IIROC, FINRA plan to collaborate

By Kanupriya Vashisht | July 27, 2009 | Last updated on July 27, 2009
4 min read

The Investment Industry Regulatory Organization of Canada (IIROC) and the Financial Industry Regulatory Authority (FINRA), an independent securities regulator in the U.S., announced a formal co-operation agreement aimed at greater exchange of information and cross-border assistance.

In addition to information sharing on compliance and enforcement-related matters, IIROC and FINRA also plan to work together on issues related to firm oversight and examinations.

Prema Thiele, a partner with Borden Ladner Gervais LLP in Toronto, called the agreement a “high-level pronouncement at this point.” She does, however, expect coordinated compliance examinations — between Ontario Securities Commission (OSC) and the U.S. Securities and Exchange Commission (SEC), IIROC and FINRA — to be one of the waves of the near future, given that a growing number of IIROC members have SEC-registered FINRA member broker/dealers in the U.S.

“The days of thinking [that] the U.S. entity will be regulated and audited by FINRA and OSC, and that IIROC can worry just about the Canadian entities, are gone,” she says.

The OSC and the SEC have had a memorandum of understanding for sharing information for a long time. Thiele says the same theme will further set the path of various communication lines between FINRA and IIROC.

She dismisses fears that such co-operation could have an impact on Canadian regulation, maybe making it more prescriptive. “It wouldn’t be right to compare the IIROC and LIMRA regimes the same way one would compare the Canadian and U.S. regimes, because the IIROC already tends to be fairly prescriptive for its members.”

According to Thiele, since Canada, compared to its southern border, has come out of this recession relatively unscathed, there’s growing interest from the U.S. in terms of the prescriptions and processes Canada has in place. “Some U.S. regulators may indeed wish to talk to Canadian regulators more than ever before because something is being done right in Canada.”

Thiele doesn’t see any downside to the increased co-operation. “We’re all in the same kind of marketplace. More than ever, we have Canadian complexes owning U.S. entities in the U.S. securities industry. It makes sense [that] the parent companies [should] be looking at integrating their operations. And if that happens, the regulators will have to get their act together as well.”

While a lot of regulations that impact the broker/dealer regime are similar in Canada and the U.S., Thiele says there are many others that are significantly different. “For example, the KYC and suitability rules in the two countries differ dramatically — Canada has blanket KYC and suitability rules across the board; IIROC members (online discount brokers) who apply for suitability relief being the only exception. The U.S. broker/dealers, on the other hand, don’t have any suitability obligation, unless they make a recommendation.”

Bill Singer, a shareholder in the Securities Practice Group of the Stark & Stark law firm of Lawrenceville, N.J., and publisher of BrokeAndBroker.com, agrees that “heightened co-operation, on the surface, is a good development.”

“It’s nice any time you have co-operation between jurisdictions sharing a border because traditionally, scams in the investment world tend to find a very receptive habitat just over the border,” he says. “If the goal is to enhance consumer protection and provide enhanced regulation, it’s a very good move.”

But the problem for many in the U.S. and Canada is that FINRA is a failed and failing regulator, Singer notes. “And to some degree we cast an askance eye at FINRA because we feel they are the individual with the broom at the end of the circus parade. But you can’t always be cleaning up messes; sometimes you have to be pre-emptive and prevent them.”

Singer notes that FINRA is in no position to make regulatory recommendations to the world, considering the jury is still out on FINRA as a self-regulator. “The United States is, to some extent, the altar of world capitalism, and FINRA really represents the excesses and failures of that unbridled capitalism.”

Singer finds the concept of having a private sector entity that self-regulates the securities market jarring.

While IIROC, Singer agrees, may not have the same magnitude of problems FINRA has, the Canadian regulation regime, he notes, is grappling with its own provincial regulations, which “to some degree retarded Canada’s ability to more effectively regulate the securities industry.”

Singer sees the proposed merger between IIROC and FINRA merely as a press event and doesn’t anticipate it will amount to greater investor protection at the end of day. “IIROC won’t necessarily gain that much co-operation from FINRA because our [U.S.] Congress will be holding a series of high-profile hearings to determine the future of securities regulation, and one thing strongly advocated by many is the abolition of FINRA or a significant curtailing of its power.”

In Singer’s opinion, this announcement is meant more to be a feather in FINRA’s nest so it can go to Congress and claim it’s active on the world stage. “In the end, I’m not sure FINRA can do much to fight securities fraud in Canada, and I don’t think IIROC can do much to fight securities fraud in the United States.”


Kanupriya Vashisht