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CONDUCT AND PRACTICES HANDBOOK (CPH) EXAM
136 QUESTIONS WITH ANSWERS,100% CORRECT
"Know Your Product (KYP) - Correct Answer This refers to obligation #2 of a registered representative
(RR) about understanding the products you recommend. Every registered representative (RR) must have this knowledge before recommending the purchase of any investment product to a client. You must understand how it is constructed and how it is likely to perform in various market conditions, as well as how new/non-tradition/complex/structured products function. This is the companion obligation of the KYC."
Duty of care - Correct Answer This refers to obligation #3 of registered representative (RR) about
acting honestly, in good faith, and in a professional manner. This is a requirement to provide advice to clients with those attributes in mind along with the proper skills and knowledge to do so. It is important to note that the standard of care provided is not a standard of perfection. RRs are usually held to this standard much more often than the standard of fiduciary duty. The two aspects of this are suitability and fiduciary duty."
"Ethics - Correct Answer These are a set of values or morals that guide individual behaviour. They are
rules and habits of conduct established according to society's perceived standards of right and wrong. In terms of the CPH course, these are a continuous process of examining our choices and making decisions within the context of moral principles. These are important because rules cannot encompass every possible situation that might occur in a day to day business, therefore we need these to help keep everyone held to another standard."
"Laws - Correct Answer these are not synonymous with ethics, but they can be seen as being
contained within, and growing out of society's overall ethical sensibility. Similar to ethics, these are based on values held by society. Adherence to these allow people to live together creatively rather than destructively."
"Fiduciary duty - Correct Answer This is a concept related to the duty of care. It is a higher standard
imposed by common law. It exists in circumstances where one person must place trust in the honest intentions of another person who holds greater authority or expertise. This is not as common as the standard of duty of care. Disputes in regard to this are sometimes resolved through civil litigation where a client was owed a fiduciary duty based on how much they relied on the RR's investment advice/product recommendations."
"Investment Industry Regulatory Organization of Canada (IIROC) - Correct Answer This is the national
self regulatory organization that oversees the securities industry. It regulates the actions and behaviour of its Registered Representatives (RRs). It has a strict compliance of rules and regulations and requires that the RR observe high standards of ethics and conduct when transacting business. This is the national SRO overseeing all investment dealers and trading activity on equity and debt marketplaces in Canada."
"institutional customer - Correct Answer This is a customer that is defined by IIROC as being/having;
acceptable counterparties/institutions, regulated entities, registrants under securities law, and a non individual with total securities under administration/management exceeding 10 million."
"issuer bid - Correct Answer this is when an issuer buys back their own shares"
"IIROC rule 1402 Standards of Conduct - Correct Answer Every IIROC dealer has a set of these rules
that ultimately comply with IIROC. This is a rule in IIROC that summarizes IIROC's expectations regarding it's Registered Representative (RR). It states that the RR must be a regulated person (observes high standards of ethics/acts fairly and does not engage in business that is detrimental to public interest) and they must be foregoing any business conduct that is negligent, fails to comply with legal/regulator/contractual obligations/interanal rules and policies, that displays an unreasonable departure from standards, or is likely to diminish investor confidence in the integrity of securities/futures/derivatives."
"Know Your Client (KYC) - Correct Answer This refers to obligation #1 of a registered representative
(RR) about understanding your client's situation before making investment recommendations. This rule implemented by IIROC states that forces you to have an understanding of your client's circumstances and that you must have an understanding their suitability before you can do any business. The dealer member must keep a record of every single client's circumstances and takes notes on the situation. This is the companion obligation of the KYP."
"Registered Representative (RR) - Correct Answer These people are permitted to provide advice on the
full range of equity and fixed income securities. This is you. The person that is must do all the work with regards to the client and must have all of the certifications and must pass all the tests. These people must observe high standards of ethics and conduct, must understand the client's situation before making investment recommendations (KYC), must understand the products to recommend (KYP), and must act honestly, in good faith, and in a professional manner (duty of care). You must also avoid entering into situations where you interests conflict with those of your client, and you should strive to maintain and improve your professional knowledge in the profession. Finally you must hold all your client's information in the strictest confidence."
"Suitability - Correct Answer This is a term that is mentioned throughout several sections such as KYC
and KYP and is directly related to the duty of care. It refers to a client's current financial situation, investment knowledge, investment objectives, time horizon, and risk tolerance. Essentially it is the quality of something being right or appropriate for a particular person, administered by IIROC."
"End values - Correct Answer This is one of two main types of values; They are values that help define
our personal goals for which we strive for, which may be years away. These values include a sense of accomplishment, service to people, security, a world at peace, and social recognition."
"Ethical Dilemma - Correct Answer These situations arise when we are faced with two or more choices
and we must make an ethical decision. There are two main categories that these situations fall into;
everyone has an equal say on what is right and wrong. (This is not the ideal ethics that you want humans to have because it leads to personal needs being greater than needs of the community or at the expense of others)"
"Types of ethical dilemmas - Correct Answer Truth vs. loyalty dilemmas (honesty vs integrity),
individual vs. group dilemmas (rights of few vs many), short term vs. long term dilemmas, justice vs. mercy dilemmas (fairness vs love)."
"Ethical decision making process - Correct Answer Steps of a process;
- Recognize that there is a moral issue. 2. Determine whose moral issue it is. 3. Gather the facts. 4. Test for right-versus-wrong issues. 5. Test for right-versus-right paradigms. 6. Apply the resolution principles.
- Make the decision. 8. Reflect on the process."
"Ethical dilemma solutions - Correct Answer These are often some of the results of an ethical dilemma;
end based ethical thinking (greatest good to greatest number of people), rule based ethical thinking (results in a rule to follow for future situations), social contract based ethical thinking (results in most harmonious relationships), personalistic based ethical thinking (best solution for self)"
"Administrator - Correct Answer This is a term used by the Canadian Regulatory Framework to
describe the securities regulatory authority of each province (The person who has authority of primary and secondary distributions of securities). These people work alongside other regulators to harmonize the regulation of the markets through the Canadian Securities Administrators (CSA). These people are also responsible for registering persons/companies that engage in anything to do with securities (buying/selling/advising) and ensure the people that are registering appropriate."
"Canadian Investor Protection Fraud (CIPF) - Correct Answer This is a fund established in 1969 that
covers the accounts of clients of dealer members. It covers the losses of securities and cash balances that result from the insolvency of a dealer member of IIROC, but not due to poor investment performance."
"Canadian Securities Administrators (CSA) - Correct Answer This is an umbrella organization whose
objective is to improve, coordinate, and harmonize the regulation of the Canadian capital markets. It aims to achieve consensus on policy decisions that affect the capital markets and their participants. It's main 3 missions are; protecting investors from unfair practices, foster fair and efficient capital markets, and to reduce risks to market's integrity/investor confidence. To achieve those missions they use 3 primary tools; the passport system, the super memorandum of understanding (Super MOU, provides oversight of marketplaces), and various electronic databases (SEDAR, SEDI, NRD, CTO)."
"Dealer member - Correct Answer This is the broker that buys and sells the securities to the investor"
"Disclosure - Correct Answer This is the underlying principle of securities regulation in Canada. Every
person/corporation that offers for public sale securities that have not yet been publicly distributed must follow these specific rules/principle. This includes filing with an administrator an delivering a prospectus to the purchaser that contains a full and true representation of all material facts relating to the
securities offered for sale. Until this is done to the satisfaction of the administrator concerned, it is illegal to sell the securities. This is normally made in a prospectus or is linked to a contract between the issuer and the person buying the securities."
"Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) - Correct Answer This is an
organization that enforces security dealers to comply with the Proceeds of Crime (money laundering) and Terrorism Financing Act (PCMLTFA). Canada does not have anything like the SEC (securities and act commission) in the United States, but this is the closest governing body/federally legislated act that regulates security dealers in Canada along with the Personal Information Protection and Electronic Documents Act (PIPEDA)."
"Integrated Market Enforcement Teams (IMETs) - Correct Answer These teams were launched in 2003
with the goal of strengthening the law enforcement community's ability to detect, investigate, and deter capital markets fraud. It is a joint initiative of the RCMP and the federal government and they work closely with regulators, SROs, the exchanges, and other federal/provincial authorities with relation to fraud."
"Joint Serious Offences Team (JSOT) - Correct Answer This was a team launched in 2013 by the OSC to
elevate efforts to target fraud and other serious misconduct. It is an enforcement partnership between the OSC, the RCMP, and the OPP. This team is responsible for investigating and prosecuting serious violations of the law using the securities act and the criminal code."
"Money Laundering - Correct Answer This is a process in which the proceeds of crime are converted
into seemingly legitimate funds through complex transactions. Criminals use this to obscure the origin of the funds without raising suspicion about legitimacy. There are 3 stages to this; Placement (physical disposal of cash derived from illegal activity), Layering (separating illicit proceeds from source by layering financial transactions), Integration (placing laundered proceeds back into economy)"
"Mutual Fund Dealers Association (MFDA) - Correct Answer This is 1 of 200+ organizations in the
IOSCO. It is the SRO responsible for regulating the distribution of mutual funds by its members in Canada, however it does not regulate the mutual funds themselves as that is the job of the securities commissions in the respective province."
"National Instrument (NI) - Correct Answer This is an instrument that has been adopted by all CSA
jurisdictions. There now exists a large harmonized group of these instruments that govern the securities markets. Some of these include; the Alberta securities commission (ASC), Ontario Securities commission (OSC) .. etc"
"Passport system - Correct Answer This is a tool used by the CSA; This system is designed to reduce
unnecessary duplication in the review of filings made in multiple jurisdictions and is based on the principles of mutual reliance"
"Canada's Anti-Spam Legislation (CASL) - Correct Answer This is enforced by the CRTC that establishes
similar rules as the NDNCL for the sending of commercial electronic messages (CEMs). It requires businesses to obtain consent to send CEMs such as emails, social media messages etc."
"conflict of interest - Correct Answer This occurs when you are dealing with clients. It arises in any
circumstance where the interests of a client and a registrant are inconsistent or divergent to each other. If these are not resolved then they may cause major issues/loss of client."
"cybersecurity - Correct Answer This is a growing concern in the area of financial and operational
compliance. These are issues that represent challenges similar to money laundering issues. This is a way to protect against cyber attacks to avoid significant damage to reputation and ability to operate."
"discount broker - Correct Answer This is one of the two roles that can be played by investment
representatives. They may either be a sales assistant or this."
"National Do Not Call List (NDNCL) - Correct Answer In accordance with the CRTC, this is a list that was
established regarding allowable times of day to call clients/nonclients for telemarketing."
"fit and proper test - Correct Answer This is a test that is conducted for suitability reviews, for
individuals seeking IIROC approval or registration under securities legislation. It is an evaluation by registration staff of the applicant's integrity, financial solvency, and competence."
"fund facts - Correct Answer This is something that every sales communication about a mutual fund
must contain. It is a plain language document containing key information about each class or series of a mutual fund and must be made available on the mutual fund's website. This document must be delivered to investors before they purchase the fund in question. It provides investors with the information they need to make a knowledgeable decision before investing."
"Investment Representative - Correct Answer This is one of the two most common IIROC registration
categories for individuals employed at a dealer member, alongside Registered Representatives. Both types of representatives must be registered to operate in the geographic location of their clients. They must state the number of hours they work per week and if it is less than 30 they must explain why. These representatives must adhere to IIROC rules as well as applicable provincial securities law. They also must disclose all outside activities that they participate in. These representatives can only take orders from clients from where they are licensed in. (if only licensed in Ontario can only take orders from clients in Ontario)."
"Personal Information Protection and Electronic Documents Act (PIPEDA) - Correct Answer This is a set
of rules for the collection, use, or disclosure of personal information in the course of commercial activities in Canada. It applies to private sector businesses and public that collect use or disclose personal information. It governs what dealer members can do with personal information that is collected used and disclosed in the course of doing business."
"Portfolio Manager - Correct Answer These are individuals who deal with or provide discretionary
portfolio management for managed accounts."
"Unsolicited order - Correct Answer These are orders that are directly given to registered
representatives (RRs) or often to sales assistants to buy and sell securities."
"Continuing education (CE) - Correct Answer this is a fundamental need in most knowledge-based
industries, and in the Canadian securities industry, it is a vitally important requirement for ongoing licensing. It ensures that you maintain proficiency in your chose area of expertise and is necessary to help you stay abreast of product develops, legal and compliance issues, emerging industry trends, and other capital market developments. Every two years, RRs must complete at least 20 hours of professional development courses and 10 hours of compliance."
"IIROC Note 11-0349 - Correct Answer This is a notice that was issued by IIROC regarding the use of
social media in any form including but not limited to the use of facebook, twitter, linkedin, and youtube etc. IIROC just wants to ensure that dealer members are ensuring compliance and are following securities legislation while on these apps."
"beneficial owner - Correct Answer This is the owner of the account that is financially responsible for
the account"
"cash account - Correct Answer This is a type of client account that require the client to deposit
payment in full for each purchased transaction. These accounts are operated in accordance with the industry Cash Account Rule."
"client discovery - Correct Answer During this process and throughout the client relationship, you must
be in the best position to observe and evaluate client behaviour from a money laundering perspective. It is in this process that you might discover red flags that indicate money laundering or terrorist financing activities."
"delivery against payment (DAP) - Correct Answer this is a type of account that involves the purchase
of securities and payment on a settlement date. There is usually a financial institution that acts as an agent to complete these transactions. These accounts are also subject to the Cash Account Rule."
"discretionary account - Correct Answer this is a type of account where discretionary authority has not
been solicited. The dealer member has authority to select securities and execute orders on behalf of the client (without their constant permission). This is usually done for clients that are ill or absent from the country and must be renewed every 12 months."
"insider (insider trading) - Correct Answer This is someone that works at a company that has
information about that company or any other publicly traded companies. They are in a position to obtain information about companies that the public does not have access to. This information is any non
"Receipt against payment (RAP) - Correct Answer this is an account that operates similarly to delivery
against payment (DAP) accounts, except the securities are sold by the client rather than the agent or financial institution."
"Registered accounts - Correct Answer this is simply an account that is registered in an individual's
name with the CRA. It includes categories such as RRSPs, RRIFs, RESPs, TFSAs etc."
"Pro account - Correct Answer this is the account that is opened for all employees or family members
of a dealer member as they are considered to be non clients"
"Relationship disclosure document - Correct Answer this is a document that outlines the account
relationship and services to be provided to the client. It includes a description of or info relating to; the types of products offered, processes, suitability, fees related to the account, how to make a complaint etc. Disclosure to clients can also relate to IPOs, mutual funds, bonds/coupons, insurance products, leverage, and derivatives etc"
"portfolio record - Correct Answer this is a document that shows each client's current holdings and
provides a quick reference when you are speaking to the client"
"security cross reference - Correct Answer this is an alphabetical list of all securities held by the firm's
clients, showing each client's name under the securities they hold. It enables you to contact all clients concerned should something important develop in regards to security."
"accredited investors - Correct Answer these are financial institutions, governments, regulated
pension funds, trust companies, certain investment funds, and wealthy individuals who purchase securities"
"best efforts deal - Correct Answer This is regarding distribution of new securities in which the dealer
may act as an agent to sell the securities with no guarantee of sales or price"
"bought deal - Correct Answer This is when you are regarding the actual distribution of new securities
in which the dealer may purchase the whole or partial block of new securities and distribute it to institutional or individual investors. This is an offering in which an underwriter (syndicate) buys all of an issuance for resale to its clients usually by way of a short form prospectus offering. The dealer is risking their own capital in these deals."
"crowdfunding - Correct Answer this is a way for companies to raise capital"
"early warning - Correct Answer this is usually issued as an initial threshold prior to a take over bid"
"exchange-traded funds (ETFs) - Correct Answer This is a product that is similar to mutual funds. Some
of them have complex structured products that use leverage and other sophisticated investment
strategies. It is a type of security that tracks an index. People usually buy these because they have low fees or they don't believe that mutual funds will beat the market over time."
"exempt market - Correct Answer this is the portion of capital markets where participation is
restricted to certain individuals and entities who meet certain requirements specified in securities legislation in the province where they reside. It refers to certain securities that are generally considered to be of low risk in terms of loss of capital"
"final prospectus - Correct Answer This is the final version of the prospectus and contains a complete
disclosure of all facts pertaining to the offering with regards to the securities being distributed"
"initial public offering (IPO) - Correct Answer This is the first issuing of securities from a company into
the market"
"principal-protected notes (PPNs) - Correct Answer This is a fixed income security that guarantees a
minimum return equal tot he investors initial investment, regardless of the performance of the underlying assets. Sale of these come through registered dealers, including IIROC dealer members."
"private placements - Correct Answer This is a way in which dealer members must communicate with
their clients in the general availability through a statement message, general mailing, or other communications"
"prospectus - Correct Answer This is the new issues of securities through an IPO or reporting issuer.
This is the investment contract between the purchaser and the company. It outlines certain facts upon which potential purchasers base their decision to buy securities"
"red herring prospectus - Correct Answer this is also known as the preliminary prospectus, it must
have in red ink on its front cover a state to the effect that the preliminary prospectus has been filed, not in its final form, and is subject to completion or amendment. It also states that securities may not be sold, nor may offers to buy them be accepted until a receipt for the final prospectus has been obtained from admin."
"reporting issuer - Correct Answer This is usually a company that is issuing addition securities into the
marketplace and a prospectus is normally still required"
"right of rescission - Correct Answer this is the right of the consumer to cancel certain types of loans or
agreements"
"right of withdrawal - Correct Answer investors have this right within 48 hours of the purchase if they
need"
"take-over bid - Correct Answer this is when an issuer purchases the securities of another issuer"
"gatekeeper - Correct Answer This is a role that registrants such as RRs and IRs (investment
representatives) must play to stop clients from breaching the securities law or regulations. This would be acting upon a red flag when seen."
"grey (or watch) list - Correct Answer after information is publicly disclosed, securities are placed
usually on restricted lists. This is a different type of list where there is very restricted dissemination because the addition of an issuer to this list would signal that something may be happening, whereas restricted lists have much broader dissemination"
"limit order - Correct Answer This is an order to buy or sell a security at a specified or better price. You
use this to purchase shares at the limit price or lower or sell the shares at the limit price or higher"
"market order - Correct Answer this is an order to buy or sell securities at the prevailing market price.
This can include any order that does not have a specific price limit."
"material information - Correct Answer This refers to any documents, facts, figures, or data which a
reasonable investor would consider significant to their decision to buy or sell a security."
"minimum quotation spread - Correct Answer This is the minimum acceptable range between bid and
ask prices when quotations are given for securities and has different ranges depending on the exchange being used."
"odd lot - Correct Answer This is any order or portion of orders to buy or sell securities that are NOT in
multiples of standard trading units. It is more difficult to fill orders for these lots and therefore they might be more expensive."
"short sale - Correct Answer this is an order to sell stock that the seller does not currently. This is when
you borrow stock from a dealer member to sell it with the expectation of the price of the stock to go down."
"standard trading unit - Correct Answer this is the standard amount/size of units that is considered by
the Universal Market Integrity Rules (UMIR) and anything outside of this standard amount is considered an odd lot."
"stop loss - Correct Answer This is an on-stop sell order. This is specifically used in connection with a
sell order where the limit price is below the existing market price. The order is triggered when the stock drops to the specified level. This is used to reduce the amount of loss that might be incurred from a drop in market price."
"settlement - Correct Answer This is the process of transferring securities into the account of a buyer
and cash into the seller's account following a trade of stocks, bonds, futures, or other financial assets. It is the time between the date of a securities transaction and the date on which ownership of the security
is transferred. For tbills this is T + 0 (trade date + 0), for goc bonds and preferred/common shares it's t+2"
"tipping - Correct Answer this is something that is prohibited by the legislations about securities. It is
when an insider passes on such information to someone who is not authorized to receive it. It's similar to insider trading, and is an illegal and unfair way to make money."
"wash trade: - Correct Answer This is a type of trade that gives a false impression of trading activity
with no real change in beneficial ownership. It is when a broker and a trader collude to make profits by feeding misleading information to the market."
"churning - Correct Answer this is the act of carrying out multiple transactions in a client's account
solely to increase the RR's remuneration (pay). It constitutes unfairness, honesty, and acting in good faith with a client."
"Canadian Depository for Securities (CDS) - Correct Answer This is a clearing system that operates for
dealer members and participating banks with the purpose to provide participants with a central facility through which to make deliveries in the settlement of security transactions either physically or electronically."
"arbitration - Correct Answer This is a form of compensation for clients with complaints (along with
ombudsman programs and civil litigation). It is more flexible than civil litigation as there is an impartial 3rd party that listens to both respective cases and then imposes binding decisions based on the facts and arguments presented. This is favoured because the proceedings and decisions are confidential whereas civil litigation is public."
"Cash Account Rule - Correct Answer this is specific to clients that do not use any form of financing
from the dealer. This is a rule that governs the operation of cash accounts and it eliminates poor credit practices without restricting normal business relations and also ensure that all dealer members extend credit to clients on an equal basis"
"complaints and settlement reporting system (ComSet) - Correct Answer This is where complaints
about RR and dealer members are sent and recorded as per IIROC. It is a web based reporting system that dealer members are required to use to report the following complaints/matters."
"fully margined - Correct Answer This is when an account's loan value is equal to or greater than the
amount borrowed. This is the opposite of being undermargined/less than the amount borrowed/having a margin deficiency (shortage of funds required for the margin)"
"fully secured - Correct Answer this signifies that a loan is in a positive equity position in the client's
account. In other words it is a very strong loan margin account and if securities were liquidated, their market value would cover any debit balance owing. The other two equity positions are partly secured/negative position, or unsecured/no securities"
