Over the past year, investment industry disciplinary activity has been on the rise. But a bigger boost to enforcement is in the offing, as the industry's self-regulatory organizations (SROs) finally will get the power to use the courts in Ontario to collect monetary sanctions from rogue reps.
New data from the Investment Industry Regulatory Organization of Canada (IIROC) indicates that in 2016, that SRO launched more enforcement investigations and initiated more prosecutions than in 2015: Investigations and prosecutions rose by 10% and 25%, respectively. And through the first quarter of 2017, IIROC's caseload appears to be on track to match 2016's results. IIROC has completed 14 prosecutions in 2017 thus far, which puts the SRO on pace to exceed last year's total.
So far this year, four firms have been sanctioned and ordered to pay almost $450,000 in fines collectively; in all of 2016, just six firms were sanctioned and collectively fined $425,000. Regarding enforcement activity against dealers, IIROC is well ahead of last year's pace, and the SRO surpassed 2016's admittedly low fine totals in just the first three months of this year.
Disciplinary activity against individual reps also appears to be on track to match or exceed last year's totals. Through the first quarter, IIROC disciplined 10 reps, handing out slightly more than $900,000 in fines. In 2016, the SRO disciplined 40 reps and levied a total of $3.1 million in fines for the full year. However, IIROC collected only about 8.3% of the fines levied against individuals during the year (down from 15.8% in 2015). Yet, that track record may yet change.
Ontario Finance Minister Charles Sousa promises the provincial government will introduce legislative amendments to give the investment industry's SROs -both IIROC and the Mutual Fund Dealers Association of Canada (MFDA) - the ability to get court orders to enforce sanctions imposed in the SROs' disciplinary proceedings.
As the situation stands, reps easily evade fines imposed by regulatory hearing panels simply by leaving the industry - which, more often than not, is the case. Although 2016 was a particularly bad year, the SROs' lack of ability to pursue collections is a long-standing problem. IIROC has accumulated about $32 million in uncollected fines since it was launched in 2008. The amount is even higher for the MFDA, which has $59 million in outstanding fines since it began undertaking disciplinary proceedings in 2004.
The SROs have long sought the power to use the courts to help improve their abysmal collection rates. IIROC states it is notably more successful in Alberta and Quebec, two provinces in which the SRO does have the ability to involve the courts. Prince Edward Island was added to that list last year, but Ontario is the big prize, given that the province is the biggest, most active jurisdiction for regulatory enforcement activity.
For example, in 2016, Ontario was home to 62% of the disciplinary investigations and 54% of the prosecutions carried out by IIROC. The province also accounts for about $20 million of IIROC's unpaid fines to date.
Andrew Kriegler, president and CEO of IIROC, calls Ontario's plans an "extraordinarily important step because regulation doesn't work unless it has teeth - and unless the system has integrity. By allowing us to pursue the collection of those fines through the courts, that integrity will be demonstrated. People who break the rules will be held to account."
That said, the power to use the courts won't fully resolve the problem of unpaid fines. Even in provinces in which IIROC already has the power to get court orders, the SRO's collection rates for individuals lag far behind the near-100% collection rate for firms. In many cases, there may be no money to recover from disciplined reps, particularly if their misconduct leads to lawsuits.
The Canadian Foundation for Advancement of Investor Rights, an investor advocacy group, recommends that governments should go further and make firms responsible for the fines imposed on their reps to bolster enforcement and enhance investor protection.
Whether the planned amendments will allow the SROs to pursue existing unpaid fines or enable the SROs to use this power only in future cases is not yet clear, as the legislative changes have not yet been introduced.
While beefed-up collection capabilities have long been on IIROC's wish list, the SRO is continuing to pursue other powers from the provinces, including statutory immunity for IIROC staff members who are enforcing its rules in good faith (which would protect them from civil suits) and the legal authority to compel evidence and testimony from third parties.
In the meantime, IIROC is planning its own changes to improve enforcement, including the possible introduction of new forms of disciplinary action.
"As part of our three-year strategic plan," notes Elsa Renzella, vice president, enforcement, at IIROC, "developing alternative forms of disciplinary action that address wrongdoing in a fair and proportionate manner is one of IIROC's key priorities."
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