By Darin R. Renton
The Investment Industry Regulatory Organization of Canada (IIROC) is the national self-regulatory organization (SRO) that oversees all investment dealers, as well as trading activity on debt and equity marketplaces in Canada. Like other regulated entities, IIROC is subject to the oversight of securities regulators, in this case each of the ten provincial securities regulators that have recognized IIROC as an SRO, collectively, the Recognizing Regulators (RRs). On July 4, 2017, the participating RRs issued their Oversight Review Report of the Investment Industry Regulatory Organization of Canada with the results of their review for the period from April 1, 2015 to July 31, 2016. The previous review was conducted in 2015.
The 2016 Report Card: Seven Deficiencies
The Report outlines findings across four IIROC functional areas, prioritized by RR Staff as “high”, “medium” or “low” (no findings were reported in respect of IIROC’s Trading Review & Analysis department):
- Business Conduct Compliance (BCC)
- Failure to Complete BCC Examination Program Changes on a Timely Basis (high priority)
- Inability to Resolve Report Deficiencies Due in Part to a Lack of Guidance / Definitions (medium)
- Inadequate Process – Meetings with IIROC Compliance Staff prior to a written referral being made by Compliance Staff to the Enforcement department (Pre-Referral Meetings) (medium)
- Inadequate Enforcement Process – Holistic View of Dealer Members (medium)
- Information Technology
- Untimely Reporting – Information Security Program Material to the Finance, Audit and Risk (FAR) Committee (medium)
- Inadequate Process – IT Related Enterprise Risk Management Testing Methodology (medium)
- Market Surveillance (Equity & Debt)
- Incomplete Documentation Within Debt Market Surveillance Records (low)
Lack of Follow-Through a Concern
A repeat finding, RR Staff note that BCC staff had not resolved issues identified in 2015 with respect to the adequacy of examination procedures to assess suitability in managed accounts and had not implemented procedures to assess Dealer Member compliance with National Instrument 81-105 Mutual Fund Sales Practices as previously agreed upon with RR Staff. IIROC acknowledged the finding, which in its view was due in large part to the timing of a change in BCC management.
IIROC Examinations Lack Teeth
The Report notes that BCC staff have had difficulty in ensuring certain Dealer Members adequately resolve repeat and/or significant deficiencies on a timely basis. According to the Report, the inability to resolve deficiencies is due in part to the lack of written guidance for BCC staff to categorize findings in the examination reports or define what constitutes a (i) repeat, (ii) significant, (iii) significant repeat or (iv) other finding and what constitutes an appropriate regulatory response by Dealer Members.
RR Staff expect IIROC to take regulatory action (i.e. referral to Enforcement, imposition of terms and conditions) to ensure deficiencies do not persist over long periods of time. RR Staff also acknowledge that IIROC’s new Consolidated Enforcement, Examination and Approval Rules relating to registration approvals (including the authority to impose terms and conditions on Dealer Members) became effective on September 1, 2016. Going forward, RR Staff expect this could be an important tool to achieve proper regulatory outcomes and RR Staff expect IIROC to use the tool when warranted, especially with respect to Dealer Members with repeat and /or significant deficiencies to ensure the deficiencies are resolved on a timely basis.
In response to RR Staff comments, the BCC department is developing guidance, targeted for release by the end of September 2017, for categorizing its examination findings as “repeat”, “significant”, “significant repeat” or “other”. IIROC is also drafting an analytic framework to assist staff in determining whether a compliance issue should be referred to Enforcement.
A Passing Grade
Overall, the Report reflects well on IIROC. RR Staff acknowledge that IIROC made sufficient progress in resolving other findings cited in the 2015 oversight report. Under the terms of its recognition orders, IIROC must administer and monitor compliance with securities laws and IIROC Rules by Dealer Members and others subject to its jurisdiction, including Alternative Trading Systems (ATSs). The Report advises that, other than the findings noted, RR Staff did not identify concerns about IIROC’s success in meeting the relevant terms and conditions of the recognition orders in the areas covered.
Also on July 4, 2017, IIROC released a brief response outlining some of the steps it is taking to address the issues raised in the Report.