CBC Report on Low Collection Rates

Stories that the CBC ran, both on its website and on The National, highlighted the low rate of fine collection by provincial securities regulators. The website article indicated that some consumers and victims are unaware that the fines are not being collected and that several individuals who have been fined consider the process “a farce”.

FAIR Canada Executive Director Ermanno Pascutto, who was interviewed for the website story, notes that the rule-breakers probably already know that most of the fines are not paid and agrees that Canadians should be aware that the current system is not effective at collecting fines. He suggests that a national securities regulator in Canada might improve both enforcement and collection efforts. The ability to enforce judgments and collect fines from individuals who move from one province to another would be simplified if the Federal Government and the provinces cooperated to create a national securities regulator. A national regulator could make orders that would be effective across Canada (including barring wrongdoers from dealing with consumers across Canada) while provincial regulators’ powers are limited to orders within their province.

Low Collection Rates Do Not Necessarily Indicate Ineffective Enforcement

Low fine collection rates should not be interpreted as a sign that securities regulators in a given province are not effectively enforcing securities laws. David Baines, who has written extensively on securities fraud for the Vancouver Sun, has provided his perspective, suggesting that uncollected fines may be an indication that the securities commissions are doing their job well, as the amount of fines imposed indicates that commissions have been aggressive in sanctioning registrants and suspending them from continuing to act as registrants.

There are many reasons that the collection rates are low and they can vary among provinces. These reasons include such considerations as whether the fines are levied against:

• registered financial institutions (which tend to pay) versus individual registrants (who are much less likely to pay),
• unlicensed fraudsters (who usually disappear with the money), and
• the size of the amounts levied in individual cases (large fines against individuals are often difficult to collect).

The BCSC has issued an InvestRight article, in response to the CBC story, which attributes the low rate of collection in B.C. in large part to four significant investment fraud cases in B.C. where very large penalties were imposed.

Benefits of Transparency

FAIR Canada supports the movement by regulators towards greater transparency through the publication of fine collection statistics and the OSC’s list of delinquent respondents. Transparency regarding the disclosure of fines levied and fines collected is beneficial as it allows all Canadians (including governments and regulators)to assess the effectiveness of our existing securities regulatory regime and consider whether reforms or other strategies are needed . We anticipate that greater transparency may lead enforcement divisions to evaluate and try to improve their ability to collect fines. Greater transparency provides Canadians with a better understanding of the extent of the problem and we hope will lead governments to work together to improve the system.

FAIR Canada Recommendations

FAIR Canada has a number of recommendations to better protect investors and improve the enforcement system in Canada.

Recommendation 1:

FAIR Canada calls on provincial regulators and governments to extend statutory fine collection power to Canada’s SROs. Providing SROs with the statutory means to collect fines from individuals 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. Regulators in other provinces should recommend amendments to provincial securities legislation to grant SROs the same collection power as they have in Alberta.

Recommendation 2:

FAIR Canada calls on regulators to enhance the sharing of disciplinary and investigative information among insurance, securities and other regulators and to promptly act on disciplinary action by other regulators. This way, individuals who have been found to be dishonest or lacking in integrity cannot simply move from one platform to another, continue to deal with clients under an alternative license, or move to another province.

Recommendation 3:

FAIR Canada recommends that the federal and provincial governments cooperate to create a national enforcement agency that could enforce judgments throughout Canada. This would end the need for each provincial securities commission to enter reciprocal enforcement orders so as to prevent a sanctioned registrant or someone illegally selling securities in one province from simply moving to another province and continuing to hold a position of trust with consumers. In reality, very few reciprocal orders are issued to ban individuals from dealing with consumers in other provinces when one province bans or censures an individual.

Financial fraud is widespread in Canada but surprisingly no precise measurement of its extent, and the impact on investors and the economy, is available. Prosecuting financial fraud is the responsibility of dozens of regulators, police and governments. A first step towards a national enforcement agency would be for the federal and provincial governments to cooperate to create a central body that could gather information on financial fraud across Canada from the various disparate agencies, as well as gather information on financial fraud that is not being addressed by any regulators, police or government.

Recommendation 4:

We recommend that provincial regulators revoke the “Northwestern Exemption” orders which allow unregistered individuals to sell high-risk exempt market products to the investing public, including vulnerable groups such as seniors. FAIR Canada recommends that all individuals and firms that are permitted to sell investments to the public be required to be registered and calls on the “Northwestern” jurisdictions (British Columbia, Alberta, Saskatchewan, Manitoba, the Northwest Territories, Nunavut, and Yukon Territory) to require that individuals and firms register as Exempt Market Dealers before they are allowed to sell products to retail investors in the exempt market, as was originally contemplated by National Instrument 31-103. At present, there are no background or criminal checks nor are there proficiency, licensing, or registration requirements to sell investments to residents of the Northwestern jurisdictions.

Recommendation 5:

Registered firms should be financially responsible for the payment of fines that are levied against their individual representatives, should the individuals fail to pay. At present, SROs are able to collect fines levied against individuals employed by member firms. In part, we believe that this is due to inadequate SRO collection powers. To improve the situation, we have recommended that SROs be granted collection powers and that member firms be held responsible for the fines levied against the individuals who are their employees.