The compliance officers (COs) and company executives surveyed for this year’s Regulators’ Report Card who have found their firms under the microscope of a regulator’s enforcement team tend to fall into one of two camps: those who experienced flexibility and understanding from the regulator during the process; and those who experienced only animosity.
The divide between those two camps was evident when looking through the ratings and comments that survey participants gave their regulators in “the fairness of the regulator’s overall approach when taking disciplinary action against registrants” and “the fairness of the regulator’s investigative process.”
For example, some COs described the investigative process as a “witch hunt”; others believe enforcement teams consider each situation carefully.
Case in point: survey participants who rated the B.C. Securities Commission (BCSC) gave the regulator an 8.0 for its overall approach to the disciplinary process. The consensus was the BCSC was strict but fair in its enforcement actions.
“[The BCSC] doesn’t just jump to regulatory action,” says a chief CO (CCO) with an exempt-market dealer (EMD) in British Columbia. “[The offence] has to be very egregious [for the regulator] to take disciplinary action. They’re very understanding.”
COs also praised the AMF’s approach and rated it at 7.4, up notably from 4.8 in 2016. Says a CCO with a wealth-management firm in Quebec: “Due process is followed [and] they’re pretty efficient.”
As for the self-regulatory organizations (SROs) – the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – some survey participants said the SROs can be fair. However, many more took issue with what they view as an arbitrary, harsh process.
For example, many survey participants feel IIROC often takes a “one size fits all” approach to disciplinary proceedings.
“They’re not willing to give anyone a break,” says a CCO with an Ontario-based securities dealer. “They’re treating the smaller firms on an uneven footing with the larger firms.”
IIROC, for its part, states its enforcement team does take the size of the firm into consideration at every stage of the disciplinary process, particularly in sanctions.
“We have very [clear] sanction guidelines, which we post on our website, that speak to the [process] in determining what the appropriate sanction is,” says Elsa Renzella, vice president, enforcement, with IIROC. “We do have to consider the size of the firm, the ability to pay, the circumstances of the individual.”
Penalties also were on the minds of COs and executives who rated the MFDA, although, survey participants did see some positive change in the SRO’s approach.
The rating for the MFDA’s overall approach to the disciplinary process was 6.2 this year, up from 5.7 in 2016. Survey participants believed the MFDA tries to be fair, although sometimes it may be hampered by the provincial securities commissions.
“There’s expectations [placed]on [the MFDA] from the [Canadian Securities Administrators],” says a CCO with an Ontario-based mutual fund dealer. “[The MFDA] is as fair as it can be; it might want to be fairer, but can’t always be.”
However, the bigger issue for survey participants was the sanctions the SRO metes out. Says a compliance executive with an Ontario-based mutual fund dealer: “The MFDA wants to make an example of the industry. I don’t feel the actions always warrant the harsh penalties.”
The MFDA has been building up its enforcement efforts, including sanctions, in matters such as advisors falsifying client signatures. The SRO issued guidance to members in 2015 on the topic with a bulletin that makes clear there will be no exceptions to discipline for such conduct and that the penalties for failure to comply would increase.
“There’s just no excuse for [falsifying signatures]; there’s no defence [against] it,” says Shaun Devlin, senior vice president, member regulation, enforcement, with the MFDA. “And [advisors] have to stop doing it.”
Nevertheless, survey participants with MFDA-regulated dealers had more positive things to say about the SRO’s investigative process. The MFDA’s rating rose to 6.6 in that category this year, up from 5.8 in 2016.
“[MFDA personnel] really do their job to gather all the evidence and make sure they’re not jumping the gun,” says a CO with an Ontario-based dual-platform dealer.
Some survey participants felt the same about IIROC’s investigative process, rating that SRO at 6.7 in the category. However, more people voiced concerns that the SRO’s investigators can be closed-minded.
“They skew their findings based on how they think [the matter] should’ve been handled instead of how it was,” says a CO with an Ontario-based securities dealer.
As for the OSC, survey participants just want to see the investigations move along in a more timely manner.
“[The OSC] takes too long and lets [the matter] hang,” says a CO with an EMD in Alberta. “They have to pick up the pace and get the things done.”
In total, the OSC typically conducts 30 to 35 investigations a year, but the length of time dedicated to each can vary widely depending on the issue being investigated, says Jeff Kehoe, director of enforcement with the OSC.
Furthermore, an investigation may be held up for reasons beyond the regulator’s control. For example, an investigation may require the OSC to request thousands of documents from companies in Canada or international agencies before the proceedings can continue.
“If we don’t get that information, we’re criticized as not doing a complete and thorough investigation,” Kehoe says. “It’s a bit of a Gordian knot for us.”
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