IIROC Advances Two New Forms of Disciplinary Action
In a recent Notice (the 2019 Proposals), the Investment Industry Regulatory Organization of Canada (IIROC) announced that it proposes to move forward with two new disciplinary programs (the Programs) that were first published for public comment last year:
- A Minor Contravention Program (MCP) that would impose fines on approved individuals ($5,000 per contravention) for minor offenses that might not have triggered any substantive legal action by IIROC Staff in the past.
- An Early Resolution Offer (ERO) process that would permit IIROC Staff to make formal offers of settlement earlier in the enforcement process, at the time, or shortly after, a formal investigation is commenced. The ERO would constitute IIROC Staff’s “best offer” to settle by granting a reduction of 30% on the sanctions Staff would otherwise seek in a settlement agreement at a later stage.
Public comments on the 2019 Proposals may be submitted to IIROC until July 24.
The 2019 Proposals are largely consistent with the 2018 Proposals, but introduce several significant revisions which we touch upon below. For a detailed description of the 2018 Proposals, please refer to our previous article.
The Minor Contravention Program
The MCP would broaden the spectrum of options available to IIROC Staff after an investigation is completed by allowing IIROC Staff to seek a fine in situations that call for a stronger regulatory response than a cautionary letter with no formal legal effect, but do not warrant the initiation of formal disciplinary proceedings against an approved person.
Significantly, the MCP:
- will no longer be available to dealer firms (only to approved persons)
- the fixed fine has been increased to $5,000
- each MCP agreement will be subject to approval by a one-member hearing panel under a streamlined process.
The process and key features of the MCP as described in the 2018 Proposals remain largely unchanged, as do the eligibility criteria IIROC Staff consider to determine whether a contravention by an approved person may be resolved using the MCP.
If Staff determines the MCP eligibility criteria are met, Staff would provide a “minor contravention notice” (MCP Notice) to the approved person in lieu of commencing a disciplinary proceeding. The MCP Notice would:
- not be public
- set out the IIROC requirement(s) contravened
- summarize relevant facts
- state that if the approved person agrees to the terms of the MCP Notice within a prescribed period of time, a $5,000 fine would be imposed on the approved person.
An approved person who agrees to an MCP Notice admits to contravening the specified IIROC requirement(s). Staff may rely on this admission as an aggravating factor at a future disciplinary proceeding involving the approved person.
The MCP agreement would then be submitted by IIROC Staff for acceptance by a one-member hearing panel. This proceeding:
- would not be public
- would not represent a formal disciplinary proceeding
- would not need to be disclosed by the approved person on his or her securities registration forms, though Canadian securities administrators and other Canadian self-regulatory organizations would have access to MCP information.
If the one-member hearing panel accepts the MCP agreement, it becomes binding on all parties.
If the one-member hearing panel rejects the MCP agreement:
- the parties may still enter into a subsequent settlement agreement, but not an MCP agreement, in respect of the matter
- Staff may commence a disciplinary hearing based on the same or related allegations and charges
- the decision to reject the agreement:
- must be made available to a hearing panel considering a subsequent settlement agreement based on the same or related allegations and charges
- must not be made public or referred to in a subsequent disciplinary hearing.
On a quarterly basis, Staff would issue a public notice in respect of matters resolved by way of MCP agreement, specifying the contravention and a summary of the facts set out in each MCP agreement, without identifying the individual involved. On an annual basis, Staff would make public the number of MCP agreements accepted each calendar year.
Because approved persons may find the MCP an attractive alternative to facing public disciplinary proceedings, approved persons may be more open to making admissions in response to an MCP Notice. Such admissions may adversely affect their dealer firms, so firms may want to follow closely any MCP process involving its approved persons and should adopt appropriate MCP policies and procedures.
Early Resolution Offers
EROs are intended to incentivize respondents (including dealer firms) to enter into a settlement agreement with Staff earlier in the enforcement process, at the time, or shortly after, a formal investigation is commenced, by seeking lower fines and cost. Settlements reached by way of ERO would still be subject to acceptance by an IIROC hearing panel.
Significantly, the 2019 Proposals now specify that the use of an ERO would reduce by 30% the sanctions that Staff would otherwise seek in a settlement agreement.
Staff may extend EROs after considering whether the following ERO eligibility factors are met:
- Staff reasonably believes it has determined the extent, scope and harm of the misconduct
- the extent to which the subject has demonstrated proactive and exceptional cooperation in accordance with Staff’s Policy Statement on Credit for Cooperation
- the extent to which the non-compliance has been remedied or will be remedied as part of the settlement
- where there are clients losses, compensation must be paid
- where there has been a financial benefit, the full amount of the profit or loss avoided must be disgorged
- whether individuals have been internally disciplined
- whether the respondent, through counsel, an agent or otherwise, has expressed a willingness to resolve the matter in a timely manner.
We invite you to contact a member of our Securities Regulation and Investment Products Group should you have any questions regarding how the new proposed Programs might affect your business.
IIROC disciplinary action Minor Contravention Program early resolution Early Resolution Offers