The Investment Industry Regulatory Organization of Canada has issued a report detailing the sorts of compliance violations it found during the past year’s examinations, and highlighting the issues it will examine in the year ahead.

IIROC reports that during the past fiscal year, April 2009 to March 2010, it examined more than 200 firms and issued a total of 303 reports during the year. The regulator says it found that the majority of firms “continue to work hard to be compliant” with both IIROC rules and securities legislation, and that firms are generally very responsive to correcting deficiencies. However, IIROC staff also continues to find that some business and compliance activities require further attention.

Three deficiencies were found in all three types of compliance examination programs that IIROC carries out: inadequate supervisory testing; inaccurate or incomplete books and records; and compliance programs that are not updated to reflect new rules or obligations.

Additionally, in the financial and operations compliance exams IIROC found: problems with the use of margin, specifically deficiencies where the wrong margin rates are used and where the inventory margin is understated due to the inappropriate use or interpretation of margin offsets; and assorted books and records issues.

In terms of business conduct compliance, IIROC found: inadequate policies and procedures; firms that are not adequately focusing on identifying the conflicts of interest; a lack of adequate controls around the sale of private placements; and inadequate controls around non-client accounts.

Trading compliance exams found: inadequate internal testing; missing trade confirmation disclosures; and inadequate controls over primary distribution of debt.

Market regulation compliance exams discovered: inadequate supervision of automated trading, including direct market access (DMA), algorithmic and order execution account trading; and inadequate procedures to ensure that better priced orders in the visible market are not traded-through.

IIROC says that the overall rate of trade-through violations “has dramatically declined in the past year”, but that trade-throughs continue to be detected, mostly at market opening and in periods of fast markets or at times of high latencies in market data.

Improvement in firm compliance is evident on many fronts, IIROC notes, although it says that it will be examining many of the ongoing issues uncovered in the most recent round of examinations.

Additionally, IIROC indicates that it is developing guidance around the core regulatory issues to be considered when outsourcing firm activities. And, it encourages firms to automate their suitability testing to ensure that larger samples are tested or in some cases that most transactions are tested.

IE