Investor advocates are taking aim at proposed regulatory changes that would resolve minor disciplinary cases more quickly but keep the names of those who broke the rules anonymous.
The Investment Industry Regulatory Organization of Canada (IIROC) – which oversees approximately 160 investment dealers and their investment advisers – proposed a rule change in April offering two alternatives in the way individuals and firms are disciplined for breaking the organization’s rules.
The proposal – which recently closed its second public comment period – includes a minor contravention program (MCP) where individual advisers could admit to wrongdoing and pay a standard $5,000 fine; and an early-resolution offer for investment firms that will give regulators more “flexibility" in addressing rule breaches, depending upon their seriousness.
However, investor advocates are raising concerns about the proposal saying the minor contravention program would be closing the door on publicly identifying offenders.
If the current proposal is approved, the minor contravention program would impose fines of $5,000 against individuals for minor violations where investors have not been harmed and would not require a full hearing. Advisers who admit to the minor violation would not have the infraction reside on their formal disciplinary record, and the public notice of the misconduct would remain anonymous.
In other words, an investor would not be able to search on a publicly available database for a record of an adviser having a history of contraventions of IIROC rules that are resolved under the minor contravention program.
“[We] question how such an outcome is in the public interest and consistent with IIROC’s stated goals of protecting investors and supporting healthy Canadian capital markets," said Ermanno Pascutto, executive director of the Canadian Foundation of Advancement of Investor Rights (FAIR), in his comment letter to IIROC.
“FAIR Canada remains unable to support the MCP and early resolution proposals in their current form.”
The Ontario Securities Commission’s Investor Advisory Panel also expressed concern about granting anonymity to advisers who committed minor violations.
“How can IIROC assert this proposal is in the public interest when the public – the stakeholder group often most directly impacted by the wrongdoing – is kept unaware of each MCP sanction?” the panel wrote in its letter. “In effect, the proposal creates a ‘secret’ disciplinary record that potentially can be considered by all stakeholders to evaluate the [adviser’s] proficiency and trustworthiness – by all, that is, except the public.”
“It is a bad bargain if IIROC trades away public disclosure, transparency and accountability in order to encourage quicker settlements,” the panel said.
IIROC investigates and prosecutes firms and investment advisers that breach its rules. Major infractions could include misappropriating funds from clients, falsely endorsing client signatures or making unsuitable recommendations to investors – which are commonly seniors and vulnerable investors who often suffer significant financial losses. None of these would be subject to the minor contravention program.
Currently, disciplinary actions are resolved in a settlement or a contested hearing. Instead, IIROC says the two proposed programs would allow it to address matters more quickly and efficiently, in a way that is more tailored to the nature of the misconduct while still providing a strong reminder to individuals and firms that they must meet regulatory requirements.
IIROC spokesperson Andrea Zviedris says the proposed programs would result in a “better use of IIROC’s resources,” allowing the organization to complete cases “more efficiently” and to “focus on more significant cases involving serious investor or market harm.”
“We want to ensure that any new disciplinary approaches we take are in place to protect investors and the integrity of Canada’s capital markets,” she said.
Throughout the process, IIROC says it has met with both investor advocate groups – inviting them to round-table discussions – and conducted an investor online survey for feedback. IIROC has not yet announced whether the rules will be approved or if a third comment period will be required.
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