Investors Scrutinizing the Regulators

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OSC audit criticizes IDA, sparks departures
Two key IDA executives resign after performance appraisal find problems; provincial regulators also conducting reviews
April 2001


By James Langton

The Ontario Securities Commission has delivered a critical performance appraisal to the Investment Dealers Association of Canada, which has the IDA scrambling to pull up its socks.

Meanwhile, two key IDA executives – Greg Clarke, who headed the regulatory arm as senior vice president of member regulation; and Fred Maefs, who ran the IDA’s enforcement function – have departed the IDA.

Their departures come partly in response to the OSC compliance audit, which criticized the IDA’s regulatory function. Among other issues, the audit takes the IDA to task for its member regulation, the efficiency of the enforcement function and a lack of transparency to the regulatory process.

Joe Oliver, IDA president and CEO, will say only that the organization has engaged executive-search firms to look for replacements for Clarke and Maefs and hopes to have them in position soon.

As for the compliance audit, he acknowledges that the OSC has recently identified a number of issues regarding the IDA’s performance as a delegated SRO. "We are moving to address them," he says.

Harry Schaefer, one of the IDA’s public directors and a member of its regulatory oversight committee, says the OSC report did find problems. "Have you ever seen an audit that didn’t?" he asks, adding that the IDA is taking the necessary steps to address the deficiencies.

Neither Oliver nor the OSC is revealing many details about the report. Toni Ferrari, manager of the OSC’s compliance department, which was primarily responsible for the report, refers questions on the report to Frank Switzer, the OSC’s director of communications. Switzer says the OSC does not disclose the contents of these reports to encourage the subjects of the compliance audits to be forthcoming in the course of the audit.

Switzer says, however, the OSC is generally satisfied with the IDA’s job.

Given that it delegates regulatory authority to the IDA, the OSC would be implicating itself if it was seen to be blasting the IDA for regulatory deficiencies.

If nothing else, the fact that both Maefs and Clarke have departed in the wake of the report indicates the OSC does have some meaningful concerns about the job the IDA is doing.

In the past, the OSC criticizing the IDA for its regulatory performance would have been seen as the pot calling the kettle black. But since the OSC received self-funding status and began beefing up its compliance and enforcement, it is now in a position to demand a better job from the IDA.

Oliver says the IDA is going to have to ramp up its own activities to keep pace with the more aggressive OSC, which now has higher expectations for the other regulatory authorities, too. "It is raising the bar," he says.

The other issue the IDA has been grappling with is growth. The IDA’s enforcement division was created in 1997 when the Toronto Stock Exchange transferred responsibility for member regulation to the IDA. Since then the IDA has also picked up member regulation responsibility from the Canadian Venture Exchange. It faces even more new members in adopting rules to make SRO membership mandatory for securities dealers in various provinces. Oliver says the IDA now has regulatory responsibility for about 97% of the securities business in Canada.

But if the IDA has such a big job before it on the regulatory side, some question whether it should serve as both an SRO and the trade association for the securities industry. Oliver doesn’t believe it is time to separate those functions. He says the IDA can handle both jobs and that the group’s dual role is not a strategic issue. Oliver also argues that one group doing both jobs doesn’t create a conflict of interest.

"The key issue is the conflict inherent in self-regulation," he says, "and we have to deal with that, just as the Nasdaq does, and any SRO does, with a series of very important checks and balances."

One of those big checks is meant to be the oversight of the provincial regulators – but the IDA has engaged in a fair amount of navel gazing on its own over the past couple of years, too. Just three years ago it hired the Boston Consulting Group Inc. to examine its performance. The BCG report generated a series of recommendations for the IDA, and it also gave rise to a powerful new committee of the board to review its SRO responsibilities. The IDA has also hired Fred Kaufman, a former judge of the Quebec Court of Appeal, to review its enforcement record.

While the IDA may have been working to improve its regulatory performance before the OSC report, the sudden departure of Maefs and Clarke seems to indicate that it is now getting more serious about it. The report from the OSC has the IDA scrambling to make changes to appease it.

Next up is B.C. Dean Pelkey, media relations officer at the British Columbia Securities Commission, confirms it is conducting its own audit of the IDA. It is also looking at all the IDA’s functions: from registration to sales, financial compliance and enforcement. "The idea is to ensure the IDA is conducting its responsibilities in an effective manner, making sure it is doing its job well," says Pelkey.

The IDA can look forward to more attention from the provincial regulators. The Canadian Securities Administrators has developed a co-ordinated oversight plan for the IDA. Oliver says the securities commission in Alberta is reviewing its work, as is Quebec, even though the IDA is not yet recognized as an SRO there.

The OSC is pledging to continue to strengthen its own oversight role. It is planning to develop a risk-based approach to oversight and compliance.

It also plans to beef up the resources dedicated to SRO oversight, and to improve its methods of dealing with the IDA and other SROs. As well, it plans to complete a review of the TSE soon. IE