The Investment Industry Regulatory Association of Canada (IIROC) recently published a decision where a Hearing Panel (Panel) initially had balked at approving a settlement agreement (Settlement) between National Bank Financial Inc. (the Bank) and IIROC’s Enforcement Department. The case is instructive both for the substantive issue it addresses (inadequate supervision) and the procedural snag that arose, when the Panel concluded at the end of the hearing that it didn’t have enough information to determine if the Settlement was reasonable.
This case begins in 2009, when the Bank issued an internal communiqué regarding the risks of leveraged, exchange-traded funds (ETFs) and conducted training so that representatives were aware that such products weren’t suitable for certain clients. Soon afterward, the Bank detected that one of its registered representatives (Cloutier) had a number of clients who held exchange-traded ETFs even though they didn’t meet the Bank’s prescribed profile for such investments. Over the next 28 months, the Bank then took various steps to resolve the problem and, ultimately, terminated Cloutier’s employment. When he was terminated, Cloutier still had some clients who held leveraged ETFs even though they didn’t meet the Bank’s prescribed profile for such investments.
It is unclear from the case exactly how the non-compliance came to IIROC’s attention, and so our summary will skip forward to the Settlement agreed to by the Bank and IIROC’s Enforcement Staff. The Settlement stated that the Bank had failed to establish and maintain a system that allowed adequate supervision of the business activities of one of its registered representatives. The Bank agreed to pay a fine of $110,000 and costs of $16,000. The Settlement was presented to the Panel for approval in December 2017.
At this point, the proceedings took an unusual turn. After analyzing the Settlement and hearing arguments from counsel for the parties, the Panel concluded that it did not have enough information to determine whether the proposed Settlement was reasonable and not contrary to the public interest. Among other things, the Panel wanted to know whether and to what extent any clients suffered losses as a result of the non-compliance.
The Panel, however, faced with a challenging situation. By law, its role was limited to approving or rejecting the Settlement based solely on the facts set out in that document. The Panel noted:
“[To] … encourage parties to settle their differences and protect the integrity of the settlement process, the latter must have assurance that any negotiations that result in a settlement agreement being signed will remain confidential and cannot be used against them subsequently.”
However, the Panel also emphasized that:
“IIROC … must not become a kind of ‘old boys’ club’ where outsiders would find it impossible to know the nature and scope of the misconduct that led to the settlement agreement.”
The Panel couldn’t require the parties to present more information, but it could encourage them to do so. With the Settlement was at risk, it is not surprising that the parties agreed to provide the additional information. Once the Panel got what it wanted (information), the parties got what they needed (an approved Settlement).
The Reasons for Decision are worth reading because they offer some interesting lessons about the measures that a firm might need to take when faced with persistent non-compliance by an individual employee, as well as factors to consider in negotiating a settlement with a regulator’s enforcement counsel. For reputational or other reasons, a firm might wish to limit the facts disclosed as part of a settlement agreement. But limiting that disclosure carries with it the risk that a settlement will unravel before the adjudicators.