CSA reports significant increase in fines for 2015

Ryan Morris, a partner at Blake, Cassels & Graydon LLP in Toronto, is “a fan of the transparency the numbers bring.” But “it’s interesting what the numbers don’t talk about,” he adds, referring to parts of the report where clarity’s lacking. For example, the highlight of the report—the large increase in fines and administrative penalties—isn’t put in context. “There were a few large-dollar cases that concluded in 2015 that may be skewing that number high,” says Morris, “so it’s difficult to rely on [the number] as indicative of an overall change in direction or an overall trend.” (The report mentions four concluded cases with penalties of more than $20 million each. )

David Di Paolo, a partner at Borden Ladner Gervais in Toronto, has a possible explanation for the increase: “What I’ve seen in the last couple years—and I really saw an uptick in this last year—is that the fine requests (what the regulators are looking for in the context of settlement negotiations or contested proceedings) have gone way, way up.”

He also highlights the report’s mention of CSA members’ collaborative partners: other members, law enforcement agencies, the OSC’s joint serious offences team and U.S. authorities. “It may be that collaboration is leading to them identify[ing] potentially more serious issues that drive higher fines.”

Rebecca Wise, an associate at Torys LLP in Toronto, points to the increase in insider trading cases. Proceedings commenced doubled compared to 2014. “That statistic is consistent with an increasing regulatory and legislative focus,” she says, referring to a 2015 Ontario Securities Act amendment that made insider trading rules apply to issuers outside Ontario.

Further, “The OSC’s been, increasingly, using its public interest jurisdiction to capture problematic trading activities that may not technically fall inside the insider trading regulations,” Wise says.

More questions

The report is short for details on some important questions. Asks Morris: “How much of [these fines] are they actually going to collect? CSA doesn’t tackle that issue.” And, “there’s no information here about how any of these penalties hold up on appeal.”

Another omission: there’s no assessment of the effect of Ontario’s no-contest settlements, says Morris. OSC adopted no-contest settlements in March 2014 to allow parties in certain case types to settle without admitting wrongdoing. “Granted, there haven’t been a great many [no-contest settlements],” he says, but it would be interesting to know their impact.

Di Paulo has doubts about that impact. “In practice, what’s happening is the no-contest settlement is accompanied by, effectively, a statement of facts: a statement of allegations. […] It’s not clear to me that in the context of a civil case you’re going to be that much better off,” he says, because the allegations will be admitted to the case.

Regardless, Wise says, “It’s good to see recognition of the OSC’s continued use of [the] no-contest settlement.”

Morris points out further issues in the numbers, such as whether the proportion of respondents receiving jail time (15 of 200) is increasing. “They’ve not phrased this in such a way that made it easier to compare,” he says. Instead, ordered jail terms are reported: 10 years in 2015 compared to 7.5 years in 2014.

Similarly, it’s difficult to tell whether enforcement under the Criminal Code is increasing, he says. The report states there were four sentences under the Criminal Code in 2015, but doesn’t compare that with previous years.

“There will be some changes in [enforcement under the Criminal Code] going forward,” adds Morris, “because of the new Cooperative Capital Market Regulatory System, which moves a number of offenses from the Criminal Code into the federal Capital Markets Stability Act. The conduct will stay the same, but it will no longer be prosecuted under the Criminal Code.”

Di Paolo remarks on what hasn’t changed compared to previous years: metrics such as number of proceedings commenced, number of respondents and types of cases. “You see a remarkable amount of consistency, and that is not unexpected. If you look at the CSA’s approach to enforcement, it probably took a turn to be a bit more aggressive three to four years ago. So it doesn’t surprise me that you’re seeing consistency from that point in time to this point in time.”

02 IIROC’s 2016 compliance priorities report

Also in February, IIROC published its annual compliance priorities review, which outlines key IIROC examination areas, such as CRM2, debt transaction reporting and best execution. In a press release, IIROC said KYC and suitability remain priorities, given almost half of prosecutions against individual registrants in 2015 involved suitability violations.

Alix d’Anglejan-Chatillon, a partner at Stikeman Elliott LLP in Montreal, calls the report “an excellent roadmap” for member firms to understand where IIROC’s review resources will be focused.

In addition to conventional areas, such as client onboarding, she describes IIROC’s focus as systems-related, targeting things like market structure and business risk. This focus “reflects the fact that dealer member firms are at the core of business systems in the financial services industry—in addition, of course, to [banks]—in terms of custodial responsibilities [and] IT systems relating to trading.”

For example, “They’re building on their 2015 guidelines and recommendations to the market on how best to address cyber-security risks,” she says.

D’Anglejan-Chatillon also cites automated advice and social media. “Now that the market for [automated] services is expanding, [IIROC’s] focusing on the unique risks associated with robo-advising and social media commentary. That’s a very interesting angle to this report.”

Adds Morris, referring to rules about social media advertising: “IIROC is clearly grappling with structural changes in the market that [it] certainly hadn’t anticipated when the regulations were drafted. […] Presumably [IIROC will] be amending the dealer member rules […] as needed to ensure [it] can continue to regulate effectively in a changing market.”

D’Anglejan-Chatillon notes that with the expansion of automated services, “the systems being implemented to collect KYC-, KYP- and suitability-type information are going to have to be a lot more robust.” The report states one of IIROC’s priorities is identifying deficiencies in online business models.

At the same time, IIROC is “open to alternative approaches and different models of risk tolerance assessment,” says Morris, summarizing IIROC’s sentiments.

Di Paolo has first-hand experience. “I’m seeing [different models] in my practice,” he notes. “You’ve got different dealers using different tools to conduct their suitability assessments,” a challenge mentioned in IIROC’s report. Di Paolo says he spends a lot of time explaining those tools to IIROC examiners during enforcement investigations.

IIROC’s main message in the report, says Di Paolo, is that “technology’s great, but it doesn’t obviate your regulatory requirements.”

by Michelle Schriver, assistant editor of Advisor Group.