Amid an ongoing debate about the proper standards of conduct in the securities business, the Investment Industry Regulatory Organization of Canada (IIROC) is proposing a series of changes to its enforcement rules – including a rule that, critics charge, significantly alters those standards.
In mid-November, IIROC published a series of modified rule proposals that aim to streamline and consolidate the regulator’s enforcement rules. In part, this is about merging the disciplinary rules that apply to dealers and the rules for markets, as there are still differences between them that stem from the rules that applied before IIROC was created out of the merging of the Investment Dealers Association of Canada and Market Regulation Services Inc.
But, in the process of putting the two rule books together, there is worry that there will be fundamental changes to how IIROC, a self-regulatory organization (SRO), assesses conduct and hands out punishment. At the heart of this concern is a proposed new rule on the standard of care that dealer reps and other regulated employees are expected to follow.
When the proposed reforms were first published for comment in early 2012, they provoked a sharp outcry from some in the financial services sector, including several lawyers who often defend people accused of regulatory violations. A joint submission by 19 prominent lawyers commenting on the initial proposals complains that the proposal amounts to a “wholesale redefinition” of the standards that apply to registrants.
In particular, the lawyers are concerned that IIROC is moving the bar on the sort of conduct that can be punished, mainly in instances in which there isn’t a specific rule that’s been violated. The lawyers’ letter argues that the proposals take regulators beyond sanctioning behaviour that is clearly offside and strays into possibly punishing the merely careless. Not only do these lawyers see this situation as being potentially unfair, they also warn that it could discourage regulatory settlements for fear that admissions of negligence could be used against defendants in subsequent civil proceedings.
According to the lawyers’ comment: “The overall effect of these proposed changes is to place registrants in a significantly more precarious position vis-à-vis both IIROC and the courts [and] significantly increase IIROC staff’s powers in enforcement hearings.”
Some of these concerns have been echoed by the Investment Industry Association of Canada and others in the industry.
Conversely, the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), endorses IIROC’s proposed new conduct standards, seeing it as a “positive step” that explicitly requires employees to uphold high ethical standards.
Now, it appears IIROC is sticking to its guns. Despite the criticism, the latest version of the proposals, which are out for comment until mid-February, maintain the same proposed standard as did the original version. In response to the criticism, IIROC stresses that the rule is not intended to create new obligations or to expand the scope of its existing rules. Rather, the proposed rule simply clarifies the intent of the existing rules.
IIROC contends that one justification for this proposed rule is that hearing panels’ decisions in recent years have been trending too far in the other direction, with panels requiring evidence of intentionally dishonest or reckless conduct in order to sustain an allegation of “conduct unbecoming” by a rep or regulated employee.
The SRO maintains this interpretation is too restrictive, that it conflicts with IIROC’s disciplinary tradition prior to this apparent shift and that it’s inconsistent with the standards of the provincial securities regulators.
According to a statement from IIROC: “It would be anomalous and improper if negligent misconduct by [IIROC-regulated individuals] could be sanctioned under provincial securities law, but not under IIROC’s own self-regulatory standards-of-conduct rule.”
Another motivation behind the initial proposals was a concern expressed by the Ontario Securities Commission about the direction in which IIROC hearing panels were trending in their interpretations of the standard – a concern that arose in the course of an oversight review of IIROC, which then launched an internal review that resulted in the initial rule proposal.
Since then, the Canadian Securities Administrators (CSA) has initiated its own consultation into whether higher standards of conduct in the industry are required – specifically, between retail clients and their advisors. The CSA has yet to make a decision on that question.
Although FAIR Canada’s comment lauds IIROC’s proposed new rule, it would also like to see the SRO take it even further and require dealers to put their clients’ best interests first. To that end, FAIR Canada’s comment calls on IIROC to issue guidance to that effect: “We believe that, at a minimum, adding guidance about a ‘best interest of the client’ standard would help to remedy the imbalance in the client/advisor/firm relationship.”
However, IIROC notes in its response to FAIR Canada’s comment that this issue is undergoing deliberation at the CSA, so it would be “premature for IIROC to consider issuing such guidance.”
In addition, although the appropriate standard of conduct may be the most high-profile change being proposed, IIROC is considering a host of other changes to its enforcement practices. Among others, IIROC is proposing to: expand the list of available sanctions, so that the SRO will be able to order disgorgement of money that’s obtained through rule violations; being empowered to require a monitor to oversee the business of a dealer; and being able to prohibit a banned person from working for a dealer in any capacity, whether the job requires registration or not.
IIROC’s proposals also would alter the requirements for the SRO to notify the target of an investigation; would prohibit disclosure of information about an investigation; and would require dealer employees who aren’t registered to co-operate with IIROC investigations.
Separately, IIROC also is proposing a new set of guidelines to help hearing panels in determining the sanctions handed down in disciplinary hearings, proposing to: eliminate prescribed ranges for fines and suggested minimum fines; eliminate specific suspensions longer than five years; and alter how a respondent’s inability to pay is considered by a hearing panel.
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