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IIROC Releases Revised Sanction Guidelines

Author(s): Lawrence E. Ritchie, Lia Bruschetta, Test Ztest, Henry Ngan

Feb 10, 2015

On January 13, 2015, the Investment Industry Regulatory Organization of Canada (IIROC) released Revised Sanction Guidelines and related Policy Statements, which go into effect February 2, 2015. Both of these documents were previously released for comment on November 6, 2013.

The Revised Sanction Guidelines supersede and replace all previous versions of both the Dealer Member Disciplinary Sanction Guidelines and the Universal Market Integrity Rules (UMIR) Disciplinary Sanction Guidelines and, together with the Policy Statements, provide stakeholders with a clear articulation of the general principles and key factors relevant to the determination of sanctions.

Relevant Changes

Significantly, once implemented, there will no longer be ‘hard and fast’ rules for setting fines against members found to have violated IIROC’s Dealer Member and UMIR rules: the Revised Sanction Guidelines did away with the minimum fine requirements and/or prescribed fine ranges set out under the previous sanction guidelines in favour of a principle-driven approach. According to IIROC, the removal of specific guidelines for itemized regulatory violations will address the mistaken notion that sanction decisions are formulaic and determined through the application of a check-list, and will reinforce the concept that appropriate sanctions are determined on a case-by-case basis.

Further, credit for cooperation was explicitly included as a relevant factor to be taken into consideration when addressing allegations of, and investigations into, possible rule violations. The Revised Sanction Guidelines and related Policy Statements set out IIROC’s approach to providing credit for cooperation when determining sanctions. While the regulator is clear that cases of “egregious conduct” will merit a severe sanction, notwithstanding whether there is cooperation from a respondent, in the majority of cases it appears that cooperation would be a mitigating factor. That said, IIROC has indicated in its Policy Statements that, in light of the general requirement for respondents to cooperate with IIROC investigations, only “proactive and exceptional” cooperation will be considered as a mitigating factor. As detailed in item 8 below, IIROC has provided guiding factors which it indicates may be considered when assessing whether a firm or individual’s cooperation has met this threshold.

Sanction Principles

Part I of the Revised Sanction Guidelines set out the principles applicable to the imposition of sanctions in all IIROC disciplinary proceedings:

  1. Disciplinary sanctions are preventative in nature and should be designed to protect the investing public, strengthen market integrity, and improve overall business standards and practices. Sanctions should be significant enough to prevent and discourage future misconduct by the respondent (i.e. specific deterrence), and to deter others from engaging in similar misconduct (i.e. general deterrence). Guided by similar contraventions in similar circumstances, the sanction imposed must be proportionate to the conduct at issue and should be reduced or increased depending on the relevant mitigating or aggravating factors. Furthermore, IIROC’s Policy Statements specify that IIROC’s enforcement actions correspond to its public interest mandate; as such, only in exceptionally rare circumstance would internally imposed disciplinary sanctions abrogate a disciplinary proceeding.
  2. Disciplinary sanctions should be more severe for respondents with prior disciplinary records.  A prior disciplinary record for a similar or identical contravention strongly suggests that the prior sanction was not a sufficient deterrent, thereby necessitating heavier sanctions in order to address specific deterrence.
  3. For multiple violations, the total or cumulative sanction should appropriately reflect the totality of the misconduct. A global approach to sanctioning may be appropriate in situations where the imposition of a sanction for each contravention would be cumulatively excessive in the circumstances.
  4. Sanctions should ensure that a respondent does not financially benefit as a result of the misconduct. Disgorgement should be imposed on financial benefits such as profits, commissions, fees, or any other compensation or other benefit received, directly or indirectly, as a result of the misconduct.
  5. A suspension should be considered where: there has been one or more serious contraventions; the misconduct in question is fraudulent, wilful and/or reckless; the respondent engaged in a pattern of misconduct and/or has a prior disciplinary history; or, the misconduct in question has caused some measure of harm to investors, the integrity of a marketplace or the securities industry as a whole. Furthermore, IIROC’s Policy Statements clarify that IIROC will generally not seek suspensions greater than five years unless the misconduct is so serious as to merit a permanent bar. In other words, any misconduct warranting a suspension beyond five years will simply result in a permanent bar to the industry.
  6. A permanent bar to the industry should be considered where: the misconduct in question has an element of criminal or quasi-criminal activity;there is a reason to believe that the respondent cannot be trusted to act in an honest and fair manner; or, the contraventions involve significant harm to the investing public, the integrity of the market or the securities industry. Furthermore, IIROC’s Policy Statements note that, in some egregious cases, a fine and/or disgorgement should be considered even where a permanent bar is imposed.
  7. Inability to pay is a factor when considering an appropriate monetary sanction or costs only when raised by the respondent. However, financial hardship should not be a predominant or determining factor.
  8. In determining the appropriate sanction, a respondent’s proactive and exceptional assistance to IIROC in the investigation will be considered. In its Policy Statements, IIROC has indicated that credit for cooperation is appropriate in cases of proactive and exceptional cooperation, as this allows investigations to be completed expeditiously using fewer resources. The extent of credit, however, will vary depending on the severity of the circumstances; in some cases, the overall objectives of sanctioning necessitate a severe sanction notwithstanding proactive and exceptional cooperation from a respondent. IIROC’s Policy Statements list a few examples of factors that may be considered when the regulator is assessing a respondent’s cooperation: timely and detailed self-identification of suspected or uncovered misconduct; thorough internal reviews the results of which are shared promptly with IIROC; provision of evidence or testimony from persons beyond the jurisdiction of IIROC; and whether cooperation led to early resolution.
  9. Remedial sanctions tailored to the specific misconduct can be a useful tool in effectively addressing regulatory misconduct. In acknowledging that there is no ‘one size fits all’ approach, IIROC provides a few examples of sanctions that may be imposed, including the possibility of requiring a member to retain a qualified independent consultant to develop and/or implement procedures for improved compliance.

Part II of the Revised Sanction Guidelines animates the articulated principles by setting out a non-exhaustive list of 21 key factors that should be applied when determining the appropriate sanctions.

Assessing the Impact the Revised Sanction Guidelines

No longer burdened with prescribed minimum fines and fine ranges, IIROC’s disciplinary panels and settlement staff have broadened discretion to address sanctions. Both negotiated settlements and IIROC disciplinary hearings in the coming months will have to be examined closely to determine the impact of these guideline revisions as a practical matter.

In addition, the Revised Sanction Guidelines and related Policy Statements highlight the importance of pre-emptive risk management and strategic crisis response. “Proactive and exceptional” cooperation, which goes beyond the required baseline of cooperating fully with investigations and responding to requests for information in a timely manner, calls for careful preparation and thoughtful action – and should encourage firms facing possible regulatory sanctions to consider engaging industry experts early on to facilitate investigations, internal reviews, and/or independent compliance audits.