Education Assistance Payments and will be taxable in the hands of the beneficiary in the year in which they are withdrawn. Canada Learning Bond payments that are not used for EAPs by the original beneficiary must be returned to HRSDC. They cannot be pooled and shared with others in the Plan, nor can they be transferred to another student or sibling. Scholarship Plan providers apply for the Canada Learning Bond on behalf of subscribers, just like the CESG and Additional CESG, as previously described. More Online: 36

43 3 Grant Programs Alberta Centennial Education Savings (ACES) Plan Children born to or adopted by Alberta residents since January 1, 2005 are eligible to receive grants of up to $800 toward their post-secondary education from the Province of Alberta. The Alberta Centennial Education Savings (ACES) Plan is administered by the Canada Education Savings Program on behalf of the Alberta Government. Here are some of the main features of the ACES Plan: Specific documentation to prove Alberta residency is required for the ACES grant application form for both the initial and subsequent grants. ACES grant payments are available to children named as the beneficiary of an RESP. ACES Plan grants can be applied for through many RESP providers. Fund paid under the program will be deposited directly in the applicant s RESP. An initial grant of $500 is available for babies born to or adopted by Alberta residents on or after January 1, The application for the initial ACES grant must be completed within six years of the child's birth date. Additional ACES grants of $100 each are available to students who are enrolled in school in Alberta and who have turned 8, 11 or 14 years old in 2005 or later. Each additional ACES grant must be applied for separately. The application must be completed within six years of the applicable birthday and evidence must be presented that at least $100 has been deposited to an RESP on behalf of the child in the year preceding the application. Children who are home-schooled at the primary level may also be eligible to receive the $100 ACES grants. A copy of the Home Education Notification Form signed by the relevant associate board or associate private school would serve as proof of enrolment. 37

44 3 Grant Programs Former Alberta residents can apply for ACES grants by providing proof of residency during the qualification period. ACES grant payments can be withdrawn in the form of EAPs by the named beneficiary of the RESP. If the ACES grant is not withdrawn through an EAP, the funds must be repaid to the Government of Alberta. Depending on the type of RESP chosen, the ACES funds may be transferable to a sibling. MORE ONLINE: Quebec Education Savings Incentive (QESI) Introduced in 2007, the QESI is a refundable tax credit that is paid by the Government of Quebec directly into a qualifying applicant s RESP. To qualify, children must be resident in Quebec on December 31 of the relevant year, under the age of 18, have a Social Insurance Number, and be the named beneficiary of an RESP into which the QESI would be paid. The QESI will add 10% of the net contributions paid into each beneficiary s RESP to maximum of $250 per year and $3,600 lifetime. As a further incentive for moderate income families, an increase of up to $50 per year, calculated on the basis of family income, may be added to the basic amount. The basic QESI entitlement accrues annually from 2007 or the child s year of birth, whichever is later, until the year the child turns 17. Unused QESI entitlement can be carried forward, though the maximum annual amount of QESI is $500. For the QESI to be paid for a given year, the RESP Plan dealer must submit a request to Revenue Quebec no later than 90 days after the end of the year, or after a longer period of time that is deemed 38

45 3 Grant Programs reasonable but that may not exceed December 31 of the third year following the year for which the QESI is requested. There are restrictions on entitlement to QESI similar to those for RESPs if the beneficiary of the Plan is 16 or 17 at the end of the year: There must have been contributions to the beneficiary s RESP of at least $2,000 that must not have been withdrawn before the end of the year in which the beneficiary turned 15; or A minimum of $100 in annual RESP contributions must have been paid into the RESP over at least four years prior to the year in which the child turned 16 and the contributions must not have been withdrawn before that year. MORE ONLINE: CHAPTER 3 SUMMARY The Federal Government launched the Canada Education Savings Grant in 1998 to provide further incentives for families to save for their children s post-secondary education. The CESG program is administered by Human Resources and Skills Development Canada and provides a grant of up to $500 per year (including the Additional CESG), to a lifetime maximum of $7,200, to the RESP of qualifying beneficiaries. The Additional Canada Education Savings Grant program provides an extra grant (up to $100) to moderate and low-income families on the first $500 contributed to an RESP. There are special contribution rules for beneficiaries who are 16 and 17 years old. CESGs must be repaid to the Federal Government if the beneficiary does not pursue post-secondary education. The Canada Learning Bond is available to families that are eligible for the National Child Benefit Supplement. This grant can be as high as $2,000. Grant programs in Alberta and Quebec can provide up to $800 and $3,600 respectively. 39

46 3 Grant Programs Test Your Knowledge Chapter 3 1. Why was the CESG program introduced? (a) To boost university enrolment. (b) To encourage parents to save for post-secondary education for their children. (c) To reduce university and college tuition fees. 2. What qualifies for the CESG? (a) $2,500 RESP contribution per year per beneficiary. (b) All RESP contributions. (c) RESP contributions in leap years. (d) $4,000 RESP contribution per family per year. 3. Under what conditions must the CESG be repaid to the Federal Government? (a) If an RESP is terminated. (b) If the beneficiary does not maintain a C average. (c) If the subscriber stops contributing to an RESP. (d) If the beneficiary chooses an out-of-province educational institution. 4. Which of the following applies to the Additional CESG? (a) There is a carry-forward provision for the additional rate. (b) Additional rates apply only on the first $500 of deposits. (c) Only applies to residents of Nova Scotia and Newfoundland. (d) The next $1,500 of annual deposits attract a 30% CESG 5. The total grant available under the Alberta Centennial Education Savings program is: (a) $500 (b) $300 (c) $800 (d) $

47 3 Grant Programs 6. Which of the following is true about the Canada Learning Bond? (a) Families that aren t eligible for the National Child Benefit Supplement (NCBS) are generally eligible to receive the grant. (b) There are carry forward provisions. (c) A request for the Canada Learning Bond entitlements from previous years must be made before the child turns 16. (d) $300 is paid to eligible families each year until the student is The Canada Learning Bond is designed primarily for: (a) Upper middle income families. (b) New immigrants, regardless of income. (c) Middle income families. (d) Low and middle income families. 8. The lifetime maximum for the Quebec Education Savings Incentive is (a) $1,000 (b) $2,500 (c) $3,600 (d) $5,000 Answers: 1 B, 2 A, 3 A, 4 B, 5 C, 6 B, 7 D, 8 C 41

48 3 Grant Programs 42

49 4 Key Benefits and Potential Risks of RESPs 4. Key Benefits and Potential Risks of RESPs CHAPTER 4 OVERVIEW Your clients and the Code of Ethical Business Conduct will expect you to be able to objectively explain the advantages of RESPs as well as the potential risks. This chapter outlines both. Your Scholarship Plan Dealer will provide you with more specific information and training to support your sales efforts, but it s important that all sales representatives have a sound understanding of the key benefits and the risks associated with investing in RESPs. Benefits of RESPs 1) Tax Savings RESPs provide a tax-deferred means for subscribers to accumulate savings specifically for post-secondary education. The subscriber s contributions to an RESP are not tax-deductible, but the income earned on those contributions can accumulate taxfree until the money is withdrawn from the Plan. On withdrawal, the subscriber s contributions are not taxed. The income that has been earned on those contributions will be taxed in the hands of the beneficiary. Typically, beneficiaries who are pursuing post-secondary education will have limited income and so will be subject to little or no tax. 43

50 4 Key Benefits and Potential Risks of RESPs 2) Tax-Free Compound Interest The income earned on RESP contributions is not taxed until it is withdrawn and can compound tax-free for up to 35 years. Compounding interest: Interest that is paid on the original amount deposited, and also on any interest that has been earned in previous periods. In Year 1, the bank pays you $5 interest on your $100 deposit. In Year 2, it pays you interest on $105. 3) Savings Enhanced by Government Grants The Federal Government will add to savings with the Canada Education Savings Grant (CESG) equal to 20% of every eligible dollar contributed to an RESP up to $2,500 contributed per year (CESG of $500) and a lifetime limit of $7,200 per beneficiary. Additional CESG, the Canada Learning Bond and the Alberta and Quebec provincial education savings programs could provide additional grant money to eligible subscribers and beneficiaries. See Chapter 3: Grant Programs for details. As outlined in the Smith/Jones examples in the previous chapter, this amount plus the income earned on the CESG can add significantly to the funds saved. RESPS IN THE REAL WORLD Sanjay contributes $2,500 per year to an RESP for 18 years. In addition, CESG of $500 is received until the $7,200 maximum is received. The RESP earns an average return of 5% over the period. At the end of 18 years, the RESP has a value of $86,597. His brother Sam contributes the same total amount ($45,000) but does so in one lump sum at the start of the period. Sam only receives a $500 CESG in the first year. His RESP earns an average return of 5% over the period. At the end of 18 years, Sam s RESP has a value of $109,501. While the brothers have invested the same amount of money and despite the fact that he only received $500 in CESG, Sam s education savings are almost $23,000 more than his brother s savings because he maximized contributions early. See the calculations in Appendix C. 44

51 4 Key Benefits and Potential Risks of RESPs Chart 4.1 Value of Maximizing Contributions Early 4) Flexibility In the past, if a student didn t pursue post-secondary education, the RESP subscriber risked losing all of the income that had been earned on their investment. Today, when the student does not qualify for EAPs, a subscriber in an Individual or Family Plan may transfer up to $50,000 of income earned in the RESP to their RRSP (if they have contribution room) or withdraw the income and pay tax on it, subject to a 20% penalty tax. This benefit is usually not available to subscribers in many Group Plans, but those with a self-determined option will have some of the features of a Self-Directed Plan such as the ability to transfer income to an RRSP or withdraw it. Subscribers in Group Plans can also transfer their Plan to an Individual or Family Plan. These options are discussed in more detail in Chapter 5. 5) Education Incentive When subscribers start saving towards post-secondary expenses, they provide an incentive to their beneficiaries to pursue further education. The beneficiaries have the confidence that someone planned ahead for them and that financial resources are available for their education. Lack of financial resources is the number one reason why students do not continue education after high school greater than all other reasons combined. 45

52 4 Key Benefits and Potential Risks of RESPs Potential Risks of RESPs RESPs are only as secure as the investments held in the portfolio. Subscribers in Self-Directed RESPs such as those offered by banks can choose from a wide range of investments from the most conservative to the most volatile. The investment objectives of Group RESPs are designed to preserve capital while maximizing the long-term rates of return for investors within the guidelines established by National Policy 15. However, even conservative investment portfolios like these can fluctuate in value and may not provide the rate of return that was expected by the subscriber. No matter what form of RESP is used, it is essential that the portfolio of investments be suitable for the needs, objectives and risk tolerance of the subscriber. There are fees associated with almost all RESPs. These fees can be for trading commissions, enrolment, depository and administration costs. These charges will reduce the investment returns that would otherwise be earned on the portfolio and could even reduce the amount of principal to be returned to the subscriber. (Some Group RESPs offer a return of all or a portion of the enrolment fees with each EAP or at another time designated by the foundation.) Funds contributed to RESPs are held in trust by financial institutions on behalf of the subscribers and beneficiaries. Even the most stable financial institution could conceivably be affected by events that impact global financial markets. Scholarship Plans may allow subscribers to make contributions prior to obtaining a Social Insurance Number for the Plan s beneficiary. However, if the required Social Insurance Number is not provided within 24 months, the Plan will be terminated. Contributions and interest will be returned to the subscriber, less any applicable enrolment fees, administrative fees, depository fees or insurance premiums (if applicable). With no annual minimum, subscribers may deposit up to a life time maximum of $50,000 which could be contributed in one year to an RESP. However, large one-time contributions may not attract the full amount of government grants that would otherwise be available over a multi-year contribution period. 46

53 4 Key Benefits and Potential Risks of RESPs The advantages of RESPs will be substantially reduced for those whose beneficiaries do not pursue post-secondary education. Grant monies will have to be repaid, and subscribers may not be entitled to receive the income that has been earned on their contributions. For those who do attend post-secondary education, there are certain conditions that will affect the beneficiaries ability to withdraw EAPs. In certain situations, the termination and withdrawal of principal from a Plan in which contributions were made after 2004 could result in a forfeiture of the Additional CESG for the remainder of that year and the next two calendar years. The amount of the tax benefit obtained from RESPs will depend, in part, on the beneficiary s tax rate when EAPs are paid out. In most cases, the tax rate applicable to full time students will be very low or even zero, but students with substantial amounts of income may find that they have to pay significant taxes on the income they receive from EAPs. CHAPTER 4 SUMMARY The primary benefits of RESPs are: Tax savings: RESPs provide a tax-sheltered investment vehicle for education savings, savings accumulate tax-free and withdrawals are taxed at the (much lower) tax rate of the beneficiary. Tax-free compounding: income can compound tax-free for up to 35 years. Savings enhanced by CESG: The 20% Federal Government grant helps build education savings. Flexibility: If a beneficiary does not pursue post-secondary education, there are options to ensure earned income is not lost. Education incentive: Students are more likely to pursue further studies if there are education savings to draw upon. The potential risks of RESPs include fluctuating portfolio values, changing financial markets, fees that reduce investment returns, beneficiaries who aren t eligible for EAPs and the tax rate of the beneficiary when EAPs are received. 47

54 4 Key Benefits and Potential Risks of RESPs Test Your Knowledge Chapter 4 1. What is the situation with RESPs and tax? (a) RESP contributions are tax-deductible. (b) Income earned on contributions accumulates tax-free until it s withdrawn. (c) Funds from RESPs can be withdrawn tax-free to make a down payment on a first home. (d) Income earned on contributions is tax-free upon withdrawal. 2. Why is tax-free compounding of interest such a benefit for the investor? (a) It allows the investment to grow more quickly because the investor doesn t have to pay tax each year on the interest earned. (b) It allows the company paying the interest to deduct the amount from its taxable income. (c) The subscriber pays tax, not the beneficiary who is unlikely to have extra money. (d) Interest can only compound if it is tax-free. 3. The CESG is added to the investment but is not permitted to earn interest. (a) True (b) False 4. What happens if a student doesn t qualify for EAPs? (a) If they are in an Individual or Family Plan, the student must pay a $500 tax penalty. (b) If they are in an Individual or Family Plan, the beneficiary can transfer income earned to their RRSP. (c) If they are in a Group Plan, the subscriber is taxed on all contributions made. (d) If they are in a Group Plan, the income earned may be made available to other students in the Plan. 48

55 4 Key Benefits and Potential Risks of RESPs 5. Which of the following is NOT a potential risk associated with RESPs? (a) Financial institutions can be affected by events that impact global financial markets. (b) There are fees associated with almost all RESPs that can reduce investment returns. (c) An increase in interest rates will result in a two-fold decrease in RESP values. (d) Even conservative investment portfolios can fluctuate in value. Answers: 1B, 2 A, 3 B, 4 D, 5 C 49

56 4 Key Benefits and Potential Risks of RESPs 50

57 5 How Scholarship Plans Work 5. How Scholarship Plans Work CHAPTER 5 OVERVIEW This chapter outlines how Scholarship Plans are structured, administered and invested, as well as how they derive value. A solid understanding of these factors will help you explain the features, benefits and risks of Scholarship Plans to your clients and prospects. How Individual, Family and Group Plans Differ As outlined in Chapter 2, there are three types of RESPs: Individual, Family and Group Plans. Most Scholarship Plan foundations specialize in Group Plans but also offer subscribers the option of investing in pooled Family (multiple beneficiary) Plans or pooled Individual Plans in which contributions are managed by the Plan s portfolio advisers. The foundations will also allow transfers from Group Plans to Individual or Family Plans, subject to certain conditions. Group Plans In Group Plans, the amount of money that may be available to beneficiaries in the form of EAPs 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 EAPs for the same qualifying year. If some of the beneficiaries in the Group Plan fail to qualify for EAPs (e.g. do not pursue post-secondary education or later drop out), the income earned on those subscribers contributions is made available for distribution to other beneficiaries who do qualify for EAPs. This can be a substantial benefit for those beneficiaries who do pursue post- 51

58 5 How Scholarship Plans Work secondary education, but it also represents a risk for those subscribers whose beneficiaries who do not continue post-secondary education. This is how Group Plans are structured: Subscribers contributions are held by the Plan s trustee in a pool that is invested collectively on the instructions of the Plan s advisers. While the funds are managed and invested collectively, the Plan s administrator tracks each subscriber s contributions, CESGs, other government grant programs (i.e. Canada Learning Bond, Alberta Centennial Education Savings Plan and Quebec Education Savings Incentive) and share of investment returns separately. Subscribers contributions are typically administered on an age group or maturity date basis. The subscriber determines when the beneficiary is expected to start their post-secondary education (often when the beneficiary turns 18) and the foundation administers that subscriber s contributions together with its other contracts for beneficiaries expected to start post-secondary school at the same time. To participate in a Group Plan, subscribers must typically join the Plan before their beneficiary reaches the age of 13 or 15 (depending on the Plan). Subscribers to a Group Plan agree to buy units, either through a lump sum contribution or through a series of periodic deposits, such as annual or monthly contributions. The units are scheduled to mature when the beneficiaries are ready to begin their postsecondary education. The amount that must be contributed for each unit is determined by the Plan s actuary and depends on the frequency of the contributions made and the number of years before maturity. Deposits are structured so that no matter when a subscriber starts to contribute, all units have earned approximately the equivalent amount of income by the time the Plan matures. Typically, when the subscriber s Plan reaches its maturity date, the accumulated investment income earned is set aside and used to fund the base EAPs to be paid. The base EAP amount is determined by the investment income earned, the number of units purchased by the subscriber, as well as the number of beneficiaries from the pool who actually continue their post-secondary education. 52

59 5 How Scholarship Plans Work Those who do not pursue post-secondary education leave their share of income to those that do. All grant funds are returned to the government. EAPs are typically made up of income earned on contributions, income left behind by terminated Plans, grant and income on grants. With some Group Plans, it may also include all or a portion of the enrolment fees. Investment income earned on the pool after maturity is normally accumulated in a general fund (often called the Income Account or Enhancement Fund). These funds may be used to pay certain expenses of the Plan and to top up or add to EAPs. Group Plans may have different programs in place for the payment of EAPs. Some allow beneficiaries to claim their EAPs from the Plan over a specified number of years, while others allow subscriber to select from various options that spread EAPs over shorter or longer periods, such as with a Self-Directed Plan. Subscribers in a Group Plan often have the option of transferring their Plan to an Individual or Family Plan if they do so in advance of their Plan s maturity date. This may be advantageous for subscribers if it appears that their beneficiary will not be in a position to take full advantage of the EAPs available under the Group Plan. RESPS IN THE REAL WORLD Scarlett had been contributing to a Group Plan for Josh since he was 10 years old. A year before he finished high school, Josh decided he was going to take a one-year post-secondary program and then become a rock musician. Scarlett knew her Group Plan would not allow Josh to take advantage of all the EAPs available unless he participated in a program that was at least two years. She decided to transfer her Plan to an Individual Plan with the same dealer. 53

60 5 How Scholarship Plans Work Individual and Family Plans Subscribers may not wish to or may not be able to participate in a Group Plan. They may be saving for a beneficiary who is too old to qualify for participation in a Group Plan. Perhaps their beneficiary is planning to pursue a post-secondary education program that will not allow them to take full advantage of the EAP payment schedules offered by the Group Plan. Perhaps the subscriber is very uncertain about whether or not their beneficiary will pursue post-secondary education at all. In cases like these, Individual or Family Plans may be attractive alternatives. Individual Plans and Family Plans maintain their own individual investment accounts rather than participating in a group allocation. The subscriber s contributions are invested and the income earned on those contributions, along with the CESGs and other government grant programs, is available to the named beneficiaries in the form of EAPs providing the beneficiary attends qualifying post-secondary education. In Individual or Family Plans, subscribers do not share in any income earned by other subscribers, as they might in a Group Plan. If the subscriber s beneficiaries do not pursue post-secondary education, the subscriber must repay the CESGs and other government grants to the Government but may be able to: Transfer the income that was earned in the Plan (including the income earned on CESG funds) up to a maximum of $50,0000 to an RRSP if the subscriber has unused RRSP contribution room, or Withdraw the income as an AIP and pay income taxes on that income plus the 20% tax penalty specified in the Income Tax Act. See Chapter 2 for a review of EAPs and AIPs. Specified Plans A Specified Plan is a single beneficiary RESP where the beneficiary is entitled to a disability tax credit. The following rules apply: The beneficiary is entitled to the disability tax credit ending in the 32 nd year of the Plan s existence. No other individual may be named beneficiary in a Specified Plan. 54

61 5 How Scholarship Plans Work No contributions (except transfers from another RESP) may be made in the 37the year of the Plan. A Specified Plan can stay open for a maximum of 40 years. Chart 5.1 How RESPs Work Subscriber enters into an RESP contract with the promoter and names one or more beneficiaries under the Plan Government grants (if applicable) Subscriber makes contributions to the RESP Canada Education Savings Grant (CESG) is paid to the RESP Canada Learning Bond (CLB) is paid to the RESP Designated provincial savings program paid to the RESP The promoter of the RESP administers all amounts paid into the RESP. As long as the income stays in the RESP, it is not taxable. The promoter also makes sure payments from the RESP are made according to the terms of the RESP. The promoter can return the subscriber s contributions tax free. The promoter can make payments to the beneficiary to help finance his or her postsecondary education The promoter can make Accumulated Income Payments. 55

62 5 How Scholarship Plans Work Chart 5.2 Comparison of RESP Plans Beneficiaries Individual Family Group One One or more Multiple Type of investment account Own account Own account Group account Sharing of income earned? No No Yes Amount of money for EAPs depends on Income earned Income earned Income earned AND number of beneficiaries who qualify for EAPs Administration of Scholarship Plans Here are the various roles and responsibilities involved in administering Scholarship Plans: Not-for-profit foundations typically sponsor Scholarship Plans. They are responsible for the Plans structure, administration and prospectus. They have overall responsibility for the Plans and oversee the investments of the Plan s assets. Administration of the Plan accounts may be contracted to a third party. The party that manages the Plan will ordinarily be registered as an Investment Fund Manager under securities legislation. The foundation and the fund manager keep all necessary account information and administer financial activity such as: o Tracking deposits, o Allocating investment income and expenses, o Administering scholarship payments, and o Preparing regulatory reports, prospectus renewals and financial statements for clients. 56

63 5 How Scholarship Plans Work Distributors are appointed by the foundations to distribute units in the Plans to subscribers. The distributors must be registered (licensed) as Scholarship Plan Dealers in each province and territory in which they sell the Plans. Sales representatives (also referred to as dealing representatives) employed by distributors must also be registered with the applicable securities commission as a dealing representative of a Scholarship Plan Dealer in each jurisdiction in which they do business. In most cases, the foundation that sponsors a Plan and 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. A trustee (typically a chartered bank or trust company) is appointed by the foundation. The trustee holds the trust assets in accordance with 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. A depository (usually a chartered bank) is appointed by the foundation to receive subscribers contributions, maintain records of subscribers contributions, withdrawals, deductions and income, and to remit deposits to the Plan s trustee. Registered portfolio advisers are retained by each foundation to provide advice on the investment of the Scholarship Plan s portfolio. 57

64 5 How Scholarship Plans Work Chart 5.3 Scholarship Plans: Roles and Responsibilities FOUNDATION Administers the Plans MANAGER Appointed to manage the business DISTRIBUTOR Dealer who distributes the Plan to subscribers SALES REPRESENTATIVES Enrol clients (subscribers) PORTFOLIO ADVISERS Registered portfolio managers who advise the foundation on the Plan s investments DEPOSITORY Handles contributions to and payments from the Plan TRUSTEE Holds the assets in the Plan in trust for the subscribers 58

65 5 How Scholarship Plans Work How Scholarship Plans Derive Value Group Scholarship Plans offer subscribers the same benefits as other types of RESPs: Tax-free compounding of the income earned on contributions, Reduced taxation of the income earned when it is withdrawn by beneficiaries in the form of EAPs, and CESG and other government grant enhancements. Generally, 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 in Group Plans may derive additional value from their share of the CESGs and investment income earned by beneficiaries from the same pool who do not pursue post-secondary education. Subscribers whose beneficiaries do not pursue post-secondary education may forfeit a considerable amount of income, and in some cases the enrolment fee, to be allocated to others in the pool. RESPS IN THE REAL WORLD Bonnie s parents enrolled her in an Individual RESP. Her friend Clyde s parents enrolled him in a Group Plan. After several years of contributions, Bonnie and Clyde both have accumulated RESPs (principal, income on their principal, government grants and interest on the grants) of $35,000. If both go on to a multi-year university program, it is quite likely that Clyde will be able to obtain more money in EAPs than Bonnie will, because Clyde will be entitled to a portion of the income earned for other students in his Group Plan who didn t pursue post-secondary education. The amount of Clyde s additional benefit is uncertain and will 59

66 5 How Scholarship Plans Work depend on the attrition rate from the Plan. If Clyde had decided to embark on his banking career without first pursuing post-secondary education, his parents could recoup their original investment, but would lose accumulated income and have to repay the CESG. Investment Mandate of Scholarship Plans Like all RESPs, Group Scholarship Plans are subject to certain investment restrictions imposed by the Income Tax Act. Go to Chapter 2 for more information about RESP-eligible investments under the Income Tax Act. Scholarship Plans are also subject to provincial securities laws and policies. One of these is National Policy 15, which, among other things, defines the nature of the investments that may be held in a Scholarship Plan. Generally, Scholarship Plans must invest primarily or exclusively in low risk, interest-bearing securities (such as federal or provincial government bonds, GICs, variable rate securities, corporate bonds and Treasury Bills). It is the responsibility of the Scholarship Plan s portfolio advisers to direct the investment of subscribers funds prudently and in accordance with the stated investment strategy of the Plan. Their 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 portfolio adviser, and Different administrative cost structures. 60

67 5 How Scholarship Plans Work Most Scholarship Plan foundations appoint an Investment Committee to define the specific investment mandate for the Scholarship Plan and to monitor the performance of the Plan s portfolio advisers. Independent Review Committees are also established to oversee potential conflicts of interest that could affect the Plan and its unit holders. Investment Strategies A Scholarship Plan s portfolio adviser may apply various strategies to minimize the risks and maximize the returns earned in a Plan. Here are a few of those strategies, focusing on fixed income (bond) investments since Scholarship Plans are primarily invested in these types of investments. An eye on interest rates: Portfolio advisers will often review various economic indicators to assess expected future changes in short-term, mid-term and long-term interest rates. There is an inverse relationship between interest rates and bond prices: as interest rates increase, bond prices tend to decrease. An increase in interest rates will tend to have a greater effect on long-term bond prices than on short-term bond prices. See Chapter 15 for more discussion about bond pricing and interest rates. Investment mix: Expected changes in interest rates may cause a portfolio adviser 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: the strategy of not putting all of the Plan s eggs in one basket is a commonly used risk management strategy. Portfolio advisers will 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. Hold or trade: Portfolio advisers may have to decide whether to actively trade the securities held in the portfolio or simply to hold them to maturity. Holding a fixed income security to maturity can reduce transactions costs and reduce some risks, but it may lead to increased volatility of the portfolio in the short-term. 61

68 5 How Scholarship Plans Work Availability of funds: Portfolio advisers will also try to structure the Plan s portfolio so that funds will be available when 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. CHAPTER 5 SUMMARY There are three types of RESPs: Individual, Family and Group Plans. In Group Plans, the amount of money that may be available to beneficiaries in the form of EAPs 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 for the same qualifying year. Subscribers contributions are held by the Plan s trustee in a pool that is invested collectively on the instructions of the Plan s advisers. Individual or Family Plans may be attractive alternatives for subscribers who are saving for a beneficiary who is too old to qualify for participation in a Group Plan or if they aren t confident the beneficiary will pursue post-secondary education at all. Not-for-profit foundations typically sponsor Scholarship Plans. They appoint distributors, who in turn employ sales representatives. Scholarship Plans are subject to investment restrictions under the Income Tax Act. Generally, Scholarship Plans must invest primarily or exclusively in low risk, interest-bearing securities. Most Scholarship Plan foundations appoint an Investment Committee (to define the specific investment mandate for the Scholarship Plan and monitor the performance of the Plan s portfolio advisers) and Independent Review Committees (to oversee potential conflicts of interest). 62

69 5 How Scholarship Plans Work Test Your Knowledge Chapter 5 1. What is the best definition of a pooled investment? (a) The investors funds are held in a non-interest-bearing account. (b) Funds are invested in the swimming pool industry. (c) Funds from a number of investors are invested together as part of a single pool of capital. (d) Investors forego interest to protect their principal. 2. In what circumstances might an Individual or Family Plan be more appropriate for a subscriber than a Group Plan? (a) The beneficiary is too old to qualify for participation in the Group Plan. (b) The education program that the beneficiary Plans to pursue would not allow him or her to take full advantage of the EAP payment schedule offered by the Group Plan. (c) The subscriber is not confident that the beneficiary will pursue post-secondary education at all. (d) All of the above. 3. What happens to a Group Scholarship Plan at maturity? (a) The fund is immediately split among all the beneficiaries in lump sum payments. (b) Subscribers have the option of withdrawing the entire investment or leaving it for the beneficiary. (c) The subscriber pays accumulated income tax to the government. (d) Contributions are returned to the subscriber while investment income and CESGs are retained for distribution to qualifying beneficiaries in the form of EAPs. 4. Which of the following is true about the relationship between Scholarship Plan foundations and distributors? (a) Foundations appoint distributors to promote the sale of units in Scholarship Plans to subscribers. (b) Foundations and dealers must occupy separate offices. (c) Both foundations and distributors are not-for-profit entities. 63

70 5 How Scholarship Plans Work 5. Which of the following is NOT on the list of allowable investments for RESPs? (a) Futures contracts (b) T-bills (c) GICs (d) Bonds 6. Why is diversification of a portfolio an important investment strategy? (a) It ensures Scholarship Plan returns are consistent from province to province. (b) It helps Scholarship Plans qualify for the Canada Education Savings Grant. (c) It keeps interest rates down. (d) It can significantly reduce portfolio risks. Answers: 1 C., 2 D, 3 D, 4 A, 5 A, 6 D 64

71 6 Scholarship Plan Disclosure Documents 6. Scholarship Plan Disclosure Documents CHAPTER 6 OVERVIEW Scholarship Plans are governed by the securities laws of each jurisdiction in which the Plans are distributed. Among other things, those laws require Scholarship Plans to provide detailed disclosure to investors and the public. As a sales representative, you must be familiar with these disclosure requirements and with the documents provided by your Scholarship Plan Dealer. They are public records designed to inform and protect investors. This chapter provides information about the key documents, which are: The prospectus, The continuous disclosure system, Key financial statements, Financial reporting requirements, and Accessing disclosure documents through the SEDAR system. 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 Scholarship Plan s securities, and it must be given to every subscriber at or before the time of their investment. 65

72 6 Scholarship Plan Disclosure Documents The prospectus must be given to every subscriber at or before the time of their investment. The purpose of the prospectus is to provide the subscriber with all the information needed to make an informed decision about the purchase. It gives clients detailed information they need to know about their investment including: The name of the foundation sponsoring the Plan, The Plan s distributing dealer, manager, trustee, depository and portfolio advisers, 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, Risks associated with investment in the Plan, The laws concerning RESPs and the government grants (CESG, Canada Learning Bond, Alberta Centennial Education Savings Plan and Quebec Education Savings Incentive), Tax considerations relevant to subscribers, Management report on Fund Performance, and Financial statements and auditor information for the Plan. This is a good time to review your Scholarship Plan Dealer s prospectus. 66

73 6 Scholarship Plan Disclosure Documents MORE ONLINE: Prospectuses and many other disclosure documents can be freely accessed online at the System for Electronic Document Analysis and Retrieval (SEDAR) website at at the RESPDAC website ( or through your Scholarship Plan s website. A few things you need to know about the prospectus: You must study your Plan s prospectus carefully to ensure you have detailed knowledge of its contents and can clearly and accurately explain the Plan to potential subscribers. You must never make representations to subscribers that are inconsistent with the disclosure in the Plan s prospectus. Scholarship Plans may not be distributed to the public in any jurisdiction where the securities regulator has not issued a receipt for the Plan s prospectus. The issuance of a receipt is not an endorsement by the securities regulator of the accuracy of the disclosure in the prospectus, the merits of the Plan or the capabilities of the Plan s management. Prospectuses are generally renewed each year. Subscribers must be given a copy of the Plan s current prospectus. The prospectus is reviewed and approved by Canada Revenue Agency. This indicates that the prospectus has fulfilled specific CRA requirements but not that CRA endorses the prospectus disclosure or the merits of the Plan. Financial Statements 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. 67

74 6 Scholarship Plan Disclosure Documents Scholarship Plans are a form of securities or investment funds under securities law. 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. Annual financial statements undergo an independent audit. Complete financial statements are included in each prospectus. Please review the financial statements included with your Plan s prospectus at or your Scholarship Plan Dealer s website. Currently, Scholarship Plans provide four primary financial statements: the Statement of Net Assets, the Statement of Operations, the Statement of Changes in Net Assets and the Statement of Investment Portfolio. In addition, the Notes to the Financial Statements provide pertinent information which often is supplemented with other schedules. 1) Statement of Net Assets The Statement of Net Assets provides a snapshot of the financial position of the Scholarship Plan at a particular point in time. In a more traditional corporate setting, this statement would be considered the Plan s balance sheet. It includes information about the Plan s assets and liabilities. The Plan s assets less its liabilities (net assets) represent 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 investment holdings are detailed in the Statement of Investment Portfolio, described below. The Liabilities section of the statement discloses the Plan s debts or other financial commitments that are still outstanding. This can include general accounts payable, subscriber deposits held, maturity amounts payable, EAP payables and unclaimed subscriber 68

75 6 Scholarship Plan Disclosure Documents funds. If a particular liability is unusual or material it may be explained in more detail in the Notes to the Financial Statements. 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 on subscriber deposits, Government grants, Accumulated interest on government grants, 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. 2) 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/<losses> on disposal of invested assets. Expenses include costs charged to the Plan such as administration fees, investment counsel fees, trustee and custodial fees. Changes in unrealized investment gains/<losses> may be shown separately or as part of income (above). 3) Statement of Changes in Net Assets This statement shows the significant financial activity (inflows and outflows of capital) in the Plan over a period of time. The major inflows to the Plan are typically subscriber assets from operations, CESG and any other government grants received and any amounts transferred from other Plans. The major outflows from the Plan are typically payments to subscribers and students (including repayment of fees and EAPs paid) and CESG and other government grant activity. 69

76 6 Scholarship Plan Disclosure Documents 4) Statement of Investment Portfolio The Statement of Investment Portfolio provides detailed information regarding each of the investment holdings, including description of the instrument, coupon rate, par value, maturity date, cost and market value. Notes to the Financial Statements An integral part of the financial statements, the Notes to the Financial Statements generally include the following information: Nature of operations: The Notes provides a brief description of the operation and some significant historical information. Significant accounting policies: The Notes 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: This includes 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. Financial risk: This note describes the various risks that may be associated with the Plan s investment strategies, financial instruments and markets in which it invests. This could include credit risk, liquidity risk and market risk and the related practices employed to deal with each of those situations. Related party transactions: This refers to 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. 70

77 6 Scholarship Plan Disclosure Documents General Fund: The Notes often will describe the characteristics of the Plan s General Fund and any restrictions that apply to it. Typically, all investment income earned by the Plan after a pool s maturity date is credited to the General Fund and may be used to offset some Plan expenses and supplement scholarship (EAP) levels. Other Scholarship Plan Information Statement of Scholarships Paid to Qualified Students This is often provided either as part of the Notes to the Financial Statements or as a separate statement. It provides information about the number of units or agreements that have received payments from the Group Plan and the amount paid in scholarships or EAPs for each unit. This information can be useful to subscribers in assessing the potential value of units. The values should be used with some caution, however, since there are many factors that affect the ultimate EAPs available. It s important to stress to subscribers that past investment performance is not indicative of future expected returns. Statement of Subscriber Contributions & Subscriber Accumulated Income This optional extra schedule 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. This statement provides the reader with details of the amount of funds on deposit for each year of eligibility pool. At maturity, the amount of funds available per unit is expected to be the same for all units in a pool. This statement provides important information about the timing of the Plan s potential liabilities to subscribers and beneficiaries in future years. 71

78 6 Scholarship Plan Disclosure Documents Additional Financial Disclosure and Oversight The disclosure obligations of Scholarship Plans and other investment funds are outlined in several National Instruments sets of rules that are adopted by provincial and territorial securities regulators. All National Instruments are available for review at the website of your provincial or territorial securities regulator. The key National Instruments for Scholarship Plan disclosure are: National Instrument (General Prospectus Requirements). MORE ONLINE: National Instrument (Investment Fund Continuous Disclosure): This sets out standardized reporting requirements for all types of investment funds, including Scholarship Plans, regarding: o Financial statement disclosure, o Management Reports of Fund Performance, o Delivery of disclosure materials to unit holders, and o Disclosure of material changes. MORE ONLINE: National Instrument (Independent Review Committee for Investment Funds): This rule requires all publicly-offered investment funds to establish an Independent Review Committee (IRC) to review conflict of interest matters and requires the fund s manager to establish written policies and procedures for dealing with conflicts of interests. Independent Review Committees must have at least three members who are independent from the fund and its manager. They must report to subscribers at least annually on their composition and activities. 72

79 6 Scholarship Plan Disclosure Documents MORE ONLINE: Effective January 1, 2011, International Financial Reporting Standards (IFRS) will replace Canadian GAAP for publicly accountable enterprises, which includes investment funds. IFRS will apply to fiscal years beginning on or after January 1, As a result, organizations are required to assess the impact of this change on net assets and disclosures in the financial statements. MORE ONLINE: CSA Staff Notice on International Financial Reporting Standards: Accessing Disclosure Documents Sales representatives, subscribers and the general public can obtain copies of a Plan s disclosure documents through the Plan s distributor or by visiting the website of the System for Electronic Document Analysis and Retrieval (SEDAR) at SEDAR provides free on-line access to a corporate profile for every reporting issuer and to each issuer s prospectuses, annual reports, financial statements and other significant filings required by securities law. MORE ONLINE: 73

80 6 Scholarship Plan Disclosure Documents CHAPTER 6 SUMMARY The prospectus is the most important disclosure document for Scholarship Plans. You must be familiar with its content, and you must give it to every subscriber. Scholarship Plans are required to provide regular disclosure regarding the Plans financial results and financial condition. This includes annual financial statements. The key financial statements for Scholarship Plans are Statement of Net Assets, Statement of Operations, Statement of Changes in Net Assets, Statement of Investment Portfolio and Notes to the Financial Statements. Disclosure documents for all reporting issuers are freely accessible through the System for Electronic Document Analysis and Retrieval ( 74

81 6 Scholarship Plan Disclosure Documents Test Your Knowledge Chapter 6 1. Which of the following is not true about the Scholarship Plan prospectus? (a) The prospectus is the most important disclosure document for a Scholarship Plan. (b) The prospectus is updated monthly, based on performance of the Plan s investments. (c) The prospectus must be given to every subscriber. (d) The prospectus gives investors all the information they need to make an informed decision about the purchase. 2. How do securities regulators deal with the prospectus? (a) A securities commission writes the prospectus. (b) Prospectuses are accepted for filing by the regulators without review. (c) The securities commission endorses the prospectus as a prudent investment. (d) The securities commission reviews and, if appropriate, issues a receipt for the prospectus before it becomes effective. 3. Which of the following is not true about the Statement of Net Assets? (a) It s comparable to a company s balance sheet. (b) It s sent to subscribers every month for their account. (c) It shows the financial position of a Scholarship Plan at a particular point in time. (d) It shows the difference between the Plan s assets and liabilities. 4. Which is not an inflow to a Plan as shown in the Statement of Changes in Net Assets? (a) EAPs (b) CESGs received (c) Subscriber deposits (d) Amounts transferred from other Plans 75

82 6 Scholarship Plan Disclosure Documents 5. What does the Statement of Scholarship Agreements show? (a) The number of scholarship agreements operated by the dealer. (b) A copy of the contract signed by subscribers. (c) A breakdown of the number of units outstanding, deposits and accumulated income for each year of eligibility. (d) A legally binding statement signed by subscribers attesting to their understanding of the prospectus. 6. Which of the following is true about SEDAR? (a) It monitors Scholarship Plan compliance across Canada. (b) It administers the CESG program. (c) It offers free on-line access to a Scholarship Plan s disclosure documents. (d) It is not available to the general public. Answers: 1 B, 2 D, 3 B, 4 A, 5 C, 6 C 76

83 7 Fees and Expenses 7. Fees and Expenses CHAPTER 7 OVERVIEW You will need a thorough understanding of fees and expenses in order to answer client questions. This chapter explains the fees associated with Scholarship Plans, why they are charged, when and how. Enrolment or Membership Fees The subscriber incurs certain sales charges when enrolling in a Scholarship Plan. These are generally enrolment fees (or membership fees) that are paid to the distributing dealer to cover the costs of distributing the Plan, paying commissions to sales representatives and providing service to subscribers. Enrolment fees generally range from $50 to $200 per unit. While National Policy 15 (discussed in Chapter 13) comments on maximum allowable enrolment fees, the limits acceptable to the regulators have changed since NP 15 was first adopted in The enrolment fee is normally collected from the subscriber s early contributions. Most foundations will 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. Enrolment fees charged by your Scholarship Plan Dealer will be explained in your dealer s prospectus. 77

84 7 Fees and Expenses 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 ). RESPS IN THE REAL WORLD Jill and Phil enrol in a Group RESP for their son Bill. They want to put away $150 each month. The total enrolment fee for their Plan will be $1,200. The first four monthly contributions the couple make (totalling $600) will be allocated entirely to enrolment fees. For the next eight months, half of their contribution ($75) will be allocated to paying enrolment fees until the full $1,200 is paid. Chart 7.1 Enrolment Fee Payments The following shows how Jill and Phil s $1,200 enrolment fee is collected. Month Contributio n Enrolment Fee Portion Principal Deposited to Account 1 $150 $ $150 $ $150 $ $150 $150 * 0 4 $150 $75 $75 5 $150 $75 $75 7 $150 $75 $75 8 $150 $75 $75 9 $150 $75 $75 10 $150 $75 $75 11 $150 $75 $75 12 $150 $75 ** $75 Total $1,800 $1,200 $600 * enrolment fees 50% paid ** enrolment fees now fully paid 78

85 7 Fees and Expenses Sales charges are not unique to Scholarship Plans. Investors who trade in stocks pay sales commissions each time they buy or sell, and mutual fund investors may be subject to sales charges that are paid when they first invest in the fund (known as front end load ) or when they redeem the fund (a back end load or deferred sales charge ). Frontend 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 fund (the deferred sales charge usually declines to zero over five or six years). Scholarship Plan enrolment fees have sometimes been criticized in the past as being high in relation to the fees charged on other investment products. In assessing those fees, people must consider that: Scholarship Plans are designed to be lifetime investments; 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 compare favourably to management fees charged by many less complex investment funds. Enrolment Fee Refunds If a subscriber elects to withdraw from a Group Scholarship Plan within 60 days of enrolment, the subscriber will be entitled to a full refund of enrolment fees, and if applicable insurance premiums. In most cases, a subscriber who withdraws from a Plan after 60 days will forfeit some or all of the enrolment fees paid. 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. 79

86 7 Fees and Expenses Completion Insurance Many Plans also offer subscribers insurance policies that are issued by insurance companies and designed to complete the subscriber s payments under the enrolment contract in the event of the subscriber s 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. Withdrawal Fees If subscribers decide to terminate a Plan 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. 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 charged directly to the subscriber s account and sometimes charged against income the Plan has earned. The amount of the fees and the method of collection will vary from one Plan to the next. Review the prospectus for your Plan carefully to ensure that you can clearly explain these fees to your clients. 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 (such as whether they make monthly or annual deposits). 80

87 7 Fees and Expenses 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. Administration fees for Group Plans are typically about ½ of 1% (0.5%) per annum, while administration fees for Individual and Family Plans can range from 0.5% to 1.5% per year. Investment management or council fees pay for professional management of the Plan s investment portfolio. These fees are typically in the range from 1/10 to 1/3 of 1% (0.10% to 0.33%) of the Plan s assets, annually. Independent Review Committee fees pay for the compensation of committee members and permitted committee expenses. These fees are paid to IRC members from the Plan s assets. Custodial/trustee fees pay the costs of holding and safekeeping of the Plan s investment assets. Typically this is a fraction of 1% of the Plans assets, paid annually from the income earned on the portfolio. 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. 81

88 7 Fees and Expenses CHAPTER 7 SUMMARY Scholarship Plan enrolment fees range from $50 to a maximum of $200 per unit. The enrolment fee is normally collected from the subscriber s early contributions. Due to the lifetime nature of the investment and the complexity of administering RESPs and the various government grant programs, the administration fees charged by Scholarship Plans compare favourably to management fees charged by many less complex investment funds. Subscribers who withdraw from a Plan within 60 days of signing the contract are entitled to a full refund of fees including insurance premiums where applicable. Subscribers who withdraw from a Plan more than 60 days after signing the contract are entitled to a refund of principal less fees and insurance premiums where applicable. While enrolment fees cover the cost of marketing and distributing a Scholarship Plan, other fees are paid to the depository, portfolio adviser, Independent Review Committee and trustee for administration and management of the Plan. Completion insurance covers the subscriber s payments under the enrolment contract in the event of their death or disability. 82

89 7 Fees and Expenses Test Your Knowledge Chapter 7 1. How can Scholarship Plan dealers justify charging an enrolment fee? (a) Scholarship Plans only charge enrolment fees for people who aren t residents of Canada. (b) There are Plans to eliminate enrolment fees and refund all past fees paid. (c) It is a complex process to administer RESPs, CESGs and EAPs on behalf of subscribers and beneficiaries over multi-year periods. (d) Enrolment fees are a requirement of the Income Tax Act. 2. Which statement is true with respect to the refund of enrolment fees? (a) Subscribers can get a full refund only if they change their mind within two days. (b) Subscribers can get a full refund if they change their mind within 60 days. (c) Subscribers get half their money back if they change their mind within 30 days. (d) There is no refund permitted for enrolment fees. 3. What is not true about administration fees? (a) They typically vary from ½% to 1 ½% of a Plan s assets per annum. (b) They cover general administration costs of a Scholarship Plan. (c) Dealing representatives charge clients a $50 administration fee annually. (d) They may be an extra charge to clients or be paid from income earned in the Plan. 83

90 7 Fees and Expenses 4. What is completion insurance? (a) Insurance that covers the life of a beneficiary until they complete their education. (b) A policy that covers your costs if your child does not complete a university degree. (c) A complete package of term and life insurance. (d) Insurance that pays a subscriber s RESP contributions in the event of their death or disability. Answers: 1 C, 2 B, 3 C, 4 D 84

91 8 Scholarship Plan Dealers 8. Scholarship Plan Dealers CHAPTER 8 OVERVIEW This chapter outlines the regulations that apply to Scholarship Plan Dealers related to their business structure, management, working capital, record keeping and business practices. You will learn about roles and responsibilities in the supervisory structure of dealers, which includes: The Ultimate Designated Person (UDP) The Chief Compliance Officer (CCO) Head Office Compliance Department Regional Compliance Officers, and Local and regional Supervisors. 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 9, dealers and sales representatives who trade or advise in securities must be registered with the securities regulators in each province and territory in which they do business. Sales representatives will not be registered unless they are retained to act on behalf of a registered dealer. Since Scholarship Plan units are securities, this registration requirement applies to you and to your dealer. 85

92 8 Scholarship Plan Dealers Both dealers and sales representatives must be registered to sell Scholarship Plan units. Dealers are subject to regulations regarding their business structure, management, working capital, record keeping and business practices. Among other things, dealers are required by law to: Establish, maintain and apply policies and procedures and a system of supervision to ensure compliance with securities legislation and to prudently manage the risks of the business. Deal fairly, honestly and in good faith with their clients. Ensure that their sales representatives are properly registered in each appropriate jurisdiction and qualified to perform the services offered to clients. Appoint an Ultimate Designation Person (UDP) and a Chief Compliance Officer (CCO) to promote compliance and oversee the dealer s compliance initiatives. Maintain detailed records of the dealer s business activities as well as records that demonstrate compliance with the dealer s policies and securities legislation. Maintain at least the minimum specified levels of capital and bonding to help ensure that the dealer is always able to meet its financial obligations to clients. Know the identity, needs, objectives and risk tolerance of its clients and ensure that transactions made are suitable for the client. Identify and respond to potential material conflicts of interest between the dealer and its clients. Properly inform clients about the relationship between the dealer and its clients. Respond fairly and effectively to complaints about the products or services offered by the firm and its representatives. 86

93 8 Scholarship Plan Dealers Make available to clients, at the dealer s expense, an independent dispute resolution or mediation service to resolve complaints about trading or advisory activities of the dealer and its representatives. Many of the key regulations that govern the conduct of dealers and sales representatives like you are set out in National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations. MORE ONLINE: Provincial securities regulators post National Instruments on their websites. Here s a link to NI : 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. These policies are designed to fulfil the dealer s obligations under securities legislation to establish and apply prudent written business procedures for dealing with clients. The policies also serve as important internal controls to protect the dealer, its staff and its clients. Compliance with the internal policies and procedures of a dealer is a term and condition of a sales representative s engagement with their Scholarship Plan Dealer. It is essential that all staff members understand and abide by their dealer s policies. 87

94 8 Scholarship Plan Dealers Supervisory Systems Every dealer is required to establish an effective supervisory system but they have some flexibility to design a system that best suits their business structure and operations. To fulfil their supervisory duties, Scholarship Plan Dealers typically establish a tiered supervisory structure, as outlined below. Chart 8.1 Scholarship Plan Dealers Supervisory Structure Dealer s Board of Directors Ultimate Designated Person (UDP) Chief Compliance Officer Regional Compliance Officer Regional Compliance Officer Local or Regional Supervisor Local or Regional Supervisor Sales representatives Sales representatives Local or Regional Supervisor Local or Regional Supervisor Sales representatives Sales representatives 88

95 8 Scholarship Plan Dealers Ultimate Designated Person (UDP) Each dealer is required by regulation to appoint a UDP. That person must: o Supervise the activities of the dealer that are directed toward ensuring compliance with securities legislation by the dealer and its representatives, and o Promote compliance by the dealer and its representatives with securities legislation. The UDP must be the dealer s Chief Executive Officer or equivalent. Chief Compliance Officer (CCO) Each dealer is required by regulation to appoint a qualified and registered CCO who must: o Establish and maintain the dealer s policies and procedures for ensuring compliance by the dealer and its representatives with securities legislation, o Monitor compliance by the dealer and its representatives, and o Report regularly to the UDP and the Board of Directors on potential non-compliance and on the effectiveness of the dealer s compliance program. Head Office Compliance Department Typically managed by the dealer s CCO, the Head Office Compliance Department is usually responsible for ensuring, on a day-to-day basis, that the dealer and its personnel comply with securities and other laws and with the policies, procedures and standards of conduct established by the dealer. Head Office Compliance staff will generally be involved in: o Monitoring client account activity, o Reviewing and dealing with client complaints, o Monitor changes in regulatory requirements and updating internal compliance policies, 89

96 8 Scholarship Plan Dealers o Overseeing the supervisory activities of Regional Compliance Officers and local and regional Supervisors, and o Handling internal disciplinary actions. Typically, the Head Office Compliance Department will rely heavily on Regional Compliance Officers and local and regional Supervisors for front-line supervision and compliance in each region. Regional Compliance Officers Most dealers will appoint one or more Regional Compliance Officers as the senior personnel responsible for the dealer s compliance program in a particular jurisdiction. These Regional Compliance Officers are generally responsible for: o Overseeing the dealer s business activity in the jurisdiction, o Ensuring that salespersons are properly supervised, usually by a designated local or regional Supervisor, o Ensuring that the dealer s policies and procedures are followed by all personnel in the jurisdiction, o Ensuring that dealer personnel properly prepare and maintain the business and compliance records that the dealer is required to maintain, o Ensuring that complaints from clients in the region are properly reviewed, recorded and addressed, and o Overseeing the compliance and supervisory efforts of designated Supervisors in the region. Local and Regional Supervisors These are the personnel assigned to provide day-to-day supervision of sales representatives and other dealer personnel in a particular region or branch office. At most dealers, every sales representative will have a designated supervisor (sometimes a branch manager or agency director) to whom they report. That supervisor will, in turn, report on supervisory and compliance issues to a senior Supervisor or a Regional Compliance Officer. 90

97 8 Scholarship Plan Dealers The specific duties of local and regional supervisors will be set out in the dealer s policies and procedures. Most local and regional supervisors are responsible for: o o o o o o o o Ensuring that the sales representatives and other personnel under their supervision act at all times in compliance with the law and with the dealer s policies and procedures. Ensuring that those who seek registration as sales representatives have the education, training, experience and integrity that are required to meet the expectations of regulators, the dealer and its clients. Promptly reviewing and, if appropriate, approving all new subscriptions (new subscriber accounts) opened in their branch or region. Conducting regular (daily and monthly) reviews of all business activity conducted through the branch. Maintaining detailed records of their supervisory efforts. Providing the training required to ensure that those under their supervision understand their professional obligations and the regulations and policies that govern their conduct. Conducting regular on-site reviews of business locations in their region to ensure that standards of conduct are being met. Documenting all supervisory activities. Reviewing and approving new subscriptions is a primary responsibility of Supervisors. Sales representatives As a sales representative registered under securities law, you must comply with the regulations that apply to registrants and with the policies established by your dealer. You are a key part of your dealer s supervisory system and, as discussed in the next chapter, you will be expected to demonstrate the highest standards of knowledge, professionalism and integrity. 91

98 8 Scholarship Plan Dealers CHAPTER 8 SUMMARY Scholarship Plan Dealers are subject to regulations regarding their business structure, management, working capital, record keeping, complaint handling and business practices. Many of the key regulations that govern the conduct of dealers and sales representatives are set out in National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations. Dealers have established internal policies and procedures to fulfil the dealer s obligations under securities legislation to establish and apply prudent written business procedures for dealing with clients, and to protect the dealer, its staff and its clients. Dealers typically establish a tiered supervisory structure that involves the Ultimate Designated Person (UDP), Chief Compliance Officer (CCO), Head Office Compliance Department, Regional Compliance Officers, and local and regional Supervisors. 92

99 8 Scholarship Plan Dealers Test Your Knowledge Chapter 8 1. What are the registration requirements for Scholarship Plan Dealers and sales representatives? (a) Only dealers have to be registered to sell Scholarship Plan units. (b) Only sales representatives have to be registered to sell Scholarship Plan units. (c) Both dealers and sales representatives have to be registered to sell Scholarship Plan units, and they must be registered in each jurisdiction in which they do business. (d) It isn t mandatory for either dealers or sales representatives to be registered. 2. What do securities regulators require dealers to do? (a) Establish and apply policies and procedures to ensure compliance with the law and to manage the risks of the business. (b) Ensure sales representatives are qualified and properly registered. (c) Create and maintain detailed records of all business activities. (d) All of the above. 3. Every registered Scholarship Plan Dealer must: (a) Appoint a new Ultimate Designated Person (UDP) every year. (b) Appoint a Chief Compliance Officer (CCO) to establish and maintain compliance polices and to report on the dealer s compliance efforts. (c) Retain a Chief Legal Counsel so that sales representatives do not have to learn about securities laws and regulations. (d) None of the above; compliance is completely the responsibility of the individual sales representative. 4. Securities law applies only to registered dealers and not directly to registered sales representatives. (a) True (b) False 5. The key securities law obligations of dealers and sales representatives are set out in: 93

100 8 Scholarship Plan Dealers (a) Section 146 of the Income Tax Act. (b) National Instrument (c) The Financial Institutions and Dealers Act. (d) The Conduct and Practices Handbook. 6. Dealers appoint Regional Compliance Officers and local and regional Supervisors to: (a) Teach advanced sales techniques to new sales representatives. (b) Ensure that sales representatives are not held accountable for errors or misconduct. (c) Protect the dealer, its staff and its clients by ensuring that all personnel comply with securities legislation and the dealer s policies. (d) Prevent sales representatives from doing any business. Answers: 1 C, 2 D, 3 B, 4 B, 5 B, 6 C 94

101 9 Responsibilities of the Sales Representative 9. Responsibilities of the Sales Representative CHAPTER 9 OVERVIEW In this chapter you will learn about your obligations under securities and other laws, including: National Instrument , Registration requirements, The Fair Dealing, Know Your Client and Suitability rules, Your disclosure obligations, Your clients privacy rights, Record keeping requirements, Conflict of interest rules, and Complaint handling procedures. As a sales representative, you will play a central role in the relationship between the Plan, the dealer and the subscriber. You are the primary contact person for the subscriber. It is imperative that you fully understand the needs of subscribers and ensure that the product(s) being offered will be suitable in their situation. As a registrant under securities law, you will have a number of obligations to 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. Many of the key legal obligations of sales representatives and dealers are set out in National Instrument You should be familiar with this regulation and the Companion Policy. 95

102 9 Responsibilities of the Sales Representative MORE ONLINE: National Instrument and Companion Policy : The Sales Representative s Responsibilities Your responsibilities as a sales representative fall under seven general categories. 1) Standards of Conduct 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 practices in response to changing legal requirements. You should also check the website of the securities regulator in your jurisdiction regularly for important notices or proposals that may affect your business. Copies of the legislation, policies, decisions and notices are available online in many jurisdictions. Comprehensive information on securities law is available from the securities regulator in your province or territory: Alberta British Columbia Alberta Securities Commission British Columbia Securities Commission

103 9 Responsibilities of the Sales Representative Manitoba New Brunswick Newfoundland and Labrador Northwest Territories Nova Scotia Nunavut Ontario Prince Edward Island Quebec Saskatchewan Yukon Territory Manitoba Securities Commission New Brunswick Securities Commission Department of Government Services, Consumer and Commercial Affairs Branch Superintendent of Securities, Department of Justice Nova Scotia Securities Commission Superintendent of Securities, Department of Justice Ontario Securities Commission Securities Office, Consumer, Corporate and Insurance Services Division Autorité des marchés financiers Saskatchewan Financial Services Commission Superintendent of Securities, Community Services Your Scholarship Plan Dealer s Chief Compliance Officer, Regional Compliance Officer and local Supervisors can also be important resources in keeping up with the law. 97

104 9 Responsibilities of the Sales Representative MORE ONLINE: If you are uncertain about securities regulations, obtain advice from your dealer before proceeding. COMPLIANCE WITH DEALER POLICIES Scholarship Plan Dealers are required to establish, maintain and apply policies and procedures to ensure compliance with the law and to manage business risks (section 11.1, NI ). Your dealer will provide you with a copy of its internal policies, procedures and forms. It is your responsibility 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. Compliance with dealer policies and procedures is a condition of your relationship with your dealer. Non-compliance may put that relationship and your ability to be registered in the future at risk. Your dealer s compliance staff and your local Supervisors can help with any questions you have about dealer policies. COMPLIANCE WITH THE CODE OF ETHICAL BUSINESS CONDUCT The Code of Ethical Business Conduct, found in Chapter 10, has been adopted by members of the RESP Dealers Association of Canada. You must study the Code and must at all times comply with the standards of conduct that it prescribes. 2) Registration Requirements REGISTRATION The requirements for registration as a sales representative and the mechanics of the registration process are discussed in greater detail in Chapter

105 9 Responsibilities of the Sales Representative You must submit detailed personal information to the regulators through your Scholarship Plan Dealer on your registration application form (in most jurisdictions, known as Form F4). You are responsible for providing complete and accurate responses to every question. Regulators and your sponsoring dealer rely on that information in assessing whether you have the proficiency, integrity and solvency to be fit for registration. You must ensure that your registration is approved by the relevant regulators before you engage in the business of trading or advising in securities. You must also ensure that you are registered in each jurisdiction in which you intend to conduct business. Contravening registration requirements can lead to serious sanctions for you and for your dealer. It is also your responsibility to: Report any changes in the information contained in your registration application form promptly usually within 10 days (refer to section 4.1 of National Instrument for more information on update requirements), and Ensure the annual renewal fees for your registration are paid in full and on time to your dealer. MORE ONLINE: NI SELLING OUT OF PROVINCE/COUNTRY You may only sell Scholarship Plans in the provinces and territories in which you are registered and where the Plan s prospectus has been receipted by the regulators. If a 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 registered in the jurisdiction your subscriber moved to. Section 2.2 of National Instrument provides a limited mobility exemption that may allow you to continue to serve a very limited number of clients who reside in a province or territory in which you are not registered. This exemption is subject to specific conditions 99

106 9 Responsibilities of the Sales Representative that require, among other things, specific disclosure to clients and to regulators. Refer to your dealer for more details. Your dealer will have specific procedures for transferring accounts out of province or country. 3) Client Service THE FAIR DEALING RULE Every sales representative and every dealer has a duty under the law to deal fairly, honestly and in good faith with every client. This principle is expressed in RESPDAC s Code of Ethical Business Conduct and in various provincial/territorial regulations and instruments. The regulators and the courts interpret this obligation quite broadly, as will your clients. In every service business, clients expect to be given balanced and accurate information about the product they are considering. They expect to be informed of the risks just as clearly as the potential rewards. They expect to be told about the fees and charges that will apply to their investment, and they expect the advice you give them to be objective and to be based on their best interests. Honesty, 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. THE KNOW YOUR CLIENT (KYC) RULE The Know Your Client Rule is set out in section 13.2 of NI It dictates that you must take reasonable steps to learn the essential facts about every client including: The identity of the client and, if you have cause for concern, the reputation of the client, and The client s financial circumstances, investment needs and objectives, and risk tolerance. The Know Your Client Rule is one of the most important rules in the securities industry. 100

107 9 Responsibilities of the Sales Representative In most cases, your dealer s Enrolment Application Form is the template to follow when collecting and documenting KYC information. The information collected may vary slightly with each dealer but must include a minimum of the following: 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 Canada Revenue Agency, Financial information about the subscriber, which may include such things as employment status, primary occupation, family income, net worth and number of dependants, Information about the client s tolerance for investment risk, and The subscriber s signature. Obtaining and recording detailed KYC information is a legal obligation; it is also the foundation of service to subscribers. Your goal is to ensure that you, your local Supervisors 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 to take. All of these factors are important in determining the suitability of any investment for the client and will give you a reasonable foundation on which to base your advice. Prospective subscribers may question the need for such detailed KYC information and may even be reluctant to provide it for privacy reasons. However, these subscribers will generally 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, privacy legislation and internal policies to hold the subscriber s personal information in confidence. 101

108 9 Responsibilities of the Sales Representative You will not be able to open an account for a subscriber who is not prepared to provide essential KYC information. Subscribers may want to transfer from one representative to another or from one Scholarship Plan to another. If a new account is transferred to you from another sales representative at your dealer, you must apply the same Know Your Client standards that you would for any other new client. You will be expected to review the subscriber s existing KYC data and discuss it with the subscriber to ensure that it is 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. Understanding Know Your Client inquiries Among other things, KYC regulations oblige you to make inquires about a client s reputation if you have cause for concern. Let s look at that obligation more closely. Cause for concern When should you have cause for concern about a client s reputation? The regulations are not specific, but generally you should be concerned if you become aware of information suggesting that the client could pose a risk of misconduct in the course of his or her business dealings with your dealer. If you have those concerns, consult with your local Supervisor or Regional Compliance Officer. You or your dealer may not wish to do business with the client, or you may decide that some additional information or additional supervisory procedures are necessary to resolve your concerns. Updating KYC Information You must make reasonable efforts to keep KYC information current. That typically means checking with the client from time to time, particularly if new transactions are being considered. You must also update your dealer s KYC records if you become aware of a significant change in what was previously recorded for the client. Changes to important subscriber information such as changes of objectives, address, employment and banking detail should be provided by the subscriber in writing. 102

109 9 Responsibilities of the Sales Representative Banking detail change Many subscribers make regular RESP contributions using automated payment services through their bank. When there is a change in a subscriber s banking detail, the information should be sent to the dealer 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. Name change A subscriber or a beneficiary may undergo a legal change of name, perhaps following a marriage or divorce. When such a name change occurs the foundation will require the proper legal documentation to verify the authenticity of the change. If a change in client information 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. Change of beneficiary To designate a new beneficiary, the subscriber is required to complete a Change of Beneficiary 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 new student s birth certificate and Social Insurance Number. THE SUITABILITY RULE As a registrant, you are bound to recommend to your client only those investments that are consistent with the client s financial circumstances, investment needs, objectives and risk tolerance. This is known as the Suitability Rule (see section 13.3 of NI ) The Suitability Rule is the second important rule of the securities industry. You are also required to make reasonable efforts to ensure that every purchase or sale instruction the client gives you, even if you did not recommend the transaction, is suitable for the client. If the client instructs you to buy or sell a security and you reasonably consider the transaction unsuitable for them, you must inform the client of your 103

110 9 Responsibilities of the Sales Representative opinion and not buy or sell the securities unless the client tells you to proceed anyway. This duty to warn is intended to help protect clients who might otherwise make unwise investment decisions. This rule would come into play more often for dealers who offer clients access to high risk investment products, but it s important that you are aware of it. As a general principle, 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. RESPS IN THE REAL WORLD Martin, a prospective new subscriber, wants to start a Plan for his daughter. He indicates that he d like to contribute $350 per month. Unfortunately, Martin has run into some financial problems recently, and his income is quite modest. You realize it might be difficult for him to maintain his $350 contributions unless his circumstances change. You think he ll be able to meet his long-term savings goals, and take full advantage of the CESGs, with a lower, more affordable monthly contribution. What do you do? You explain to Martin the risks of over-committing financially and set out a realistic contribution that he can afford. You explain he can buy additional units, if the need arises, when funds are available. You also work with him to see if he is eligible for supplementary grants such as the ACESG and the Canada Learning Bond. 4) Informing the Client DISCLOSURE ABOUT THE PLAN In addition to completing the Enrolment Application Form, you are expected to explain fully to the subscriber the terms and condition of the Plans being offered. This includes: How deposits are made, When funds can be withdrawn, 104

111 9 Responsibilities of the Sales Representative 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 at the time of the transaction 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 subscriber upon enrolment, and you should encourage the subscriber to review the material in detail as soon as possible and at the latest before the end of the 60-day initial period. Particular attention should be paid to key features such as: The structure of the Plan, Its investment objectives, The risks associated with the Plan, Eligibility for EAPs under the Plan, Termination and transfer provisions, and Fees and expenses. Your goal is to minimize the risk of any misunderstandings on the part of the subscriber. 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 must not give the subscriber any promises, guarantees or undertakings about the future value of their units or the rate of return 105

112 9 Responsibilities of the Sales Representative that will be earned on the Plan s investments. The returns earned in the Plan will depend on many factors, including the success of the Plan s portfolio advisers and on economic developments that affect future interest rates and investment performance. You should also ensure the subscriber realizes that approval of the Plan by securities regulators and CRA does not constitute an endorsement, recommendation or guarantee by those agencies of the Scholarship Plan offered in the prospectus. RELATIONSHIP DISCLOSURE Securities regulations require that before they advise clients or make a purchase or sale for them, dealers provide clients with information that a reasonable investor would consider important about the client s relationship with the dealer (see section 14.2 of NI ). This relationship disclosure information will be prepared by your dealer and must be delivered to your clients in accordance with your dealer s policies at the outset of your relationship with the client. The disclosure will include such things as: A description of the nature or type of the client s account, A discussion of the products and services that the dealer offers, A description of the types of risks that a client should consider in making investment decisions, A description of the risks associated with using borrowed money to invest, A description of the conflicts of interest that the dealer must disclose to the client, Disclosure of the costs the client will pay for the operation of the account, A description of the compensation paid to the dealer in relation to the products offered, A description of the content and frequency of reporting the client will receive, 106

113 9 Responsibilities of the Sales Representative Disclosure that an independent dispute resolution service will be available to the client at the dealer s expense, A statement that the dealer is obliged to assess the suitability of proposed purchases and sales before executing the transaction, and The information collected by the firm to meet its Know Your Client obligations. If there are significant changes in the relationship disclosure information provided to clients, the dealer must take reasonable steps to notify the client of the changes in a timely manner. Your dealer s policies will explain how that is to be done. REFERRAL ARRANGEMENTS Registrants will sometimes enter into arrangements where they pay or receive fees, commission splits or other compensation for the referral of a client. For example, at some point you may want to enter into an arrangement where you pay an outside marketing agency for the referral of potential clients. Perhaps you want to enter into an arrangement with a financial planning firm where you would receive a fee for referring clients who are in need of financial planning services. These and other types of referral arrangements are governed by NI (see sections 13.7 to 13.11). You may not participate in any referral arrangement involving people or companies outside of your dealer unless: Before a client is referred to you or by you, the terms of the referral arrangement are set out in a written agreement between the outside person making or receiving the referral and your dealer, All fees paid or received by you under the arrangement are recorded by your dealer, and You ensure that specific information about the arrangement is provided to your client, in writing, before the person receiving the referral either opens an account for the client or provides services to the client (whichever is earlier). 107

114 9 Responsibilities of the Sales Representative The information that must be disclosed to the client is set out in section of NI and includes: The name of each party to the referral arrangement, The purpose and material terms of the referral arrangement, including the nature of the services to be provided by each party, Any conflicts of interest resulting from the relationship between the parties to the referral arrangement and from any other element of the referral arrangement, The method of calculating the referral fee and, to the extent possible, the amount of the fee, The category of registration of each registrant that is a party to the agreement with a description of the activities that the registrant is authorized to engage in under that category and, giving consideration to the nature of the referral, the activities that the registrant is not permitted to engage in, If a referral is made to a registrant, a statement that all activity requiring registration resulting from the referral arrangement will be provided by the registrant receiving the referral, and Any other information that a reasonable client would consider important in evaluating the referral arrangement. If there are changes in the information disclosed to the client about a referral arrangement, you must ensure that written disclosure is provided to clients affected by the change as soon as possible and at least 30 days before the next referral fee is paid or received under the arrangement. In addition, NI requires that before you refer a client to another person or company your dealer must take reasonable steps to satisfy itself that the person or company has the appropriate qualifications (including registration, if necessary) to provide the services to your client. 108

115 9 Responsibilities of the Sales Representative CONFLICTS OF INTEREST Conflicts of interest arise whenever the interests of parties, such as a registrant and a client, are inconsistent. They can arise in the investment industry in a number of ways. For instance: Representatives may be advising clients on securities issued by a party that is connected or related to the representative s dealer, Compensation systems may tend to favour the recommendation of one investment product over another, or may simply induce a representative to recommend transactions that are not prudent for the client, or Representatives may have outside business interests that could influence the advice they give to clients. Not surprisingly, conflicts of interest that arise between registrants and their clients are subject to regulations (see section 13.4 of NI and the discussion in Companion Policy ). The regulations require that all dealers take steps to identify material conflicts of interest that exist or are expected to arise and then to respond to those conflicts appropriately. Depending on the nature of the conflict an appropriate response may involve avoiding the conflict, controlling the risks associated with it, and disclosing the conflict to clients. Disclosure of conflicts to clients is required under section 13.4(3) of NI : If a reasonable investor would expect to be informed of a conflict of interest identified under subsection (1), the registered firm must disclose, in a timely manner, the nature and extent of the conflict of interest to the client whose interest conflicts with the interest identified. Your dealer will have specific policies that dictate how it will evaluate and address conflicts on interest and the role that you must play in identifying, responding to and disclosing those conflicts. For your dealer to meet its regulatory obligations, you must be sure to promptly inform your dealer of anything that could create a conflict of interest between you and your clients. 109

116 9 Responsibilities of the Sales Representative You must never let a real or potential conflict of interest interfere with the quality and objectivity of the advice and services you provide to your clients. 5) Processing Business COMPLETING AN ENROLMENT APPLICATION FORM The Enrolment 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. Contact your Scholarship Plan Dealer to see an Enrolment Application Form. After you have worked through the Enrolment Application Form with the subscriber, your local Supervisor will usually have to review and approve the opening of the account before the transaction can be processed. This review helps ensure that KYC procedures have been followed, that the proposed subscription is appropriate for the subscriber and that the documentation is complete. TRADE CONFIRMATION Following the sale of a Scholarship Plan contract, your dealer is obliged to send the subscriber a written confirmation of the purchase setting out the following information (outlined in section 14.12, NI ) A description of the security, 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 sales representative who made the sale. This trade confirmation is typically included in the Scholarship Plan Dealer s Welcome Package. 110

117 9 Responsibilities of the Sales Representative STATEMENTS OF ACCOUNT Your dealer will also provide to each subscriber a detailed statement of their account at least once every 12 months. That statement will include details of each transaction undertaken for the client during the period covered, as well as information about the value of the subscriber s Plan as at the end of the period (see section 14.14, NI ) PLAN TRANSFERS 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 rollover to an RRSP or as taxable income (see Chapter 2 for more detail). 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 a standard disclosure form to be used in the case of a Plan Transfer between Scholarship Plans. A copy of the form is included in Appendix D. One of its purposes is to ensure that the subscriber has received adequate disclosure of the transfer and its implications. 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. COMMISSION REBATES Enrolment fees are established by your dealer and are specified in the Plan s prospectus. Dealers do not authorize sales representatives to: Negotiate lower enrolment fees, Pay part or all of a subscriber s enrolment fees or deposits, Offer to rebate a portion of your commissions, or 111

118 9 Responsibilities of the Sales Representative Provide gifts or other financial inducements to secure an enrolment. 6) Record Keeping Your dealer is obliged by corporate, tax and securities legislation to keep comprehensive and accurate business records (see section 11.5, NI ). In addition to all of the obvious records concerning revenues, expenses, client transactions and employees, dealers must also keep records that: Permit determination of the dealer s capital position, Demonstrate compliance with the firm s internal control procedures and with its compliance policies and procedures, Provide an audit trail for client orders, instructions and transactions, Document the opening of new accounts and record any agreements with clients, Demonstrate compliance with Know Your Client and Suitability Rules, Document correspondence with clients, including s and notes from conversations with clients, and Document compliance and supervision actions taken by the dealer. These regulations are just one more reason why sales representatives must be consistent and meticulous in their record keeping and diligent in their compliance with both regulations and dealer policies. Supervisors must also be diligent in ensuring that they maintain detailed and current records that document their supervisory efforts and the fulfilment of the compliance duties assigned to them by their dealer. Each dealer s record keeping system 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. 112

119 9 Responsibilities of the Sales Representative Your dealer will specify the records you must maintain, which will usually include copies of: All Enrolment 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. 7) Client Confidentiality and Complaints CONFIDENTIALITY OF CLIENT INFORMATION The confidentiality of your client s personal information is protected by federal and provincial privacy legislation. Commercial enterprises that collect and use personal information about their clients are subject to the federal Personal Information Protection and Electronic Documents Act (PIPEDA) or similar legislation in provinces such as Quebec, Ontario, Alberta and British Columbia. This legislation is designed to protect your client s privacy and to ensure that the information they provide to you is used only for its intended purpose. Some of the basic principles underlying federal and provincial privacy legislation are that your client is entitled: To know why the personal information is being collected and to consent to its collection, except were exempted by law, To have that information used only for the purpose that was consented to, To know that you will not collect more personal information than is reasonably necessary to properly serve the client and to meet legal obligations, and 113

120 9 Responsibilities of the Sales Representative To know that their personal information will be safeguarded and not disclosed to any other party without the client s consent or legal authority to disclose. Your dealer will have specific policies on privacy and client confidentiality and will be able to provide additional information in the legislation that will apply in your jurisdiction. 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 dealt with promptly and professionally. Your dealer will have specific policies and procedures for the investigation and resolution of complaints. The goal of those policies is to ensure that the dealer complies with section of National Instrument , which requires every dealer to document and, in a manner that a reasonable investor would consider fair and effective, respond to each complaint made. Complaints are normally recorded by the local Supervisor, the Regional Compliance Officer 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 many cases, a local Supervisor will be responsible for investigating and addressing the complaint. If the complaint alleges serious misconduct, responsibility for the internal investigation may be assigned to the Head Office Compliance department. 114

121 9 Responsibilities of the Sales Representative 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. If the client is unsatisfied with the dealer s proposed resolution, they may take their complaint to the independent dispute resolution or mediation service that is made available by your dealer, such as the Ombudsman for Banking Services and Investments (OBSI). The OBSI is an independent agency that helps resolve disputes between banking and investment firms and their clients. It provides its services for free to consumers. MORE ONLINE: CHAPTER 9 SUMMARY Sales representatives are expected to conduct their business with the highest standards of ethics and integrity. Many of the key legal obligations of sales representatives and dealers are set out in National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations. You must ensure you are properly registered in each jurisdiction in which you do business. You will only be registered if the regulators believe that you have the proficiency, integrity and solvency to be fit for registration. You must know and comply with your duties under securities law, the policies and procedures established by your dealer and the RESPDAC s Code of Ethical Business Conduct (Chapter 10). The Fair Dealing Rule requires that you deal fairly, honestly and in good faith with every client. The Know Your Client Rule and the Suitability Rule are two important rules of the securities industry. They require that you learn and record the essential facts about your client, including the client s financial circumstances, objectives and risk tolerance, and that you always provide advice that is suitable for the needs of that client. 115

122 9 Responsibilities of the Sales Representative You must provide clear and objective disclosure about the products and services you offer, and you will be expected to explain to subscribers the terms and condition of the Plans being offered to them. You must collect and maintain confidential client information in strict accordance with federal and provincial privacy legislation, securities laws and your dealer s policies. All client complaints must be documented and must be addressed in a way that a reasonable investor would consider fair and effective. Test Your Knowledge Chapter 9 1. Who is the primary contact person for the subscriber? (a) The local Supervisor. (b) The sales representative. (c) The Regional Compliance Officer. (d) Your dealer s Compliance Officer. 2. Which of the following are your responsibilities as a sales representative? (a) Have a good knowledge of the laws that apply to you. (b) Know and comply with the policies and procedures established by your dealer. (c) Know and comply with the RESPDAC s Code of Ethical Business Conduct. (d) Know Your Client. (e) All of the above. 3. The obligation to deal fairly, honestly and in good faith with clients is known as: (a) The Honest Registrant regulation. (b) The Fair Dealing Rule. (c) The Fiduciary Duty Rule. (d) The Know Your Client Rule. 116

123 9 Responsibilities of the Sales Representative 4. What must you know about a client to satisfy the Know Your Client rule? (a) The client s name, address and telephone number. (b) Their investment needs and objectives. (c) Their birth date and Social Insurance Number. (d) Their risk tolerance. (e) All of the above. 5. A client who is reluctant to provide KYC information can be informed: (a) That they are entitled to waive the Know Your Client rule, though that it will make it difficult for you to advise them properly. (b) That you are subject to legal obligations to know your client so that you can advise them properly. (c) You and your dealer are obliged to hold personal information in confidence. (d) Items (b) and (c). 6. The rule that requires you to recommend only those investments that are appropriate for your clients needs, objectives and risk tolerance is called the: (a) Know Your Client Rule. (b) The Fair Dealing Rule. (c) The Income Attribution Rule. (d) The Suitability Rule. (e) The Fit and Proper test. 7. To act as a sales representative, you must first be registered: (a) With the RESP Dealers Association of Canada. (b) In one province or territory before you can do business nationwide. (c) With the securities regulator in the province or territory in which your dealer s Head Office is located. (d) With the securities regulator in each jurisdiction in which you engage in the business of trading or advising in securities. 117

124 9 Responsibilities of the Sales Representative 8. Which of the following items should you ensure that every new subscriber understands about the Plan: (a) Their right to withdraw from the enrolment without cost for up to 60 days. (b) The investment objectives of the Plan they are participating in. (c) The structure, potential benefits and risk of the Plan. (d) The enrolment, administrative, depository and other fees that the subscriber may be charged. (e) The options available to the subscriber to withdraw funds from the Plan if and when necessary. (f) All of the above. 9. If a subscriber s account is already opened with your dealer when it is transferred to you, you do not need to check and confirm that the Know Your Client information for that client is still accurate and complete. (a) True. (b) False. 10. Your dealer is required to maintain records that: (a) Permit determination of the dealer s capital position. (b) Demonstrate compliance with the firm s internal control procedures and with its compliance policies and procedures. (c) Provide an audit trail for client orders, instructions and transactions. (d) Demonstrate compliance with know-your-client and suitability rules. (e) Document compliance and supervision actions taken by the dealer. (f) Items (a), (c) and (e) only. (g) All of items (a) through (e). Answers: 1B, 2 E, 3 B, 4 E, 5 D, 6 D, 7 D, 8 F, 9 B, 10 G 118

125 10 Code of Ethical Business Conduct 10. Code of Ethical Business Conduct I. Preface The following Code of Ethical Business Practices has been developed and adopted unanimously by the member firms (Members) of the Registered Education Savings Plan Dealers Association of Canada (RESPDAC). This Code concerns each Member s dealings with: The public Potential RESP subscribers Existing and former RESP subscribers Other Members of RESPDAC All other RESP providers Provincial and federal Governments and regulatory agencies This Code reflects the commitment of RESPDAC and its Members to ensure that: a culture of compliance and mutual cooperation exists within each Member; each Member upholds the rules and regulations established by Federal and Provincial Regulators; and each Member is dedicated to serving its subscribers and their families in the most positive and ethical way Members have agreed to abide by this Code in conducting themselves as a firm and have agreed to ensure that their Sales Representatives and other employees and agents also are aware of, and abide by the Code. The Code will be updated as necessary from time to time, and as approved by the Board of Directors. Members will abide by any such updates. 119

126 10 Code of Ethical Business Conduct II. Definitions The Association and RESPDAC mean the RESP Dealers Association of Canada. Five firms are Members of RESPDAC: C.S.T. Consultants Inc. Global RESP Corporation Heritage Education Funds Inc. Knowledge First Financial Inc. Universitas Management Inc. RESP and Scholarship Plan refer to a group Registered Education Savings Plan, as administered, marketed and sold by Members of RESPDAC. Member means a member firm of the Association, and includes its employees, client service personnel and Sales Representatives across Canada. Client means an existing subscriber (planholder). Prospect means a potential Client, generally identified and initially contacted by a Member s Sales Representative. III. Guiding Principles All Members, their employees, agents and Sales Representatives, will adhere to this Code. Members may use the Association logo and report that they are members of the Association. No other firm, person or entity is permitted to use the Association logo and state either directly or indirectly that they are members of the Association. The corporate behaviour of a Member, and that of its employees and agents, including Sales Representatives, reflects on other Members of the Association, and on the integrity of the group RESP industry. 120

127 10 Code of Ethical Business Conduct Members will at all times deal fairly, honestly and in good faith with Clients, Prospects and the public. Members will at all times act cooperatively and responsibly with other Members of the Association, competitors in the financial services sector, regulatory agencies and other stakeholders in the RESP industry. Members will strive at all times to manage their businesses in compliance with federal and provincial regulations, and participate actively in the development of regulations governing group RESPs and administrative processes. Members will not denigrate any other Members, RESP providers, or financial institutions. Members advertising and promotional statements will be truthful and accurate. Members will not use misleading, deceptive or aggressive methods of client solicitation that demonstrate poor business practice. Members will comply with all training and examination requirements mandated by RESPDAC, including those mandated for Sales Representatives. IV. Standards A. MEMBERS ACT IN GOOD FAITH WITH CLIENTS Members will deal fairly, honestly and in good faith with Clients. Sales Representatives of Members will also deal fairly, honestly and in good faith with Clients. A Sales Representative will provide objective and impartial information to Clients and Prospects to enable them to make informed decisions about investing in group RESPs. Sales Representatives will make recommendations to Clients and Prospects objectively, impartially and in a professional manner, without considering their own personal interest in any proposed investment, including remuneration that may result from completion of the transaction. 121

128 10 Code of Ethical Business Conduct B. MEMBERS ACT IN GOOD FAITH WITH EACH OTHER As befitting a professional association, Members of RESPDAC will deal fairly, honestly, cooperatively and in good faith with each other, and with other dealers in the RESP industry. Members will not entice or solicit Sales Representatives or other employees from other Members, in an attempt to recruit staff or Sales Representatives. Initial efforts will be made to resolve disagreements and disputes in an informal manner. Members will participate actively and cooperatively in RESPDAC affairs. C. COMPLIANCE WITH LAWS A Member, and any person acting on behalf of the Member, will comply with the laws and regulations governing the business of the Member in each jurisdiction in which they operate. Sales Representatives will be registered, properly trained and in good standing with appropriate regulatory bodies, prior to interacting with Clients or Prospects. A Member and any person acting on behalf of the Member will also adhere to the compliance standards established by that particular Member. D. TRAINING AND PROFICIENCY Competence requires attaining and maintaining an adequate level of abilities, skills and knowledge in the provision of professional services. Sales Representatives of a Member will complete internal training, and study and pass the RESPDAC Sales Representative Proficiency Course, before being registered for trading in Scholarship Plans. The examination is accredited by RESPDAC and authorized by the Canadian Securities Administrators. Sales Representatives will also ensure that they are up to date on product knowledge, and current market and regulatory requirements. E. SUPERVISION AND SUPERVISORY PROFICIENCY A Member s supervisory personnel, including its senior officers and managers, both corporately and in field branch offices, will make employees and Sales Representatives under their supervision aware of and comply with this Code as well as with the laws, regulations, guidelines and compliance standards related to their specific activities. 122

129 10 Code of Ethical Business Conduct A Member s supervisory personnel who have been designated by the Member as responsible under securities laws for supervising the activities of Sales Representatives will take the RESPDAC Branch Manager Proficiency Course and achieve a passing grade on the examination, prior to taking on these roles for the Member. Members will monitor that their other employees and agents, and outside service providers whom they may engage, comply with this Code. F. CORPORATE RESPONSIBILITY A Member is responsible for the acts and omissions of its Sales Representatives, other employees and agents engaged in carrying out its business. G. CONFLICTS OF INTEREST A Member must be aware of the possibility of conflicts of interest arising between the interests of the Member or its Sales Representative, and the interests of a Client or Prospect. Members will seek to avoid any conflict of interest; however, if and when a Member or a Sales Representative becomes aware of any conflict or potential conflict of interest, he or she will immediately disclose such conflict or potential conflict of interest to the appropriate supervisor or senior management of the Member, and the Member will take appropriate action to manage such conflict in the Client s or Prospect s interest. Any conflict or potential conflict of interest that arises will be disclosed in writing to a Client or Prospect by the Member, or by the Sales Representative as directed by the Member, as soon as practically possible and in any event, prior to the Member or Sales Representative proceeding with any proposed transaction involving the Client or the Prospect. V. Approaching Prospects/Clients A. PRIVACY A Member and its Sales Representatives will not be intrusive when dealing with Clients or Prospects. The right of a Client or Prospect to refuse further discussion or interaction with the Member or its Sales Representatives will be scrupulously respected. Members and its Sales 123

130 10 Code of Ethical Business Conduct Representatives will only contact Clients or Prospects during reasonable hours, and in appropriate locations. B. TELEPHONE SOLICITATION Members will conduct their sales activities in accordance with applicable legislation including the Competition Act (Canada) (Bill C- 20), the Telecommunications Act (Canada) (Bill C-37), Personal Information and Electronic Documents Act (PIPEDA) and applicable provincial privacy legislation. Members will comply with the national Do Not Call regulation and will ensure that their Sales Representatives also comply with that regulation. Members will not make false or misleading statements to Clients or Prospects. A Member or a Sales Representative will provide fair and reasonable disclosure at the beginning of each telephone communication with a Client or Prospect which includes the identity and role of the person and the Member on whose behalf the phone call is being made. C. GIFTS Members will not promise any free gifts or benefits if a Client invests in a Group RESP, other than those of a nominal value. D. ADVERTISING All representations made in Members advertisements will be truthful, balanced, clearly written and not misleading. The factual basis for claims, including performance claims, will be made available to the Client or Prospect upon request. All claims will be based on supportable facts and consistent with the disclosure contained in the prospectus of the particular Group RESP. No advertisement will contain false or exaggerated statements or misrepresentations. No advertisement will contain guarantees regarding income, yield, investment returns, risk or future values. Past performance of a Group RESP will be calculated in accordance with applicable securities regulatory requirements. 124

131 10 Code of Ethical Business Conduct VI. Presenting to Prospects/Clients A. DISCLOSURE A Member will provide full, true and plain disclosure to Clients and Prospects in presenting information about a Group RESP at all times. Disclosure will be consistent with the information contained in the most recent financial statements, Management Reports of Fund Performance and the prospectus of the applicable Group RESP. Members will deliver the most current approved Prospectus prior to or at the time that a Client enters into an agreement to invest in a Group RESP. Members will accurately and completely describe the fees that are payable by the Client before the Client completes his or her contract to invest in a Group RESP. In particular, the enrolment fees will be brought to the attention of the Client, along with the implications for the Client if he or she prematurely terminates the contract. B. ACCURACY OF INFORMATION Members will not, in the course of a sales presentation, or completion of the sales contract with any Client or Prospect, make any statement or take any measures which, directly or by implication, omission, ambiguity or exaggeration, would have the reasonable potential of misleading the Client or Prospect about the terms of the investment. A Sales Representative will not commit to a future value for the Group RESP being invested in, nor hold out enticements, which may cause a Client or Prospect to invest beyond their financial capability. C. JURISDICTION A Member will advertise services and Group RESPs offered by the Member only in those provinces and territories where the Member and the Group RESP are authorized to so distribute and offer that Group RESP. A Sales Representative will not carry out any dealing or trading activity in a province where he or she is not registered as a Sales Representative. 125

132 10 Code of Ethical Business Conduct D. SUITABILITY/KNOW YOUR CLIENT A Member will determine the general investment knowledge, investment needs, financial circumstances, affordability and objectives of each Client and ensure that every recommendation and proposed investment is appropriate and suitable for the Client. The persons responsible for supervising trades made by a Member s Sales Representatives will review the information about the Client collected by the Sales Representatives. The Member will maintain records of this information. E. EXPECTATIONS A Sales Representative will endeavour to ensure that a Client understands what the Sales Representative and the Member will provide in any transaction, as well as their ongoing relationship once the Client enters into an agreement for a Group RESP. VII. Post-Contract A. TRANSFERRING OF BUSINESS A transfer by a Client out of one Member s Group RESP to another Member s Group RESP, where the Client has been enrolled for more than 60 days in the first Member s Group RESP, may not be in the best interests of the Client, given the potential for forfeiture of the fees paid by the Client, and accrued interest. Accordingly, a Member and its Sales Representatives will not encourage the transfer of a Client s business from one Member to another Member. If a Client decides to transfer from one Group RESP to another Group RESP, the receiving Member will require the Client to acknowledge in writing the financial implications of such transfer, using the Plan Transfer Disclosure Form endorsed by RESPDAC, a signed copy of which will be provided to the sending Member. In addition, the receiving Member will ensure that the Client fully understands the implications and costs of such transfer before entering into an agreement to so transfer. 126

133 10 Code of Ethical Business Conduct B. CONFIDENTIALITY Members will treat all personal information of Clients as confidential, applying proper safeguards to protect this confidentiality. Members will maintain tight control over access to Client information. A Member will not disclose a Client s personal or confidential information, except with the Client s written consent, or in accordance with applicable laws; and will not use that information to the detriment of the Client or to obtain advantage for themselves or for another person. A Member will develop and maintain written policies and procedures relating to confidentiality and the protection of Client information. C. CLAIMS ABOUT COMPETITORS A Member and its Sales Representatives will not, directly or indirectly, make comments of any kind which are false, misleading, inaccurate or incomplete about another Sales Representative, another Member or any other organization, product, or service. A Member will be objective and fair in any discussion of any competitors, their Sales Representatives or their competing products, and will not make derogatory statements. A Member will present balanced and accurate information. The Sales Representatives of a Member will only use written product information about the Group RESP published or approved by the Member, when discussing the RESPs of the Member or of any competitor. 127

134 10 Code of Ethical Business Conduct VIII. FAILURE TO COMPLY WITH THIS CODE A. RESPONSIBILITY All employees, Sales Representatives or officers of a Member have a duty to report to the Member s Compliance Department any contravention of this Code of which they become aware, and to cooperate with senior management of the Member in the investigation of possible breaches of the Code. Any perceived breaches of this Code, together with all supporting information, will be reported to the Compliance Officer of the Member. Members in breach will rectify breaches of this Code as quickly as possible, and where required or appropriate, notify any organization to which it reported such breach, about the action taken as appropriate. B. CONSEQUENCES The failure of a Member or any of its employees or Sales Representatives to comply with this Code may result in the Company s suspension or expulsion from the Association. Failure to comply with certain sections of this Code may also be a violation of securities laws and may subject the Member and its Sales Representatives to applicable enforcement action and penalties. It is expected, however, that no serious breaches of this Code will occur that would warrant suspension or expulsion, and that the collegial and cooperative manner that has been the hallmark of RESPDAC will continue to be applied to all matters of mutual interest, competition and/or disagreement. 128

135 10 Code of Ethical Business Conduct Test Your Knowledge Chapter Which of the following is true about the RESPDAC Code of Ethical Business Conduct? (a) It is optional for RESP sales representatives. (b) It applies to mutual fund dealers. (c) It is endorsed by the RESP Dealers Association of Canada. (d) It only applies to new sales representatives as existing sales representatives are grandfathered. 2. Which of the following is one way that the sales representative should show respect for the privacy of clients and prospects, according to the RESPDAC Code of Ethical Business Conduct? (a) Only call or visit during daylight hours. (b) Don t ask any questions about the client s income. (c) Respect the client s right to refuse further discussion. (d) Provide incentives to encourage enrolment. 3. Why is promoting transfers of business among different Group Plans discouraged? (a) It causes too much paperwork with little compensation. (b) Clients may forfeit fees and accrued interest, which may not be in the best interest of the client. (c) It increases competition among RESP dealers. (d) Securities regulators have disallowed the practice. 4. Which of the following does the RESPDAC Code of Ethical Business Conduct prohibit sales representatives from doing? (a) Making derogatory statements about a competitor. (b) Showing the client performance data. (c) Discussing the relative merits of different kinds of investments. (d) Meeting with prospective clients during reasonable hours. 129

136 10 Code of Ethical Business Conduct 5. A sales representative can disclose confidential information about a client if they have: (a) The verbal consent of the client. (b) The written consent of the beneficiary. (c) The written consent of the client. (d) A request from another financial institution. 6. The RESPDAC Code of Ethical Business Conduct requires sales representatives to identify themselves, their role and the name of the Member on whose behalf they are calling at the beginning of each telephone communication with a client or prospect. (a) True (b) False Answers: 1 C, 2 C, 3 B, 4 A, 5 C, 6 A 130

137 11 Marketing and Advertising 11. Marketing and Advertising CHAPTER 11 OVERVIEW In this chapter you will learn about marketing, advertising and sales communications, including: The role of marketing and advertising, Dealer policies and pre-approval requirements, Laws that prohibit deceptive or misleading representations, Standards for advertising and sales communications, Rules for disclosing performance data, Rules for business cards and letterhead, and Cold calling and telemarketing regulations. Role of Marketing and Advertising Scholarship Plans use marketing and advertising programs to attract new clients, to expand recognition of the brand and to attract new sales representatives. These programs have a direct impact on the firm s public profile, image and credibility. As a result, all dealers have written advertising and marketing policies that you must strictly adhere to. Marketing and advertising policies are also designed to ensure compliance with securities and trade practices legislation, as well as telecommunications regulations. 131

138 11 Marketing and Advertising The marketing and advertising of securities products are related to securities trading. For that reason, those who engage in those activities must generally be registered in each jurisdiction where the marketing and advertising takes place. 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. An advertisement is a sales communication that is 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 and dealer policies governing sales communications and advertising. Approval Requirement Marketing programs and advertising copy must be submitted to and approved by the dealer (usually by Head Office) and the Compliance Officer before distribution to the public. As a registered salesperson, all of your Scholarship Plan business and your advertising must be done in the name of your dealer. The dealer s name must appear prominently in every sales communication and advertisement. You cannot use any other trade name in the course of your Scholarship Plan sales activities without prior permission from your dealer in accordance with the dealer s policies. 132

139 11 Marketing and Advertising Misleading Sales Communications and Advertising The fundamental principles underlying advertisements and sales communications are that they must be clear, accurate and balanced, and they must not be misleading. Most provincial securities legislation prohibits misrepresentations in connection with trading in securities. Some legislation makes it an offence for you to make any statement, with the intention of effecting a trade in a security, that you know or ought to know is a misrepresentation. Other provincial and federal consumer protection legislation, such as the federal Competition Act, prohibits anyone who is promoting a business or product from knowingly or recklessly making representations to the public that are false or misleading in a material respect. Some examples of misleading communication would include: Representations of past or future investment performance that are not justified, Statements about the characteristics of a Scholarship Plan that speak only to benefits and do not fairly disclose risks or limitations that would be relevant to the audience, Exaggerated or unsubstantiated claims about the product being offered or the qualifications of those offering it, and Inaccurate or unfounded statements when comparing a Scholarship Plan to other potential investment vehicles. 133

140 11 Marketing and Advertising Standards for Advertising and Sales Communications The following standards of conduct are expected for all advertising and sales communications prepared or distributed by Scholarship Plan sales representatives: Your advertisements 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. Advertisements and sales communications must not contain information that is untrue or misleading and must not include information that conflicts with information in the prospectus. When comparing your investment product to competing investments, you must fairly include the pertinent facts about both investments and present data from the same time periods for each. You must not refer to a performance rating or ranking of an investment vehicle unless the ranking has been prepared by a third party. You must not refer to the credit ratings of securities held in an investment product unless the rating is current and prepared by an approved credit rating organization. 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 only and is not intended to reflect future values or returns. If you have questions about the form or content of marketing materials, advertising copy or sales literature, consult with your Regional Compliance Officer or Head Office compliance staff before proceeding. Advertising and marketing programs are subject to prior review and approval by your dealer. 134

141 11 Marketing and Advertising Performance Data Historical performance data for an investment product can differ depending on the method used to calculate that performance and the methods used to present the results. For this reason, it is important to consistently follow the strict standards for Scholarship Plan performance measurement endorsed by the RESP Dealers Association of Canada. In addition to the general standards set out below, 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 in making the calculations. Where data is available, performance 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. Comparisons between Scholarship Plans or similar investments must be for the same time periods and provide all of the same comparative information. Names of other organizations may only be included in the comparison if permission has been obtained from the other company. A statement must be included that performance data represents past performance and is not necessarily indicative of future performance. If you have questions about the form or content of marketing materials, advertising copy or sales literature, consult with your Regional Compliance Officer or Head Office compliance staff before proceeding. Advertising and marketing programs are subject to prior review and approval by your dealer. 135

142 11 Marketing and Advertising Business Cards and Letterhead Business cards and letterhead are useful business development tools that reflect your role as a sales representative as well as the corporate identity of your dealer. They are subject to specific rules: Business cards and letterhead must be prepared and used according to your dealer s policies and procedures. They may be used only in relation to your business dealings on behalf of the dealer. Business cards cannot mislead investors about your qualifications or industry designations. Business cards must disclose the full legal name of the Scholarship Plan Dealer as well as your name, title and business address. You may only use titles that are authorized by your dealer and that fairly reflect your registration status and your functions within the organization. You cannot use other trade names or business names in the course of your securities business activities without the prior approval of your dealer. Cold Calling and Telemarketing 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 it can include door-to-door soliciting as well. Securities 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 potential clients is abused. Some of the more common abuses include: Repeated and persistent calling, Calls at inappropriate times of the day, 136

143 11 Marketing and Advertising Calls that incorporate abusive, unduly assertive or high-pressure sales tactics, and Misrepresentations about the nature and purpose of the call (e.g. disguising the sales call as a survey). Sales representatives and dealers are also subject to telemarketing rules found in federal legislation such as the Telecommunications Act, the Unsolicited Telecommunications Rules and the Competition Act. The Telecommunications Act authorizes the Government to make rules to govern unsolicited telecommunications. In 2008, the Unsolicited Telecommunications Rules established new rules for telemarketers and established the National Do Not Call List (DNCL). These rules require: All organizations engaged in telemarketing must register with and subscribe to the National DNCL and maintain their own DNCL, Telemarketers must not call numbers listed on the National DNCL or their own DNCL, and Telemarketers must identify who they are and, on request, provide consumers with a fax or telephone number where they can speak to someone about the telemarketing call. The rules also provide certain DNCL exemptions for charitable organizations and public opinion surveys, among others. Importantly, the rules also exempt organizations that are making calls to consumers with whom they have done business in the last 18 months (i.e., existing clients). MORE ONLINE: Additional information about telemarketing regulations can be found at The federal Competition Act also contains provisions that apply to telemarketing, requiring fair disclosure of the identity of the caller and the nature of the business interest being promoted and prohibiting false or misleading representations, among other things (see section 52.1 of the Competition Act in Appendix E). MORE ONLINE: (English) (French) 137

144 11 Marketing and Advertising CHAPTER 11 SUMMARY Marketing programs and advertising can affect your image, profile and credibility as well as your dealer s. Compliance with your dealer s advertising and marketing policies is essential. Marketing programs and advertising materials must be reviewed and approved by your dealer before being used. All advertising and marketing materials must clearly disclose the name of your dealer. Misleading or deceptive advertising or sales communications can lead to enforcement action under securities legislation and other federal and provincial consumer protection laws. Comparisons between investment products must fair and accurate and include pertinent data about both investments. There are specific RESPDAC standards governing disclosure of performance data. Business cards and letterhead must comply with your dealer s requirements. All enterprises that engage in telemarketing are subject to the Unsolicited Telecommunications Rules, the requirements of the National Do Not Call List and the telemarketing rules in the Competition Act. Inappropriate marketing practices can have a serious impact on your reputation and the reputations of your dealer and the Plans it distributes. Review your marketing strategies with your local Supervisor and ensure that the programs you have planned are fully compliant with the regulations and your dealer s policies. 138

145 11 Marketing and Advertising Test Your Knowledge Chapter Which of the following statements about advertising is NOT true? (a) Advertising of RESPs is prohibited by law. (b) Your dealer has written advertising policies that you must adhere to. (c) Misleading or deceptive advertising is contrary to both federal and provincial legislation. (d) Advertisements concerning the investment products you sell must include the name of the dealer. 2. Which of the following is NOT an RESPDAC standard for presenting performance data? (a) It must be calculated for one, three, five and ten-year periods ending no more than 180 days prior to the date of communication. (b) It must be printed in 10-point type or larger. (c) It can only be communicated within 30 days of your dealer s year-end. (d) Assumptions used in preparing the performance calculations must be disclosed. 3. What must a business card include? (a) Your name and correct title. (b) The full name of your dealer. (c) Your business address. (d) All of the above. 4. If a person s name is on the National Do Not Call List, you may still call them providing they are a client with whom you have done business in the previous 18 months. (a) True (b) False 5. Anyone can engage in advertising and marketing of investment products, providing that the ultimate sale is done by someone who is properly registered. (a) True (b) False 139

146 11 Marketing and Advertising Answers: 1 A, 2 C, 3 D, 4 A, 5 B 140

147 12 Federal Regulation 12. Federal Regulation CHAPTER 12 OVERVIEW In previous chapters, you were introduced to some of the key pieces of federal legislation such as the Income Tax Act, the Competition Act and the Unsolicited Telecommunications Rules that govern RESPs and the ways in which you must conduct your business. In this chapter, you will review some of those regulations and learn about other federal laws, including: Canada s Money Laundering and Terrorist Financing legislation, and Relevant provisions of the Criminal Code of Canada. Income Tax and CESG Legislation Sections 118.6, and 204 of the Income Tax Act contain the key provisions of the tax law governing RESPs. Among other things, this legislation deals with the tax deferral benefits available through RESPs, the requirement to register RESPs before offering them to the public and the types of investments that can be held in an RESP. The Canada Revenue Agency (CRA) is responsible for administering the RESP rules under the Income Tax Act. In order for an Education Savings Plan to become a registered Education Savings Plan, its promoter must first submit details of the Plan for review and approval by CRA. If and when the Plan is approved, CRA will issue a registration number under which the Plan is allowed to operate as an RESP provider. Human Resources and Skills Development Canada (HRSDC) administers the Canada Education Savings Grant (CESG) and Canada 141

148 12 Federal Regulation Learning Bond (CLB) program rules under the Canada Education Savings Act. MORE ONLINE: Canada Education Savings Act MORE ONLINE: Extensive information about these programs is available at government websites including: Proceeds of Crime and Terrorist Financing Act and Regulations Federal legislation to address the global problem of money laundering has been in place since Since that time, the legislation has been amended to cover terrorist financing and to impose more stringent requirements on financial service providers to aid in the detection and prevention of money laundering and/or terrorist financing. The legislation is called the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. It is administered by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The Act applies to a wide range of financial service providers, including banks, credit unions, trust companies, life insurance companies, securities dealers (including Scholarship Plan dealers), casinos and foreign exchange dealers. Among other things, it requires these entities to: Verify the identity of the clients in accordance with specific regulations, Maintain specified records concerning each client account, 142

149 12 Federal Regulation Create and file with FINTRAC records of every large cash transaction (>$10,000 or more), Report suspicious transactions to FINTRAC, and Establish supervisory procedures, training programs and internal reviews to ensure that the legislative requirements are being met. While RESPs are exempt from some of these requirements, you are still required to comply with record keeping requirements set out in securities legislation and your dealer s policies. MORE ONLINE: FINTRAC publishes detailed guides that explain Canada s money laundering and terrorist financing regulations at 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 directly or indirectly from the commission of a criminal offence, which can include theft, fraud, forgery, drug trafficking, bribery, forgery, murder, counterfeiting, stock manipulation and a host of other crimes. Money laundering typically occurs in three stages: 1) Placement: when the proceeds of crime are placed in the financial system. 2) Layering: when those proceeds are converted into other forms, creating complex layers of financial transactions to hide the source and destination of the money. 143

150 12 Federal Regulation 3) Integration: when the laundered proceeds are extracted from the system with the illusion of legitimacy. Criminals may try to launder money in countless ways. As a financial service provider, you must be very diligent to ensure that you and your dealer are not used to facilitate that activity. Assisting someone in converting or concealing assets when you know or believe that those assets were obtained directly or indirectly from criminal activity is itself a Criminal Code offence. Terrorist Financing In 2001, Canada passed the United Nations Suppression of Terrorism Regulations. These regulations: Provide for a list of individuals or entities believed to be involved in or associated with terrorist activity. 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, insurance companies and securities dealers) determine on an ongoing basis whether they have possession or control of property owned or controlled by or on behalf of anyone on the list. Each institution must report monthly to their principal regulatory body (i.e., 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. 144

151 12 Federal Regulation Record Keeping and Identity Verification Proper record keeping and verification of client identities are key aspects of anti-money laundering and anti-terrorism legislation. 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. IDENTITY VERIFICATION Under Canada s anti-money laundering regulations, Canadian dealers and financial institutions are required to verify the identity of every person authorized to give instructions for an account. This identity verification can be accomplished in several ways, such as personally viewing the person s birth certificate, driver s license, passport or similar record issued by the provincial, territorial or federal government and by confirming that the person has an account in their own name with a Canadian bank or savings institution. The Proceeds of Crime legislation exempts dealers from the requirement to verify the identity of persons authorized to give instructions on registered Plan accounts, including RESPs, but securities legislation (NI , section 13.2) requires that every registrant (including Scholarship Plan sales representatives) take reasonable steps to establish the identity of every client. Your dealer will have client identity verification procedures in place to help you meet your legal obligations. Follow those procedures carefully. SUSPICIOUS TRANSACTION REPORTING Scholarship Plan Dealers and other financial institutions are obliged to report suspicious transactions to FINTRAC. These are transactions for which there are reasonable grounds to suspect that the transaction is related to the commission of a money laundering offence or the commission of a terrorist financing activity offence. Suspicious transaction reports must be filed with FINTRAC in electronic form within 30 days of the dealer become aware of the facts giving rise to the suspicion. 145

152 12 Federal Regulation You must be diligent and objective in identifying suspicious transactions. If you suspect that a transaction or proposed 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. The fact that you are dealing in RESP investments does not mean you are immune from the risk of being asked to deal in the proceeds of crime or funds that are related to terrorism. It is quite possible that at some point in your career you will deal with a client whose funds were improperly obtained. WARNING SIGNS Common indicators of suspicious transactions can include such things as clients who: Make statements about involvement in criminal activities, Are secretive or deceptive in responding to normal inquiries, such as refusal to provide a proper form of indentification, Who attempt to use aliases or beneficiaries to make contributions, or who use other methods of conceal the source of the funds being contributed to a Plan, Who attempt to make unusual contributions in cash, Who show uncommon curiousity about your record-keeping and reporting obligations, or Who seek to make contributions that are completely inconsistent with their employment income and net assets. MORE ONLINE: For additional guidance on identifying suspicion transactions and more information about the reporting requirements, see FINTRAC s Guideline 2: Suspicious Transactions at LARGE TRANSACTION REPORTS Dealers are also required to report to FINTRAC: Large cash transactions involving amounts of $10,000 or more, and 146

153 12 Federal Regulation The import to or export from Canada of negotiable monetary instruments (i.e. cash and other financial instruments such as bonds, cheques or share certificates that have been signed off and are ready to be cashed in or sold by the holder) with a value of $10,000 or more. As a sales representative, you should inform your local Supervisor or your dealer s compliance staff if you become aware of any reportable transactions, particularly any transactions in which subscribers seek to make large contributions in cash. In order for your dealer to complete the required report to FINTRAC, you must make detailed inquiries of the person prior to accepting the transaction. As a result, potentially reportable transactions should be handled only by your local Supervisor or by other personnel at your dealer who are thoroughly familiar with the requirements of the legislation. MORE ONLINE: Additional information is available in FINTRAC s Guideline 7: Submitting Large Cash Transaction Reports at Disclosure Provisions Filing reports concerning client activities can sometimes seem like an invasion of the client s privacy. Remember, though, that financial institutions are obliged by law to make reports in certain circumstances and can be exposed to serious sanctions for non-compliance. There is also a provision of the Criminal Code that serves to protect people who disclose information to the authorities: For greater certainty but subject to section 241 of the Income Tax Act, a person is justified in disclosing to a peace officer or the Attorney General any facts on the basis of which that person reasonably suspects that any property is proceeds of crime or that any person has committed or is about to commit a designated offence. 147

154 12 Federal Regulation 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: 52. (1) No person shall, for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, by any means whatever, knowingly or recklessly make a representation to the public that is false or misleading in a material respect. As noted in Chapter 11, the Competition Act also deals with some aspects of telemarketing in section 52.1 (see Appendix E). Violation of the trade practice standards set out in the Competition Act can lead to fines and prosecution. The Unsolicited Telecommunications Rules As discussed in Chapter 11, the Unsolicited Telecommunications Rules established by the Canadian Radio-television and Telecommunications Commission govern the conduct of everyone who engages in telemarketing in Canada. They require: All organizations engaged in telemarketing to register with and subscribe to the National Do Not Call List (DNCL) and maintain their own DNCL, That telemarketers not call numbers listed on the National DNCL or their own DNCL, and That telemarketers identify who they are and, on request, provide consumers with a fax or telephone number where they can speak to someone about the telemarketing call. Exemptions are available when you are making telemarketing calls to existing clients with whom you have done business in the last 18 months. You are, of course, also entitled to initiate telemarketing calls when you have the express prior consent of the consumer to make the call. 148

155 12 Federal Regulation MORE ONLINE: More information about the CRTC s telemarketing rules is available at Criminal Code The Criminal Code of Canada contains a number of provisions that relate to financial products and services, including prohibitions on theft, fraud, forgery, misrepresentation and money laundering. Sections 380, and 400 are most relevant to the sale of securities. Fraud 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 fourteen 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 (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. (2) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, with intent to defraud, affects the public market price of stocks, shares, merchandise or anything that is offered for sale to the public is guilty of an indictable offence and liable to imprisonment for a term not exceeding fourteen years. Sentencing aggravating circumstances (1) Without limiting the generality of section 718.2, where a court imposes a sentence for an offence referred to in sections 380, 382, and 400, it shall consider the following as aggravating circumstances: 149

156 12 Federal Regulation (a) the value of the fraud committed exceeded one million dollars; (b) the offence adversely affected, or had the potential to adversely affect, the stability of the Canadian economy or financial system or any financial market in Canada or investor confidence in such a financial market; (c) the offence involved a large number of victims; and (d) in committing the offence, the offender took advantage of the high regard in which the offender was held in the community. False prospectus, etc (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, is guilty of an indictable offence and liable to imprisonment for a term not exceeding ten years. MORE ONLINE: Securities Legislation Historically, the regulation of securities markets has fallen within provincial jurisdiction. That is why Canada has 13 provincial and territorial regulators and, as of 2011, no federal securities commission and no federal securities legislation. 150

157 12 Federal Regulation The potential advantages of having a single national securities regulator in Canada have been studied and debated for many years. Many believe that a single regulator and uniform federal regulations would improve the efficiency and the effectiveness of our regulatory system and would increase Canada s ability to influence the development of securities regulation globally. Others believe that the current system of provincial and territorial regulation has led to much more innovation and regional responsiveness than would be possible in a federal system. In 2008 and 2009, the Federal Government began to more actively promote the development of a national regulatory system with a view to securing support from the provinces. In 2009, the Federal Government formed the Canadian Securities Transition Office to coordinate and promote the move to a single national regulator. It is quite possible that Canada will soon start the process of restructuring its securities regulatory system. Even if that occurs, you should expect that your fundamental legal obligations as a sales representative, and your duties to your clients, will remain largely unchanged. 151

158 12 Federal Regulation CHAPTER 12 SUMMARY Federal legislation governs the structure and tax implications of RESPs (the Income Tax Act), as well as the availability of federal grants such as the Canada Education Savings Grants and the Canada Learning Bond (the Canada Education Savings Act). Several government agencies, including the Canada Revenue Agency (CRA) and the Department of Human Resources and Skills Development Canada are involved in administering RESP rules under the Income Tax Act. The federal Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations require Scholarship Plan Dealers and other financial service providers to maintain records, report large cash transaction and report suspicious transactions, among other things. The federal Competition Act includes sections that prohibit deceptive advertising and require forthright disclosure in telemarketing calls. The Unsolicited Telecommunications Rules (established by the CRTC) require all telemarketers to subscribe to the National Do Not Call List and to maintain their own list. The Criminal Code of Canada contemplates jail terms of up to 14 years for investment fraud and up to ten years for making false statements in relation to investment schemes. Securities law has historically been a matter of provincial jurisdiction, but the development of a national regulatory system may be on the horizon. 152

159 12 Federal Regulation Test Your Knowledge Chapter Federal legislation and rules include: (a) The Income Tax Act. (b) The Competition Act. (c) The Canada Education Savings Act. (d) The Criminal Code. (e) The Unsolicited Telecommunications Rules. (f) Items (a), (b) and (d). (g) All of the above. 2. The Canada Education Savings Grant Program is administered by: (a) Canada Revenue Agency. (b) Canadian Securities Administrators. (c) CESG Funding Agency of Canada. (d) Department of Human Resources and Skills Development Canada. (e) FINTRAC. 3. Canada s Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations apply to RESP dealers under which of the following statements? (a) Dealers who sell RESPs and other registered products are exempt from the legislation. (b) The legislation applies to RESP dealers, though RESP accounts are exempt from a few of the regulatory requirements. 4. A dealer s responsibilities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, include reporting: (a) All cash transactions exceeding $10,000. (b) All lottery winnings to CRA. (c) All suspicious transactions that may relate to money laundering or terrorist financing activity. (d) All transactions done for non-resident clients. 153

160 12 Federal Regulation (e) Items (a) and (c) above. (f) All of the above. 5. Must an RESP dealer take reasonable steps to establish the identity of every subscriber? (a) No, registered accounts such as RESPs are exempt from the identity verification requirements of federal law. (b) Yes, even though federal identity verification requirements do not apply to RESP accounts, securities regulations require registrants to take reasonable steps to establish the identity of their clients. 6. What is one way that the Competition Act applies to RESP sales representatives? (a) It stops you from working for two competing dealers at the same time. (b) It stops you from competing against a fellow sales representative for a client account. (c) It prohibits any person from making false or misleading statements to sell or promote a product or service. (d) It does not apply to RESP sales representatives. 7. What is the maximum term of imprisonment for those convicted of fraud under sections 380 of the Criminal Code of Canada? (a) 18 months. (b) Five years. (c) 14 years. (d) 20 years to life. Answers: 1 G, 2 D, 3 B, 4 E, 5 B, 6 C, 7 C 154

161 13 Securities Regulation in Canada 13. Securities Regulation in Canada CHAPTER 13 OVERVIEW As a Scholarship Plan sales representative, you will be dealing in securities. This chapter contains important information about how securities are regulated in Canada, including: The role of provincial/territorial securities regulators, Canadian Securities Administrators and self-regulatory organizations, Securities law, Regulations, rules, instruments and policies, Forms, notices, decisions and settlements, Investigations and enforcement, Registration, and Prospectus requirements, including National Policy 15. Introduction to Securities What are securities? They are the common shares, preferred shares, bonds, debentures, options, promissory notes, mutual funds, Scholarship Plans and investment contracts that businesses and governments issue to raise capital and that investors acquire to earn a return on their money. Securities markets are an important element of modern market economies. They provide a mechanism for businesses to raise capital and for investors to direct their savings to productive investment opportunities. Securities markets also allow businesses and investors to spread economic risk and reallocate their assets efficiently. Given 155

162 13 Securities Regulation in Canada the 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 abuse. 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 Scholarship Plans. The legislation is typically comprised of a Securities Act and Securities Regulations, supplemented by local and national rules, forms, orders, interpretation notes and policies. While there are some differences from one province to the next, the regulatory system is fairly uniform across Canada. There is no federal securities regulator in Canada, though the Federal Government is aggressively pursuing a consensus among the provinces to create a single national regulator. Despite the absence of a federal regulatory agency, our system of securities regulation is similar in many ways to systems in the United States, the United Kingdom, Australia and elsewhere. Securities law in Canada has four broad objectives: To ensure that investors have access to the information they need to make informed investment decisions, To provide rules of fair play for the markets, 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 legislation is administered and enforced in each province or territory by a securities commission or securities administrator that is appointed by the provincial or territorial government. These agencies also referred to as the regulators have broad powers to apply and enforce the legislation. Their funding comes from fees charged to registrants and issuers who do business or raise capital in the jurisdiction. 156

163 13 Securities Regulation in Canada Securities Regulators There are securities regulators in all Canadian provinces and territories. Alberta British Columbia Manitoba New Brunswick Newfoundland and Labrador Northwest Territories Nova Scotia Nunavut Ontario Prince Edward Island Quebec Saskatchewan Yukon Territory Alberta Securities Commission British Columbia Securities Commission Manitoba Securities Commission New Brunswick Securities Commission Department of Government Services, Consumer and Commercial Affairs Branch Superintendent of Securities, Department of Justice Nova Scotia Securities Commission Superintendent of Securities, Department of Justice Ontario Securities Commission Securities Office, Consumer, Corporate and Insurance Services Division Autorité des marchés financiers Saskatchewan Financial Services Commission Superintendent of Securities, Community Services

164 13 Securities Regulation in Canada MORE ONLINE: Contact information for the provincial and territorial securities regulators can be found at: Canadian Securities Administrators (CSA) The provincial and territorial securities commissions and administrators have established an informal national association called the Canadian Securities Administrators (CSA). The CSA s goal is to enhance cooperation among the regulators and to foster market efficiency through greater harmonization of the rules and regulations. MORE ONLINE: The CSA website is Industry Self-regulatory Organizations Two industry organizations the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) also play important roles in securities regulation. They are self-regulatory organizations (SROs) that oversee the conduct of their member firms under the general supervision of the securities commissions. Neither of these SROs is directly involved in the regulation of Scholarship Plan Dealers or Scholarship Plan sales representatives. Since it was formed in 2000, the RESP Dealers Association of Canada (RESPDAC) 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. Securities Law Securities legislation applies to every trade and to every person who trades in securities or exchange contracts in Canada. As a sales representative, you must be familiar with, and you must comply with, the securities laws that apply to you and your dealer in the jurisdictions in which you do business. In many jurisdictions, the laws and policies 158

165 13 Securities Regulation in Canada that apply to you are available online through the various securities commission websites. Among other things, securities legislation governs: Registration: Everyone who is in the business of trading in, advising on or underwriting securities or exchange contracts must be registered (licensed) by the securities commission(s) to engage in that activity, or they must be able to rely on a specific exemption from the registration requirement. Trading is broadly defined in securities law 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. 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 exemption from this prospectus requirement. 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. Becoming a reporting issuer: An issuer can become a reporting issuer in several ways; the most common way is to file a prospectus. Insider reporting: Most insiders (directors, senior officers and those who hold more than 10% of a reporting issuer s voting shares) must publicly disclose their trading activity within five 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 specific regulations in areas such as: 159

166 13 Securities Regulation in Canada o Minimum capital requirements for dealers, o Record keeping requirements, o Supervisory obligations, o Prohibited sales practices, o Know Your Client and Suitability obligations, o Conflict of interest provisions, and o 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 limited number of specific statutory exemptions from the registration, prospectus and takeover bid requirements. The legislation also authorizes the securities commissions to grant discretionary exemptions from certain regulatory requirements. As a sales representative for Scholarship Plans, you will not deal with these exemptions often (if ever), but it s important that you know they exist. Investigative and enforcement powers: The securities commissions are granted broad powers to investigate conduct in the markets, hold hearings and impose sanctions. Offences: The courts are empowered to imprison and fine those who commit offences under the legislation. While the legislation is quite similar across the country, there may still be significant differences from one province to the next. 160

167 13 Securities Regulation in Canada 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 itself, while others contain specific rules that apply to those who participate as dealers, as investors or as securities issuers 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 registration exemptions, take-over bids and issuer reactivations. National Instruments National Instruments are rules that have been adopted on a uniform basis by securities regulators across Canada. There are more than three dozen National Instruments. They govern such things as: The System for Electronic Document Analysis and Retrieval (SEDAR), Canada s electronic system for filing disclosure documents (National Instrument ), The operation of stock exchanges and trading systems in Canada (NI ), Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI ), The National Registration Database system (NI ), Underwriting conflicts (NI ), Prospectus disclosure requirements (NI ), and Investment Fund Continuous Disclosure (NI ). 161

168 13 Securities Regulation in Canada Multilateral Instruments Multilateral Instruments are uniform rules adopted by several, but not all, other jurisdictions in Canada. Policy Statements Also known as Companion Policies, Policy Statements are issued by regulators to tell market participants how the regulators interpret the legislation or how they intend to exercise their discretion under the legislation. Local Policy Statements apply in a single jurisdiction. Multilateral Policy Statements have been adopted in some, but not all, Canadian jurisdictions. National Policy Statements apply uniformly across the country. Forms, Notices, Decisions and Settlements There are several other types of instruments issued under the legislation that are important to the regulatory process: Forms set out the required content of disclosure documents and other filings. Interpretation Notes 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 arrangement or would conflict with the legal requirements of an issuer s primary jurisdiction. Exemptions may be given in respect of registration and prospectus requirements, take-over bid rules and filing requirements. Blanket Orders and Rulings (BORs) are orders made by a regulator that apply to all of the market participants described in the order. As with exemptions, you will probably not deal with BORs, but you should know they exist. 162

169 13 Securities Regulation in Canada 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. 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 securities commission staff, waive their right to a hearing and consent to appropriate enforcement orders or other sanctions. Investigations and Enforcement Securities legislation gives the regulators broad powers to investigate conduct in the securities markets and to impose administrative sanctions to protect the public and enforce compliance with regulatory requirements. Those 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. The legislation includes powers that enable regulators to compel others to give evidence and produce records. It may also allow the regulators to enter the business premises of registrants and other market participants to conduct investigations or compliance examinations. 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. 163

170 13 Securities Regulation in Canada Enforcement Orders The regulators have a range of powers aimed at ensuring compliance with the legislation. They may: Suspend or cancel a person s registration, Order that a person cease all trading in securities, Deny a person 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 up to $1 million or more. Prosecution Securities legislation also authorizes the prosecution of specified offences such as misrepresentation, trading without registration, distributing securities without a prospectus, illegal insider trading and market manipulation. Prosecutions are conducted before the courts. Penalties on conviction may include fines of over $1 million and imprisonment for several years. 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 of misconduct, such as failure to deliver a prospectus, misrepresentations in prospectuses or trading on undisclosed inside information. These statutory civil remedies are in addition to other rights of action that may be available at common law. They are important elements of 164

171 13 Securities Regulation in Canada the regulatory scheme and enable investors to protect themselves by seeking restitution through the courts. Registration Securities legislation requires that all persons who are in the business of trading or advising in securities be registered in each province in which they do business. That means 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. The legislation also establishes proficiency standards that must be met by every applicant for registration. These standards are set out in NI In addition to the training mandated by your dealer, which will include successful completion of your dealer s Product Knowledge program, all Scholarship Plan salespersons must successfully complete an approved proficiency examination based on this course prior to submitting an application for registration. 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 F4 Registration of Individuals and Review of Permitted Individuals through the National Registration Database (NRD). Any changes in the information disclosed to the regulators must be promptly disclosed (usually within 10 days) in Form F5 Change of Registration Information. MORE ONLINE: NI (English) (French) 165

172 13 Securities Regulation in Canada These application forms include questions about your: Identity, Qualifications, Prior employment, and Regulatory, civil or criminal history. It is your responsibility to provide complete and accurate information for your registration application. Errors in the completion of an application 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 local Supervisor 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 generally conduct detailed reviews of any application that discloses such things as: Past refusals by any government body or self-regulatory organization (SRO) to grant registration or to license you to deal in financial products or otherwise to deal with the public, Disciplinary actions against you by any securities commission, SRO or similar regulatory body, Past criminal or quasi-criminal convictions, Bankruptcies or proposals to creditors, and Any civil judgments or garnishments. Your registration is not effective until your application has been reviewed and approved by the relevant regulatory agencies. You cannot undertake trading activity until registration has been confirmed to you by your dealer. 166

173 13 Securities Regulation in Canada Registration application forms are submitted electronically through the National Registration Database (NRD) System. Some supporting documents must still be submitted in physical form. National Registration Database In early 2003, Canada s securities regulators introduced a new electronic registration system for individuals. The National Registration Database (NRD) is a web-based system designed to harmonize and improve the registration process by permitting dealers to file registration information online. Under National Instrument , use of the NRD is mandatory for all individual registration applications, changes to registration and terminations of registration. Electronic filing allows for automated screening of deficiencies prior to applications being submitted to the regulators. It also speeds up the flow of information and allows registrants to submit one application to register in multiple jurisdictions. The procedures and forms to be used with NRD are described in National Instrument MORE ONLINE: NI (English) (French) NRD forms: Form F1 Notice of Termination of Registered Individuals and Permitted Individuals Form F2 Change or Surrender of Individual Categories Form F3 Business Locations other than Head Office Form F4 Registration of Individuals and Review of Permitted Individuals Form F5 Change of Registration Information 167

174 13 Securities Regulation in Canada Form F7 Reinstatement of Registered Individuals and Permitted Individuals Once a dealer is registered as an NRD participant, it appoints a Chief Authorized Firm Representative (Chief AFR) who may, in turn, appoint other Authorized Firm Representatives (AFRs) who are authorized to submit applications through the NRD on behalf of the dealer and its representatives. Once you have completed your registration application form, it will be reviewed by one of your dealer s AFRs and, if accepted, submitted by the AFR through NRD. Only AFRs can submit applications through NRD. When your application is submitted online, your dealer makes payment through NRD by electronic funds transfer. Residency Generally you must be a resident of Canada for at least one year before the regulators will register you to sell Scholarship Plans. Some exceptions are made, most often for sales representatives who had previously held a securities license in the United States for more than one year. Most sales representatives seek registration only in the province in which they reside, but multi-jurisdictional registrations are becoming more common. Consult with your dealer if you think you want to become registered in more than one province or territory. If multijurisdictional registration is an option, you will have to pay the annual registration fees that apply in each jurisdiction, and you will have to ensure that you comply with the laws of each jurisdiction in which you do business. More information is available in National Policy Process for Registration in Multiple Jurisdictions. MORE ONLINE: (English) (French) 168

175 13 Securities Regulation in Canada Part-time Sales Representatives Historically, securities regulators expected registrants to be engaged as sales representatives on a full-time basis except in unusual circumstances. Those restrictions have been modified in recent years, and now registration as a part-time sales representative is an option in many parts of the country, subject to the position of the local regulator and the policies established by your dealer. Where registration on a part-time basis is possible, dealers and regulators will still insist that part-time registrants maintain the expertise necessary to provide objective and professional advice to their clients. In addition, part-time registrants must be able to address any potential conflicts of interest arising from outside employment and the potential for confusion among clients about which employer a salesperson is acting for at any point in time. If you are contemplating registration as a part-time sales representative you should be prepared to satisfy your dealer and the regulators that: You will devote sufficient time to your work as a salesperson to maintain adequate knowledge of the products you are dealing in and the various regulations and policies that govern your conduct, You will be able to provide your clients with an adequate level of service, 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, and Procedures are in place to ensure that your clients are at all times aware of the dealers or other entities you are representing in relation to a particular transaction. Your dealer will have specific policies that deal with the subject of parttime employment. Dual Licensing Many jurisdictions will allow you to hold both a securities license and an insurance license. They will often impose specific obligations on your dealer and your local Supervisor to diligently supervise all of the financial services you provide that are not subject to regulation under the insurance regime. 169

176 13 Securities Regulation in Canada If you plan to pursue dual registration, you will have to meet the proficiency requirements of, and apply for registration to, both the insurance and the securities regulators in the jurisdiction. In addition, you will generally 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. Changes in Registration Information Once you are registered as a sales representative, you are required by law to report to regulators any change in the information provided in your original registration application form. As set out in NI , almost all changes to the information you submitted in your registration application (Form F4) must be reported through NRD within 10 days. A few very specific items like changes in citizenship or past employment need only be reported within 30 days. Fortunately, you are not required to regularly update certain personal information such as hair colour or weight. Some examples of common changes that must be reported within 10 days include: 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, Civil actions or judgments against you, Bankruptcy, or New or changed outside business or employment activities (whether you are compensated for those activities or not). Amended information can cause regulators to reconsider your suitability for registration, particularly if the change relates to bankruptcy or civil, criminal or regulatory misconduct. 170

177 13 Securities Regulation in Canada If you wish at some point to change the category of your registration or surrender your registration, the appropriate form to be filed is Form F2 Change or Surrender of Individual Categories. Reporting Terminations Your dealer must promptly notify the regulators any time a registered sales representative leaves the dealer, whether through resignation or dismissal. Form F1 Notice of Termination of Registered Individuals and Permitted Individuals must be filed within 10 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. MORE ONLINE: Form F1 Payment of Registration Fees To maintain registration, your annual license renewal fees must be paid in each jurisdiction in which you are registered. Typically, sales representatives pay the registration fees to their dealer who then submits the funds to NRD. Fees are due before the first day of each calendar year (i.e., your 2012 fees are due before December 31, 2011). Failure to pay registration fees can lead to the suspension of registration. Annual registration fees are set out in the regulations of each jurisdiction and vary from one province or territory to the next. Additional information about the payment of registration fees is available from your dealer or from your provincial or territorial regulator or its website. 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 (Form F7) for the reinstatement of your registration with your new employer. The application is made online through NRD by an AFR of the new dealer. 171

178 13 Securities Regulation in Canada A copy of the former sponsoring dealer s termination notice must be provided to the new sponsoring dealer upon transfer in order to make the transfer automatic. In many cases, the reinstatement of registration with a new dealer will be automatic, provided that several specific conditions are met. For more information about the transfer and reinstatement process, see section 2.3 of NI Prospectus Requirements Regulators believe that one of the best ways to protect investors is to ensure that they have access to accurate and up-to-date information about any company, investment fund or Scholarship Plan Dealer in which they might 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 information such as: 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, 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 172

179 13 Securities Regulation in Canada 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. Chapter 6, Scholarship Plan Disclosure Documents, has more information about 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 receipted by the regulators is not a regulatory seal of approval, nor an assurance that the securities are a worthy investment. In fact, the front page of every prospectus must state that: No securities commission or 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 current, every prospectus has a lapse date (an expiry date). Beyond the lapse date, the prospectus is no longer valid and no securities may be sold under it. Mutual funds and Scholarship Plans engage in the continuous distribution of their securities, constantly issuing new securities and 173

180 13 Securities Regulation in Canada redeeming old ones. To allow 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. 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. Most dealers establish more strict requirements that oblige their salespersons to deliver the prospectus when they first present the Plan to their clients or at the time of enrolment. To satisfy the delivery obligation, the prospectus can either be personally delivered or mailed to the purchaser. If mailed by ordinary mail, receipt by the purchaser is deemed to occur on the seventh day after mailing. If mailed by registered mail, receipt by the purchaser is deemed to occur on the earlier of the seventh day after mailing or on the day that receipt is acknowledged. Some dealers have developed policies allowing for the delivery of documents, including prospectuses, to clients by electronic means (i.e. by ). These policies have been crafted to meet specific requirements set out in National Policy Delivery of Documents by Electronic Means and must be strictly adhered to. Check with your dealer about the rules you need to follow for ing a prospectus to clients. 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 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 174

181 13 Securities Regulation in Canada to promptly deliver the appropriate prospectus to the subscriber, the subscriber will have an ongoing right to cancel his or her purchase. Pursuant to National Policy No. 15, the securities 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 was not sent a prospectus that they were entitled to has a right of action for damages or rescission (cancellation) of the purchase agreement against the dealer who failed to send the prospectus. If a prospectus contains a misrepresentation, a person who purchased securities under that prospectus: Is deemed to have relied on that misrepresentation, and 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. National Policy 15 In National Policy 15, the Canadian Securities Administrators have set out certain standards that must be followed by any Scholarship Plan before the regulators will issue a receipt for the Plan s prospectus. The Policy is an important one and for that reason has been reproduced below. Read it carefully. It deals with several key aspects of 175

182 13 Securities Regulation in Canada 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. The Policy sets out the regulators general expectations for Scholarship Plans. Exceptions to the policy are not uncommon. The prospectus for each Scholarship 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. 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 "foundation" (which is described as a body without any profit motive or desire for pecuniary gain) and the 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 provincial acts. The use of such expressions as "education counsellors", "scholarship counsellors or 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. 176

183 13 Securities Regulation in Canada 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 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) (ii) (iii) the Scholarship Plans under administration have total net assets of at least $50,000,000; 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 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) (ii) such mortgage is insured under the National Housing Act (Canada) or any similar act of a province; or the excess over 75% is insured by an insurance company registered or licensed under the Canadian and British Insurance Companies Act (Canada), the Foreign Insurance Companies Act (Canada) or insurance acts or similar acts of a Canadian province or territory; 177

184 13 Securities Regulation in Canada 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: (i) (ii) (iii) the administrator, the trustee or the distributor of the fund or any senior officer or director thereof, or any person or company who is a substantial securityholder of the administrator, a trustee or the distributor of the fund, or 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 $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) (ii) 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 funds held on behalf of subscribers who, after receipt of an information circular which has first been filed 178

185 13 Securities Regulation in Canada 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. 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. 179

186 13 Securities Regulation in Canada 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 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. 180

187 13 Securities Regulation in Canada Leverage Risk Disclosure Section of NI requires that you provide specific information, in writing, to your clients about the risks of borrowing money to invest ( leveraging ) whenever you recommend that the client use borrowed money to finance any part of the purchase of a security. You must provide the leverage risk disclosure before the client s purchase. It must be substantially similar to the following: 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. You are not required to provide that risk disclosure statement to your client at the time of purchase if you already made the disclosure to that client in the previous 180 days. CHAPTER 13 SUMMARY Businesses and governments issue securities to raise capital; investors acquire securities to earn a return on their money. Given the 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 abuse. There are securities regulators in every Canadian province and territory, an informal national association called the Canadian Securities Administrators and self-regulatory organizations. Securities law governs registration, distribution of securities, continuous disclosure, insider reporting, take-over bids, sales and business practices, deceptive practices, exemption, investigative and enforcement powers, and offences. National Instruments rules that have been adopted on a uniform basis by securities regulators across Canada govern such things as SEDAR, the operation of stock exchanges and trading systems, registration, the National Registration Database, underwriting 181

188 13 Securities Regulation in Canada conflicts, prospectus disclosure requirements and continuous disclosure. Securities legislation gives the regulators broad powers to investigate conduct in the securities markets and to impose administrative sanctions. Securities legislation requires that all persons who are in the business of trading or advising in securities be registered in each province in which they do business. There are significant requirements of registration, and it must be done with a sponsoring dealer online through the National Registration Database. An underlying principle of Canadian securities law is that one of the best ways to protect investors is to ensure that they have access to accurate and up-to-date information about any company, investment fund or Scholarship Plan in which they might invest. For this reason, securities issuers must prepare prospectuses whenever they plan to issue securities to the public. National Policy 15 sets out standards that must be followed by any Scholarship Plan before the regulators will issue a receipt for the Plan s prospectus. National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations deals with the registration requirements across Canada. 182

189 13 Securities Regulation in Canada Test Your Knowledge Chapter Is securities legislation a provincial or federal responsibility? (a) Federal. (b) Provincial. (c) Regulation has been lifted to enable the industry to compete globally. (d) For Scholarship Plans, it is the responsibility of the RESPDAC. 2. Which of the following is NOT true about securities commissions/administrators? (a) They are appointed by the provincial or territorial government. (b) They have broad powers to apply and enforce securities legislation. (c) There is no securities regulator in the territories. (d) Funding is provided from fees charged to registrants and issuers. 3. What does securities law govern? (a) Registration of everyone who trades in, advises on or underwrites securities. (b) Reporting of insider trading. (c) Sales and business practices of dealers and registered sales representatives (d) Disclosure requirements for entities that issue securities to the public. (e) All of the above. 4. What phrase best describes a National Instrument? (a) A musical instrument played in more than one province. (b) A federal securities law. (c) A federal RESP rule. (d) A rule that has been adopted uniformly by securities regulators in every province and territory. 183

190 13 Securities Regulation in Canada 5. Which of the following powers do securities regulators NOT have? (a) The power to compel dealers and sales representatives to provide records and information about clients and business activities. (b) The power to suspend or cancel a sales representative s registration. (c) The power to investigate the conduct of any registrant, issuer or other market participant. (d) The power to order investors to complete the terms of their subscription agreements. 6. With very few exceptions, you must be registered in each province or territory in which your clients reside. (a) True (b) False 7. To be registered, you must meet certain proficiency requirements set out in NI (a) True (b) False 8. How frequently must your registration fees be paid in order to maintain your registration? (a) Monthly. (b) Every three years. (c) Annually, before the first of the year. 9. Which of the following is NOT true about the registration process? (a) Your dealer can submit your registration online. (b) You must provide information about your prior employment and any criminal history. (c) Once you ve submitted a registration form, you can begin trading in securities. (d) It is an offence to provide false information on the registration application form. 184

191 13 Securities Regulation in Canada 10. Which of the following is true about the National Registration Database? (a) It enables you to register in multiple jurisdictions with one application form. (b) Only authorized dealer personnel can submit applications to the NRD. (c) It helps screens applications prior to submission to regulators. (d) (a) and (c) above. (e) (a), (b) and (c) above. 11. Why does the law require you to distribute a prospectus to Plan subscribers? (choose the best answer) (a) It saves the sales representative time explaining details of the Plan. (b) It shows that the subscriber has been contacted by a particular sales representative. (c) It protects investors by providing them with accurate and upto-date information about the investment. (d) It stops subscribers from investing in high risk ventures. 12. Once a securities commission receipts a prospectus, they have given it their seal of approval as a prudent investment. (a) True (b) False 13. What are the rules for delivering a prospectus to a client? (a) The client must receive a prospectus during your first face-toface meeting. (b) The client must receive a prospectus if they request one. (c) The client must receive a prospectus within one week of their application form being submitted. (d) The client must receive a prospectus by midnight after the second business day after entering into a purchase agreement. 185

192 13 Securities Regulation in Canada 14. What topic is not specifically addressed in National Policy 15? (a) The use of titles such as educational counselors. (b) The need for a clear distinction between the foundation and the Plan s distributor. (c) The requirements to disclose the availability of CESGs. (d) Acceptable institutions for holding funds received from subscribers. 15. What is a leverage risk disclosure statement? (a) A statement by sales representatives disclosing any personal debt they have. (b) A statement by dealers disclosing any risk in their investment portfolio. (c) A statement given to subscribers outlining the risk of borrowing money to purchase a security. (d) A statement by securities regulators to subscribers, outlining the risk of investing in a security. Answers: 1 B, 2 C, 3 E, 4 D, 5 D, 6 A, 7 A, 8 C, 9 C, 10 E, 11 C, 12 B, 13 D, 14 C, 15 C 186

193 14 The Economy 14. The Economy CHAPTER 14 OVERVIEW As a professional working in the financial services industry, you need to understand the larger economic picture. Changes in the economy will affect your clients, their investments, their risk tolerance and their expectations. This chapter will help you understand important elements of the economy including: Key measures of the economy: Gross Domestic Product, capacity utilization, productivity, international trade, balance of payments and inflation. Inflation: how it s measured, why it happens, the impact and implications for investors. Role of the Bank of Canada. The two forms of economic policy: fiscal and monetary policy. 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 cost of goods and services in the future. Your understanding of these concepts can help you and your clients gain insight into the factors that affect savings and investment plans. The economy generally moves in cycles, expanding rapidly in some periods and contracting (or shrinking) in others. The economy grows 187

194 14 The Economy during periods of increased demand for goods and services. That demand can be influenced by general consumer confidence, population growth, interest rates, exchange rates, economic conditions around the world and many other factors. Economic growth leads to higher employment, improved business profits and increased tax revenues for governments. Periods of economic contraction, on the other hand, lead to reduced consumption, greater unemployment, stagnant or declining wages and profits, and decreased tax revenues. A period of at least six consecutive months of economic contraction is generally called a recession. Economic cycles, often ebbing and flowing over periods of four to seven years, are difficult to predict and even harder to control. Even so, much effort is devoted to measuring and forecasting economic conditions so that governments can use some of the tools at their disposal (discussed below) to reduce the negative consequences of excessive growth or prolonged contraction. Measuring the Economy There are several ways to track the performance of our economy. Here are the primary economic measures in Canada. Gross Domestic Product (GDP) Gross Domestic Product (GDP) is a popular indicator used by countries to estimate the value of their economic activity. GDP is a measure of the total value of goods and services produced in a country during a given period. It 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, GDP excludes the purchase of raw materials and services used by businesses to produce the final products that consumers purchase. 188

195 14 The Economy 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. In calculating the GDP, Statistics Canada measures the output of many different segments of the economy. This allows economists and business people to analyze the performance of specific industries, such as manufacturing, telecommunications, construction, computers and peripherals, and mining. In 2008, Canada s GDP was approximately $1.6 trillion. Capacity Utilization and Productivity Even when the economy seems to be strong, economists review other indicators for signs of long-term encouragement or potential problems. One measure of an economy s strength is the extent to which it operates at full capacity. This is its capacity utilization 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. Productivity is another useful economic indicator. 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; international trade is an extremely important part of our economy. Increased exports of goods to our trading partners means increased sales for Canadian industries and increased demand for Canadian 189

196 14 The Economy 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. Canada, the United States (by far our largest trading partner) and Mexico are signatories to the North American Free Trade Agreement (NAFTA), which encourages trade by eliminating tariffs on goods and services and reducing other barriers to trade. By encouraging freer trade in a larger and more integrated North American economy, NAFTA seeks to increase efficiency and provide benefits to consumers 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. Inflation Inflation is the general increase in prices across the economy over a period of time. It is most commonly measured by changes in the Consumer Price Index (CPI), which is calculated on a monthly basis by 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. 190

197 14 The Economy Keeping inflation under control is important to a strong and stable economy, and controlling inflation is one of the objectives of Canada s government-owned central 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% and 3%. If these annual targets are exceeded, the Bank 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. Between 2000 and 2009, Canada s inflation rate has averaged 1.98%. MORE ONLINE: You can find the latest Federal Government statistics about key economic measures at the Statistics Canada website: Economic Policy Economic policies are the tools available to the government to stimulate, slow down or stabilize the economy or particular segments of the economy. The two key forms of economic policy are fiscal policy and monetary policy. The government will often use both fiscal policy and monetary policy to foster stable economic growth and control inflation. Fiscal Policy Fiscal policy refers to the way that governments can influence the economy through budgetary decisions, particularly decisions to increase or decrease government spending or to increase or decrease taxation. In Canada, the government is a significant consumer. By deciding to substantially change its pattern of spending on health, education, public safety, social programs or infrastructure, for instance, the 191

198 14 The Economy government can create or reduce the level of employment and the demand for goods and services. In addition to controlling its own spending, the government can influence the level of spending by business and consumers by changing the levels of 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. Monetary Policy The Bank of Canada s 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, and Conducting monetary policy to foster confidence in the value of money. Monetary policy refers to the measures that can be taken by the Bank of Canada to influence the economy by regulating the amount of money in circulation. The primary goal of the Bank s monetary policy is to foster a 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. 192

199 14 The Economy Lower interest rates tend to increase spending and reduce savings, and a lower dollar can boost exports and hold back imports. Conversely, higher 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. There are usually lags of from 18 months to 24 months between monetary policy changes and their effects on 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. MORE ONLINE: The Bank of Canada website has extensive information about monetary policy, including the current bank rate, at CHAPTER 14 SUMMARY All business and investment activity can be affected by changes in the Canadian and global economic environments. Your understanding of these concepts can help you and your clients gain insight into the factors that affect savings and investment plans. The primary measures of the Canadian economy are: Gross Domestic Product, capacity utilization, productivity, international trade, balance of payments and inflation. The two key forms of economic policy are fiscal policy and monetary policy. The government will often use both fiscal policy and monetary policy together to foster stable economic growth and control inflation. Canada s central bank, the Bank of Canada, 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. 193

200 14 The Economy Test Your Knowledge Chapter Which of the following is true about GDP? (a) It s short for Greater Domestic Productivity. (b) It measures the productivity of homemakers. (c) It is a measure of the total goods exported to NAFTA partners during a given period. (d) Statistics Canada calculates GDP by measuring the output of all Canadian goods and service industries. 2. The capacity utilization rate compares the potential output of an industry with its actual output. (a) True (b) False 3. What is the impact of increased exports of Canadian goods? (a) An increase in interest rates. (b) Increased sales for Canadian companies in foreign countries. (c) Decreased sales for Canadian industries. (d) Increased demand for Canadian dollars. 4. Which of the following is true about inflation? (a) It is the general increase in prices across the economy over a period of time. (b) When it is high, it encourages people to save their money. (c) It can t be reliably measured. (d) The inflation rate is set by the Bank of Canada monthly. 5. What is NOT an example of how governments can use fiscal policy to influence the economy? (a) By increasing government spending. (b) By decreasing government spending. (c) By increasing or decreasing taxation. (d) By legislating increases in productivity. 6. What is monetary policy? (a) The way the Bank of Canada supervises the chartered banks. (b) The average savings rate of Canadians. 194

201 14 The Economy (c) The way the Bank of Canada influences the economy by regulating the amount of money in circulation. (d) The way the Canada Education Savings Grant program is implemented. 7. Why does the government use fiscal policy and monetary policy? (a) To foster stable economic growth. (b) To give the Bank of Canada something to do. (c) To create demand for RESPs. 8. How do changes in interest rates affect the economy? (a) Lower interest rates will tend to increase spending and increase savings. (b) Lower interest rates will tend to increase spending and decrease savings. (c) Higher interest rates will tend to boost domestic spending. (d) Higher interest rates will tend to curb foreign spending. Answers: 1 D, 2 A, 3 D, 4 A, 5 D, 6 C, 7 A, 8 B 195

202 14 The Economy 196

203 15 Understanding Financial Markets 15. Understanding Financial Markets CHAPTER 15 OVERVIEW Knowledge of financial markets is important in helping you understand the investment options your clients face, as well as important considerations such as risk tolerance and income tax implications. In this chapter, you will learn about: The three basic characteristics of securities: liquidity, expected return and risk. Other considerations, including income tax implications. Investment risk: the risk/reward relationship, the components of risk and risk tolerance. Asset classes: cash and cash equivalents, fixed income and equities. How different securities compare in terms of liquidity, expected return and risk. Other financial products: insurance and annuities. Understanding Securities Liquidity - Expected Return - Risk This section 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. 197

204 15 Understanding Financial Markets Some securities, such as mutual funds, can be redeemed (returned to the issuer) on short notice. For non-redeemable securities, liquidity will 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 even years. Or they may find that there is no market for the securities when they want to sell. Expected Return: is the overall profit that an investor might expect to receive from an investment. This could be 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 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 substantial. MORE ONLINE: Characteristics of Various Types of Securities from the Canadian Securities Administrators provided much of the information for this chapter and is a valuable source of detailed information about securities: Tax and Other Considerations In addition to considering these factors, investors and their advisers must carefully consider the investor s financial needs and objectives, their tolerance for risk and other issues, such as taxes, before making any investment decision. Income tax considerations are important because they will affect the investor s net, or after tax, return from an investment. Interest, dividends, capital gains and capital losses are all treated differently for tax purposes. 198

205 15 Understanding Financial Markets Interest is generally treated as ordinary income for tax purposes and taxed at the same rate as the investor s employment earnings. Dividends from a Canadian corporation are often taxed more favourably than interest or other taxable income because investors can claim a dividend tax credit. Capital gains can generally be partially excluded from income for tax purposes. Capital losses can be used to offset capital gains. Canadian tax legislation provides significant tax benefits for individuals who make qualifying investments through tax-deferral plans such as RESPs (contributions are not tax-deductible; income will be taxed in the hands of a beneficiary), RRSPs and Registered Retirement Income Funds (RRIFs) and Tax-Free Savings Accounts (TFSAs). RRSPs Registered Retirement Savings Plans (RRSPs) offer tax advantages to Canadians who use them to save for their retirement. When a person puts money into an RRSP, they are allowed to deduct the contribution from their income when calculating their income tax, which of course reduces their taxes for that year. This is different from RESPs, where contributions are not tax-deductible. The money saved in an RRSP grows tax-free until it is withdrawn, but when it is withdrawn is taxed as ordinary income in the hands of the RRSP holder. People usually start to withdrawn money from their RRSP after they retire, when their income and their tax rate is much lower. Generally, up to the age of 71, Canadians can contribute up to 18% of their previous year's income to an RRSP each year, subject to certain pension adjustments and an annual maximum ($22,000 in 2010). RRIFs The money held in an RRSP must be withdrawn once the contributor reaches the age of 71. One option is to transfer the money to a Registered Retirement Income Fund, which allows the holder to continue to shelter the money from tax until it is withdrawn from the RRIF. However, RRIF holders must withdraw at least a minimum percentage of the funds from the account each year. That percentage will depend on the account holder's age. 199

206 15 Understanding Financial Markets MORE ONLINE: Tax-Free Savings Accounts TFSAs were introduced in Canada in Every Canadian resident who is at least 18 years old can contribute up to $5,000 (2009 limit) to a TFSA each year. While TFSA contributions are not tax-deductible, the income (interest, dividends or capital gains) earned on those contributions will not be subject to taxation at any time even when withdrawn. Funds can be withdrawn from a TFSA at any time. If a contributor withdraws money from a TFSA, that amount can be re-contributed to the TFSA in a subsequent year. The money that accumulates in a TFSA can be used for any purpose, including helping to fund someone s education. TFSA contributions can be invested in the same types of products (deposits, GICs, stocks, bonds, mutual funds, etc.) that can be acquired in an RRSP. MORE ONLINE: TFSAs are an important savings tool for Canadians and should be discussed objectively with clients who are saving for their children s education. TFSAs are flexible and, like RESPs, offer certain tax benefits. However, they do not offer clients the important advantages of CESGs or other education grant programs, nor do they offer the potential for enhanced educational assistance payments that can result from investment in group Scholarship Plans. Tax-Advantaged Securities Some types of securities such as units of labour-sponsored investment 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; you and your clients should rely on expert advice. 200

207 15 Understanding Financial Markets Tax implications should not be the only factor considered when making an investment decision. Each potential investment should be analyzed based on: Its own merits, How it will affect the risk and expected return of the investor s overall financial portfolio, and How well it fits the investor s personal financial objectives, risk tolerance and investment time horizons. 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: They are paid for the use of their money, and 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 riskfree-rate must be prepared to assume some risk to get it. 201

208 15 Understanding Financial Markets Chart 15.1 The Risk-Reward Relationship Risk and expected return are very closely correlated. The relationship can be illustrated in a simple graph. Expected Return % Risk Simply put, the higher the risk of an investment, the 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 is comprised of a number of factors, 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. Market risk: Common shares on stock exchanges have 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. Changing interest rates affect some investments, such as long-term bonds, more than others. Equity investments are also affected, but not as predictably as fixed income investments. 202

209 15 Understanding Financial Markets 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. Risk tolerance can be affected by many things, including the investor s age, health, income, net worth, financial 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 (KYC), but it can be a challenge. Many of your clients will not have thought about how much risk they are prepared to take, and few will have the technical skills or the time to evaluate the risk of a particular investment. Other clients may overstate their tolerance for risk in their initial discussions with you, perhaps in an effort to appear more worldly or fearless. Most clients will rely heavily on you and their other financial advisers to inform and educate them about risks and to objectively consider the risks associated with any proposed investment program. Diligent and objective consideration of 203

210 15 Understanding Financial Markets risks is an important part of your KYC and suitability obligations to your clients. Risk in Practice The Global Credit Crisis The global financial crisis that shocked businesses and investors in 2008 was the most recent reminder that risk is not a theoretical concept that can be safely ignored by optimistic advisers or investors. Over the period from June 2008 to March 2009, Canada s senior equity index, the S&P TSX Composite Index, lost roughly half of its value, devastating the portfolios of many investors who had come to expect continued growth after several years of positive investment performance. Stock markets were not the only sector affected; countless businesses, including many large international financial institutions, failed or teetered on the brink of bankruptcy. This particular market meltdown had its origins in very relaxed mortgage lending practices over the preceding decade, largely in the United States. This excessive consumer credit had often been funded through debt securities such as asset-backed commercial paper (ABCP) that were not well enough understood by either lenders or investors. These factors, combined with changing interest rates and increasing defaults on U.S. residential mortgages, led eventually to a crisis in global credit markets and a dramatic decline in the capital available to businesses and consumers. Extensive information about the recent global credit crisis is available online. Managing Risk No sector of the economy is immune to risks. Some investment portfolios will always be subject to high risks, while other will be much more stable. Some will be affected mainly by stock market returns, others by changes in interest rates, commodity prices, currency exchange rates or other factors. The historical volatility of stock market and interest rate benchmarks is illustrated in the following charts: 204

211 15 Understanding Financial Markets 205