Big dip in IIROC fines

By Allan Tong | May 15, 2015 | Last updated on May 15, 2015
5 min read

01 IIROC’s 2014 enforcement report

Last year, IIROC imposed more than $3 million in fines on 47 people, compared with more than $5 million in 55 cases in 2011. The number of suspensions has stayed fairly consistent: 21 in 2014 versus 19 in 2011. Fines against firms have also dropped, down from $1.57 million on 17 decisions in 2011 to $224,000 on 10 last year.

Despite the declines, the latest IIROC report strikes Laura Paglia, a partner at BLG in Toronto, as generally consistent with past trends where infractions, according to IIROC, arise. “It depends on the nature and extent of the infractions in any given year. You wouldn’t be able to conclude much solely by the number of decisions, or the amount of fines in any given year.” IIROC can fine a firm as much as $5 million, and individuals $1 million (per contravention); but, each year, both categories typically see fines between $10,000 to $125,000, with an occasional fine reaching $500,000.

Bernard Pinsky, a partner at Clark Wilson LLP in Vancouver, says the report shows “firms are doing a better job at self-governance, making sure that things don’t go wrong. Compliance departments are worried [about] securities commissions and breaching rules, so they have lots more rigid rules about what can [and can’t] be done.” He says another factor at play is the dearth of activity in the venture capital market, particularly the resource sector. “That means there are fewer opportunities to get into trouble, because there are fewer rushed opportunities that brokers have to jump into and make quick decisions about, because they would lose the business to somebody else.” Pinksy predicts if the market got busy again, fines and violations would increase. “There’s always new players entering the industry, and those new players don’t have [much] experience. They make mistakes.”

02 Poison pill, R.I.P.?

CSA wants to change the rules for non-exempt take-over bids. “Our goal is to provide target[ed] boards with sufficient time to respond to hostile bids, while facilitating the ability of target[ed] shareholders to make voluntary, informed and co-ordinated tender decisions,” the regulators say in a release.

There are three game-changing points to consider.

First, the new regime will demand that at least 50% of outstanding target securities owned or held by people other than the bidder must be tendered. Also, under the proposal, “minor shareholders […] don’t have to worry about jumping into a deal and missing their opportunity to sell, particularly in a market that’s pretty slow,” notes Pinsky.

If the minimum tender is met, then the bid would be extended for another 10 days. This would let other shareholders tender once they know a majority of shareholders are in favour of the bid. Pinksy likes the measure: “It takes the pressure off small shareholders to make quick decisions on these offers to tender.”

One of the biggest proposed changes is to increase the period for which a takeover bid can remain open from 35 days to 120. Again, this measure would give target boards more time to respond to takeover bids, but increase the risk to hostile bidders. “That’s a long time for other bidders to pop up or markets to change,” says Gordon Raman, a partner at BLG in Toronto. “That’s probably what the regulators wanted to do. The activist shareholder and bidder might not be happy with 120 days, versus the regulators, who thought the previous regime was too friendly for the bidder and activist shareholder.”

The 120-day period will likely render the poison pill strategy moot. The strategy provides rights to shareholders other than the bidder to potentially buy shares at a steep discount, thereby diluting the bidder’s interest in the company. The poison pill strategy was intended to make it very difficult for a hostile bidder to succeed. “Regulators are not likely to let the poison pill continue in most circumstances; the proposal provides the target a better ability to respond to hostile bidders,” concludes Raman.

03 OSC Investor Advisory Panel report

The OSC Investor Advisory Panel’s 2013-2014 report urges the regulator to prioritize seniors’ issues.

Susan Han, senior legal counsel at AUM Law in Toronto, notes existing OSC measures and panel recommendations only apply to licensed brokers and dealers. “The missing piece [the Investor Advisory Panel] is not saying is, ‘We encourage the commission to investigate people who aren’t licensed, and who are perpetrating frauds on seniors.’ ”

The report identified another key concern: restitution. “It’s long past time,” the panel says, “for the OSC to address the flawed nature of the only restitution system regulators have made available to Ontario investors: the Ombudsman for Banking and Investment Services.”

Han translates: “We are concerned about the increasing rate of non-compliance and we think you guys need to step in and do something about that. We can’t allow OBSI to be seen as a toothless tiger.” OBSI’s practice of naming and shaming was working well until recently, says Han. Increasingly, however, firms are ignoring OBSI’s compensation recommendations.

Han notes the regulators are publicly musing about what to do. “Maybe those OBSI awards ought to be mandatory, as opposed to just a recommendation,” she says.


IIROC’s fines against firms fell to $224,000 on 10 decisions in 2014, down from $1.57 million on 17 decisions in 2011.

To her, the most interesting part of the report was the panel’s concern over disclosure as a primary investor protection tool. “We have consistently expressed our serious reservations about the effectiveness and fairness of disclosure as a primary investor protection tool,” says the report, “particularly in matters of conflicts of interest, where avoidance, not disclosure, should be required. Nevertheless, we do agree that better information to investors is desirable.”

Han agrees disclosure has limits, and points to recent research by Sunita Sah, an assistant professor of business ethics at Georgetown University in Washington, D.C. Sah found that when advisors offered clients a choice between, say, two mutual funds with identical fees and returns, and also disclosed that they receive an annual trailer from one fund, more clients actually chose the fund with the trailer, even though they would make more if they choose the other fund. “Customers perceive the advisor as asking them for a favour,” explains Han. “Human inclination is to make yourself liked by the other person.”

04 IIROC exemption report

IIROC recently released a breakdown of proficiency exemptions it granted in 2014.

Topping the list of 449 applications last year (up 18% from 2013) were the 122 advisors who requested to be excused from writing or rewriting the Investment Management Techniques Course (IMT), and 119 from the Portfolio Management Techniques Course (PMT). Of the 449 applications, only 13 were rejected. For the IMT and PMT categories, IIROC states “virtually all individuals in the cases reviewed exceeded IIROC’s minimum experience requirement.”

“The stats look pretty good,” says Erin Seed, a securities lawyer at BLG in Toronto, who wasn’t surprised by the low rejection rate.

“It may be that people decide to apply only when they’re likely to be granted the exemption.” Seed says there’s a high standard for proficiency exemptions and that getting them is difficult.

by Allan Tong, a Toronto-based financial journalist.

Allan Tong