PROFICIENCY STANDARD FOR APPROVED PERSONS SELLING EXCHANGE TRADED FUNDS ( ETFs )

Transcription

1 MFDA POLICY NO. 8 PROFICIENCY STANDARD FOR APPROVED PERSONS SELLING EXCHANGE TRADED FUNDS ( ) Purpse Under Rule (Educatin, Training and Experience), an Apprved Persn must nt perfrm an activity that requires securities registratin unless the Apprved Persn has the educatin, training, and experience that a reasnable persn wuld cnsider necessary t perfrm the activity cmpetently, including understanding the structure, features, and risks f each security that the Apprved Persn recmmends. A similar requirement exists under Natinal Instrument Registratin Requirements, Exemptins and Onging Registrant Obligatins ( NI ). Cnventinal mutual funds are thse that are traded as a primary distributin with the issuer. In cntrast, are mutual funds that are traded in the secndary market n an exchange. The purpse f this Plicy is t set ut minimum requirements that Members and Apprved Persns must meet t ensure that advice and transactins in respect f the sale f by Apprved Persns satisfy the prficiency, experience, and related requirements under Rule and NI Requirements under this Plicy d nt apply t the sale f cnventinal mutual funds that invest in. Backgrund MFDA Members and their Apprved Persns are permitted t sell that meet the definitin f a mutual fund. Hwever, there are imprtant differences between and cnventinal mutual funds. With the exceptin f the Canadian Securities Curse ( CSC ), existing curses and examinatins used by Apprved Persns t satisfy prficiency requirements under NI , in respect f the sale f cnventinal mutual funds, d nt adequately address the sale f. As a result, additinal measures must be taken t ensure that advice and transactins in respect f the sale f by Members and their Apprved Persns meet the prficiency, experience, and related requirements under Rule and NI ETF Prficiency and Training Members must ensure that each Apprved Persn advising r transacting in has adequate prficiency, educatin, and training. In rder t satisfy requirements under Rule 1.2.3, Apprved Persns must receive apprpriate training frm the Member in respect f the fllwing: infrmatin abut the characteristics, features, benefits, and risks f ; and hw will be ffered thrugh the Member. Page 1 f 8

2 Member Plicies and Prcedures Members are respnsible fr perfrming a reasnable level f due diligence n prir t their apprval fr sale. As part f this due diligence, Members are required t determine if the ETF meets the definitin f a mutual fund. Where are sld by a Member, the Member must have apprpriate plicies and prcedures regarding their sale. Apprved Persns must receive specific training n thse aspects f the Member s plicies and prcedures that deal with advising and transacting in. Such training must, at a minimum, include: detailed prduct infrmatin in respect f the apprved fr sale by the Member; hw market qutes will be btained; the types f trades accepted and the infrmatin required fr each trade accepted; the disclsure infrmatin required fr each transactin; hw evidence f trade instructins, whether executed r unexecuted, and disclsures will be maintained; and hw trade rders will be prcessed. ETF Prduct Training fr Apprved Persns As nted abve, there are existing curses and examinatins used by Apprved Persns t satisfy prficiency requirements under NI in respect f the sale f cnventinal mutual funds. Sme f the infrmatin in such curses verlaps with infrmatin that Apprved Persns wuld be required t knw and understand fr the purpse f prviding advice and transacting in. Training must fcus n unique aspects f that Apprved Persns must understand in respect f the particular ETF prducts ffered thrugh the Member. In additin, Apprved Persn training in this area must highlight key differences between and cnventinal mutual funds. Attached as Appendix A t this Plicy is a chart that sets ut hw new infrmatin and existing tpics/cncepts shuld be addressed as part f ETF prduct training fr Apprved Persns. ETF prduct training fr Apprved Persns may be satisfied by curses ffered thrugh independent curse prviders, r training ffered thrugh the Member. In either case, the training must, at a minimum, address all f the matters included in the chart set ut in Appendix A. Independent Curse Prviders The fllwing curses wuld be acceptable t meet ETF prduct training requirements fr Apprved Persns: Exchange Traded Funds fr Mutual Fund Representatives (Canadian Securities Institute); The Exchange-Traded Funds Curse (IFSE Institute); Exchange Traded Funds fr Representatives f Mutual Fund Dealers (Smarten Up Institute). Page 2 f 8

3 ETF Prduct Training Prvided by Member Where ETF prduct training fr Apprved Persns is prvided by the Member, the training must include an examinatin t be successfully cmpleted by the Apprved Persn. The Member must keep apprpriate recrds f such training, as required under MFDA Rule N. 5 (Bks, Recrds and Reprting). Examples include, but are nt limited t, the fllwing: attendance recrds; evidence f training sessins; cntent f training materials; and results f frmal examinatins. Deleted: and the Deleted: administered by Deleted: the Member Page 3 f 8

4 Appendix A ETF Prduct Training fr Apprved Persns Chart Belw is a chart that sets ut hw new infrmatin and existing tpics/cncepts must, at a minimum, be addressed as part f ETF prduct training fr Apprved Persns. Legend: New Infrmatin Existing Tpics and Cncepts Cntent shuld be explained in detail. Generally a higher level f detail is expected. Shuld include cmparisn f and cnventinal mutual funds. Existing tpics and cncepts shuld be explained in the cntext f. Shuld include cmparisn f and cnventinal mutual funds. General Tpic Sub-Tpics Cmment Percentage Allcatin Intrductin t Definitin f an Exchange-Traded Fund Registratin/licensing requirements and limitatins Prvide an ETF definitin. Explain hw they have attributes f bth cnventinal mutual funds and stcks. Review the registratin requirements t sell mutual funds and the limitatins f registratin fr Dealing Representatives. 15 Regulatin f Descriptin f that may be sld by Apprved Persns. Fr example, index tracking, actively managed, and quasiactive/quasi-passive Descriptin f that may nt be sld by Apprved Persns. Fr example, leverage and inverse Offering Dcuments (Natinal Instrument General Prspectus Requirements) Disclsure Requirements Delivery f ETF disclsure dcument, as prescribed under securities legislatin Cntinuus Disclsure Investment Restrictins Investment restrictins applicable t Independent Review Cmmittee Rle and respnsibility Page 4 f 8 Review prducts that Dealing Representatives can and cannt sell. Describe in detail the types f that may be sld by Dealing Representatives. Describe in general the types f that may nt be sld by Dealing Representatives. Generally describe the regulatin f including the ffering dcuments, disclsure requirements, investment restrictins and the rle f the Independent Review Cmmittee. May include a summary f hw the regulatin f is similar/different than cnventinal mutual funds. 10 Frmatted: N bullets r numbering Deleted: can Deleted: : Deleted: I Deleted: can Deleted: T Deleted: Deleted: A Deleted: M Deleted: Deleted: Q Deleted: A Deleted: Q Deleted: P Deleted: cannt Frmatted: N bullets r numbering Deleted: : Deleted: L Deleted: cannt Deleted: I

5 General Tpic Sub-Tpics Cmment Percentage Allcatin Characteristics f Descriptin f investment management styles: Active vs. Passive Quasi-Active/Quasi-Passive Indexing What are indices?* Tracking an Index Physical vs. Synthetic Full Replicatin vs. Sampling Tracking Errr Describe Passive vs. Active investment management styles. Describe Quasi-Passive/Active investment management styles. Prvide examples f each style. Define Index and describe in detail the different methds fr tracking an Index. 20 Creatin and Redemptin f Units Designated Brkers/Dealers/Market Makers New In-kind creatin In-cash creatin Existing Additinal unit creatin Redemptin f units When number f units may change Explain, and give examples f, tracking errrs. Describe generally the varius rles and respnsibilities f: Designated Brkers; Dealers; Market Makers. Describe in detail hw new are created and funded. Describe hw new units are created fr existing. Describe hw existing ETF units are redeemed. Operating Csts Management fees Operating expenses Trading expenses Trailing cmmissins Features and Benefits Prfessinally Managed Lw cst Transparency Tax Efficiency Liquidity Diversificatin Describe circumstances where ETF units may be created r redeemed. Generally describe the varius perating csts that can apply t with a fcus n differences between and cnventinal mutual funds. Generally describe the features and benefits f with a fcus n differences cmpared t cnventinal mutual funds. Explain that sme features may nly apply t certain (e.g. sme may nt be diversified). Page 5 f 8

6 General Tpic Sub-Tpics Cmment Percentage Allcatin Exchange Trading General Risks Market Risk Equity Risk Interest Rate Risk Currency Risk Credit Risk Freign Investment Risk Style Risk Cncentratin Risk Cunter-party Risk Tracking Errr Risk that market price differs frm NAV Cmpare t: Cnventinal Mutual Funds Clsed-End Funds Exchange -Traded Ntes Intrductin t Financial Markets Describe Primary Market Describe Secndary Markets* Auctin Markets Dealer (Over-The-Cunter) Markets Trading n an Exchange ETF Pricing Market pricing Cntinuus during market pen hurs NAV pricing End f day calculatin Daily, Weekly, Mnthly Risk that market price differs frm NAV Qutes system What is a Bid? What is an Ask? Bid/Ask Spread Last Trade Price Market Open/Market Clse Price Generally describe, with examples, each risk that can apply t. Explain in detail the risk f market price. Explain hw market price differs frm NAV pricing and that market price risk applies t and nt cnventinal mutual funds. Prvide a summary f key differences and similarities between and Cnventinal Mutual Funds, Clsed-End Funds, and Exchange -Traded Ntes. Define the terms Primary Market and Secndary Market. Describe in detail the varius Secndary Markets fcusing n the markets where will be traded. Details shuld include type f markets, market hurs and any specific trading rules and requirements. Explain that have bth a market price and a NAV calculatin. Explain the difference between calculating a NAV and market price. Explain that may nt trade at their NAV. Define the terms Bid, Ask and the Bid/Ask spread. Explain in detail hw t prperly qute an ETF. Define the terms Last Trade Price, Market Open and Market Clse. 40 Page 6 f 8

7 General Tpic Sub-Tpics Cmment Percentage Allcatin Market Depth and Liquidity What is a Bard Lt/Odd Lt? Define Market Depth Liquidity Rle f Market Makers Distributins Define the term exdistributin Describe distributin reinvestment plans UMIR Rules Trading Halts Circuit Breakers Define terms Bard Lt, Odd Lt, Market Depth. Explain liquidity and the rle f Market Makers fr exchange traded securities. Define the term exdistributin and explain what it means fr trading purpses. Describe distributin reinvestment plans fr. Prvide an verview f UMIR Rules and wh has t fllw them. Order Instructins Types f rders (Market, Limit, Stp Limit etc.) Order Dcumentatin Risks and benefits f each rder type Best practices fr rder entry (e.g. in cases f buying r selling large number f shares) Order Entry Order Prcessing Best Executin Exchange rules fr placement and executin Changing Trade Instructins Cancelling Trade Instructins Trade Settlement Cnfirmatins Transactin csts Trading as Principal vs. Agent Explain trading halts and circuit breakers including their purpse and when they are triggered. Describe the varius types f rders including the infrmatin required fr each rder as well as the risks and benefits. Describe situatins where certain rder types may be better than thers. Describe hw rders must be prcessed n exchanges including best executin requirements (e.g. immediate executin), exchange rules, and hw rders are filled. Describe hw t change and cancel pen rders. Discuss settlement, cnfirmatins and csts. Briefly explain trading as Principal vs. Agent. Deleted: S Deleted: C Page 7 f 8

8 General Tpic Sub-Tpics Cmment Percentage Allcatin Investing in Review existing bligatins fr: Knw-Yur-Client Knw-Yur-Prduct Suitability Obligatin Explain that existing bligatins fr KYC, KYP and suitability apply t the sale f. 15 Deleted: S Prtfli Management Alpha and Beta Efficient Market Hypthesis Describe different investment strategies fr Review the fllwing and hw they apply t : Splits and Cnslidatins PACs, SWPs DRIPs Taxatin Incme Capital Gains and Lsses Dispsitins Custdy Nminee name ( street frm ) vs. client name Explain that nt all prvide the same level f infrmatin as cnventinal mutual funds, such as risk rating, and that this infrmatin wuld have t be assessed by the Member in rder t satisfy existing bligatins. Briefly explain the cncepts f Alpha, Beta and Efficient Market Hypthesis. Describe in detail the rles an ETF can fill when cnstructing a prtfli. Review these cmmn tpics with a fcus n hw they are applicable t trading in. Describe in detail nminee name accunt recrds, including a cmparisn f hw they differ frm client name accunt recrds. *Additinal resurce materials, that prvide mre detail n different trading exchanges and cmmn market indices, may be helpful fr Apprved Persns. DM#471611v6 Deleted: 3 Page 8 f 8