IIROC takes aim at mi­nor in­frac­tions

The SRO is look­ing to deal with cer­tain cases more quickly

Investment Executive - - FRONT PAGE - BY JAMES L ANGTON

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 sel­f­reg­u­la­tory 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 i mpose 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 i mpact 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 i ssue 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 i nvolved firms).

Sim­i­larly, al­though IIROC has poli­cies i n 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 co­op­er­a­tion 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.

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