Risk Management and Crisis Response Blog

IIROC moving forward with new enforcement tools

Apr 26, 2019 4 MIN READ
Authors
Lawrence E. Ritchie

Partner, Disputes, Toronto

Lia Bruschetta

Partner, Disputes, Toronto

The Investment Industry Regulatory Organization of Canada (IIROC), Canada’s national investment dealer self-regulatory organization, has announced it is moving forward with a series of new enforcement proposals. If implemented, the proposals represent what may be significant alternative approaches within its enforcement toolbox. 

On April 25, 2019, IIROC released a request for comments on Rules Notice 19-0076.

Rules Notice 19-0076 comes as part of IIROC’s Three Year Strategic Plan, where IIROC adopted an objective to expand their portfolio of Enforcement Options, and follows an earlier Rules Notice published in February 2018 (Rules Notice 18-0045) where IIROC requested comments from Canadian investors, industry members and other stakeholders on two proposed alternative forms of disciplinary action:

  • Minor Contravention Programs (the MCP); and
  • Early Resolution Offers

In Rules Notice 19-0076, IIROC has signaled to the market that it is pushing forward with its plans for these proposed alternative disciplinary tools, and is now seeking comments from market participants on proposed amendments to Consolidated Rules 1200, 8200 and 8400 (the Proposed Amendments) relating to the MCP, and a Staff Policy Statement to adopt the Early Resolution Offers program.

If implemented, these measures would significantly expand the options available to IIROC Enforcement Staff to address wrongdoing.

The Minor Contravention Program (the MCP)

The MCP is meant to provide a more efficient means to resolve cases that cannot be adequately addressed by way of a Cautionary Letter, but do not warrant formal disciplinary proceeding.

After considering public comments, IIROC refined the MCP from what was initially set out in Rules Notice 18-0045. Specifically, IIROC indicated that the MCP will not apply to Dealer Members (firms) as originally proposed – but only to Approved Persons. Sanctions will remain fixed, but will be increased from the originally proposed $2,500 for Approved Persons, to $5,000, and IIROC has advised that each case resolved by the MCP will be approved in a streamlined process by a one-member hearing panel.

What hasn’t changed are the principles behind the MCP.

Cases resolved by way of MCP will be at Staff’s discretion, and based on principles consistent with those set out in IIROC’s Sanction Guidelines.

The types of contraventions that could fall under the program are those where contraventions of IIROC’s requirements are isolated and/or result in limited or not hard to the public and the capital markets. This could also include, for example, circumstances where a contravention was technical, or where conduct was unintentional or inadvertent.

MCP proceedings will not be made public, other than certain anonymous reporting that Staff will issue to track statistics regarding their use year by year. Nor will they need to be disclosed on an Approved Person’s Form 33-109F4. However, the CSA and other Canadian self-regulatory organizations will have access to MCP information.

Staff’s Policy Statement: Early Resolution Offers

In Staff’s view, the Staff Policy Statement will similarly promote resolving cases efficiently, by encouraging settlement agreements at an earlier point in the enforcement process.

Specifically, in Rules Notice 19-0076, IIROC has disclosed for the first time that those Dealers and Approved Persons who choose to resolve a case by Early Resolution Offer will be granted a reduction of 30% on the sanctions Staff would otherwise seek in a settlement agreement and a quicker resolution of the proposed enforcement proceeding.

This is a significant incentive to respondents who receive such an offer, and they will now have a clear understanding of the credit Staff is prepared to offer them for timely resolution of a proposed enforcement proceeding.

In cases that meet the outlined criteria (i.e., where, for example, the scope of harm has been determined, there is evidence of proactive cooperation, non-compliance has been remedied, the respondent has agreed to disgorgement and/or compensation of clients, if required, and, in the case of individuals, they have been internally disciplined), Staff will make formal offers to settle at an earlier point in time in the enforcement process, and the time for acceptance will be strictly time-limited.

If rejected, the matter will proceed through the normal enforcement process. Any settlement agreement reached through this procedure will still be subject to acceptance by an IIROC hearing panel.

A step toward more flexible enforcement outcomes  

The flexibility that these programs offer suggest that the regulator is taking very seriously it’s stated objective to have robust and, most importantly, appropriate enforcement tools to address wrongdoing in a fair and proportionate manner. In addition, the operational efficiencies that may be gained could prove helpful to the regulator in managing its case load year to year.

IIROC is inviting comments on the Proposed Amendments and the Staff Policy Statement in writing until July 24, 2019.