IIROC wants court authority to collect fines

01 IIROC ups ante on collecting fines

IIROC has a poor record of collecting fines from individuals, but that could soon change.

In remarks made to the Ontario Standing Committee on Finance and Economic Affairs in early February, IIROC president and CEO Andrew Kriegler made his case for new enforcement powers in Ontario. “We are pursuing an amendment to the Securities Act to permit IIROC to more effectively collect fines in Ontario. Such an amendment would give us the ability to enforce hearing panel sanctions through the Ontario Superior Court of Justice.”

He noted that while some rule breakers don’t pay because they don’t have the money, others skirt fines by deregistering from IIROC. “In Ontario, we have no ability to collect beyond that point—regardless of what they have done, or how much money they owe. This is wrong. If you break the rules and abuse the trust your clients have placed in you, you must pay the penalty and be seen to pay it,” he said. All of this stands in contrast to the situation in Alberta and Quebec, added Kriegler. “[T]hrough their respective Securities Acts, [they] have given [IIROC] the power to pursue these wrongdoers. Unsurprisingly, our collection rates in those two provinces are considerably higher than our national rate.”

That IIROC needs more teeth is clear from the stats:

• Nationwide, the collection rate for firms is 100%, compared to less than 20% for individuals.
• In Ontario, there is over $20 million in outstanding fines against individuals (since 2008).
• The Ontario collection rate for individuals for the current fiscal year is only 2%.
• Ontario represents 61% of the total amount of outstanding fines on a national basis in this fiscal year.

Kriegler’s remarks are “uncontroversial,” says Andrew Gray, partner at Torys in Toronto. “The powers [IIROC’s] looking for are reasonable and reasonably limited. [IIROC] could’ve […] requested broader powers, but limited [its request] to circumstances that were analogous to orders that the securities commission itself could get, were it undertaking the same regulatory activity.”

Ryan Morris, partner at Blake, Cassels & Graydon LLP in Toronto, wonders if Kriegler’s remarks account for the proposed Capital Markets Act to be adopted by B.C., New Brunswick, Ontario, P.E.I., Saskatchewan and the Yukon, probably in early 2017.

Currently, IIROC staff can appeal decisions of an IIROC panel to the OSC, he explains. But the proposed act gives the OSC (in the act, “the Tribunal”) explicit jurisdiction to order a party to comply with IIROC’s decisions.

“While we do not know exactly how the proposed new provision will work,” says Morris, “it appears to provide the ability for IIROC (or other SROs) to apply to the Tribunal to issue an order directing compliance with an IIROC order, without the Tribunal sitting in review of the IIROC order.”

Regardless of whether that provision would satisfy Kriegler, Morris asks if court authority will make a difference. Rule-breakers often leave the industry or have no assets, although it appears to have made a difference in other jurisdictions, like Quebec and Alberta.

“Would it be worth the resources to pursue a lot of these people if you’re never actually going to collect anything? Because to pursue a debt effectively, you still have to take court proceedings, you still have to make applications to court, you still have to look for things like garnishment orders to try and get property you can sell to fulfil these debts—and that all costs,” says Morris.

Adds Gray: “[What] I assume IIROC would consider in each case is the cost-benefit analysis” of collection.

He thinks IIROC’s main motivation is to take away the option to escape the SRO’s jurisdiction simply by giving up registration.

“If [an amendment] takes away that option or it gives [IIROC] a tool to enforce those orders, that might have the indirect effect of improving behaviour,” Gray says.

Morris, too, envisions that indirect effect: “Big picture: Would a threat of judicial proceedings to enforce fines add to the incentive to proper conduct? You have to think it probably would.”

02 Five provincial regulators adopt new prospectus exemption

Regulators in Alberta, B.C., Manitoba, New Brunswick and Saskatchewan announced in January that they are each adopting a prospectus exemption so issuers listed on a Canadian exchange can raise money by distributing securities without an offering document. The key condition of the exemption is that an investor must obtain advice from an investment dealer on the investment’s suitability.

“At first blush, it seems like a very broad exemption,” says Lianne Tysowski, senior counsel at Torys in Calgary, noting there are no limits on investment amounts or offering size.

However, because of the requirements—e.g., issuers must report in a Canadian jurisdiction, have securities listed on one of the Canadian exchanges and have up-to-date continuous disclosure—“the person investing in the private placement should have the same information that the person who’s investing [or] trading in the secondary market would have,” she says.

Further, “investors under this exemption basically have the same protections against misrepresentations in the continuous disclosure record as investors today do trading in the markets.”

She points out that greater access to private placements allows investors to take advantage of pricing discounts, warrants (which allow investors to acquire a security at a fixed price) or other incentives offered in private placements. And for issuers, “it [seems] like a very cost-effective, timely way to raise capital.”

Tysowski adds: “One of the big drawbacks, of course, is it’s not national. Ontario and Quebec have not adopted a similar rule.”

Bernard Pinsky, partner at Clark Wilson in Vancouver, has a theory on that lack of national adoption. While he sees the positives for investors and issuers, he suggests the regulators “really did this for brokers,” partly because local independent brokerage firms—especially in B.C. and Alberta—are “suffering.”

“Ontario is not worried as much about the independent retail brokers. But, in B.C. and Alberta, a lot of the market has been dependent on the Haywoods, the PI Financials, the Global Securities,” he says. The exemption “adds non-broker private placements to the mix of things the investment brokers can sell to relatively small retail investors.”

Overall, Pinsky calls the exemption “a small win” for all involved—small, because non-accredited investors probably won’t be a big source of capital. And he doesn’t see a substantial increased risk for investors.

“If a broker is going to do his or her job, they’re going to tell a person who’s not accredited, ‘You like this company […], but considering your financial assets, your investment […] is going to be quite limited.’ [No investor] should lose tens of thousands of dollars through this exemption if they listen to the advice of their advisors.”

03 CSA floats new national instrument targeting derivatives

This January, CSA published for comment NI 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions, and its companion policy.

The proposal sets out requirements to ensure customer clearing of over-the-counter (OTC) derivatives is carried out so that it protects customer collateral.

“The purpose behind this rule is to protect [customer collateral] in the event that something happens either to the clearing broker or dealer,” says Carol Derk, partner at Borden Ladner Gervais (BLG) in Toronto. “[Say] they become insolvent, for example, or something happens to the clearing agency.”

Julie Mansi, also partner at BLG in Toronto, adds that the proposal “should be viewed from a customer standpoint […] because this is going to speak to what is likely the foreign counterparty [customers are] dealing with as a foreign clearing agency.” (Canada doesn’t have a domestic clearing agency for most types of derivative transactions.)

But, says Derk, “Canadian banks provide clearing services, and they will be subject to these requirements as well when they’re clearing for a Canadian customer” anywhere in the world.

Both Derk and Mansi applaud the instrument’s harmonization with other G20 country initiatives, but they point out two things likely to conflict with the proposed rule: Canada’s bankruptcy legislation (which affects collateral recovery) and rules governing Canadian retail mutual funds (which affect collateral investment).

Mansi concludes: “There’s a number of different [customer clearing and collateral] rules that all impact each other.” She says the derivative registration proposed rule is still in the works. “We don’t fundamentally know who is going to be caught in these myriad rules […and] if we don’t know who is captured within this regulatory scheme […], to ascertain the business impacts is quite difficult.”

The 90-day comment period ends on April 19, 2016.