Many of the dealer firms surveyed for this year’s Regulators’ Report Card remain unhappy with what they perceive to be the regulators’ heavy-handed approach to discipline. And although the dealer firms say that some improvements have been made over the past year, they also note that there’s still much work to be done.
One of the biggest complaints is that regulators are too focused on penalizing dealers for minor infractions, such as bookkeeping items. Says the CEO of an Ontario-based firm regulated by the Mutual Fund Dealers Association of Canada: “They seem to be enforcing a lot of things that are very small. They’re losing sight of the big picture.”
Not only are regulators nitpicking, dealer firms say, but they’re also being too severe in the disciplinary action they take against such small violations. “I’m all in favour of discipline because it helps keep the industry in line,” says a chief compliance officer with an Ontario-based investment dealer regulated by the Investment Industry Regulatory Organization of Canada. “How-ever, sometimes I feel that the penalties for small or minor offences seem exorbitant. They serve as visuals for the public rather than being fair.”
Furthermore, dealer firms say, the regulators’ aggressive approach has created an adversarial relationship between the two sides — and this is something that has to change, says a CCO with an IIROC-regulated firm in Ontario: “They should help dealers more, which is what their agenda should be. It seems that they’re there to police us and take clients’ side rather than help us understand.”
But whether regulators are focusing on small infractions is all a matter of interpretation, says Susan Wolburgh Jenah, IIROC’s president and CEO: “Sometimes, people look at a case and think it’s about a small thing, and other people might look at that same case and believe that there was an important regulatory message that needed to be sent through that particular enforcement action.”
And IIROC, Wolburgh Jenah adds, in its role as a self-regulatory organization, needs to be focused on such infractions. However, she points out that most enforcement action in the past year has been against individuals for serious infractions, such as fraud, rather than against firms for smaller infractions, such as inadequate bookkeeping. (There were 91 enforcement actions against individuals, vs 11 against firms.)
Both IIROC and the MFDA list penalty guidelines for various infractions on their websites. Minimum fines for members range from $5,000 for minor infractions up to $100,000 for serious violations, such as fraud. Suggestions for suspensions and expulsions also differ, depending on the seriousness of the infraction.
Penalties assessed by both SROs are ultimately at the discretion of a hearing panel, which is made up of two financial services industry members and a public chairman — usually a retired judge. “[The fine] depends on the facts,” says Larry Waite, the MFDA’s president and CEO. “Some members may be fined more and some may be fined less.”@page_break@The MFDA, Waite adds, isn’t looking to change the penalty guidelines at this time.
In 2010, IIROC fined 48 individuals a total of $3.1 million, vs 31 individuals fined a total of $1.5 million in 2009. In addition, 20 individuals were suspended in 2010 compared with eight the year prior. The increase in the frequency and severity of penalties imposed by IIROC in the past year may help explain why dealer firms view the SRO’s approach to disciplinary action in a more negative light. IIROC’s rating in “the regulator’s approach when taking disciplinary action against its members” category slipped to 6.1 this year from 6.3 last year.
IIROC is evaluating its case selection criteria, says Wolburgh Jenah, to ensure the cases getting through to enforcement are those that involve “wrongful, harmful actions or activities [in which] it’s clear that a message should be sent to the market to deter others who might engage in that same course of action, such as where systemic issues are concerned or where particularly egregious conduct could have a very serious effect on the market.”
The MFDA, on the other hand, has seen a decrease in the number of issues referred from compliance to enforcement, says Karen McGuinness, vice president of compliance: “Before issues go to enforcement, the vast majority are addressed with the member or with compliance.”
The MFDA first calls a member firm to inform it of an issue and gives the firm time to rectify the problem or gather any additional information to defend its actions. Then, MFDA staff may send a warning letter or a cautionary letter if they are not satisfied.
It’s only when there is a major violation that the case goes to the MFDA’s investigation and prosecution departments, says Waite. On the other hand, he says, “Small violations are [approached] from the perspective of ‘If you fix this, it won’t be a problem again’.”
Between July 2009 and June 2010, only 96 of 506 cases escalated to investigation, and just 44 went through to litigation for the consideration of formal proceedings, which include hearings and settlement hearings.
By comparison, 585 cases were opened between July 2008 and June 2009, of which 100 went to investigation and 48 went to litigation.
“Our goal is to work toward a resolution,” says Mark Gordon, executive vice president of the MFDA.
Adds Waite: “If a member wants to come in and talk about a case, we’ll talk about it. Our people are trained to make a fair and neutral decision. We’re open to input from members.”
It appears the MFDA’s efforts to be more collaborative with its members have not gone unnoticed. The SRO’s rating in the approach to disciplinary action category rose to 6.1 this year from 5.7 in 2010.
Says a CCO with an Ontario-based mutual fund dealer: “They’re relatively fair with us. They’re better at suggesting rather than demanding, as they used to [do] before. If we’re reasonable, so are they.” IE