Canadian regulators often suffer in comparison with their counterparts south of the border, as U.S. regulators are perceived to be more proactive in seeking out and punishing wrongdoers. However, an examination of the disciplinary records of the brokerage industries’ self-regulatory organizations in Canada and the U.S. over the past few years suggests that there’s little to choose between them.

Comparing the data published on disciplinary activity by the Investment Industry Regulatory Organization of Canada and the U.S. SRO, the Financial Industry Regulatory Authority, it appears that brokers are disciplined at about the same rate and suffer suspensions and permanent bans with more or less the same frequency.

These similar rates of discipline occur despite the large size disparity between the brokerage industries of both countries — and the supposed cultural differences between the two countries, which are often invoked to explain the difference in enforcement activity between the statutory regulators in Canada and the U.S. (That is, the various provincial securities commissions in Canada and the Securities and Exchange Commission in the U.S.) Typically, the U.S. is characterized as a society that takes law and order quite seriously, while Canada is seen as having a relatively light touch.

Yet, when it comes to self-regulation, it seems those cultural differences evaporate, more or less, even though looking at data for a single year in isolation might suggest that the stereotype of tougher U.S. regulators holds true. In 2008, for example, FINRA resolved disciplinary actions, handed down suspensions and permanent bans against brokers at a higher rate than IIROC did.

However, an examination of the data over a longer period makes it clear that this is not always the case. For example, looking back over the past five years in both countries, the incidence of disciplinary actions brought per registered rep has bounced between about 0.15% and less than 0.3% (this includes decisions against both reps and firms, as FINRA data don’t distinguish between them).

In fact, over that period, the Canadian rate tends to be slightly higher than the U.S. rate; 2008 was the exception in those five years, as the Canadian rate was somewhat higher in the other four years.

Admittedly, in 2008, the Cana-dian disciplinary decision rate was just 0.14%, but that was something of an anomalous year. As explained in the Canadian Securities Administrators’ latest annual enforcement report, SRO enforcement activity in 2008 and 2009 was affected by an ongoing court challenge to the jurisdiction of the SROs over former reps in Ontario. (See “Regulatory enforcement fines soar…” on page 22.)

In mid-2008, the Ontario Divisional Court ruled that IIROC’s predecessor, the Investment Dealers Association of Canada, could not claim jurisdiction over former reps; as a result, the SROs adjourned all of their cases against former reps in the province while that decision was being appealed. It wasn’t until August 2009 that the lower court’s decision was reversed by the Court of Appeal of Ontario, and those suspended cases were resumed.

Notwithstanding this notable dip in 2008, IIROC’s disciplinary decision rate has typically outpaced FINRA’s over the past five years. And, in terms of the frequency of sanctions, similar trends are evident. In both countries, the incidence of suspensions handed down to reps runs right around 0.05% each year. The rates were the same in both countries in 2005, higher in Canada in 2006 and 2007, but higher in the U.S. in 2008 and 2009 (which were, again, years that were affected by the court challenge in Ontario).

As well, looking at the frequency of permanent bans meted out to reps, the rates are similar on both sides of the border. That rate also tends to run at about 0.05% of brokers, although it was notably lower in the court challenge years of 2008 and 2009 in Canada; excluding those two years, it was higher in Canada one year, higher in the U.S. another year, and about the same in one year.

All of which leads to the conclusion that although there may well be significant differences between the enforcement activity carried out by the statutory regulators in Canada and the U.S., this doesn’t appear to be the case at the SRO level.

But while the frequency of disciplinary actions and sanctions appears to be quite similar on both sides on the border, what’s not clear from the data is whether the magnitude of the penalties is comparable. Certainly, the rate of permanent bans appears to be fairly equal. Data on the duration of suspensions are not published, and the data on monetary penalties are also rather sketchy. FINRA doesn’t publish detailed monetary penalty data the way IIROC does, and regulatory fine totals tend to be very volatile year to year, as they can often be skewed by large penalties attributed to an extraordinary case.

@page_break@For example, in 2009, the total value of fines imposed by IIROC jumped to more than $34 million from $3.3 million the previous year, solely due to the large settlements in the non-bank-sponsored asset-backed commercial paper case. In years in which fine totals jump sharply, these also tend to reflect large penalties against firms, not individual reps. In more normal years, the total penalties levied against reps typically exceed the penalties given to firms. Ultimately, it’s hard to determine how the severity of punishment compares between Canada and the U.S.

The picture also gets a bit murky in comparing the complaints data from FINRA and IIROC. On that count, it appears that the incidence of complaints is notably higher in Canada. In 2009, the rate of complaints per rep in Canada was about 1.62%, whereas it was about half that in the U.S. This 2:1 ratio holds over the previous five years, too.

There could be several possible explanations for this. For one, complaints data is inherently noisier than disciplinary data. Although disciplinary action is fairly black or white — the regulator either brought allegations against a rep or it didn’t — there can be much more variation in what constitutes a complaint. So, when does a question or an inquiry about an issue rise to the magnitude of a complaint? The two regulators may handle that differently.

Another possible source of variation is the difference between the countries’ mechanisms for resolving complaints. In the U.S. for example, many more complaints are resolved through the arbitration system than in Canada. In 2009, FINRA reported receiving slightly more than 5,000 investor complaints, but there were also more than 7,100 arbitration cases filed during the year. In contrast, IIROC received 457 inves-tor complaints during the year, but just eight cases were submitted to its arbitration program.

Indeed, IIROC launched a review of its arbitration program in late 2009, owing, in part, to the lack of use that program is now getting. That review noted that the arbitration program saw many more cases in the 2000-03 period, with 96 cases filed in 2002. And the review has suggested that the fall-off since then may be because awards are capped at $100,000, coupled with the emergence of the Ombudsman for Banking Services and Investments as a free dispute-resolution mechanism for the investment industry.

In contrast, FINRA’s arbitration program is much different. As IIROC explained in its review: “Fundamental factors influencing utilization and development of the FINRA program are not present in Canada.”

It points out, for example, that there is no limit on the size of the awards that can be ordered under the FINRA arbitration program. Dealers must participate if clients choose arbitration to solve a dispute, and arbitration is also mandatory for all disputes between firms — and between firms and their reps. Additionally, clients are contractually obliged to submit to arbitration if they have previously agreed to that; and many account agreements may require clients to give up their right to sue their broker in court. Moreover, there’s no U.S. equivalent of OBSI or other similar dispute-resolution mechanism to serve as an alternative to arbitration.

Nevertheless, in an effort to improve access to effective investor redress, IIROC is trying to make its arbitration program more relevant. It is proposing to increase the award limit to $350,000, and may be willing to go higher. That proposal is out for comment until March 16.

There are other differences between the regulatory systems of Canada and the U.S., too — not least, the fact that U.S. investors have access to the complaint and disciplinary histories of brokers through the BrokerCheck service.

Among the basic premises of much securities regulation is that disclosure is essential, in that it allows investors to trade with full knowledge of what they’re getting into. So, in theory, giving clients the ability to scrutinize the complaint history of a broker before they open an account — and during their relationship, for that matter — should serve as a preventative measure that helps clients steer clear of the few bad apples that populate any industry.

If disclosure is doing the trick, then it should be preventing problems before they happen. That’s inherently hard to measure, but the notable difference in complaint frequency between Canada and the U.S. may be evidence that this type of disclosure does do some good — particularly as the similar rates of actual discipline suggest that the occurrence of bad apples within the overall broker population is pretty uniform on both sides of the border.

Certainly, U.S. regulators seem to believe that this sort of disclosure is useful, as they are regularly expanding the scope of the information that is available to the public about their brokers. In mid-February, FINRA announced plans for the latest extension of the BrokerCheck service that would see it increase the number of client complaints that are reported publicly to include all complaints against a broker dating back to 1999. It would also extend the public disclosure period for the full record of a broker who leaves the industry to 10 years from two years, and make certain information about former brokers available permanently — such as criminal convictions and certain civil and arbitration judgments — in addition to the regulatory judgments it now discloses.

Whether there is any relationship between the level of disclosure on brokers’ backgrounds and client complaints is hard to know, but that level of disclosure is one key difference between the systems in the U.S. and Canada that may impact the rate of complaints. IE