01 IIROC’s 2015 enforcement report
IIROC enforcement in 2015 saw an increase in sanctions but a drop in the SRO’s fine collection rate. IIROC levied more than $4.5 million against firms and individuals, compared to $3.67 million in 2014, and collected 84% of fines against firms and 13.2% against individuals, compared to 100% and 19.8%, respectively, in 2014.
Suitability accounted for almost 50% of prosecutions against individuals, and the majority of these involved elderly or vulnerable clients.
Other cases involved conflicts of interest, misrepresentations and deceptive conduct, manipulative and deceptive trading, and deficiencies in supervision of electronic trading.
“The IIROC report is generally consistent with enforcement activities in the past,” says Laura Paglia, regional co-lead of the securities litigation and regulatory group at Borden Ladner Gervais (BLG) in Toronto. She says the enforcement statistics show “the vast majority of [IIROC] members are compliant, because relative to the number of member[s], the enforcement activity is low.”
Paglia draws no conclusion from the increase in sanctions, saying they ebb and flow from year to year, subject to the size of institutional infractions and the number of institutions involved.
She says the report signals IIROC’s areas of interest in future, particularly suitability issues with respect to seniors and vulnerable investors, and conflicts of interest.
Bernard Pinsky, a partner at Clark Wilson LLP in Vancouver, says the large proportion of suitability complaints is actually a positive. “That is a sign of a market well regulated,” he says. “In other words, we’re not finding fraud [or] scams.”
Paglia notes suitability is subjective. “What is suitable remains a matter of professional judgment,” she says, involving different opinions on the definition of risk, for example, or what constitutes an appropriate portfolio.
John Fabello, a partner at Torys in Toronto, says a significant number of the suitability cases he sees involve seniors and vulnerable investors—and that highlights a vexing problem for advisors.
“[They] have been pressured the last several years to come up with ways to increase income,” says Fabello, “and the only way to do that—other than dipping into capital, which clients don’t like—is to recommend things that have a higher risk profile. […] Combine that with volatile markets [and] it’s impacting the portfolios of seniors and vulnerable investors. That’s what’s generating a continued high incidence of [suitability complaints].”
When it comes to IIROC’s emphasis on conflicts of interest, Fabello makes a connection with fee disclosure.
“Regulators are starting to say there are some kinds of conflicts that are not going to be remedied adequately through disclosure—certain fees, for example. […] Going forward, are regulators going to be content with disclosure that’s on page 52 of a 100-page prospectus, or is there going to be more of an emphasis on individual advisors to bring those fees or potential conflicts to the direct attention of an investor?”
The report also mentions collaboration among SROs and regulators. “Any effort for co-operation is going to play into [the national regulator] discussion,” notes Fabello.
He adds, “One of the main arguments for a national regulator is lack of co-ordination and disparate approaches to enforcement and penalties.” Effective collaboration between enforcement bodies could support the view that a national regulator is unnecessary.
Collaboration also serves as a response to concerns about regulatory arbitrage. “If there’s lots of collaboration [among] the regulators,” says Fabello, “registrants can’t hide.”
While 2015 saw a drop in IIROC’s fine collection rate, Fabello says the rate is still close to those of recent years. The perennially low collection rate against individuals has motivated IIROC to pursue court authority to collect fines against individuals in Ontario (the SRO already has this ability in Alberta and Quebec).
02 MFDA’s 2015 enforcement report
MFDA’s enforcement arm also had a busy year. Highlights from its annual enforcement report include:
- a record 69 proceedings commenced—40% of these involved seniors or vulnerable clients;
- a focus on signature falsification, with 38 of 69 commenced proceedings involving this allegation; and
- 65 hearings concluded, resulting in total fines of $5,389,650.
“The standout in the MFDA report is this emphasis on blank signed forms,” says Paglia. “If you look at the enforcement activity of the MFDA, blank signed forms has been top of the list for a few years now.” But, she notes, “the settlement agreements do not […] invariably involve forgery of client signatures, and that’s key.” Sometimes the agreements involve “information being put on forms after the forms have been signed, and [the statistics] don’t necessarily distinguish on the materiality of that information. […] Forging a client signature is more serious than adding administrative information to a form after a client signs.”
Further, “when you read through the settlement agreements, there’s no client harm, [and] there’s been no client complaints—the clients have consented,” says Paglia.
Pinsky says he understands the hassle of signing forms for all parties involved.
“There’s tons of paperwork that all securities-involved brokers, advisors [and] dealers have to get signed by the client on a regular basis,” he says. “As a lawyer I get asked all time, ‘[…] Do I have to be in front of you when I sign?’ And I say, ‘Yes, you do.’” Signature falsification is not appropriate or condoned, he says.
The signing of blank forms is more prevalent for the MFDA, suggests Fabello, because MFDA advisors tend to have a higher volume of clients compared to IIROC advisors, and mutual funds aren’t traded as frequently as individual securities, reducing face-to-face interactions.
So, if you take out the top two infractions in the report—blank signed forms and falsification/misrepresentation—“the experience of the MFDA as far as enforcement activity is in line with […] IIROC,” says Fabello. AER
03 OBSI’s annual report
In 2015, OBSI saw a 14% drop in investment-related complaints, continuing a two-year downward trend. Suitability continues to be the most common investment-related complaint, followed by poor product disclosure and fee disclosure.
Matthew Williams, a partner at BLG in Toronto, suggests two reasons for the decrease in investment-related complaints:
- the uptick in the economy meant fewer losses or losses too small to warrant complaint; and
- firms increased their efforts to resolve complaints.
“With some of the legislative initiatives like pre-trade disclosure requirements, [which] came in as part of CRM2, you’ve got investors being made more aware of the consequences of their investments,” says Williams. Further, firms are motivated to resolve complaints internally to keep clients happy.
“But there’s probably some element of OBSI’s name-and-shame power that comes into this,” says Williams, noting the report outlines cases where firms failed to compensate complainants according to OBSI’s recommendations.
In contrast to the overall trend of declining investment complaints is the increase in resource-sector investment complaints, notes Williams. But that’s not surprising, considering the sector’s downturn and its volume of start-ups, which have a higher failure rate than established firms, and may have lock-up periods on investments.
Add in investors who themselves work in the sector and are thus financially vulnerable, and the situation is primed for complaints.