Regulators often are unwilling to apply discretion when enforcing their policies – even on minor, technical issues – say many of the compliance officers (COs) and company executives surveyed for Investment Executive‘s 2013 Regulators’ Report Card.
As a result, the ratings they bestowed on their regulators in “the regulator’s willingness to apply discretion when enforcing policy decisions” category were largely negative. Case in point: three of the four regulators in this year’s Report Card saw their ratings in this category drop by a substantial margin.
The two Toronto-based self-regulatory organizations, the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC), both saw their ratings drop to 6.2 from 7.4 and 7.5, respectively, in 2012, while the Ontario Securities Commission (OSC), also based in Toronto, took the biggest hit, with its rating in the category dropping to 6.0 from 7.5 year-over-year.
One possible reason for the severity of the drops in these ratings is the change to the wording for the category; in previous years, those surveyed were asked to rate “the firmness of the regulator’s policy decisions.” The change was made to improve clarity.
That said, the feedback from those COs and company executives who were surveyed reveals other, more important reasons behind their dissatisfaction. Specific complaints included: the regulators don’t do enough to recognize the unique needs of different firms; regulators’ front-line staff are too inexperienced; and regulators fail to prioritize issues, focusing instead on minor concerns of little consequence.
Some COs complained that in an effort to appear fair, regulators are unreasonably strict and treat all firms the same way. In particular, several COs said there are matters that just don’t apply to their business, but the regulators don’t understand that.
“The time allocation of their audits is not fair,” says a CO with an Ontario-based investment dealer. “They spend four days to audit us; but, if they took into account the difference in assets and paper flow, they would have to audit the banks continuously to investigate them as thoroughly as they do us.”
However, all the regulators said they are taking the necessary steps to avoid such situations.
“The rules are principles-based rules,” says Mark Gordon, the MFDA’s president and CEO. “And we recognize there is more than one way to comply.”
Adds Susan Wolburgh Jenah, IIROC’s president and CEO: “One of the ways we’ve gotten away from [treating all firms as being homogeneous] is by understanding the business of the entity that you’re going out to audit first, before you go out into the field, rather than treating everybody as a homogeneous group that all do the same thing. They don’t, and they don’t all have the same risks. It’s about a lot more of doing that preparatory work before the staff go out into the field.”
However, many COs and company executives surveyed complained that regulators’ field agents are unable to judge when to apply discretion appropriately because they lack experience and are afraid of making a mistake. In particular, many survey respondents said that regulators use audits and investigations as a “training ground” of sorts.
“At the grassroots level, they are pretty unreasonable,” says a CO with an Ontario-based investment dealer about IIROC staff. “But, as you work your way up the hierarchy, you can end up finding someone able to exercise discretion.”
IIROC has addressed this problem by sending out managers on compliance reviews along with the more junior staff, says Wolburgh Jenah: “We’re very fortunate to have senior people who have been around a long time, who really understand the industry well. And we think it’s important for those people to support [more junior staff] in the field.”
This particular change was made relatively recently, she pointed out, so not all firms will have seen the difference yet.
Another major complaint among those surveyed is that regulators do not discriminate effectively between major and minor issues. In fact, survey respondents were concerned that a “checklist” approach can lead regulators to focus on issues that don’t really pose any risk.
“The [OSC] doesn’t show much discretion,” says a CO with an Ontario-based mutual fund dealer. “If we make a mistake by filing something in the wrong format, they charge us a fee.”
Adds a CO with a British Columbia-based mutual fund dealer about the MFDA: “No matter how technical the issue is or how reasonable the explanation, they make a federal case out of it.”
A CO with an Ontario-based investment dealer says that IIROC is “hiring people who view wrong dates as capital crimes.”
However, Rosemary Chan, IIROC’s senior vice president, member compliance, general counsel and corporate secretary, points out that things that may seem minor to dealers sometimes are important, so there is a reason regulators focus on technical issues: “If the date on a form is part of an audit trail for client priority, then the date is important. Sometimes, there is a valid reason why we focus on it; and sometimes, it’s part of that discussion [we have with] dealers to [help them] understand where we’re coming from.”
Although several COs said they avoid bringing up such issues out of fear that it will lead to regulators treating them more harshly, the regulators say that having an open dialogue at the time a problem arises is the best way to find a solution to it.
Furthermore, Wolburgh Jenah says, there is no tolerance for treating feedback with resentment, let alone taking retaliation against firms: “We’re not trying to go out and find problems. We’re trying to help firms identify the issues before we go in so we can fix them.”
The one regulator that fared well in this category was the B.C. Securities Commission (BCSC). Its rating was much higher than the other regulators and, at 7.3, almost the same as the 7.4 rating the regulator received for the category in 2012. Several COs and executives with BCSC-licensed firms lauded the BCSC for making itself accessible to dealers and having a strong understanding of the financial services industry, as well as for recognizing the differing needs of firms.
“It doesn’t matter if you have thousands of clients or not,” says a CO in British Columbia, “[BCSC staff] are willing to address your firm’s issues.”
According to Sandy Jakab, the BCSC’s director, capital markets regulation, it’s the provincial regulator’s steadfast adherence to principles-based regulation that is the main reason why the BCSC is seen to be so willing to apply discretion.
“We are able, when there’s a principle, not to have to hold every firm to a gold standard that would be appropriate for an internationally competitive firm,” Jakab says. “We can allow them to develop approaches that make sense in their own business environment. And so, that really is the secret to our success.”
© 2013 Investment Executive. All rights reserved.