Top five takeaways from IIROC’s 2019 enforcement report

The Investment Industry Regulatory Organization of Canada (IIROC) has released its 2019 Enforcement Report (the Report)¹. The Report provides insight into IIROC’s enforcement activities in 2019, and is a harbinger of IIROC’s enforcement focus and priorities for the coming year. The Report is therefore worthy of careful consideration by registrants; below are our top five takeaways.

1. Increased fines for firms and expanding collection power

In 2019, IIROC collected $1,775,000 in fines from dealer members, up from $860,000 in 2018. There was a marked increase in the average fines for dealer members: the average fine for firms more than doubled from $86,000 in 2018 to $221,875 in 2019.

The average fine for individuals actually fell in 2019 from approximately $66,000 in 2018 to approximately $57,000. This was accompanied by a decrease in the number of decisions affecting individuals from 42 in 2018 to 28 in 2019.

It has long been a goal of IIROC enforcement to strengthen the efficacy of its sanctions by having the power to enforce them through the courts. The Report touts that IIROC now has the power to collect fines through the court system in 12/13 Canadian jurisdictions (Newfoundland and Labrador being the one outlier). This enhances IIROC’s ability to collect fines from parties, regardless of whether they remain registered with IIROC. This is more significant for individuals than firms as the Report notes that IIROC is able to collect approximately 97% of levied fines from firms but only 29% from individuals.

2. A focus on capital markets violations

While suitability of investments for retail investors remains a core focus of IIROC, representing approximately one third of the prosecutions, 2019 saw an increased focus on capital markets violations (e.g., violations by trade desks and investment banking units, as opposed to infractions by registered representatives). The Report highlights trading and investment banking-related enforcement matters.

In one matter, IIROC levied fines against a dealer member and its Ultimate Designated Person of $45,000 and $40,000 respectively, for failing to follow the dealer member’s policies and procedures regarding the receipt and containment of confidential information, which resulted in four issuers not being added to the firm’s grey list in a timely manner and permitting the trading of securities of one of these companies.

In another matter, fines totaling $280,000 were levied as a result of a failure to implement appropriate safeguards to manage the confidential information of an issuer that the dealer member’s corporate finance group had proposed a bought deal to at the same time that an institutional sales trader was assisting the issuer with marketing activities. IIROC found that the dealer member did not adequately consider how the corporate finance group’s activities could potentially expose the employee to confidential information. Additionally, the employee failed to alert the dealer member’s compliance department that he had received confidential information about the issuer, (as he was required to do by the firm’s policy). As a result, the dealer member was unable to appropriately monitor the employee’s activities related to the issuer.

Additionally, the Report highlights IIROC’s scrutiny, through enforcement, of underwriting syndicate practices and a technical violation of UMIR 6.4 (UMIR 6.4 requires that trades be entered on a marketplace, the respondents settled trades related to the offering in question by way of journal entries without seeking an exemption from IIROC allowing them to do so), which resulted in a total of $1.5 million in sanctions.   

3. Emphasis on gatekeeping obligations

The Report highlights the prosecution of registered representatives who failed to meet their gatekeeping obligations related to suspicious trading activities. The registered representatives received unsolicited orders for two illiquid securities from a number of related clients. These clients were engaged in frequent same-day trading (including trading on opposite sides of the market) which sometimes resulted in no economic benefit. IIROC determined that these registered representatives should have questioned the trading on the basis of the numerous red flags present, or at a minimum sought an explanation from their clients about the trades’ legitimacy. IIROC determined the registered representatives failed to fulfill their gatekeeper obligation to prevent potentially manipulative and suspicious trading.

These prosecutions demonstrate IIROC’s high standards for registered representatives to not only to protect their clients’ interests but also to uphold the integrity of the markets.

4. Continued cooperation between IIROC and other regulators

The Report emphasizes IIROC’s regulatory role as complimentary to the Canadian Securities Administrators (CSA) stating that IIROC works with CSA jurisdictions on matters of mutual interest. The Report highlights that IIROC’s Trading Review & Analysis team referred 41 market-related cases to the CSA in 2019. Thus, if an IIROC investigation identifies issues that would be better addressed by a provincial securities regulator, parties can expect IIROC to work in concert with the relevant securities regulator to investigate and prosecute these issues as necessary.

5. Developing IIROC’s enforcement toolkit

The Report discusses IIROC’s continued development of two alternative forms of disciplinary action: a Minor Contravention Program (the MCP) and Early Resolution Offers (ERO). As a result of comments from the public and a survey of over 1,000 investors IIROC has revised both proposals and expects to publish its response to comments later this year. The MCP has been revised to exclude dealer members, increased the fine for individuals from $2,500 to $5,000, and that each case resolved by the MCP would be heard by a streamlined process involving a one-member panel. The ERO proposal has been clarified to state that respondents facing disciplinary action who opt for an ERO would receive a 30% sanction reduction.

It is assumed that both of these alternative forms of disciplinary action are designed to improve the efficiency and effectiveness of IIROC’s enforcement activities. Registrants should be aware that the MCP is likely to increase the number of enforcement matters that IIROC previously may not have pursued given the time and expense of doing so. The ERO program is similarly focused on reducing the number of cases requiring the time and expense of full disciplinary hearings which will allow IIROC to operate more efficiently.

Statistics of interest

Below are some of the statistics of note taken from the Report:

• Complaints by received by IIROC in 2019: 1,148 (up from 1,089 in 2018)
• Number of investigations completed in 2019: 104 (down from 127 in 2018)
• Disciplinary proceedings commenced in 2019: 36 (about the same—35 in 2018)
• Completed prosecutions in 2019: 36 (down from 52 in 2018)
• As in prior years, the most common regulatory violation prosecuted was again for Suitability/Due Diligence/Handling of client accounts

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¹ The Report can be found here.