Last month, the Canadian Securities Administrators released its annual Oversight Review Report of the Investment Industry Regulatory Organization of Canada (IIROC), which evaluates the effectiveness of IIROC's key processes and the organization's compliance with its mandate during the period between April 2015 and July 2016. IIROC oversees investment dealers (known as "Dealer Members") and trading activities in Canada, and is subject to the oversight of the ten provincial security regulators that have recognized it as a self-regulating organization.
For the second year in a row, the CSA report criticized IIROC's implementation of its business conduct compliance examination program, finding that the examination procedures were not effective in identifying inappropriately high risk investments in client managed accounts. The report also found that at the time of the review, IIROC had failed to implement procedures for assessing Dealer Members' compliance with parts of National Instrument 81-105, which regulates mutual fund sales practices.
In response to these findings, IIROC advised that certain procedural changes had already been implemented since the end of the review period, including the introduction of new examination procedures. IIROC further committed to providing the CSA with the details of any additional processes or procedures implemented to address these issues in the future.
The report also criticized IIROC for failing to implement a formal process to facilitate a holistic view of Dealer Members' conduct. IIROC's current practice lacks a central process for ensuring that issues with Dealer Members are addressed on a holistic basis, rather than in isolation. The report expressed concerns that the current process could result in a failure to take appropriate action against Dealer Members who have a history of non-compliance. The report encouraged IIROC to implement processes needed to asses issues on a collective basis, which should assist with the identification and handling of problematic Dealer Members. IIROC has responded quickly to this criticism by confirming that measures would be implemented this summer to address the issue.
Dealer Members should be on high alert as they are likely to come under increased scrutiny from IIROC as a result of the CSA's emphasis on compliance and the steps taken – and to be taken – in response to the CSA's concerns. Dealer Members should continue to ensure their compliance procedures are robust and expect IIROC to intensify its examination procedures in the months ahead.
The author would like to thank Daniel Weiss, summer student, for his contribution to this article.
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