Regulators under fire for investigative processes

In terms of even-handedness, ratings for the provincial regulators were flat (up by 0.1 of a point to 6.4) in this year’s Report Card vs last year.

Meanwhile, a bright spot was the rating for the Investment Industry Regulatory Organization of Canada. Its score on evenhandedness rose by half a point to 6.3.

With client complaints about the unsuitability of their investments skyrocketing in 2009 at both the SROs, there’s no question the dealers have felt the heat.

For the 12-month period ended March 31, 2009, unsuitable investment complaints IIROC received directly rose by 22% compared with the same period in 2008. Likewise, the MFDA saw investment complaints rise by 53.5% over the 12-month period ended June 30, 2009, with 15.2% of them pertaining to suitability — the most common complaint in the category.

Whenever a regulator receives a suitability complaint from the public, it must do a case assessment or inquiry — even if the issue is nothing more than a client upset with poor investment performance in a down market.

Having to respond to an increasing number of these inquiries, some dealers wondered if regulators were looking into every minor complaint simply because of media pressure.

As an executive at one Winnipeg-based, MFDA-regulated dealer points out: “Certain provincial regulators appear to be aggressive in pursing actions in the interest of collecting penalties or reacting to issues for public relations rather than with a view to more serious protection issues.”

The time and money it takes dealers to meet regulatory inquiries into complaints was also a major concern.

“There is a good sense of due diligence. However, going through their case assessment is costly for us,” says a survey respondent from an MFDA-regulated firm in Waterloo, Ont. “We are charged double for complying to their investigation and gathering data for them.”

An executive at a Toronto-based, IIROC-regulated firm adds: “The investigations can take two weeks, when they really should take two days. Since they give themselves that time, they get to pick through everything, while you have to deal with them being in your firm’s small space.”

Although it may have seemed as if regulators were cracking down more in the past year, regulators say that’s not the case. “If you change enforcement during tough times, then you have SWAT teams going in with the flavour of the day,” says Larry Waite, president and CEO of the MFDA. This can make the regulator appear inconsistent in its proceedings.

However, due to the volume of suitability complaints, Waite appreciates how it could seem that way: “In a huge percentage [of these complaints], there is nothing there. But you still have to do the work, talk to the dealer and get [staff] to look into it.”

Although IIROC and other regulators understand that enforcement can take a toll on a member firm’s resources, acquiring documentation to look into complaints is a necessary part of the enforcement process, says Susan Wolburgh Jenah, IIROC’s president and CEO: “[Enforcement] is a perceived intrusion for any firm. There’s not much we can do about that.”

Part of ensuring effectiveness as a regulator is deciding which cases or complaints to pursue and those that should be let go, says Wolburgh Jenah: “Enforcement should be about sending those strong, important deterrent messages by bringing the right cases forward. We don’t bring [enforcement] to the easy, technical breaches. We aren’t looking to just to collect numbers or collect scalps.”

Although suitability complaints had increased substantially over the past year, that doesn’t mean every complaint will escalate into an investigation or hearing. The determining factors for whether a case moves from assessment to investigation include: how serious the offence was; how much an investor was harmed; whether or not it was a repeat offence; and what will happen if the regulator does not take disciplinary action.