Investment Executive June 2018 front cover
Investment Executive

As the investment industry Regulatory Organization of Canada (IIROC) looks for ways to enhance enforcement, that self-regulatory organization’s (SRO) proposal for meting out discipline has received the cold shoulder from both the investment industry and investor advocates.

In February, IIROC proposed a couple of alternatives for disciplining both financial advisors and securities dealers who violate the SRO’s rules. The idea is to introduce new procedures for resolving certain cases more quickly without resorting to a full-scale disciplinary hearing, thereby improving both efficiency and productivity of enforcement.

However, both the investment industry and investor advocates are pushing back on the proposals. Although the submissions both sides submitted regarding the proposals demonstrate support for IIROC’s novel proposal to improve enforcement, the specific details of the SRO’s initial proposal are cause for concern.

The industry is worried that the new processes will mean more enforcement action by the regulator. And this could have a secondary impact, in terms of both increased legal action and follow-on impacts on other aspects of advisors’ careers.

Investor advocates, for their part, are concerned primarily about possible lack of transparency in cases that are brought forth under the proposed disciplinary processes and whether the impact of misconduct on investors will be accounted for properly in cases that take this route.

A component of IIROC’s proposal is a process for resolving certain cases more quickly by settling them at an early stage without going into an in-depth investigation and prosecution. Like the “no contest” settlement process that the Ontario Securities Commission (OSC) adopted several years ago, the expedited settlement process IIROC proposes is designed to be used in cases in which the scope of the misconduct is well known, the accused has co-operated with the regulator and investors that were harmed by the misconduct are being compensated.

IIROC also proposes introducing a program for punishing “minor violations” that may not merit a full-blown disciplinary proceeding, but require more than a just a warning from the SRO.

This proposed program would function like an industry “speeding ticket.” It’s intended to deal with misdemeanors by offering firms and advisors the opportunity to admit to an alleged violation and pay a set fine ($2,500 for individuals and $5,000 for firms).

In turn, the SRO would not pursue disciplinary action for the violation. The admission would not count as formal discipline on either the firm’s or the advisor’s record, and the admission would not be made public. IIROC proposes to publish case summaries on an anonymous basis.

Yet, submissions from organizations such as the Investment Industry Association of Canada (IIAC) state that investment dealers and advisors are unlikely to accept those citations. The IIAC’s submission on the proposal states that the requirement of an admission of wrongdoing under the proposed program will be unpalatable to many in the industry. Even though these admissions wouldn’t count as formal disciplinary action, the IIAC states, they still could affect advisors negatively.

The IIAC’s submission notes that how these admissions are treated by other regulators and professional associations that may require advisors to disclose this information is not clear. This could, in turn, affect advisors’ standing with these organizations.

For example, the IIAC’s submission warns that the proposed process could jeopardize advisors’ membership in professional organizations such as the Chartered Financial Analyst Society or the Financial Planning Standards Council. Furthermore, the IIAC’s submission notes concerns about how these admissions could be used in civil cases.

The IIAC’s submission also states concerns that rather than diverting minor cases from costly disciplinary hearings, the proposed program will capture relatively trivial infractions that would be better to deal with through either in-house discipline by the firm or a warning letter from IIROC.

Investor advocates, such as the OSC’s Investor Advisory Panel (IAP), maintain that admissions involving minor violations should not be kept secret. The IAP’s submission on IIROC’s proposal argues: “The investing public has a right to know about the nature and extent of disciplinary action.”

The IAP’s submission rejects the concept of these admitted violations being kept under wraps; in fact, that submission suggests that these admitted violations should be admissible in civil litigation against a dealer or an advisor.

The Canadian Foundation for Advancement of Investor Rights’ (a.k.a. FAIR Canada) submission also expresses concern that secrecy in disciplinary matters may undermine the deterrent effect of enforcement action: “Misconduct should have a light shone upon it, and expediency and efficiency should not be of sole importance. Otherwise, confidence in our markets is undermined and investor protection is compromised.”

The Canadian Advocacy Coun-cil for Canadian CFA Institute Societies’ (CAC) submission echoes this concern regarding lack of disclosure under the proposed disciplinary enforcement processes. In fact, the CAC’s submission notes that a weakness of the current practice of regulators issuing warning letters for relatively minor infractions is the lack of transparency for the public.

Thus, the CAC’s submission states, there should be public disclosure of the names of dealers that admit to minor violations: “We are of the view that the importance of market transparency will outweigh the potential negative impact on a dealer’s business.”

Ottawa-based MBC Law Corp.’s submission also supports public disclosure of minor violations – as both a deterrent to misconduct and an alert to investors.

MBC’s submission suggests that investor compensation should be a mandatory feature of the early settlement process. Requiring violators to compensate harmed investors would bolster investor protection while also enhancing enforcement efficiency – much as the OSC has done with its no-contest settlement program.

Indeed, the underlying goal of enhancing enforcement by resolving certain types of cases more quickly has proven successful for the provincial regulators.

So far, the OSC has utilized its no-contest settlement process to put to bed a series of high-profile cases against some of the industry’s largest players without undergoing contested hearings – all while ensuring that hundreds of millions of dollars are returned to investors who have been wronged through systematic overcharging and other industry misconduct.

That program has not been without its critics, however, including complaints that the no-contest settlement process lacks transparency. Yet, the Alberta Securities Commission became the second provincial regulator to embrace the use of such arrangements in early May – signalling that regulators at least are pleased with the results of the no-contest process thus far.