More complaints and more investigations: highlights from CIRO’s inaugural Enforcement Report

It has been almost a year since the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) amalgamated to continue their operations as the Canadian Investment Regulatory Organization (CIRO).

As the successor to IIROC and MFDA, CIRO is the national self-regulatory organization that oversees all investment dealers, mutual funds dealers and trading activity on Canada’s debt and equity marketplaces. CIRO carries out its regulatory responsibilities through setting and enforcing market integrity rules and dealer member rules regarding the proficiency and the business and financial conduct of its member firms and their registered representatives.

On October 25, 2023, CIRO published its first Enforcement Report [PDF], highlighting its enforcement activities for the 2022–2023 year. The Enforcement Report highlighted key cases prosecuted in 2023 and the regulator’s progress on enhancing its legal authority. To this end, 2023 was a year of increased enforcement activity for CIRO, and the Enforcement Report suggests that continued cooperation and reporting by firms will remain critical under the newly formed regulatory organization.

Enforcement year in review

CIRO’s Enforcement Report reflects the organization’s regulatory enforcement priorities and serves as a reminder that there remains a significant amount to do to realize upon the promise of a fully integrated, single pan-Canadian market regulator. For example, following the amalgamation of IIROC and the MFDA and the creation of CIRO, the enforcement branch of CIRO now operates as two divisions: Investment Dealers and Mutual Fund Dealers. The two divisions are working towards full integration and the development of a uniform case selection policy, Sanction Guidelines and a centralized complaint intake process. This is in alignment with one of CIRO’s stated strategic priorities: namely, the harmonization of its regulatory approach.

Notwithstanding structural integration matters left on the table upon the establishment of CIRO on January 1, 2023, its activities to date demonstrate that CIRO continues to seek a more active position in the Canadian regulatory environment.

Of the various successes championed in the Enforcement Report, a few stand out. In particular, 4,104 complaints were reviewed, 187 investigations were conducted, 108 disciplinary proceedings were completed and $25,140,343 in fines, costs and disgorgement were imposed. Moreover, activities are underway to harmonize CIRO’s regulatory approach and include the following:

• developing a centralized complaint intake process to simplify the process for investors and ensure it remains easily accessible
• integrating the Enforcement department and its operations, with priority on developing a uniform case selection policy to identify and pursue cases that send a strong regulatory message
• developing Sanction Guidelines to promote consistency, fairness and transparency in the disciplinary process
• pursuing legislative authority across the country that will improve Enforcement’s ability to collect and present evidence and provide statutory protection against malicious lawsuits

Both firms and individuals were the subject of increased scrutiny and enforcement activities in 2023. With respect to firms, CIRO’s Enforcement Report notes that in the typical course of investigations, Enforcement staff will assess whether a Dealer Member has fulfilled its supervisory obligations. In response to contraventions of supervision rules in particular, CIRO may tailor remedial measures to the particular compliance and supervision failings of that firm.

The Enforcement Report highlights three settlements with firms, in which each firm allegedly failed to establish and maintain a system of internal controls and supervision. In those cases (and in addition to enforcement actions against individual Approved Persons employed at the firms) the firms themselves were subject to the payment of fines and costs, remediation to clients and non-monetary measures such as a comprehensive review and the adoption of new policies, procedures and internal controls. In one case, CIRO agreed to significantly reduce the fine imposed on a firm in view of the of “exceptional cooperation” demonstrated through self-reporting and a comprehensive review and action plan. In another case, a firm paid a fine of $1 million in addition to costs and over $10 million in remediation to clients.

A closer look at enforcement statistics: Investment Dealer Division

The Enforcement Report’s published statistics also paint an illuminating picture regarding the diverse range of cases pursued in 2023. The Report supplies separate statistics for its Investment Dealer and Mutual Fund Dealer Divisions. Suitability continues to be a core focus, and the majority of investigations and enforcement proceedings were in Ontario for both the Investment Dealer and Mutual Funds Divisions.

Complaints to the Investment Dealer Division increased by 48% as compared to the previous year. In 2023, the distribution of the types of complaints to the Investment Dealer Division were as follows:

• unsuitable investments (26%)
• unauthorised and discretionary trading (19%)
• supervision (14%)
• misrepresentation (14%)

With respect to geographic distribution, Ontario had the highest number of completed investigations, followed by British Columbia and then Alberta. Nearly twice as many proceedings involving individuals were concluded (20 proceedings) as compared to proceedings involving firms (11 proceedings).

The total sanctions imposed against individuals increased dramatically in 2023 to $14,685,470 (as compared to $2,830,530 in 2022). The Enforcement Report noted that the 2023 figure was impacted by over $13 million in fines, disgorgement and costs imposed against individuals in three cases that are unlikely to be recovered. By contrast, the total sanctions imposed against firms has remained relatively steady since 2021, with just over $1 million in total sanctions imposed in each of 2021, 2022 and 2023.

Enforcement statistics: Mutual Funds Dealers Division

On the Mutual Funds Dealers Division side, the total number of complaints received increased dramatically in 2023 to 2,541 complaints (up from 1,635 complaints in 2022), representing a 55% increase. The distribution of the types of complaints to the Mutual Funds Dealer Division were as follows:

• suitability of investments (31%)
• business standards allegations (16%)
• unauthorized/discretionary trading (8%)
• transfer of accounts (8%)

As with the Investment Dealer Division, Ontario led the number of completed investigations launched by the Mutual Funds Dealers Division, followed by Alberta and British Columbia. The total sanctions imposed against individuals in 2023 was $8,050,873 (a decrease from the 2022 figures), and total sanctions imposed against firms was $1,362,500 (the highest increase as compared to figures from 2019 to 2022).

Looking forward: CIRO’s enforcement priorities

CIRO’s Enforcement Report dovetails with its recently released Annual Report [PDF], in which CIRO provided an update on its progress towards realizing its eight stated priorities.

One of CIRO’s eight stated priorities is to harmonize its regulatory approach as part of its operational integration. In its Annual Report, CIRO announced that the following regulatory harmonization sub-priorities have been completed:

1. the integration of the compliance department and its operations
2. the announcement of a phased plan to consolidate Investment Dealer and Mutual Fund Dealer Rules

Phase 1 of the consolidation plan is complete, with the establishment of a new rule set structure, which includes the adoption of rule interpretation provisions, definitions, rule exemption provisions and general standards of conduct applicable to all activities of the dealer and their employees and Approved Persons. CIRO has been accepting public comments on the rule set structure; the comment period is set to end on December 19, 2023.

The other eight “harmonization” sub-priorities — including commencing the integration of the enforcement department and its operations and establishing a centralized complaint intake process for the public — have not yet been completed but are on CIRO’s radar, as signaled by the Enforcement Report.

Implications

CIRO’s latest Enforcement Report and stated priorities highlight the regulator’s gradual — yet consistent — increase in enforcement activity, particularly when viewed through work of its legacy SROs: IIROC and the MFDA. (You can read our past reporting on reports from prior years here.) The increase in the dollar value of sanctions imposed against firms and individuals, as well as the increasing number of complaints and completed proceedings since 2019, indicates an aggressive enforcement strategy that will likely continue as the Investment Dealer and Mutual Fund Dealer divisions work towards full amalgamation in the coming years.

Understanding CIRO’s concerns and priorities is a significant component of managing risks and opportunities by regulated firms. The trends reported in its latest Enforcement Report emphasize the meaningful and impactful benefits of ongoing and appropriate enterprise risk management. The newly amalgamated regulator’s escalating reach will undoubtedly have an effect on its member firms, encouraging them and their personnel to develop, maintain and enhance a culture of compliance.