The Canadian Securities Administrators (CSA) have demanded that the Investment Industry Regulatory Organization of Canada (IIROC) boost business conduct compliance activities after the CSA noted serious deficiencies in multiple consecutive oversight reviews. In an Oversight Review Report on IIROC published July 4, 2017 (Report), CSA flagged ‘Business Conduct Compliance’ as a high priority area requiring immediate action. This public censure will likely result in stricter enforcement of IIROC dealer members.
The Report comes out of an oversight review of IIROC conducted by staff of seven provincial securities regulators, covering a period from April 1, 2015 to July 31, 2016. The purpose of the review was to assess whether the selected regulatory processes of IIROC were “effective, efficient, and applied consistently and fairly, and whether IIROC complied with the terms and conditions of the [CSA members’] recognition orders.” The Report also evaluated whether recommendations in the previous Oversight Review Report published on March 3, 2016 (covering the year before the period addressed by the current Report) (Previous Report) had been dealt with satisfactorily. The Report categorized deficiencies as high, medium, or low priority. High priority items “will result in IIROC not meeting its mandate” and require IIROC to “immediately put in place an action plan,” the implementation of which is to be directly monitored by the CSA.
The Report’s most serious findings concerned IIROC’s ‘Business Conduct Compliance’ function: monitoring dealer member compliance with non-financial regulatory requirements such as suitability of investments, account opening procedures, and supervision of advisors and other staff.
The Report deemed the adequacy of examination procedures to assess suitability in managed accounts as the most notable deficiency, rating it a high priority item and noting that it was a holdover issue from the Previous Report. The Report also expressed CSA’s expectation that IIROC would (i) increase training of examiners to ensure that dealer members’ overall commitment to compliance is more accurately measured, and (ii) take regulatory action such as referral to the enforcement division as well as the imposition of terms and conditions, to ensure deficiencies do not persist over time. On the question of serious or repeat offenders, IIROC was urged to use expedited enforcement tools more frequently on such dealer members, and to take a “holistic” view of dealer members that encompasses any history of non-compliance.
IIROC responded to these criticisms in a press release stating it “takes the recommendations seriously” and intends to fully address the flagged issues. IIROC further announced that it is developing more rigorous programs to train ‘Business Conduct Compliance’ staff, and that it will begin formally considering a firm’s regulatory history in its compliance referral process.
Dealer members are cautioned that IIROC may step up examination and enforcement activities in the wake of the Report. While it remains to be seen how much more detailed the review process will become, the non-financial regulatory obligations of dealer members are likely to come under the magnifying glass.