The Investment Industry Regulatory Organization of Canada (IIROC) board has granted an exemption to TD Waterhouse Canada Inc. (TDW) from provisions of the client relationship model reforms that the firm was fined for violating earlier this year.
In March, an IIROC hearing panel fined TDW $4 million for failing to provide clients with position cost information for certain securities positions, starting Dec. 31, 2015.
Following the enforcement ruling, the IIROC board considered TDW’s application for an exemption from the requirements it had been sanctioned for breaching.
According to the board’s decision, IIROC staff discovered that TDW wasn’t complying with the CRM2 requirements on position cost in April 2017.
“Following discussions with IIROC staff, TDW provided affected clients with an estimate of position cost using the position’s market value as at Dec. 31, 2018, rather than the 2015 estimated position cost information the rule required,” it said.
It noted that TDW first applied for an exemption in November 2018, but that the IIROC board deferred its review of the application until the enforcement case was completed.
Once that happened, the application — requesting a permanent exemption from the requirements to provide position cost using data from Dec. 31, 2015 — was revived.
According to the decision, TDW argued that resetting the position costs to new values based on 2015 data “would confuse clients and complicate any performance tracking clients may have been doing based on the [2018] position cost.”
In its decision, the board concluded that not having position cost disclosure to 2015 “is not unduly burdensome” for several reasons, including that “the number of affected account positions has declined significantly since TDW made its initial exemption request,” and the firm has provided clients with an explanation of its reporting.
It also noted that requiring compliance with the original cost disclosure requirements would be expensive and time consuming for the firm.
“The estimated cost of implementing the full-compliance solution is considerably more expensive five plus years later than it would have been in 2015,” the board said in its decision, adding that “TDW estimates that it would take approximately two years for any full-compliance solution to be implemented.”
By allowing the exemption, the board concluded that TDW will have incurred comparable costs to other dealers for providing clients with cost disclosure, and that it has addressed its historical non-compliance “by complying with the decision reached in the separate IIROC enforcement process.”
The decision also noted that the enforcement process is designed to address past misconduct, whereas the exemption process is a distinct procedure focused on future conduct, the interests of clients, other dealers and the public.
With that in mind, the board also considered concerns that allowing the exemption could “create an incentive for other [dealers] to not comply with […] IIROC rules if they think that they now have the option of resolving a non-compliance situation by seeking an exemption,” and whether it would be unfair to dealers that comply with the original requirements.
However, it dismissed these concerns, noting that the reputational and financial costs imposed by the enforcement case, coupled with the cost of providing clients with disclosure to 2018 and obtaining an exemption, don’t create an incentive for other dealers to ignore IIROC rules, and aren’t unfair.
“Given the […] totality of the circumstances […] (including the significant fine paid by TDW for its non-compliance), the IIROC board does not believe that the public would conclude that [dealers] have the ‘option’ of non-compliance with an IIROC requirement that will be cured by an exemption,” it said.