A closer look at CIRO's enforcement trends identifies issues affecting registrants that remain unanswered – further, we hope that this report will be rethought to introduce more meaningful stats for better understanding and transparency.
In its inaugural enforcement report, the newly merged Canadian Investment Regulatory Organization (CIRO) revealed a significant surge in complaints compared to last fiscal year. This blog will explore the key statistics, highlighting the increase in the number of complaints, and share how we hope that the next fiscal year-end report will be improved to offer greater insights and more transparency.
- Rising Complaints: CIRO continues to issue separate statistics for its Mutual Fund Dealer (MFD, previously MFDA registrants) and Investment Dealer (ID, previously IIROC registrants) divisions. This year complaints for both MFD and ID increased significantly by almost 60% and 48% respectively. Suitability remains the top issue with the MFD division receiving more than double the complaints, and ID division receiving 30% more complaints, in this area.
- Investigations Landscape: There has been a notable surge in investigations within the ID division with an increase of 19%. In contrast, the MFD division witnessed almost a 28% decrease in investigations. The report provides no explanations for why there are increased complaints and fewer investigations, nor does it explain the reason for the backlog or how it will be resolved. As such, it is not clear whether the industry will be bombarded with many new investigations in 2024.
- Top Violations in Enforcement Proceedings: The top violations in enforcement proceedings in the ID Division were suitability/handling of client accounts, misappropriation, discretionary trading, and inappropriate personal financial dealings. The MFD Division continued its focus on the issue of pre-signed forms, although you will see below there were less of these this year than last year (18 down from 25 thankfully!). Despite the decrease, pre-signed forms cases continue to be the leading violation, with the next highest number being 11 cases of active signature falsifications. Other top MFD violations involved breaches of business standards and personal financial dealings cases.
- Changing Enforcement Priorities: CIRO's report points towards its shift in priorities in enforcement proceedings. In the ID division, enforcement proceedings related to suitability infractions significantly decreased by 60%, while unauthorized trading proceedings increased from zero cases to three. In the MFD division, resources seem to be reallocating towards business standards proceedings, as pre-signed forms proceedings dropped 28%.
- Penalties & Collection Rates: Interestingly, there was a surge in monetary penalties issued against individuals, although the collection rate decreased across both divisions. In the ID Division, it plummeted from 29% to 4%, primarily due to three cases in FY 2023 where substantial fines, disgorgement, and costs exceeding $13M were imposed but are unlikely to be collected. The MFD Division saw a collection rate decrease from 37% to 21%. There is no explanation for the decrease in collections – is it due to the biggest fines being levied against those no longer in the industry and perhaps outside the jurisdiction? With the relatively new enforcement powers (permitting both MFD and ID to enforce tribunal decisions in court) we would expect the collections to increase, not decrease.
Key Questions Remain for CIRO
As CIRO consolidates post-merger, it faces the ongoing challenge of adapting to evolving priorities and effectively responding to the increased number of complaints. The regulatory landscape is shifting and CIRO might consider the issues raised in this blog as well as the following key questions to improve its report so that the registrants can better understand priorities and concerns moving forward:
- How is it that the number of investigations is down when the number of complaints is significantly up? Is there a backlog? If not, why not? How will it be resolved?
- Will CIRO continue to issue large penalties against individuals to prevent and deter misconduct, even if it doesn't expect to collect them?
- With the new enforcement powers why is there a continued failure to collect? What efforts are being made? Are the largest sanctions being levied against those no longer in the industry/jurisdiction?
- Will there be penalty guidelines that apply to both MFD and ID?
- Will investigations and enforcement proceedings be streamlined with more transparency around the process?
We understand that CIRO has a lot on its plate that takes priority over its annual report. That said, we are hopeful that for the fiscal year, CIRO's report will be reworked to provide more meaningful stats, and explanations, so that registrants (and their lawyers) can better understand CIRO's values and intentions going forward.
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