Enforcement departments at all regulatory bodies have one of the toughest jobs in the industry. And, although regulators strive to maintain a firm and concise enforcement process, dealers have plenty to say about what could be better.
“The Canadian market would benefit from less discretionary enforcement of the rules,” says an investment dealer based in Central Canada. “The rules and requirements should be clearly stated and applied evenly and consistently to all parties. Making exceptions in some instances and enforcing rigid adherence in others creates an inequitable regulatory environment in which all market constituents are not treated fairly.”
It seems that regulators and dealers alike agree on the goals. The enforcement policy of the Toronto-based Mutual Fund Dealers Association of Canada states its goal is to develop and establish “firm, fair and transparent regulatory processes.” The British Columbia Securities Commission uses the terms “effective, collaborative and responsive” to describe its enforcement procedures. Yet, that’s not necessarily how dealers see things. The disparity is in the execution — and the fault may lie with Canada’s fractured regulatory system.
“Certain provincial regulators appear to be aggressive in pursuing actions in the interest of collecting penalties,” says a dealer based in Western Canada, “or reacting to issues for public relations reasons rather than with a view to more serious investors-protection issues.”
“I’m not convinced it’s fair,” says another dealer based in Central Canada. “The approach seems to differ geographically across the provinces.”
Dealer complaints focus around processes taking longer than expected, not having enough input during the process and the need for uniformity within a single regulator.
The relative new kid on the block, the MFDA, is still educating its dealer members. The MFDA holds members’ forums twice a year at which procedures are reviewed to ensure that everyone is aware of what the enforcement process entails.
“From a proactive standpoint, we do try to translate our enforcement and compliance experience into financial guidelines for members,” says Shaun Devlin, the MFDA’s vice president of enforcement, “to help them avoid problems before they occur.”
The enforcement department at the MFDA is organized into three main groups: case assessment, investigations and litigation. The case assessment group reviews and assesses cases as they are received; it escalates cases to investigations if there is reason to believe there has been a substantial breach of MFDA requirements or if the matter is sufficiently complex to require a more extensive review by an investigator.
Most cases handled in case assessment are minor violations that end up being disciplined informally and are not made public, says Devlin. Of the 381 total cases opened at the MFDA from July 1, 2007, to June 30, 2008, 272 of those cases were solved at the case assessment stage, with only 109 escalating to investigations; 24 of the latter subsequently advanced to the litigation stage.
If a case does get passed on from the case assessment stage, the investigations group conducts an in-depth investigation, gathering documentation, conducting interviews, analyzing cases and preparing reports and recommendations. The group also co-ordinates investigation activity with other regulatory and law enforcement agencies. The litigation group provides counsel and advice to investigators; receives reports on those cases that are escalated from investigations; analyzes cases and prepares recommendations; and acts as the MFDA counsel in disciplinary hearings before regional councils.
The MFDA has implemented performance benchmarks at each stage. Case assessment aims to close or escalate to investigations 80% of its cases within 120 days; investigations aim for 80% of all cases to be closed or escalated to litigation within one year of receiving the file; and litigation aims to close or submit a notice of hearing or settlement within 10 months. In 2008, all three groups exceeded their benchmarks.
For smaller dealers, the enforcement process can seem overpowering; settlement costs can paralyze, even shut down a dealer. For some, it has turned into a culture of fear and paranoia, says Merlin Chouinard, president of Saskatoon-based Sentinel Financial Management Corp., which makes it difficult to continue operating.
“We need to get away from this rule-based culture that is so miserable for dealers,” adds Chouinard. “The securities commissions in the common-law provinces abdicated their responsibilities for regulation and enforcement when they allowed the formation of the [self-regulatory organizations]. If the commissions had spent the money at the time and aligned themselves more closely with the criminal justice system, they could have accomplished what we still don’t have in this country, which is true enforcement that goes after the real bad guys.”
@page_break@Chouinard is not alone in his concerns, and many dealers say that a single national regulator could make the difference. “The sooner a national regulator takes over, the better,” says a dealer based in Central Canada. “There is not enough due diligence in the system.”
Says another dealer from the same region: “A single regulator would be simpler for those of us who deal in more than one province.”
A dealer based in Western Canada agrees that the lack of a single national regulator is an issue that should be addressed but says another major topic for discussion is the apparent dislocation between the provincial regulators and the Investment Industry Regulatory Organization of Canada. “The result is a situation that can accurately be described as a game of hot potato,” he says, “in which the provincial regulator indicates an issue should be addressed by IIROC, and IIROC points back to the provincial regulator as the cause of IIROC’s inability to address the issue.”
But Canada’s regulatory bodies do have to share the turf when it comes to enforcement. Colla-boration with other jurisdictions is essential when it comes to enforcement, as cases are rarely contained solely within provincial borders. “Working with other [Canadian Securities Administrators] jurisdictions and the SROs is extremely important,” says Lang Evans, director of enforcement with the BCSC in Vancouver. “Money knows no borders, and the information that we need to investigate these things has to be shared and gained from other jurisdictions if we are to put the complete picture before our panels.”
At the end of the day, as a regulator, Evans says, it is tough to make everyone happy, and he can understand dealers’ frustration. “We are like the referee in a contest for the public’s money,” he says. “There is never a standing ovation at the end of the game for the referees. But people will grudgingly acknowledge that the game is better and arguably safer if we are there enforcing the rules for everybody.” IE