Manipulation refers to a range of manipulative and deceptive trading practices that can harm a fair and transparent market. IIROC investigates a range of practices that includes any conduct which has the effect of deceiving the public, the purchaser or the seller of any security about the nature of a transaction or the price or value of the security.
These would include
- creating a false or misleading appearance of active public trading in a security. For example, entering fictitious orders for the same security with no intention of trading;
- entering into any scheme to sell and repurchase a security in an effort to manipulate the market;
- using manipulation or deception to influence the market price of a security;
- causing the last sale or last bid or offer for the day in a security to be higher or lower than warranted by the market;
- making a fictitious transaction, or knowingly giving or receiving an order involving no change of ownership of a security.
These practices are addressed by the Universal Market Integrity Rules (UMIR) under the rules on "Manipulative and Deceptive Activities" (Rule 2.2).
Conflict of Interest
When an investment advisor works with his or her clients, there may be situations where the advisor's interests do not match the client's interests.
For example, any personal financial dealing with clients creates an unacceptable conflict of interest between the advisor and the client.
Firms are required to take reasonable steps to identify existing and potential conflicts of interest that the firm reasonably expects to arise between the firm or each individual acting on behalf of the firm and a client. Firms are required to respond to any existing or potential conflicts of interest. Responses may include control, disclosure or avoidance of the situation [National Instrument 31-103 adopted by the Canadian Securities Administrators
Unauthorized or discretionary trading
The buying or selling of a security by an advisor without the proper consent of the client is considered to be unauthorized or discretionary trading and is a violation of the IIROC rules.
When taking an order from a client, advisors are prohibited from using their discretion to determine factors such as quantity, security, price or time. These decisions must come from the client.
In limited circumstances an advisor may exercise discretion in a client's account temporarily if specifically authorized in writing by the client and the exercise of the discretion is in accordance with IIROC rules relating to Discretionary Accounts.
"Managed accounts" are an allowable form of discretionary trading, but only registered Portfolio Managers may operate managed accounts. Firms must have specific procedures to operate such accounts in accordance with the IIROC rules.
Inappropriate personal financial dealings and outside business activities
It is contrary to rules of conduct for advisors to engage in any personal financial dealing with their clients. These dealings include lending money to or borrowing money from clients, paying their losses out of personal funds and sharing a financial interest in an account with a client.
Advisors should also not have any business activities outside of their firm, unless approved by the firm.
Advisors are required to use due diligence to ensure that any orders accepted or recommendations made to a client to buy, sell, exchange or hold a security are suitable for the client. The suitability of an order or recommendation for a retail client must be assessed based on factors that include the client's financial situation, investment knowledge, investment objectives and risk tolerance. When a client opens an account with a firm, these factors should be discussed and identified in the account opening documentation.
Wash trading is a manipulative practice used by market participants who want to create the impression that there is an active market for a stock, possibly to manipulate the price or encourage others to invest in the stock. Wash Trading involves placing orders to buy and sell the same security which results in a trade with no actual change in the ownership of the stock. To other investors, however, it looks like an active, two-sided market exists for the stock. See Manipulation as well.
Frontrunning & Client Priority violations
Frontrunning occurs when a market participant receives a client order that could reasonably be expected to affect the market price of a security, and then enters his or her own order ahead of that client order.
The participant needn't act personally on this information to be in violation. If the participant tells another person about a client order that could reasonably be expected to change the price of a security, and that person's order is then entered ahead of the client order, this would also qualify as frontrunning.
Frontrunning differs from the client priority rule violations in that both involve trading ahead of a client order, but frontrunning requires that the client order is reasonably expected to affect the market price of a security while client priority violations do not include such an expectation.
Falsification / Forgery of Documentation
Forgeries can include the unlawful creating or altering of client investment plans, letters, disclosure documents, change of address forms or professional qualification documents
Attempting to mislead someone by making untrue statements or withholding important information is known as misrepresentation, particularly if it applies to information that may influence a client's investment decision. For example, an advisor may not disclose all the risks associated with a particular security in an attempt to convince the client to buy.
Theft and fraud are criminal offences and if IIROC staff identify potential incidences of theft or fraud during an investigation they will refer these matters to the appropriate policing agency.
IIROC-regulated firms must properly and effectively supervise the actions of their advisors. Firms who fail to fulfill this obligation may face disciplinary actions and penalties.
Failure to Deliver Best Execution
When advisors receive client orders they have an obligation to act in the client's best interest when completing them.
Best Execution requires a firm to seek to execute a client order on the most advantageous terms reasonably expected in the market at the time. Historically this has meant getting the client the best price available at the time the order is received; however, firms may also take into consideration such things as speed of execution, certainty of execution and the overall cost of executing the trade.
Churning or Excessive Trading
These terms refer to excessive trading in a client's account for the purpose of generating commissions. IIROC-regulated firms are required to monitor for this type of violation and investors are encouraged to review their statements carefully and report any questionable activity to IIROC and their firm.