Consolidation of enforcement regimes by securities regulators, including some new standards and procedures, is generating concern in the financial services sector.
Late last year, the Investment Industry Regulatory Organization of Canada (IIROC) published two sets of proposals designed to consolidate its enforcement rules and sanction guidelines for dealers and marketplaces. The comment period for both proposals ended in mid-February, with the sector expressing a range of concerns about the possible impact on what gets punished, and how severely.
The proposed consolidation and revisions to the enforcement rules were first published in March 2012. At the time, certain aspects of those proposals proved to be controversial. In particular, there was a good deal of worry over proposals to clarify the negligence standard. The new proposal would allow IIROC to punish conduct that doesn’t violate a specific rule but which nevertheless falls short of general standards of behaviour expected in the sector.
IIROC resisted that initial criticism and stuck with its plans for a new negligence standard in its 2013 proposals.
The financial services sector remains concerned. The comment from the Investment Industry Association of Canada (IIAC) reiterates an objection to the adoption of a simple negligence standard: “We have concerns with such a broad and far-reaching standard of conduct.”
The IIAC is worried that the standard of negligence doesn’t require intent and that hearing panels could impose discipline for inadvertent violations. The IIAC’s comment calls such a standard “unrealistic” and questions how it will be applied and interpreted: “We are not aware of other forms of professional discipline that are based upon a standard of simple negligence. Civil proceedings are the more appropriate venue for raising the issue of negligent conduct rather than under IIROC jurisdiction.”
The IIAC comment also raises the concern that other aspects of the proposals will result in vague standards: “This is problematic, as it sets the bar where [sector] members will not have advance knowledge of what is expected of them.”
The IIAC comment acknowledges that IIROC has made useful changes from the first publication in certain areas. However, given that these proposals now have been through two comment periods, it seems unlikely that IIROC will back away from its approach to standards of conduct.
Indeed, IIROC maintains that the proposals don’t amount to introducing new standards; rather, they’re simply clarifying existing expectations.
Apart from these doubts over conduct standards, there are other provisions of the proposals that are sparking pushback from certain quarters. For example, the IIAC is worried that the revised rules would mean IIROC staff aren’t required to inform people when they are under investigation; and also is concerned about the possible disclosure of information gathered in a regulatory proceeding.
At the same time, the IIAC takes issue with the proposals to consolidate and revise the guidelines that spell out IIROC’s approach to imposing sanctions in disciplinary hearings, which were published for comment at about the same time as the enforcement proposals.
The IIAC’s comment on those proposals questions some of the principles that will be used in meting out discipline. For example, IIROC’s proposals indicate that disciplinary history may be considered as a factor in determining sanctions.
But, the IIAC comment argues, warning letters should not be considered part of the disciplinary record because reps and firms don’t have the ability to defend themselves against allegations in a warning letter.
The IIAC comment also questions whether sanctions handed down by other regulators – in the case of reps with dual licences, for example – should be included in a rep’s record. And, the comment questions whether or not internal discipline counts.
The IIAC comment maintains that internal discipline should be counted as a mitigating factor by a hearing panel when considering sanctions.
This sentiment is echoed in the comment from Toronto-based Royal Bank of Canada (RBC), which also stresses that dealers should get credit for imposing internal discipline. Absent that, the RBC’s comment warns, there will be a “chilling effect” on internal disciplinary efforts: “Dealers will be less inclined to impose internal discipline on its employees if there is a perception that the employee will be disciplined twice for the same infraction.”
Members of the financial services sector also question IIROC’s approach to suspensions. The IIAC’s comment suggests that suspensions are becoming more common and that they are being handed out for less severe violations.
That comment also notes that IIROC staff have indicated that they believe that suspensions of less than 30 days don’t have much deterrent effect; thus, they typically won’t recommend suspension periods of less than 30 days.
However, the IIAC comment maintains that suspensions should be considered serious penalties. “Suspensions are a severe form of sanction and should not be applied routinely … they hurt beyond their immediate financial impact.”
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