IIROC’s plans have been crit­i­cized by in­dus­try and in­vestor ad­vo­cates

Investment Executive - - CONTENTS - BY JAMES L ANGTON

IIROC’s pro­pos­als for met­ing out dis­ci­pline are get­ting the cold shoul­der from the in­vest­ment in­dus­try and in­vestor ad­vo­cates alike.

as the in­vest­ment in­dus­try Reg­u­la­tory Or­ga­ni­za­tion of Canada (IIROC) looks for ways to en­hance en­force­ment, that sel­f­reg­u­la­tory 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 fol­lowon 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 con- cerns 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 i n our mar­kets is un­der­mined and in­vestor pro­tec­tion is com­pro­mised.”

The Cana­dian Ad­vo­cacy Coun­cil 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 high­pro­file 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 no­con­test 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.

“Mis­con­duct should have a light shone upon it, and ex­pe­di­ency and ef­fi­ciency should not be of sole im­por­tance”

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