1. 1 Canadian Investor Protection Fund China Securities Investor Protection Fund Corporation Limited Hohhot, Inner Mongolia July 31, 2008

2. 2 Topics  Background  Canadian Investment Industry  CIPF Authority  Issues of Interest to SIPF  Risk Monitoring Over Securities Companies  Investor Education  Investor Services  May 2008 Compensation Funds Meeting - Paris

3. 3 Background: Canadian Investment Industry  No specific mention of securities activities in Canadian Constitution  Securities generally assumed to fall within “property and civil rights” sections of Constitution and therefore under provincial and territorial jurisdiction  Regulations found in 10 provincial and 3 territorial statutes  No national regulatory authority, but provincial and territories authorities work together under the banner “Canadian Securities Administrators” - CSA

4. 4  A company cannot trade in a security unless the company is registered as a dealer  Condition of registration includes participation in a Compensation Fund Background: Canadian Investment Industry (cont’d)

5. 5 MUTUAL FUND DEALER MFDA IPC registered to trade in units of mutual funds SRO: Mutual Fund Dealers Association of Canada (MFDA) OTHER DEALERS Minimal Compensation in some Provinces financial intermediary foreign or international limited market scholarship plan and security issuer etc. direct oversight by provinces BROKER / INVESTMENT DEALER CIPF registered to trade in securities, including mutual funds, in the capacity of principal or agent SRO: Investment Industry Regulatory Organization of Canada (IIROC) Background: Canadian Investment Industry (cont’d)

6. 6 CIPF Authority Canadian Securities Administrators Broker / Investment Dealers MOU CUSTOMER PROTECTION Customers

7. 7 MOU: Organization  Board must fairly represent all Members and their customers  4 of 10 must be public  Appropriate and timely regional representation  Human Resources including President & CEO  Auditors CIPF Authority (cont’d)

8. 8 MOU: Funding and Maintenance  Fair and reasonable method of establishing assessments  Maintain appropriate level of assets for protection  Maintain Internal Controls  Meet with CSA at least once per year CIPF Authority (cont’d)

9. 9 MOU: Consumer Protection  Policies for Coverage  Appeals  Assistance to IIROC where financial problems at a Member exist CIPF Authority (cont’d)

10. 10 MOU: Member Review  Review the business and operations of any Member where a situation has occurred that could result in payments from the Fund CIPF Authority (cont’d)

11. 11 MOU: Reporting  Respond to all requests from CSA for information on registrants  Immediately advise of situations that could result in payment from the Fund  Details of any insolvencies CIPF Authority (cont’d)

12. 12 MOU: Reporting (cont’d)  Agreement from CSA that when a registrant requires CIPF intervention, it will take appropriate action to help minimize the risk of loss to customers  Contemplated CSA action is suspension, which permits CIPF to petition its Member into bankruptcy under Part XII of the Bankruptcy and Insolvency Act of Canada - the preferred route CIPF Authority (cont’d)

13. 13 CIPF Authority (cont’d) Canadian Securities Administrators Broker / Investment Dealers IIROC MOU Recognition Orders MEMBER Customers Customer Protection OVERSIGHT

14. 14 Example of IIROC Ontario Recognition Order:  Immediate reporting of “reportable conditions”  Extensive communication on complaints, investigations and disciplinary actions  Annual self-assessment  Information sharing with OSC, CIPF and others listed in order CIPF Authority (cont’d)

15. 15 CIPF Authority (cont’d) Canadian Securities Administrators Broker / Investment Dealers IIROC Industry Agreement MOU Recognition Orders Members Customers Customer Protection

16. 16 IIROC / CIPF Industry Agreement  Governance  IIROC can select a Director for Nomination  Assessments  CIPF discretion to set within framework outlined  Annual limit on amount any Member has to pay  IIROC must collect for CIPF CIPF Authority (cont’d)

17. 17 IIROC / CIPF Industry Agreement (cont’d)  Regulation  IIROC maintains rules for capital, insurance, business structures, financial reporting, client confirmations and statements and related subjects  30 day notice of any changes  IIROC must enforce rules  Advise of situations likely to give rise to payments from Fund  Information Sharing CIPF Authority (cont’d)

18. 18 IIROC / CIPF Industry Agreement (cont’d)  Regulation (cont’d)  Member reviews – CIPF entitled to second staff to IIROC for training – CIPF entitled to do independent review where a reportable condition exists CIPF Authority (cont’d)

19. 19 IIROC / CIPF Industry Agreement (cont’d)  Regulation (cont’d)  Require IIROC to take action against Member – If IIROC fails to, CIPF can take action – If action justified, IIROC pays cost  Advertising by Members  Require staff and Members to comply with agreement CIPF Authority (cont’d)

20. 20 CIPF Authority (cont’d) Canadian Securities Administrators Broker / Investment Dealers IIROC Industry Agreement MOURecognition Orders Member Oversight Customers Customer Protection

21. 21 CIPF Receives  Monthly regulatory capital calculations  Annual audited financial statements  Report of any breaches of Minimum Capital or Early Warning Tests  Communication with Members on Field Examination Results  Communication with Member’s auditor  IIAC Member risk ratings Risk Monitoring over Securities Companies

22. 22 Method of Receiving  Communication - mostly hardcopy or PDF  Financial results - shared industry database called SIRFF  IIROC risk ratings - SIRFF Risk Monitoring over Securities Companies (cont’d)

23. 23 Member SIRFF Web Database IIROC CSA view Data Entry view View and approve filings SIRFF: Risk Monitoring over Securities Companies (cont’d)

24. 24 Background: Why CIPF Gets Information  CIPF has no government backstop  Membership is a “credit ring” where each Member is responsible to “pay-up” if another Member fails Risk Monitoring over Securities Companies (cont’d)

25. 25 Background: Why CIPF Gets Information (cont’d)  Historically:  5 Self-Regulatory Organizations with Members participating in CIPF  Each had own rule-book, examination program, etc.  CIPF acted as “quality control” to ensure each SRO implemented consistent rules and met same standard of care in examinations  Now only one SRO, IIROC, but have continued right to receive information so as to mitigate risk Risk Monitoring over Securities Companies (cont’d)

26. 26 Example Of What We Use Information For  CIPF is pre-funded  How big should the Fund be?  Fund Size Model - theoretical size of the Fund is the sum of the amount of capital needed for the default of each Member…  Amount of capital is based on the Member’s probability of default and the loss to CIPF if it defaults…  Loss to CIPF if it defaults is based on its customer asset base Risk Monitoring over Securities Companies (cont’d)

27. 27 Example Of What We Use Information For (cont’d)  Board sets a total annual assessment amount  Each Member pays a percentage of the total annual assessment as follows:  Members advised of risk rating relative to others and how to reduce it “Theoretical Fund Size” Capital For Member Theoretical Fund Size XTotal Annual Assessment Risk Monitoring over Securities Companies (cont’d)

28. 28 IIROC Fund Size Model Assessment of Risk Factors Allocation of Resources Assessments Risk Monitoring over Securities Companies (cont’d)

29. 29 Risk Monitoring over Securities Companies (cont’d)

30. 30 Investor Education  CSA has broader mandate on assisting investors to make safe sound investment decisions  Quote from CSA Web site “But the CSA's impact on most Canadians comes through its efforts to help educate Canadians about the securities industry, the stock markets and how to protect investors from investment scams.The CSA provides a wide variety of educational materials on securities and investing. It has produced brochures and booklets explaining various topics such as how to choose a financial adviser, mutual funds, and investing via the internet. All CSA materials are available through your local securities regulator”

31. 31 Investor Education (cont’d)  CIPF Investor Education mandate targeted at increasing investor awareness of CIPF  2008 mandate to educate investment advisor, who in turn will educate their clients  Tools include web-site, brochure and annual report  CIPF responds to all calls and emails from the public on CIPF protection

32. 32 Investor Services  CIPF mandate does not include:  Compensation is for return of property if a Member fails to do so because it is insolvent  Very few customers have exposure exceeding the CIPF limit of Cdn $1 million due to Bankruptcy Act pooling of losses  Trustee will litigate to optimize size of customer pool  Coverage does not include unsuitable trades, bad advice, etc.  Not aware of any customer compensation fund in Canada with public interest litigation mandate

33. 33 Investor Services (cont’d)  Arbitration  IIROC offers arbitration for customer complaints with IIROC Member  Independent arbitrator  Member participation mandatory  For disputes up to $100,000  Fee charged, but cost is less than conventional legal action

34. 34  Mediation  Offered by Quebec Securities Commission (Autorité des marchés financiers)  For Quebec residents  Participation is voluntary and requires the consent of both the firm and the client Investor Services (cont’d)

35. 35  Ombudsman for Banking Services and Investments (OBSI)  OBSI offers a free, independent and impartial resolution service for IIROC Member’s clients  Claims for a maximum of $350,000  Must first attempt to resolve dispute with Member  Members firms are required to participate fully with any investigation carried out by OBSI  All matters are confidential although a summary of recommendations will be made public should the firm not comply with the recommendations Investor Services (cont’d)

36. 36  Customer complaints  Directly to IIROC  To Member, who must report to IIROC  IIROC investigate complaints of regulatory violations and to impose penalties on those who are found guilty of such violations  IIROC monitors client complaints and disciplinary matters to proactively identify emerging regulatory issues at Member firms Investor Services (cont’d)

37. 37 May 2008 Compensation Funds Meeting - Paris  Attended by Belgium, Canada, Germany, India, Ireland, UK, & USA  Issues discussed:  Benefits of compensation fund meetings - join IOSCO?  Lack of bankruptcy legislation specifically for investment dealers in some EU countries causing delays in customer compensation while the Courts decide issues  Investor Education in India - many new investors

38. 38  Bankruptcy Legislation  Canada - customer and creditor entitlement different and spelt out in Bankruptcy Act - key concepts: – Two pools of assets for distribution - customer and general – Customer pool includes all customer assets and more – Customer pool used to pay customers, and trustee if general fund not able to do so – Shortfall in customer pool is allocated to all customers based on their client net equity May 2008 Compensation Funds Meeting - Paris (cont’d)

39. 39  Bankruptcy Legislation (cont’d)  Germany - Phoenix insolvency (2005) – Administrator proposed equal sharing of loss between customers and creditors – Customer opposed - wants tracing – Investment dealers opposed - want customers assets to be treated as trust assets – To date customers not yet compensated May 2008 Compensation Funds Meeting - Paris (cont’d)

40. 40  Bankruptcy Legislation (cont’d)  Ireland (W&R Morrogh) – Lack of statutory legislation responsible for a 5 year delay in compensation to customers – Trustee paid from client assets so delay resulted in larger deficiency May 2008 Compensation Funds Meeting - Paris (cont’d)