IIROC says it is focused on systems-related risks like market structure and weaknesses in trade execution, enhanced suitability and outsourcing.
The self-regulatory organization for investment dealers says in its annual compliance priorities report that it is reviewing its risk models informing the frequency and content of compliance examinations. The review “could result in recalibration of risk attributes, metrics or weightings,” the report says.
More firms are outsourcing business functions, IIROC notes, to manage operating expenses, and “due diligence is especially important to ensure that third-party IT service providers protect dealers’ data against cyber threats.” IIROC adds: “We remind Dealer Members that outsourcing regulated activities in no way diminishes a registrant’s responsibility to comply with IIROC rules and to supervise the service providers’ performance.”
Read: Worried about conflicts of interest? IIROC and MFDA are watching
Some highlights of the report:
Terms and conditions of IIROC membership
IIROC says it may impose terms and conditions on a dealer member’s membership — such as business restrictions on opening new accounts or hiring additional staff — to ensure continuing compliance with IIROC’s requirements.
IIROC adds in the report: “We will use this new authority primarily to address situations in which there are outstanding compliance issues that clearly require regulatory action, but may not be best addressed through an enforcement proceeding (although the imposition of terms and conditions does not preclude the initiation of an enforcement proceeding against the dealer).”
Incomplete notices of termination
IIROC has a warning for dealers who continually provide incomplete information in their notices-of-termination filings. They may be referred to a training session pilot program to ensure they understand their obligations.
Selling group allocations
IIROC notes there is a trend where small dealers, as part of the selling group of an underwriting syndicate, “borrow freely-traded securities of the issuer and short-sell their assigned allocation into the market without making any bona fide effort to solicit expressions of interest or build an order book for sales to their retail clients. On closing date of the underwriting, the newly issued securities are used to cover their short position.” IIROC says it will monitor the appropriateness of this activity.
Best execution
In light of the order protection rule, IIROC says it is reminding dealers to consider all available sources of liquidity when developing best execution policies and procedures. IIROC will also closely monitor bulk order handling and allocation.
MFDA members offering ETFs
IIROC is also reminding dealers that, to facilitate the execution of ETF orders originating from a mutual fund dealer, they must set up an omnibus trading account. Executing mutual fund dealers’ customer orders on a fully disclosed basis would violate IIROC rule 35, the report says.
Read the full report.
Also read:
Why regulators should provide cost-benefit analyses–and why they don’t
Examining IIROC’s guidance on order execution discount brokers