Canada needs to prevent dishonest securities registrants from continuing to sell investments or advise the public. Given the fragmented system of financial services industry regulation in Canada, registrants who are disciplined for misconduct are all too often able to avoid proper sanctioning and evade bars to selling investments. Time and again, former registrants simply move platforms to sell in the exempt market (where individuals and firms are not required to register in certain western provinces) or, for example, sell insurance despite having been found to have been dishonest or otherwise not of sufficient integrity to deal with investors.

Disciplined Advisors Continue to Sell Investments

The press has reported on many cases where dishonest, former registrants continue to be in a position of trust with the public despite the fact they have been prohibited from selling any securities for a given period of time or have been barred from the securities industry.

For example:

1. David Baines of the Vancouver Sun reports a case where Jill MacGregor Bock sold hundreds of thousands of dollars of illiquid and risky investments to seniors and was banned by the British Columbia Securities Commission from selling investments for a period of three years. Nonetheless, she was able to obtain a license to sell insurance and obtained a designation as an Elder Planning Counselor, which would have allowed her to market her services to other unknowing seniors. It appears she is no longer licensed as an insurance agent in BC; and
2. In B.C., a registrant who was disciplined by the Investment Dealers Association (David Michaels) received a fine and a two-month suspended sentence, and then went on to prey on vulnerable seniors in the exempt market in B.C. where he is not required to be registered. Click here to read the media article and click here to see the IDA (now IIROC) decision dated December 21, 2007

Financial Advisors Ignore SRO Fines

It also appears far too common for individuals who have been disciplined by one of the self-regulatory organizations (“SROs”), namely the Investment Industry Regulatory Organization of Canada (“IIROC”) or the Mutual Fund Dealers Association of Canada (“MFDA”), to fail to pay the fine and simply cease to be members or approved persons of the SROs. Many news stories report to Canadians about fines imposed on disciplined persons, but also point out that the individual is no longer an SRO member. What the media often fail to mention is that it is unlikely that the SRO will be able to collect the fines from those individuals, particularly large fines from the more serious offenders.

The inability to collect fines detracts from the credibility of the self-regulatory system which plays an important regulatory role in the Canadian securities industry. It also undermines securities regulation more broadly, particularly when the investing public hears of egregious cases where an individual who is the subject of a successful disciplinary action is able to dodge their punishment by simply walking away. Furthermore, the SRO or securities commission’s disciplinary action does not, in and of itself, prevent these individuals from continuing to harm investors. 

FAIR Canada notes that the SROs’ record of fine collection is quite good in respect of fines assessed against member firms with close to 100% collection rates. However, collection statistics for individuals are disappointingly low. During IIROC’s last fiscal year, they were only able to collect $398,170 (14.6%) of the over $2.7 million in fines assessed against individuals. Similarly, in 2010 the MFDA was able to collect only $370,525 (10.3%) of the over $3.6 million in total fines assessed; virtually all of the MFDA’s uncollected fines ordered are due to non-payment by individuals. While this may be partially attributable to the inability to pay in some cases, we believe that in many cases it is because the SROs lack the power to collect fines. The fault here lies with provincial securities legislation. Providing SROs with the statutory means to collect fines from individuals formerly associated with member firms would significantly increase the amount of fines collected.  

In Alberta, the Securities Act provides SROs with the power to enforce their decisions as though they are court judgments. In December 2006, the CSA SRO Oversight Project Committee “unanimously support[ed]… the granting of the authority to file disciplinary decisions with the courts” for jurisdictions where these powers are not already in place. Not only would such power enable the SROs to pursue individuals, but it would also give SROs more leverage in settlement discussions. It appears that CSA members and provincial governments have not implemented the CSA Committee’s recommendations.

FAIR Canada Recommendations

FAIR Canada, therefore, has three simple recommendations for provincial regulators and governments to help protect investors:

1. FAIR Canada calls on the rest of the Canadian jurisdictions to extend the statutory fine collection power to Canada’s SROs to increase the efficiency and effectiveness of their enforcement efforts. This would increase the likelihood of the payment of penalties and enhance the credibility of self-regulation, which would contribute to improved credibility of the overall securities regulatory system.
2. FAIR Canada calls on regulators to enhance the sharing of disciplinary and investigative information between the insurance and securities regulators and promptly act on disciplinary action by other regulators so that individuals who have been found to be dishonest or lacking in integrity cannot simply move from one platform to another or continue to deal with clients under their other license.
3. FAIR Canada calls for the end of the so-called “Northwest exemption” that allows anyone (even someone found to be dishonest or to be lacking in integrity) to sell high risk exempt market products to the investing public including vulnerable groups such as seniors. For further details, see CSA Staff Notice 31-312. FAIR Canada recommends that all individuals and firms that sell investments to the public should be required to be registered and calls on the Northwestern jurisdictions to require that individuals register as Exempt Market Dealers as was originally contemplated by National Instrument 31-103 (the Registration Reform Project) before they are allowed to sell products to retail investors in the exempt market.

FAIR Canada believes that these three recommendations would assist in preventing these disciplined persons found to be dishonest from harming others and increase the effectiveness of current enforcement proceedings.