A dichotomy in disciplinary approaches

Those surveyed for this year’s Report Card were asked to rate the regulator’s disciplinary approach and processes in four categories: “the regulator’s approach when taking disciplinary action against registrants”; “the fairness of the regulator’s hearing process”; “the regulator’s fairness when performing audits and examinations of registrants”; and “the fairness of the regulator’s investigation process.”

In the first three categories, the MFDA’s ratings rose by half a point or more compared with last year’s Report Card. For example, regarding the regulator’s approach when taking disciplinary action, the MFDA received a rating of 6.9, up from 6.2 in 2012.

A CO with a mutual fund dealer in Atlantic Canada attributes the higher rating to the professionalism of the MFDA’s staff: “We had a few issues, and [the MFDA was] professional and expedient when dealing with them.”

Similarly, a CO with a Quebec-based mutual fund dealer was impressed with the professional nature of the MFDA’s audit process. “Its examiners were very professional,” the CO says. “They seemed fair and not high-handed in any way.” (The SRO’s rating in the audit category rose to 7.0 from 6.5 year-over-year.)

Those surveyed also were happy with MFDA’s hearing process, giving it a rating of 7.6, a significant improvement from 6.8 in 2012. However, for one CO with a mutual fund dealer in British Columbia, that fairness comes at a high price: “The hearing process is fair. [But] they have unlimited resources to put into those hearings – and that comes at a cost to dealers.”

One possible reason for the MFDA’s higher ratings in all these categories is its recent focus on collaborating with member firms. This proactive strategy helps resolve issues before the process gets to the reporting stage, says Karen McGuinness, the MFDA’s vice president, compliance: “It’s a positive message for the compliance officers and the MFDA staff that we have been able to resolve the majority of the issues by the time we get to the reporting phase.”

Still, the COs and other executives who were surveyed say that some lingering issues remain. For example, the SRO received a rating of only 6.6 in the fairness of the investigation process category, a slight increase from 6.3 in 2012. Despite giving a higher score, some survey respondents still found the investigation process to be a burden.

“Lately, we had a bit of a run of complaints,” says a CO with an Ontario-based mutual fund dealer, “and the investigations were too cumbersome. [MFDA staff] are becoming overly critical about trivial issues.”

Similar criticism was levelled against IIROC, as many COs and executives with investment dealers felt that the SRO’s disciplinary approach and processes are too heavy-handed and burdensome.

In fact, they gave IIROC a rating of 5.7 in the disciplinary approach category – down from 6.4 in 2012 – because, they say, IIROC is too focused on finding problems and creating an overly complex regulatory environment. Says a CO with a Quebec-based investment dealer. “It seems they put out new rules just for the sake of rules, whether or not they are relevant or if there is already a rule out there that deals with the same issue.”

COs and other surveyed executives also took issue with the fairness of IIROC’s investigation and audit processes. Ratings for both categories dropped slightly, to 6.0 from 6.3, and to 6.8 from 7.0, respectively. Many IIROC members say they are frustrated with IIROC’s use of rookies in the field.

“[IIROC uses] audits as a training ground,” says a CO with an Ontario-based investment dealer. “But those junior examiners treat minor guidelines as if they’re gospel.”

The recent inclusion of junior staff in field meetings is part of IIROC’s strategy to improve the audit and investigation processes. In fact, Susan Wolburgh Jenah, IIROC’s president and CEO, says the initiative was launched to help rookie staff better understand individual dealer firms and their financial advisors, thereby creating a better system: “Our goal in doing this is to make the examination process more efficient and more focused [while] less frustrating for both our staff and for the firm.”

The SRO also is re-evaluating its services to create a more efficient and focused disciplinary process. For instance, to make sure staff prioritize cases properly, IIROC has developed a new case selection criteria, says Paul Riccardi, IIROC’s senior vice president of enforcement, member policy and registration. This includes focusing on cases involving senior-age clients, as the data show that most complaints made to IIROC are by clients aged 50 to 70 years old.

“We think we are now pursuing the cases that need to be and should be pursued,” Riccardi says, “as opposed [to] perhaps in the past, [when] there may have been less discipline about case selection.”

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