Regulators struggle to collect fines

In general, the fines that are collected are from people and firms that want to keep working in the securities industry. Those that don’t can simply ignore the regulators’ penalties.

This is reflected in the large disparity in collections between cases that are settled and those that aren’t. In the OSC’s case, the vast majority of its successful collections — $109.8 million worth — came from settlements, representing 70.6% of the $155.5 million assessed in these deals. Only $690,000 has been collected in cases involving contested hearings. This represents just 0.94% of the $73.4 million in sanctions and costs that have been assessed in contested hearings.

For the self-regulatory organizations, the difference in collection is often between firms, which have a greater incentive to pay their fines and keep running their businesses, and individuals who can leave the industry to escape the sanctions.

For example, the Investment Industry Regulatory Organi-zation of Canada reports that in its most recent fiscal year, it has collected 98.8% of the penalties it has assessed against firms, but just 14.6% of the fines levied against individuals.

In most years, the vast majority of SRO fines are levied against individual brokers. For example, in the Mutual Fund Dealers Asso-ciation of Canada’s most recent fiscal year (ended June 30, 2011), individuals faced $2.8 million in fines vs just $137,500 for firms. And IIROC’s statistics for calendar 2011 show that it ordered slightly less than $1.5 million in fines, costs and disgorgement against firms last year but more than $7.8 million against individuals. The result is that most of these sanctions ultimately prove uncollectible.

Those who avoid paying their fines by leaving the industry are paying a price by giving up the opportunity to work in what can be a very lucrative trade. In addition, prospective rule-breakers may be deterred. Investors are protected, in that proven violators of securities law are no longer in the business.

But that still doesn’t sit right with investor advocates. The Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) had raised the issue of uncollected SRO fines last year, charging that the inability to collect fines “detracts from the credibility of the self-regulatory system” and that it “undermines securities regulation” generally.

The regulators have indicated that their ability to collect fines is limited in many cases — because the defendants don’t have any assets, they’ve moved away or they can’t be found. In other cases, the miscreants may have managed to hide assets, which is something that is difficult to uncover. So, it may not be cost-effective for the regulators to go to great lengths to chase down assets that may or may not exist.

Nevertheless, the OSC suggests that its staff is looking at ways to improve its collection performance. Staff are examining the practices of other organizations, in both the public and private sectors, to see if there are more effective methods the OSC could be using.

One measure the OSC has taken, along with publishing its collections data for the first time, is publishing a list of people and firms that are considered delinquent in paying monetary sanctions. The list ranges from a $29.2-million penalty outstanding against various defendants in an illegal distributions case to those who just owe a couple of thousand dollars.

The list, which dates back to Jan. 1, 2005, does not include amounts owing in proceedings that are subject to ongoing litigation; nor does it include costs owing to the OSC that were imposed by the courts.

FAIR Canada says that it supports the OSC’s decision to publish both its collections data and the list of deadbeat defendants, although the investor advocate is not sure if this will enhance either the deterrent effect of securities enforcement or improve the regulator’s ability to collect on the penalties owed.

FAIR Canada also says the poor collection record points to the need for more effective enforcement. And the investor advocate suggests that part of the problem is the fact SROs generally lack the legislative power to collect fines.

Only Alberta provides SROs with the power to enforce their decisions as though they are court orders. A Canadian Securities Administrators committee examining SRO oversight in 2006 had recommended that SROs have that power in every province.

The committee had stated that giving SROs the power to file disciplinary decisions with the courts “would increase the likelihood of the payment of penalties and, thus, the SROs’ credibility.”  IE