Urging consistency nationally

“To state the matter simply,” the IAP’s letter argues, “no one who lacks integrity or who has proven themselves ungovernable should be permitted to provide financial services of any sort, nor should they be allowed to advise the public about any type of investment.”

The panel proposes that any sort of registration ban or suspension that’s imposed by one regulator – regardless of geography, industry lines of business or whether the organization imposing the ban is a statutory agency or a self-regulatory organization (SRO) – should “immediately and automatically” become “an equivalent ban or suspension by all federal, provincial and territorial financial services regulators and SROs across the country.”

As the situation stands, there are a handful of provincial securities authorities that automatically reciprocate one another’s sanctions. That’s currently the case for Alberta, Quebec, Manitoba, Nova Scotia and New Brunswick. In these provinces, if any member of the Canadian Securities Administrators (CSA) imposes a penalty – provided that it’s based on a finding that securities rules were violated – the same penalty automatically takes effect in those provinces too.

In the other provinces, such as Ontario and British Columbia, sanctions can be reciprocated, but there must be a hearing before a ban handed down in one province applies there. While these kinds of orders often are granted after routine, written hearings, those regulators aren’t required to accept the sanctions imposed in the original enforcement action and still have the flexibility to vary the penalties if those regulators decide that’s warranted.

The underlying goal of impos- ing these kinds of reciprocal sanctions is to overcome one of the inherent limitations of the provincial regulatory system and, specifically, to prevent an individual who’s banned or suspended in one province from setting up shop in another province.

The IAP’s letter applauds these efforts, but also argues that the current approach is too limited. While the use of reciprocal orders by members of the CSA may help to curb “serial misconduct” within the securities industry, the letter continues, that process doesn’t prevent violators from migrating to other parts of the financial services industry.

As the letter states: “The IAP would like to suggest that this can and should be improved.” To that end, the letter recommends that the sort of reciprocal enforcement that some members of the CSA already provide should be extended throughout the industry.

The need for regulators from different parts of the financial services industry to abide by one another’s enforcement efforts is something that has been worked on before – but the sort of automatic mechanism envisioned by the IAP has not been developed.

Instead, over the past few years, the Investment Industry Regulatory Organization of Canada (IIROC) entered into a series of agreements with Canadian authorities in other spheres – including a handful of provincial insurance regulators, the federal Financial Consumer Agency of Canada and Quebec’s Chambre de la sécurité financière. These agreements facilitate co-operation and the sharing of information among regulators from different segments of the industry.

The underlying goal of these arrangements is much the same as the IAP’s proposal. IIROC indicates that its memorandums of understanding (MoUs) shared with other regulators are designed to “prevent disciplined individuals from avoiding regulatory consequences by merely changing their registration to another organization, carrying on business with unsuspecting consumers and regulators under another designation or continuing to work in an unregistered capacity.”

While the underlying rationale for these MoUs aligns with what the IAP seeks, they don’t provide the sort of concrete action that the IAP is demanding. For example, under the agreement between IIROC and Ontario’s insurance regulator – the Financial Services Commission of Ontario – disciplinary action that is taken against a rep by one regulator is supposed to trigger a review of that rep by the other regulator automatically.

The IAP wants to see these arrangements go a step further: that disciplinary action prompts not just a review and a possible investigation, but also the automatic imposition of the same penalties across all sectors of the industry and jurisdictions.

The IAP’s letter suggests that the regulators already have a mechanism at hand that would enable them to adopt this approach relatively easily: their ability to determine whether an individual is fit to be registered. The letter states: “A person banned or suspended by one regulator [could be] deemed presumptively ‘unfit’ by all other regulators for the duration of the ban or suspension. We believe the public would give overwhelming support to this concept.”

At this point, the IAP is asking the OSC to kick off a discussion with the rest of the CSA and Canada’s various other financial services industry regulators to explore the panel’s call for comprehensive reciprocal enforcement.

Neil Gross, chairman of the IAP, says that the panel decided to propose this approach, given both the emergence of automatic reciprocity among certain provincial securities regulators and Ontario’s relatively new Financial Services Regulatory Authority of Ontario (FSRA).

“We felt it would be a logical next step now that reciprocal enforcement is more common among Canadian securities commissions,” says Gross. “And with [the] FSRA coming online, this seemed like an opportune moment to put forward the idea.”

So far, the OSC has yet to provide the IAP with its response to the idea, but it is being considered within the OSC. And, Gross says, the proposal will be discussed at the panel’s next meeting with the OSC in late March.

The OSC has proven to be open to enforcement innovation in the past few years. The regulator has stepped up its efforts at investor protection by introducing no-contest settlement provisions and a whistleblower program that offers financial rewards for tips that lead to significant enforcement action. And those measures are beginning to produce results.

Comprehensive, industry-wide reciprocal enforcement could be the OSC’s next innovation.