The siren call for the proposed expansion of the powers of the Investment Industry Regulatory Organization Industry of Canada (IIROC) to enforce its fines through the courts in Ontario has been welcomed with open arms and few questions. In its Budget 2017, the federal government announced it will soon introduce legislative amendments to improve the ability of self-regulatory organizations (SROs) to collect fines levied against individuals, claiming it will help to "deter potential offenders" and increase funds available for investor protection. While this has been applauded by IIROC and some investor advocacy groups, it is unclear how it will better protect the investing public.
A career-ending punishment is a considered sufficient for discipline in most other professions, so why not financial advisers?
Currently IIROC can enforce its fines against its members; they must pay up or face permanent suspension. Since membership in IIROC is required to participate in the securities industry as a full-service dealer or adviser, suspension effectively means expulsion from the industry. That is a pretty effective enforcement mechanism by most standards. What IIROC has been requesting, and is apparently going to receive, is the ability to pursue through the courts those advisers who have already left the industry.
The first question should be, what will this achieve?
IIROC's 2016 Enforcement Report includes its collection rates for its fines. The figure highlighted and bemoaned by IIROC executives is the 8.3-per-cent collection rate in Ontario from individuals in 2016. However, the collection rate from dealers, which was a robust 100 per cent, is more telling because it is through the dealers that IIROC's rules and policies are implemented and enforced by internal compliance and risk-management personnel. IIROC supervises the dealers and checks the adequacy of their policies and procedures. Specific compliance issues that arise, such as client complaints, are reported to IIROC through the ComSet reporting system. Advisers who go offside the rules typically face remedial and disciplinary action from their dealer. This can include close supervision, reduced or withheld compensation to cover the cost of fixing mistakes or providing redress to clients, and potentially dismissal.
By the time a case against an adviser makes its way before an IIROC hearing panel on a disciplinary case, the adviser will in many cases have already been subject to internal discipline by the dealer. Those individuals who still want to continue to be employed in the industry must also pay any fines levied by IIROC or they will be permanently suspended.
IIROC gripes that many individuals avoid payment by "simply leaving the securities industry and abandoning their registration with IIROC." But the underlying premise — that a person losing their career and livelihood will not be deterred from wrongdoing if they don't also pay a fine — is flawed. A career-ending punishment is undoubtedly a significant deterrent and is considered sufficient for the disciplinary procedures of most other professions, including health professionals, lawyers and accountants. Why should it be any different for investment advisers?
In addition, IIROC can refer cases of serious misconduct to the Ontario Securities Commission (OSC), which has the power to freeze accounts, obtain court orders to recover investor funds and order financial penalties (which are enforceable as court orders). The Joint Serious Offences Team can bring criminal prosecutions. Accordingly, there is no reason for true rogues to escape punishment.
Additional funds from fines would not help finance IIROC's regulation of investment dealers and advisers, which is its primary function as an SRO. IIROC is only permitted to use fines for limited purposes, such as the public education fund. Fines levied by IIROC cannot be used to fund IIROC's own operations, as this would create a conflict of interest.
Nor would any additional money collected from fines compensate harmed investors. As matters stand, fines collected by IIROC deplete the financial resources available to a dealer or adviser to satisfy investor claims pursued through the civil courts or the IIROC arbitration process. Perhaps IIROC can develop a viable strategy to distribute the proceeds of fines to harmed investors, but the challenge of doing this should not be underestimated. The OSC rarely uses its power to pay the fines it collects to investors.
Finally, if IIROC fines were to be enforced as court orders, IIROC would need to be restructured in important ways to transform it from an SRO — an industry association — to a public regulator. It is not clear that the legal implications of this have been considered.
In short, IIROC has not yet made the case for additional enforcement powers.
Originally published by Financial Post.
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