Provincial regulator threatens Canadian dealer group's powers

 

By David Clarke

April 3, 2006

OTTAWA - Could one province's securities regulator undermine the effectiveness of a key national regulator?

That remains to be seen. But the Investment Dealers Association of Canada, a Toronto-based self-regulatory body for brokerage firms, is taking a Saskatchewan case very seriously.

Fearing a precedent that could spread nationwide, the association is appealing a decision of a Saskatchewan Financial Services Commission panel that doesn't recognize the association's power to discipline its former members after they have left the industry.

The case, which dates back 10 years, involves two former IDA registrants and a third who still is in the industry, who appealed to the commission the decision of an IDA hearing panel.

At issue is IDA bylaw 20.7, which says: "Any member and any approved person shall remain subject to the jurisdiction of the association for a period of five years from the date on which such member or approved person ceased to be a member."

'A very important case'

"This is a very important case for the IDA," said Jeff Kehoe, the association's director of enforcement litigation. "Our ability to effectively regulate depends on our ability to discipline people allegedly involved in misconduct, even if they are terminated from their member firm."

The IDA is one of three associations to which some provincial securities commissions delegate certain aspects of securities regulation.

The others are the Mutual Fund Dealers Association of Canada and Market Regulation Services Inc., both of Toronto. Canadian Securities Administrators, an interprovincial body based in Montreal, acts as the de facto national securities regulator.

In its appeal motion, the IDA said that the commission erred in law in finding that the association "has no statutory authority to regulate its former members."

"One point we are trying to get across is that our relationship with our members is based on a contract," Mr. Kehoe said, "and 20.7 is part of that contract."

Alberta is the only jurisdiction in Canada that has granted authority to the IDA to collect sanctions from former members.

"If this ruling holds up in Saskatchewan, you may see some of the other jurisdictions contemplating whether they will need similar legislation [to the legislation in Alberta]," said Bill Rice, chairman of the Alberta Securities Commission.

And that would open up new problems for the IDA, which has been criticized for being in a conflict-of-interest position, as it was a trade association while also being responsible for policing and punishing its members.

On June 27, the IDA launched the Task Force to Modernize Securities Legislation in Canada, which it said will "recommend revisions to Canadian securities legislation and regulation to achieve a dynamic, fair, efficient and competitive capital market."

An enforcement arm

And the IDA is breaking itself into two. Capital Markets Regulation of Canada will be a stand-alone enforcement arm. A new trade association will retain the Investment Dealers Association name, albeit with a new logo, and will be headed by IDA senior vice president Ian Russell.

"We're one national trade association, and we speak on behalf of all our members coast to coast," Mr. Russell said in a statement. "We will not only marshal industry opinion on regulatory and public-policy issues but provide leading and qualified opinions on financial issues and capital markets."

The new trade association will be national in scope, with regional offices across the country. Membership will be voluntary.

CMR has a powerful tool, a database called ComSet, which can be used to track complaints, monitor industry trends and spot issues.

All 200 members of the IDA must report all client complaints, internal investigations, disciplinary actions and civil suits within 20 days to ComSet.

ComSet also tracks reports of money laundering, market manipulation, insider trading, internal and external disciplinary actions, and arbitration notices.

The IDA says that 87.6% of its registered representatives have had zero "events" reported on ComSet since mandatory reporting began in October 2002. Of 3,929 reported complaints registered with IDA members over the two years through February, 463 remain outstanding.

Only 15 charged

Still, only 15 individuals on the ComSet database have been charged with a criminal offense since 2003.

Whether that is enough is a question for the various police agencies and legislatures who create the securities regulatory regimes.

"Basically, all member firms must report complaints, internal investigations launched, civil lawsuits and certain criminal charges within days of them happening," said Mr. Kehoe. "So of the over 23,000 registrants, we receive less than 2,000 complaints/ events each year."