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Regulators in Canada have been expanding the scope of their enforcement capabilities during the past several years with the introduction of no-contest settlements and paid whistleblower policies. Now, the Investment Industry Regulatory Organization of Canada (IIROC) proposes new measures to ensure securities dealers and investment advisors follow the rules.

In late February, IIROC unveiled proposals for a pair of new enforcement processes designed to help IIROC deal with straightforward cases more quickly and enable the self-regulatory organization (SRO) to penalize members in the investment industry who commit misdemeanors.

The proposals include introducing an “early resolution” process that would enable IIROC to settle certain cases much more quickly and a new “minor violation” program that would enable the SRO to impose penalties for lesser infractions rather than initiating a full enforcement hearing or simply letting the offender off with a warning.

If these proposals, which are out for a 90-day public comment period, are adopted, they would give IIROC’s enforcement staff more flexibility in how they deal with certain types of cases. In turn, this may lead to more enforcement activity. At this point, though, IIROC is not prepared to estimate just how much the new disciplinary options may boost its enforcement activity.

“We will be in a position after the new programs are launched to assess impact on the level of enforcement activity,” says Elsa Renzella, senior vice president, registration and enforcement, with IIROC. “Overall, we expect more efficient resolution of cases. Added tools and flexibility will permit IIROC to address wrongdoing of varying degrees of seriousness, [thus] ensuring proportionate, fair penalties tailored to the misconduct.”

The goal of the new enforcement processes is to allow IIROC to dispense with certain cases more easily, so it can throw more resources at tougher files. Says Renzella: “What’s important to us is to ensure that we optimize our resources so that we can focus on matters that are more serious or harmful to investors.”

Under the proposed minor violations program, IIROC would issue a notice to either a firm or an advisor that would spell out the alleged violation, the evidence in the case and the proposed fine (which would be fixed at $2,500 per violation for individuals and $5,000 per violation for firms) rather than launching a formal enforcement proceeding. If the recipient of the notice admits the violation and pays the fine, the violation would not be reported on his or her disciplinary record nor would the violator’s identity be revealed publicly.

Instead of formal hearings, which are public, IIROC intends to publish a quarterly report that would list the violations resolved under the program during the previous quarter on an anonymous basis. Essentially, the trade-off for settling a minor enforcement case – and paying the required fine – without going through a full hearing would be a reprieve from the damage to a reputation that can accompany regulatory disciplinary action.

IIROC’s notice proposing the new approach states that the aim is to “discourage future misconduct … by imposing a sanction that is proportionate and appropriate.” Furthermore, such an approach generally would apply only in cases in which a breach is inadvertent or for an isolated event in which there was little to no harm caused to clients or markets.

The new process wouldn’t be used for cases of repeated, deliberate conduct that causes serious damage. Currently, IIROC’s basic options for these kinds of minor violations are to issue a “cautionary letter” to the offender or initiate a full-scale enforcement hearing. The thinking is that a full-on hearing may not be worth the time and expense, and cautionary letters may have little effect, given that they don’t carry any real penalty or even a finding that a violation has occurred.

“The deterrent effect of a cautionary letter is minimal and it doesn’t materially enhance confidence in IIROC’s enforcement efforts,” the SRO’s notice states.

In fact, cautionary letters are rarely used. According to IIROC enforcement data, just one caution was issued to an advisor in 2017, down from nine in 2016 (seven of those were against individuals and two involved firms).

Similarly, although IIROC has policies in place that are designed to encourage the early settlement of the more serious cases, these measures aren’t working that well.

Currently, IIROC’s policy is to provide “credit for co-operation” and an enforcement mediation program, both of which are designed to speed up settlement negotiations and resolve cases more quickly. Yet, the SRO indicates that these programs are not having the desired effect.

“Despite the implementation of these measures, the settlement process has not been significantly impacted,” states the IIROC notice that spells out the proposed new procedure.

Under the proposed program, IIROC hopes to expedite settlements by enabling enforcement staff to offer “substantial credit” in the form of lower fines and costs orders in exchange for early settlements.

Although the proposal envisions IIROC staff making their “best offer” early on, the terms of these deals still would be open to negotiation. Unlike the proposed approach to minor infractions, an IIROC hearing panel still would have to approve these settlements, and the full details of these settlements would be made public.

Again, only certain types of disciplinary cases would be eligible for an expedited settlement. The criteria for determining eligibility include the level of co-operation provided, the extent to which the harm has been remedied and the existence of plans for disgorgement or client compensation.

The proposed disciplinary approaches are out for public comment. IIROC also will be soliciting investor input through an online survey of a subset of a pool of 10,000 investors. This feedback will enable the SRO to get investor feedback on its plans for more disciplinary options rather than just the industry’s perspective.