What role should dealers-play in enforcing securities regulatory requirements against employees or agents who are non-compliant?
Securities regulators have an expectation that, in addition to preventive measures and remedial actions, dealers should penalize individual registrants for misconduct by imposing fines, suspensions and dismissals, as appropriate.
Does it make sense for a dealer in the regulatory context (as opposed to the employment context) to sanction its personnel for regulatory misconduct? Or is it just a mistake for all concerned?
If, notwithstanding an internally initiated sanction, the individual is subject to a regulator\u2019s investigation and sanction (with the regulator taking a second kick at the can, so to speak), clearly the individual is worse off.
Particularly in rogue broker and other high-profile cases, securities regulators \u2014 who are under pressure, real or perceived, to do \u201csomething\u201d \u2014 seek to sanction dealers and their supervisory and compliance personnel for having failed to prevent the frequently unpreventable. The theory of regulatory liability in these cases is that there were red flags or warning signs that ought to have signalled to the dealer that something was amiss in the conduct of the wrongdoer.
While in the normal, run-of-the-mill case of registrant misconduct, a dealer has a reporting obligation to the regulator, a dealer that sanctions an individual may call unwarranted attention to the situation. This can ultimately lead to a negative result for both the dealer and the individual.
One complicating factor is regulators\u2019 obsession with statistics. One need only turn to the annual enforcement reports of the Canadian Securities Administrators; these reports appear to equate the number of proceedings commenced, concluded cases, penalties and settlements, and even reciprocal orders with effective enforcement by securities regulators. But the total amounts of the penalties and settlements usually represent only a few large settlements with a handful of major issuers and financial institutions.
So long as regulators see the need to justify themselves \u2014 and, particularly, their enforcement efforts \u2014 by fairly meaningless statistics, there is an incentive for regulators to further investigate and sanction an already sanctioned registrant.
However, if the policy goal of regulation is to ensure enhanced compliance (rather than the appearance of a robust regulatory enforcement department), regulators should support dealer-initiated sanctioning of an individual\u2019s misconduct without the necessity to repeat the process and levy a further sanction.
The issue is, as usual in securities regulatory matters, how to effect change without exposing regulators to criticism, warranted or not, in circumstances in which the regulators rely on statistics to justify the efficacy of their enforcement efforts.
The answer starts with the recognition that dealer compliance and supervisory personnel are in a position superior to that of regulators to investigate and act quickly \u2014 in days or weeks, as opposed to a regulator\u2019s months or years of investigation, which eventually lead to a settlement or hearing.
The dealer has multiple incentives to conduct a thorough investigation and sanction, as appropriate, including: protecting its clients\u2019 interests; safeguarding its business and reputation; and fulfilling its regulatory obligations. The individual under investigation is protected from unjustified sanctions levied in bad faith by his or her employment and contractual rights.
In order to promote the investigation of individual registrant misconduct and sanctioning at the dealer level, regulators should limit their involvement to a review process. The dealer would provide a report to the regulator, which would set out the following: the source or origin of the matter (whether client complaint, compliance review or otherwise); its investigative process (particularly, how the dealer ensured completeness and fairness in its investigation); the findings of the investigation; and the dealer response to the conclusions, ranging from restitution to clients, to changes in internal policies and procedures, to sanctions applied to the individual.
The regulator would then conduct a summary review of the process, findings and responses of the dealer, without duplicating the document review, interviews or other fact-finding measures. The regulator would then approve or reject the dealer\u2019s report.
An approved report would be filed in the dealer\u2019s and the individual\u2019s registration files, and the matter would then be concluded. There would be no second kick at the can. The report would only be rejected if the regulator\u2019s review revealed substantial inadequacies in the investigation and\/or dealer response to the findings. The dealer would then have an opportunity to cure the deficiencies \u2014 failing which, the regulator would conduct its own investigation as it does now.
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