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3.2.4 Investor Protection Funds

A comprehensive guide to understanding the investor protection funds available in the Canadian securities industry, including detailed explanations of CIPF, MFDA IPC, CDIC, and provincial insurance corporations.

Investor Protection Funds

The securities industry safeguards the investing public from losses caused by the financial failure of firms within the self-regulatory system. The covered account types include those of IIROC dealer members, MFDA members, banks, trust and loan companies, and credit unions.

Canadian Investor Protection Fund (CIPF)

Founded in 1969, the Canadian Investor Protection Fund (CIPF) aims to maintain investor confidence by protecting eligible customers in the event of an IIROC dealer member’s insolvency. Note that CIPF does not cover client losses due to changing market values or accounts held at non-IIROC member firms.

Coverage Details

  • All customer accounts are covered, either as part of a general account or as separate accounts.
  • Accounts such as cash, margin, short sale, options, futures, and foreign currency are combined and treated as one general account entitled to a maximum coverage of $1 million.
  • Separate accounts, such as registered accounts and trusts, each receive up to $1 million in coverage unless combined with other separate accounts.

Example

An investor holds assets worth $1,310,000 divided among different accounts. If the IIROC dealer becomes insolvent, CIPF protection would apply as follows:

  • Cash Account ($20,000) + Margin Account ($85,000) = $105,000 (protected)
  • RRSP ($940,000) + RRIF ($200,000) = $1,000,000 (protected)
  • RESP ($65,000) = $65,000 (protected)

In total, the investor’s assets would be protected up to $1,170,000.

Mutual Fund Dealers Association Investor Protection Corporation (MFDA IPC)

The MFDA IPC, created in 2005, extends protection to eligible customers of insolvent MFDA member firms. It’s important to note that MFDA IPC does not cover losses from market value changes, unsuitable investments, or issuer default.

Each customer account—classified as part of a general account or a separate account—is eligible for a maximum coverage of $1 million.

Quebec Exclusion

MFDA IPC coverage is unavailable in Quebec since the MFDA is not recognized as a self-regulatory organization in the province. Quebec maintains its own compensation fund.

Canada Deposit Insurance Corporation (CDIC)

The Canada Deposit Insurance Corporation (CDIC), a federal Crown corporation, provides deposit insurance to uphold the stability of Canada’s financial system. CDIC insures eligible deposits up to $100,000 per depositor per CDIC member institution.

Insurance Criteria

  • Deposits must be in Canadian currency, held at member institutions, and payable within Canada.
  • CDIC insures different types of accounts separately, with each account type covered up to the $100,000 maximum.

Example

Assume deposits as follows:

  • $80,000 (cash in your name)
  • $120,000 (RRSP)

If the institution fails, CDIC will cover $180,000 total: $80,000 for the cash deposit and $100,000 of the RRSP.

Did You Know?

CDIC separately covers seven deposit categories up to $100,000. These categories include deposits in one name, more than one name, registered savings plans, RRIFs, Tax-Free Savings Plans, trusts, and deposits for property taxes.

Provincial Insurance Corporations

Provinces may have organizations specifically protecting credit union member deposits, often termed as deposit insurance corporations or similar. Coverage terms and limits vary, so checking with your province is essential.

Dive Deeper

For more thorough information on different coverage forms and their specific terms, visit the respective corporations’ websites:

Key Takeaways

  • CIPF: Covers eligible accounts up to $1 million per general and separate accounts under IIROC dealer members.
  • MFDA IPC: Offers up to $1 million in coverage per general and separate accounts for MFDA member firm insolvencies; does not cover accounts in Quebec.
  • CDIC: Insures deposits up to $100,000 per deposit category in member institutions.
  • Provincial Insurance: Different regions have unique agencies and coverage terms for credit union deposits.

Frequently Asked Questions (FAQ)

Q: What kinds of losses are not covered by CIPF?

A: Losses due to changing market values are not covered by CIPF.

Q: Does the MFDA IPC cover accounts held in Quebec?

A: No, MFDA IPC is not recognized in Quebec. Quebec has its own compensation fund.

Q: How are deposits covered under CDIC?

A: CDIC insures eligible deposits up to $100,000 per deposit type category within a single member institution.

Q: Where can I get more detailed information about investor protection funds?

A: You can explore the websites of CDIC, CIPF, MFDA IPC, and your provincial insurance organization for more detailed information.


📚✨ Quiz Time! ✨📚

🧐 Assess and Solidify Your Understanding

Welcome to the Knowledge Checkpoint! You’ll find 10 carefully curated quizzes designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you’re on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck! 🍀💪

## What is the primary role of the Canadian Investor Protection Fund (CIPF)? - [ ] Insuring accounts held at mutual fund companies - [ ] Covering losses due to market value changes - [x] Protecting eligible customers in the event of the insolvency of an IIROC dealer member - [ ] Insuring deposits at banks and credit unions > **Explanation:** The primary role of the CIPF is to protect eligible customers in the event of the insolvency of an IIROC dealer member. It does not cover losses due to market value changes or accounts at mutual fund companies and banks. ## Which types of accounts are combined and treated as one general account under CIPF coverage? - [ ] Registered accounts and trusts - [x] Cash, margin, short sale, options, futures, and foreign currency accounts - [ ] Bank accounts and credit union accounts - [ ] Mutual fund accounts > **Explanation:** Cash, margin, short sale, options, futures, and foreign currency accounts are combined and treated as one general account under CIPF coverage. ## How much coverage does CIPF provide for separate accounts such as registered accounts and trusts? - [ ] $100,000 - [ ] $500,000 - [x] $1 million - [ ] $2 million > **Explanation:** Separate accounts such as registered accounts and trusts are each entitled to coverage up to a maximum of $1 million under CIPF. ## When was the Mutual Fund Dealers Association Investor Protection Corporation (MFDA IPC) created? - [ ] 1969 - [x] 2005 - [ ] 1980 - [ ] 1995 > **Explanation:** The Mutual Fund Dealers Association Investor Protection Corporation (MFDA IPC) was created in 2005 to provide protection for eligible customers of insolvent MFDA member firms. ## What types of losses are not covered by the MFDA IPC? - [ ] Insolvency of MFDA member firms - [x] Losses resulting from changing market values - [ ] Deposits held at banks - [ ] Losses resulting from the value of mutual funds > **Explanation:** The MFDA IPC does not cover customer losses that result from changing market values, unsuitable investments, or the default of an issuer of securities. ## How much insurance does the Canada Deposit Insurance Corporation (CDIC) provide for eligible deposits per depositor in each member institution? - [ ] $50,000 - [x] $100,000 - [ ] $200,000 - [ ] $500,000 > **Explanation:** The Canada Deposit Insurance Corporation (CDIC) insures eligible deposits up to $100,000 per depositor in each member institution. ## For a deposit to be eligible for CDIC insurance, it must be held under what conditions? - [x] In Canadian currency and payable in Canada - [ ] In foreign currency and payable outside Canada - [ ] In any currency and payable outside Canada - [ ] Only in foreign currency and within Canada > **Explanation:** To be eligible for CDIC insurance, deposits must be held with a member institution in Canadian currency and payable in Canada. ## How does CDIC handle deposits held in different branches of the same member institution? - [ ] Insured separately - [ ] Not insured at all - [ ] Prorated amongst branches - [x] Not insured separately > **Explanation:** Deposits held in different branches of the same member institution are not insured separately; they are combined for insurance purposes. ## How is the CIPF funded? - [x] By quarterly assessments on IIROC dealer members - [ ] By the Canadian federal government - [ ] By the Bank of Canada - [ ] By the CDIC > **Explanation:** The CIPF is funded by quarterly assessments on IIROC dealer members. ## Which of the following accounts is not covered by CDIC? - [ ] Registered retirement savings plans - [x] Foreign currency accounts - [ ] Trusts - [ ] Tax-free savings accounts > **Explanation:** CDIC insures eligible deposits in Canadian currency but does not cover foreign currency accounts.

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Saturday, July 13, 2024