Boosting enforcement is a perennial priority for securities regulators, and the Investment Industry Regulatory Organization of Canada (IIROC) is on track to improve on last year's performance.
IIROC, a self-regulatory organization (SRO), was on pace to levy more disciplinary sanctions against individuals through the nine months ended Sept. 30 than it did in all of 2016. In fact, IIROC has more than doubled the total disciplinary sanctions involving firms in the first nine months of this year than it did all last year.
The SRO has rendered disciplinary decisions against seven firms, handing out more than $1 million in combined sanctions - including $830,000 in fines, almost $80,000 in costs and $100,000 in disgorgement - as of Sept. 30 this year. In comparison, IIROC disciplined six firms, imposing $425,000 in total monetary sanctions, in all of 2016.
This year's enforcement activity against firms also includes a permanent suspension (after an introducing broker fell into capital deficiency) and an unusual disgorgement order requiring another firm to donate to charity money collected from an employee.
The latter order stems from a settlement with Scotia Capital Inc. in July for failure to supervise properly a couple of advisors who employed an unsuitable, high-risk trading strategy with several of their clients that ultimately led to the firm paying more than $2.5 million in compensation to those clients. Scotia Capital, in turn, required a supervisor to contribute $100,000 to the client restitution; in addition, as part of a subsequent settlement with IIROC, the firm agreed to disgorge that amount to a charity.
IIROC also is on pace to exceed last year's level of enforcement activity in cases involving individual advisors. The SRO completed 30 prosecutions against individuals in the nine months ended Sept. 30. In each of the past two years, the regulator completed 40 cases.
Although Elsa Renzella, IIROC's vice president of enforcement, acknowledges that the SRO is poised to exceed last year's prosecution totals, she also sounds a note of caution: "It's important to keep in mind that some cases are more complex, require more attention and resources, and may take longer to complete."
Still, IIROC is set to increase the sanction totals it has posted in each of the past couple of years against advisors. The SRO has handed down more than $2.8 million in monetary sanctions against individual advisors thus far, including $1.7 million in fines, $330,000 in costs and $776,000 in disgorgement. In all of 2016, individuals collectively were hit with $3.1 million in sanctions, up from $2.95 million in 2015.
More important, the SRO now is better positioned to collect the sanctions it levies against individuals: legislators in Ontario recently granted IIROC the power to enforce its disciplinary orders in court. (Previously, IIROC enjoyed this power only in Alberta, Quebec and Prince Edward Island.)
IIROC has long sought this capability to bolster the credibility of its enforcement process. Too often, fines imposed against individual advisors went unpaid because an advisor who had been disciplined could evade his or her penalties by leaving the investment industry.
IIROC reports that it's unable to provide much insight into how this new power in Ontario will affect its collection rate as yet. To date, there's about $20 million in unpaid fines involving former advisors in Ontario, which accounts for about two-thirds of IIROC's total unpaid fines. Still, the SRO expects its recently increased authority will enhance its enforcement capabilities significantly.
In addition, IIROC acquired new enforcement powers in Alberta this year, including the ability to compel co-operation with its investigations and statutory immunity for IIROC staff members who are carrying out their duties in good faith. The SRO is seeking to add these powers to its enforcement arsenal in every province.
Although enforcement activity is up this year, not much has changed regarding the enforcement issues the securities industry faces; suitability remains the top complaint from clients. Notably, IIROC's statistics through the nine months ended Sept. 30 reveal that allegations involving suitability account for almost half of the enforcement cases opened so far this year; that's 83 of 180 cases, according to Renzella.
"Unsuitable investments continue to be a major source of enforcement cases this year," she says. "Suitability and cases involving seniors remain two key areas of focus for our enforcement department. We also continue to pursue a variety of other cases to ensure the proper protection of investors and the integrity of the capital markets in Canada."
Looking ahead, though, IIROC enforcement staff may face a declining workload. The number of events reported to the regulator so far this year via the complaints and settlement reporting system (ComSet) used by firms in the investment industry - reports that include client complaints, civil lawsuits and internal discipline - looks set to decline year-over-year.
The SRO received 1,437 ComSet reports, including 1,207 client complaints, in all of 2016. But through the nine months ended Sept. 30, 2017, there were 862 ComSet events reported to IIROC, including 692 client complaints. Assuming this trend persists, firms in the industry collectively are on track to receive about 920 client complaints and report a total of 1,150 ComSet events this year - a sharp drop from last year.
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