Compliance roundup – June 2014

By Staff | June 20, 2014 | Last updated on June 20, 2014
4 min read

IROC’s 2013 Enforcement Report is out. Suitability and senior clients remain the regulator’s biggest worries (see statistics in brackets, this page).

“Seniors are attractive targets for unscrupulous advisors because they have more money,” says Simon Romano, a partner at Stikeman Elliott in Toronto, adding some older people are ill-equipped to spot such advisors.

IIROC’s also concerned about “recurring examples of investment advisors failing to adequately understand the products recommended and properly assess the suitability of complex investment products, including leveraged or inverse ETFs.”

How much should an advisor know? Should she understand the product as well as the team that built it? Or is a lesser degree of understanding appropriate, provided she grasps essential features?

“It’s a question that’s often debated,” says Marsha Gerhart, a securities lawyer at Borden Ladner Gervais in Toronto. Her view: advisors needn’t have the same product knowledge as people who build them. “To understand a product and how it works might be different from understanding how to put it together.”

Gerhart says advisors should be able to answer the following:

  • How does the product create returns?
  • When and how does the client receive money from the investment?
  • What are the risks that determine whether and how much the client will make?
  • What are the conditions under which the client will lose part or all the money she invests?

If you don’t answer these questions thoroughly and properly, says Gerhart, clients will likely conclude you don’t fully understand the products you’re recommending.

Trouble collecting fines

The report reveals IIROC’s dismal fine collection record.

While it received 98.1% of penalties assessed against firms, it only got 10.5% of those imposed on reps. Twelve decisions against firms resulted in fines, costs and disgorgement totalling $2,630,000, while 45 decisions against reps resulted in fines, costs and disgorgement totalling $5,258,071. “If you plan to stay in the business, you’d better pay your fine,” notes Romano. Those who don’t face suspension. He adds some will see big fines as career-ending, so they don’t bother paying. “People are increasingly able to search and see what’s happened to you, so my guess is some decide to move on and do something different.”

In a bid to get more reps to pay, IIROC’s adopting a name-and-shame approach similar to OBSI’s. Beginning this May, the SRO is publishing the names of reps who don’t pay fines on its website.

OSBI’s naming and shaming hasn’t always had the intended effect. In the first four-and-a-half months of 2014, four firms have refused the ombudsman’s compensation recommendations, totalling just shy of $450,000.

Gerhart suggests IIROC’s approach may see some success. “There will be a percentage of people who don’t want their names on a website, so if they’re looking for a job, they’re going to pay up. The fact that they’ve had a sanction will come out some other way if they’re looking for a job in the same industry, but it would be better to at least have paid the fine.”


The number of foreign financial institutions that have agreed to share information about U.S. account holders with the IRS as part of FATCA

Source: U.S. Treasury Department >

Five years to life

The report floats a proposal that says reps who warrant five-year suspensions would instead be permanently barred.

Romano argues that people out of the business for five years would have a tough time returning anyway. “Your client base has vanished. I would imagine there aren’t too many people who come back after a five-year suspension.”

Viewed this way, the rule would simply codify the practical implications of a five-year suspension.

Gerhart says that if the proposal goes through, banned reps could appeal to provincial securities commissions; if that doesn’t work, they may be able to go to the courts.

Say the courts decide to overturn IIROC’s ruling. What then?

“When after five years that person goes to reapply, IIROC could say, ‘We don’t think you’re fit and proper for these reasons. We find your registration objectionable for these other reasons….’ So there’s an avenue for them to object to that person being registered after five years, regardless.”

Some may be inclined to write off a rep whose misconduct is bad enough to warrant such a long vacation. But Gerhart says that may not be fair.

“Isn’t everyone entitled to a second chance? He could say, ‘In those five years I went to university, I really studied ethics, and I think I can be a better registrant now that I’ve gone through this experience.’ You can think of many such arguments.” staff


The staff of have been covering news for financial advisors since 1998.