investor protection / Yellow Man

This article appears in the February 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

The new industry self-regulatory organization may not have a name, but it already has one good idea to its credit: returning money to victims of industry misconduct. Following through on that could go a long way to establishing credibility with investors.

The nameless SRO proposes creating a mechanism that would pay out funds collected under disgorgement orders to eligible victims. Under the proposed plan, when a rep is disciplined in an SRO enforcement case and the sanctions include a disgorgement order, money paid to satisfy that order could be returned to the investors who were directly harmed by the misconduct.

Several issues still need to be worked out. For example, it’s unclear who would administer the process of returning money to investors. The proposal indicates the task should be separate from enforcement, but the new SRO is still so new that it’s unsure which part of the agency should do it.

The potential effect on enforcement also must be carefully considered. Because only victims of specific allegations that are proven (or admitted) at enforcement proceedings would be eligible for restitution, this consideration will probably bleed over into the enforcement process — potentially impacting the scope of charges the SRO’s enforcement staff decide to bring and the kinds of penalties they seek.

Assuming such policy and administrative considerations can be resolved, returning money to harmed investors could be a big win for the new SRO — particularly as it tries to establish itself as a new agency with the public interest at its heart rather than as a clumsy merger of existing SROs to benefit dual-platform dealers.

The idea isn’t new. Back in 2005, before the Investment Industry Regulatory Organization of Canada (IIROC) was created, its predecessor, the Investment Dealers Association of Canada (IDA), openly contemplated something similar. The IDA’s musings about returning money to investors also came at a time of deep investor dissatisfaction and skepticism about the value of regulators in general — and self-regulation in particular.

The IDA never followed through and, a couple of years later, it was broken up and IIROC was formed. Hopefully, the new SRO will see this project through.