Despite repeated warnings and enforcement action from Canadian SROs, some individuals and dealers continue to operate with blatant disregard for investor interest.

The regulators are more determined than ever to find the guilty and take them to task. And it’s not just client complaints that raise the alarm.

Hugh Corbett, director of litigation at the MFDA, provided an update into the regulator’s disciplinary process and how compliance is examined. Speaking at the Strategy Institute’s Registrant Regulation Compliance Strategies Summit, in Toronto, Corbett highlighted some of the methods used to assess compliance.

Routine examination

As part of the regularly scheduled compliance examinations, a team of regulators is sent to do onsite and branch reviews and desk reviews of documents at the MFDA.

Corbett said the MFDA is currently working on a new model that would split these examinations into two different cycles.

“There will be a two-year cycle for those members that are viewed as being slightly higher risk, and a four-year cycle for those viewed as being slightly lower risk,” he said. “That is to make sure we use our resources efficiently and allocate our time and effort in the best way.”

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These examinations are one of the primary sources for matters that are referred to enforcement.

“We’ll be doing a sampling of files and they’ll uncover one of the deadly sins; usually some kind of forgery or falsification that may have gone unnoticed.”

Approved persons, he added, may be pulled out of the standard compliance review and sent to enforcement for further review and consideration of their circumstances.

Repeat deficiency

The main reason why cases get referred to enforcement is unresolved deficiencies. An exit interview, said Corbett, is an integral part of the compliance examination process.

“At the end of that process there is an identification of issues that need to be addressed, and usually a plan is put in place, and agreed to by the member, to address those deficiencies going forward.”

The regulator doesn’t actively supervise and it’s largely left to the member to take the necessary steps. When the regulator looks at those specific deficiencies in the next round of the review, they find two types of shortcomings.

“The first is that you said that you were going to address the deficiency, and you did not,” said Corbett. That invariably results in an automatic referral to enforcement.

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In a variation on that theme, sometimes the actions taken are not enough to resolve the deficiency. “That kind of matter will invariably be referred to enforcement for further action,” said Corbett.

Product specific issues

Recently, the MFDA has received a spate of cases involving failure to supervise the leveraging activity adequately.

“Where that failure is widespread and fairly significant, those matters are referred up to enforcement,” said Corbett.

The MFDA penalty guidelines clearly detail that “members and approved persons are required to ensure that each order accepted or recommendation made for any account of a client is suitable for the client and in keeping with the client’s investment objectives.”

The suitability obligation remains in effect even when the account is transferred to a different firm or to a different approved person at the same firm.

Sweeps and questionnaires

The other area through which regulators assess compliance is through sweeps and questionnaires.

“They’re usually the one-off issue- or product-specific enquiries,” said Corbett adding that it is “a potential source of referrals up to enforcement for assessing compliance.”

These referrals frequently involve exempt products, which are more complex and less regulated and transparent than conventional mutual funds.

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Regulators conduct exempt product surveys to try and “get a better handle on the sales practices and the degree of distribution of exempt products among members.”

Electronic filing requirements

The MFDA requires both monthly and annual filings that tend to be related to financial compliance matters.

“Those can also be a source of indicating difficulties with either compliance or with some other matter that needs to go to enforcement,” said Corbett.

These electronic filing obligations, known as the Member Event Tracking System (METS) require members and individuals to report incidences and events including bankruptcy, civil claim, criminal charges, customer complaint, etc.

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“The MFDA receives on average about 2,500 of those events a year, so it’s a very substantial volume,” said Corbett. “And those are obviously very rich sources of potential matters for assessing compliance and matters that get referred to enforcement.”

Speaking about the coordination between compliance and enforcement, Corbett said the two don’t work in separate silos.

“We do communicate regularly about these kinds of matters,” he said. “The standards, methodologies and tests that are being applied by compliance examiners in the field have to mirror and match up with the standards being used in enforcement when we assess whether your conduct warrants discipline or not.”