IIROC Proposes Two New Forms of Disciplinary Action Against Dealer Firms and Approved Individuals
Recently, the Investment Industry Regulatory Organization of Canada (IIROC) proposed two new disciplinary programs (the Programs) that will be of interest to IIROC Dealer Members and Approved Persons:
- A “Minor Contravention Program” (MCP) that would impose fines on dealer firms ($5,000 per contravention) and their approved individuals ($2,500 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 reduced fines and costs sought by IIROC Staff by way of ERO will constitute IIROC Staff’s “best offer” to settle.
The Programs would increase the number of enforcement options available to IIROC Staff. Comments on the proposed Programs may be submitted until May 23, 2018.
The Minor Contravention Program
The current spectrum of options available to IIROC Staff after an investigation is completed ranges from closing a matter with no action, issuing a cautionary letter with no formal legal effect that sets out Staff’s opinion that a rule has been contravened, or initiating formal discipline proceedings.
The MCP would allow IIROC Staff to seek the imposition of a fine in situations that call for a stronger regulatory response than a cautionary letter but do not warrant the initiation of formal disciplinary proceedings.
Key features of the MCP include the following:
- Staff will determine whether a contravention by an Approved Person or Dealer Member may be resolved using the MCP by considering whether the following key MCP eligibility criteria are met:
- the contravention is technical
- the contravention is isolated
- the contravention resulted in limited or no harm to clients, other market participants or the reputation of the marketplace
- the contravention resulted in limited or no benefit to the firm or individual engaged in the conduct or any related parties
- the conduct was unintentional or inadvertent.
- If the above criteria are met, Staff will consider the following additional MCP eligibility criteria:
- whether the conduct is admitted
- whether the conduct is self-reported
- whether the conduct has been the subject of internal discipline by the firm
- whether corrective or remedial measures were taken
- whether voluntary compensation has been made, including voluntary disgorgement of commissions, profits or benefits.
- A private MCP Notice is issued by IIROC Staff to an Approved Person or Dealer Member in lieu of commencing a disciplinary proceeding. The MCP Notice would specify the alleged IIROC requirement contravened, the facts relied on to support Staff’s allegations, the fine sought and the period of time the recipient has to respond.
- If the Approved Person or Dealer Member voluntarily agrees to the terms of the MCP Notice:
- the recipient admits to contravening the specified IIROC requirement
- Staff would be prohibited from initiating a disciplinary proceeding based on the admitted contravention
- the admission would not constitute a formal disciplinary record and the recipient firm or individual would not be required to disclose it as disciplinary history
- IIROC Staff may rely on the admission at a future disciplinary proceeding against the recipient.
- Anonymous Public Notice of admission: On a quarterly basis, Staff would issue a public notice setting out all matters resolved by way of MCP Notice, specifying the contravention and a summary of the facts set out in the MCP Notice without identifying the individual or firm involved. IIROC would also promptly notify the Canadian Securities Administrators (CSA) of all MCP Notices.
- If the Approved Person or Dealer Member does not voluntarily agree to the terms of the MCP Notice, Staff may commence a disciplinary proceeding against the recipient of the MCP Notice.
- The MCP will generally not be available when the following factors are present:
- the conduct is deliberate
- there is a prior disciplinary history
- there is significant harm to investors or the reputation of the capital markets
- the conduct involves serious and complex issues
- the conduct relates to whether a firm fully and properly supervised securities-related activity.
Early Resolution Offers
Currently, in the context of an enforcement action, settlement agreements with IIROC Staff are typically reached after a full investigation is completed and following extensive negotiations between Staff and the Respondent. The process is resource intensive for both IIROC Staff and respondents. EROs are intended to incentivize respondents 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.
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
- whether the respondent has or agrees to disgorge the amounts obtained or loss avoided as a result of the contravention
- whether the respondent has compensated or agrees to compensate affected clients
- 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.