Protecting your assets: our priority

Asset protection is essential when choosing a financial institution. It is crucial that your assets are never at risk due to a potential insolvency of the institution. Clients of National Bank Financial Wealth Management (“NBFWM”) enjoy solid protection. To fully understand these guarantees, it is important to understand:

  • The strength of the organization and its disciplined asset management practices.
  • Insolvency protection mechanisms.

1. The strength of the organization and its disciplined asset management practices

More than a century ago, National Bank Financial Wealth Management, which was born of several mergers and acquisitions over the years, was already at the forefront of the Canadian investment world.  Today, as one of the top six Canadian securities dealers and an undisputed leader in the industry in Quebec, NBFWM operates from coast to coast, with close to 100 branches and 2,000 employees, including nearly 850 wealth management advisors. It serves more than 225,000 individuals, for whom it manages more than $140 billion in assets. 

The firm is a subsidiary of National Bank (the “Bank”), which is one of the Big Six federally chartered banks and also governed by the Office of the Superintendent of Financial institutions (OSFI). With some 500 branches across the country and offices around the world, National Bank itself has an asset base of over $418 billion and represents a strong and dynamic ally for National Bank Financial.

These practices take the following forms:

a) Ongoing and evolving monitoring thanks to its Audit Committee, Risk Management Committee and numerous internal controls

As a wholly-owned subsidiary of the Bank, NBF is subject to the Audit Committee and the Risk Management Committee of the Bank.

The Audit Committee reports to the Bank's Board of Directors and reviews its financial statements, audit processes and management information systems, as well as other material financial information, to ensure their integrity, efficiency of processes and compliance with applicable accounting standards.

The Audit Committee reviews the effectiveness of internal control and recommends measures to correct all significant control issues identified during this review, oversees the work of the internal auditor and the independent auditor and acts as an intermediary between the Board and those responsible for independent oversight of internal audit, external audit and compliance matters.

The Audit Committee also oversees the work of internal and external auditors, the financial information and analysis process, the Bank's compliance, internal control and risk management and reviews certifications. declarations and reports required by the regulatory authority.

In accordance with Regulation 52-110 on the Audit Committee adopted by the Canadian Securities Administrators (CSA), all members of the Audit Committee must be independent, so that none of its members is an employee of the Bank.

The Bank's shareholders, on the recommendation of the Board of Directors, have appointed Deloitte LLP (“Deloitte”) independent auditor of the Bank. Independent auditors have full access to the Audit Committee to discuss any matter related to their mandate.

b) Extremely rigorous practices in administering assets entrusted to us

As a full-service broker, NBFWM offers a full range of investment, research, management and advisory services, as well as securities trading, clearing and custodial services. That said, the firm is governed by several regulatory bodies to ensure that your assets are protected.

NBFWM is a member of the Canadian Investment Regulatory Organization (CIRO), the national self-regulatory organization that oversees all investment dealers, mutual fund dealers and trading activity on Canada's debt and equity marketplaces.

CIRO performs the regulatory functions previously performed by the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada and is committed to protecting investors, ensuring effective and consistent regulation and strengthening Canadians’ confidence in financial regulation and the people who handle their investments.

As a CIRO member, NBFWM is subject to strict regulations, including detailed rules concerning the conduct of its business.

Similar to other Canadian financial institutions, NBFWM also does business with the following organizations to settle its clients' transactions:

For Canadian securities:

  • The Canadian Depository for Securities (CDS)
  • The Canadian Derivatives Clearing Corporation (CDCC)

For U.S. securities:

  • The Depository Trust Company (DTC)

For European securities:

  • Euroclear

Among these organizations, the Canadian Depository for Securities (CDS), created in 1970, is the main deposit system in Canada, as it plays a role in the vast majority of securities transactions carried out on Canadian financial markets. CDS has reduced the proportion of physical certificates in its vaults to less than 1% and obtained regulatory approval to eliminate all global physical certificates. Today, it processes more than 1.6 million transactions a day. CDS's reputation is built on reliability. It is responsible for the custody of securities worth more than $4 trillion.

c) Custody of securities on deposit

CIRO rules require that all clients' fully-paid securities or those held in excess of a margin, deposited in brokerage accounts with NBFWM, be kept separately and identified as held in trust for clients. Securities on deposit cannot be used by NBFWM for its own business. This separation helps limit the risk of losing assets in the event of bankruptcy.

Separate custody refers to the way securities held on behalf of our clients are recorded in the Canadian Depository for Securities (CDS). Separate custody means that our clients' fully paid securities are accounted for separately from any other securities we hold, such as securities not fully paid or those that belong to us. This way, in the very unlikely event that National Bank Financial Wealth Management becomes insolvent, its creditors will not be able to repay themselves from our clients' securities. Sophisticated accounting mechanisms and regular audits by independent firms and self-regulatory organizations ensure compliance with this fundamental rule.

Each dealer member must monitor compliance with their client securities deposit requirements on a daily basis and correct any discrepancies discovered.

To the extent permitted by CIRO rules, NBFWM may make use of free credit balances (not yet paid) in carrying out its activities. Under these rules, free credit balances that exceed the limits must be held in trust and cash by NBFWM in a separate account with a certified financial institution or invested in short-term government debt securities.

The rules governing the use of clients' securities are designed so that the assets held by a dealer are at least equivalent to the net assets to which their clients are entitled. The Canadian Investment Regulatory Organization (CIRO) recently proposed changes to fully-paid securities lending and financing arrangements. These changes are intended to improve the regulatory framework for fully-paid securities lending for retail clients, correct certain aspects of the existing financing rules and strengthen investor protection. We will inform you of any changes that may occur in this regard.

 

A proven system

Custody systems used by Canadian securities dealers have evolved over the years to keep pace with the growth of our industry. Millions of securities worth billions of dollars are traded each year with a very low margin of error. This system, although complex, allows us to have liquid and efficient markets while protecting Canadian investors. 

Example: How are securities held?

Except in exceptional cases, the securities you purchase through us are not shipped to you or physically kept on our premises. Instead, they are entrusted to organizations called "clearing houses."

Here's how these organizations work:

When Mr. Thomas, a client of financial institution "A," sells 100 shares of ABC and Mr. Gage, a client of financial institution "B," acquires 100 shares of the same company on the market, ownership of securities simply involves entries in the accounts held by each of these financial institutions with the clearing house. Corresponding entries are then made in the internal registers of each of the two firms: Institution A will note that 100 shares are removed from the Thomas account, and institution B will note that 100 shares are added to the Gage account. In the past, when ownership was reflected in certificates held directly by the institution, the 100 ABC share certificate would have been returned to the transfer agent for destruction and another certificate issued in the name of the new owner. Since Canadian investors carry out millions of transactions every year, you can understand the problems that would arise if each transaction involved the cancellation of one certificate followed by the issuance of another.

In addition, the settlement period for securities transactions has been reduced over the years. This shortened timeframe makes the efficiency of centralized clearing even more essential.

 

d) Risk adjusted capital and broker notice

Dealers must maintain a regularized capital level based on minimum risk to be able to continue their activities and must file regular reports with CIRO regarding their capital levels. In order to determine their risk-adjusted capital, assets are assessed cautiously, with the value of most financial assets discounted.

Dealers must notify CIRO immediately if their liquidity, capital or profitability falls below the specified warning system levels, in which case specific corrective measures must be taken. Early warning levels are well above the level at which a dealer would be at risk of default. CIRO examines the books and records of member firms to verify whether they comply with regulatory requirements.

Subject to compliance with minimum capital and account segregation requirements, the member firm must be able to return all fully paid and held securities in excess of margins  and uninvested client funds in an orderly and timely manner in the unlikely event of a business termination due to insolvency.

2. Protection mechanisms available to investors in the event of insolvency

As with all industries, the Bankruptcy and Insolvency Act (BIA) establishes a protection mechanism for clients in the event of the insolvency of a securities dealer. A major mechanism implemented by members of the securities industry adds a unique safety net through the involvement of the Canadian Investor Protection Fund (CIPF). Other measures are also available if it is not the securities dealer, but rather the issuer of a specific product (member firms of the Canada Deposit Insurance Corporation), who are experiencing difficulties. Here's an overview.

The Bankruptcy and Insolvency Act (Canada) (BIA) contains specific provisions dealing with the liquidation of a securities dealer in the highly unlikely event that the dealer becomes insolvent. These rules were adopted to simplify and streamline the administration of the assets of a bankrupt securities dealer and avoid the uncertainty, costs and time-consuming situations that existed before the legislation was passed in 1997.

It is important to note that clients' funds are repaid before they are repaid to other creditors.  Clients' funds are earmarked first for bankruptcy administration costs, but only to the extent that the funds available in the general fund are not sufficient to cover these costs.

Example: Operating Rules of the Bankruptcy and Insolvency Act (Canada)

Generally speaking, these rules operate as described below.

Bankrupt brokers' assets are divided into three categories:

  • Registered securities are those registered in the name of the client in the registries maintained by or in the name of the issuer and are in non-negotiable form (e.g., physical share certificates).  These securities must be returned to the client after payment of the client's debts to the broker. NBFWM generally no longer holds such registered securities.
  • Clients' funds are made up of cash and securities (generally equities, debentures and other financial assets) held by or on behalf of the broker. Clients' funds also include the dealer's investments in its subsidiaries, but exclude registered securities or other eligible financial contracts in which the dealer participates.
  • The general fund is comprised of other dealer property such as non-client accounts receivable, furniture and fixtures.

It is important to note that clients' funds are repaid before they are repaid to other creditors.  Clients' funds are earmarked first for bankruptcy administration costs, but only to the extent that the funds available in the general fund are not sufficient to cover these costs.

Clients' funds are then allocated to clients in proportion to their net capital.  The BIA defines client status in a very broad sense and includes any person who has money or other assets in a securities account with the dealer, excluding rights accruing to the client under contract or by operation of law that form part of the capital of the dealer and subordinated claims.

A client's net assets represent the amount that the dealer would normally owe the client if their account (excluding registered securities) had been liquidated at the close of business on the day of bankruptcy, less any debts the client owed to the dealer.

General creditors of the liquidating dealer cannot access the clients' funds until the claims on the clients' net capital have been paid in full (regardless of the total value of the client's net capital).  In other words, clients' claims to net capital take precedence over all claims from all unsecured creditors.  Subject to secured and preferred creditor claims and any net capital claims from clients not satisfied by the client fund and CIPF payments, the general fund is available to satisfy unsecured creditor claims.

A trustee in bankruptcy of a securities dealer may exercise broad powers to process assets in the client fund and the general fund in consultation with the Canadian Investor Protection Fund, including the power to buy and sell securities (other than registered securities) and transfer securities accounts to another securities dealer.

Since our company is a member of CIRO, the funds you entrust to us are covered by the Canadian Investor Protection Fund (CIPF), which protects the public in the event of the insolvency or bankruptcy of a member firm. CIPF insures your accounts to a maximum of $1,000,000.

Separate coverage of $1,000,000 also applies to all your registered retirement accounts (RRSP, RRIF, LIRA, LIF). Lastly, certain other types of accounts (RESP, testamentary trust, etc.) also have their own separate coverage of $1,000,000. For more information on this topic, go to www.cipf.ca.

Cash balances in registered plan accounts are also covered by traditional deposit insurance up to $100,000, as this money is held by the trustees of our registered plans.

Examples: Indemnification and loss calculation

Indemnification example:

A client has a cash account with $900,000 in assets (cash and securities), an FHSA account with $16,000, an RRSP account with $1,500,000, a LIRA with $500,000, and an RESP account with $50,000 (The client is the subscriber for the plan) for their son and another RESP with $15,000 for their daughter.

Compensation will be calculated as follows:

  • General accounts (cash account + FHSA): ($900,000 + $16,000) = $916,000
  • Registered retirement accounts (RRSP + LIRA): ($1,500,000 + $500,000) = $1,000,000
  • Registered Education Savings Plan (RESP) account: ($50,000 + $15,000) = $65,000

Total compensation could therefore be ($916,000 + $1,000,000 + $65,000) = $1,981,000

For more information on this topic, go to www.cipf.ca.

Consult the CIPF coverage policy for full details.

Calculation of losses:

This is the calculation of compensation for missing assets. Missing assets are assets held by a dealer member on behalf of a client that are not returned to the client following the insolvency of the dealer member.

The CIPF establishes the maximum amount of compensation that it will pay to a client taking into account:

  • Remittance to the client of the assets to which they are entitled
  • The client's share of the assets of the insolvent dealer member
  • The deduction of amounts, if any, owing by the client to the dealer member

Example:

  • 100 shares of Company X are held on behalf of a client by a dealer member prior to its insolvency.
  • 100 shares of Company X are not returned to the client due to the insolvency of the dealer member.
  • The subscription price paid by the client is $50 per share.
  • At the date of insolvency of the dealer member, the share was worth $30.
  • The client owes the dealer member $1,000.
  • Loss for applying CIPF coverage 
  • = 100 shares x $30 per share minus $1,000 = $2,000.

Consult the CIPF coverage policy for full details

Certain products have specific coverage (Canada Deposit Insurance Corporation)

The Canada Deposit Insurance Corporation (CDIC), like other member financial institutions, protects the money you deposit at our parent banking institution (National Bank of Canada), National Bank Trust and Natcan Trust Company. The following items are covered by CDIC:

  • Chequing account
  • Savings accounts and high interest savings accounts
  • Term deposits (including GICs - issued by National Bank of Canada, National Bank Trust and Natcan Trust Company)
  • Money orders and bank drafts

To determine the applicable coverage amount, which cannot exceed $100,000 per issuer and per class of deposits at the same financial institution, CDIC will group together all insurable deposits from the same class. Consult the CDIC website for more information. You can also ask your advisor at NBFWM to guide you on this topic based on your personal situation.

In Quebec, the Autorité des marchés financiers (AMF) and the Canada Deposit Insurance Corporation (CDIC) protect deposits made at various financial institutions. If your financial institution goes bankrupt, your money is secure. The AMF undertakes to reimburse eligible deposits made at authorized deposit-taking institutions in Quebec, including each Caisse Desjardins du Québec, the Fédération des Caisses Desjardins du Québec, National Bank Trust Inc. Beneva Inc. and Ma Financière Prêts et Placements. CDIC also reimburses eligible deposits made at its member institutions, such as banks and federally regulated financial institutions.

Examples - CDIC coverage

Jane has two chequing accounts containing $10,000 and $15,000 respectively, as well as a savings account worth $50,000. She will receive a cheque for $75,000, since her three accounts fall into the category of deposits in the name of one person.

Jane and her husband John also have $35,000 in a joint account. This amount will not be combined with Jane's other deposits, as this account is classified as deposits in the name of several individuals (joint deposits). The CDIC will therefore issue another cheque for $35,000 in the name of Jane and John.

Jane's total deposit insurance coverage is $110,000.

$75,000 for deposits in the name of a single individual

$35,000 for deposits in the name of a several individuals

Guaranteed Investment Certificates and High Interest Savings Accounts

A client has $200.000 in Guaranteed Investment Certificates at ABC financial institution and $100.000 in a High Interest Savings Account at XYZ institution. In the event of difficulties at these two financial institutions, the client could recover $100,000 from ABC and $100,000 from XYZ.

Source: What happens in a failure – CIDC

Fixed-income securities, such as bonds, detached coupons and Treasury bills, benefit from their own coverage in terms of return and value at maturity – unconditional and unlimited coverage for securities issued by a government or one of its agencies.

However, the value of other securities, such as equities or investment funds, is entirely dependent on market fluctuations and is not guaranteed.

Since National Bank and National Bank Financial Wealth Management are separate entities, the securities offered by NBFWM are not guaranteed by National Bank, except for certain securities issued by National Bank itself.