On January 27, the Investment Industry Regulatory Organization of Canada released its annual consolidated compliance report for 2014/2015.
Key findings in the report are certain recurring and/or significant compliance deficiencies identified over the past year. The report, which also addresses key IIROC priorities for 2015 and results of recent targeted reviews and surveys, is intended to assist investment dealers in focusing their efforts to ensure compliance.
Recurring/significant registration deficiencies
The report identified a number of recurring or significant compliance deficiencies in 11 areas, including in respect of (i) the absence of written internal control policies; (ii) non-performance of minimum regulatory requirements in respect of internal controls; (iii) accounting, reporting and margin calculation errors; (iv) dealers not meeting minimum requirements relating to books and records; (v) operational issues; (vi) lack of agreements or effective supervision in respect of outsourcing; (vii) a lack of familiarity with best execution methodology; (viii) inadequate supervision of employee/agent accounts; (ix) a lack of adequate policies and procedures regarding outside business activities; (x) conflicts of interests policies and procedures and (xi) registration.
Recurring/significant registration deficiencies include (i) registration applications and changes of registration information; (ii) notices of termination of registered individuals and permitted individuals; and (iii) ownership changes and other dealer member filing requirements.
Review and survey results
According to the report, targeted reviews and surveys suggest that, despite enhanced suitability requirements, some dealers are not collecting precise know-your-client information. Specifically, IIROC noted that while dealers are generally collecting thorough information regarding a client's current financial situation and investment knowledge, the depth and quality of information collected in regards to clients' investment objectives, time horizon and risk tolerance was "much more varied". IIROC intends to use the survey results to consider future studies of dealers' alternative approaches to suitability assessments.
Key IIROC priorities for 2015
The report also set out a number of key areas of regulatory concern going forward intended to inform IIROC's current and future regulatory programs. These areas of focus include: (i) cyber security and the need to mitigate cyber-attack risks; (ii) outsourcing risk management; (iii) balance sheet leverage, with IIROC stating that it will continue to monitor dealers with a balance sheet leverage ratio greater than 20:1; (iv) liquidity and cash management; (v) whether dealers are voluntarily complying with the proposed limitation of the use of client free credit balances to 12 times their current early warning reserve level; (vi) whether market participants are monitoring for manipulative and deceptive trading practices such as spoofing; (vii) gatekeeper reporting; (viii) whether participants are meeting the risk controls requirements in respect of the electronic trading rule; (ix) third-party access; (x) client relationship model (CRM) implementation; (xi) the use of business titles and financial designations; and (xii) the use of social media.
For more information, see IIROC Notice 15-0021.