The Investment Industry Regulatory Organization of Canada (IIROC) has released its priorities for 2018 (Priorities). The Priorities address issues related to policy development, enforcement and IIROC’s general supervisory mandate.
The Priorities highlight IIROC’s focus on inspiring confidence and deterring wrongdoing, as well as its desire to achieve efficient regulation while being a “leading edge” regulator. They further offer a glimpse into the challenges facing the regulator, including those posed by evolving technology and increased public apprehension over broker conduct and retail investor security.
As a matter of policy development, IIROC has identified four major priorities: (1) taking steps to ensure dealers manage conflicts in the best interests of clients; (2) ensuring IIROC requirements accommodate new advice and service models; (3) finalizing the plain language rule book and introducing dealer training; and (4) conducting investor research on key policy issues. The first two priorities are of particular note.
With respect to compensation conflicts, IIROC seeks to, amongst other things, enhance its Business Conduct Compliance examination procedures and work with the Canadian Securities Administrators (CSA) to ensure IIROC’s requirements are materially harmonized and implemented on the same schedule. This priority is noteworthy in light of the CSA’s recent decision not to impose a “best interest” standard on investment advisers.
IIROC also recognized concerns over the growing amount of advice being provided in an automated fashion. IIROC has responded to this issue by committing to examine whether its current requirements present any unnecessary barriers, while ensuring that its core regulatory obligations remain (amongst other things) scalable to the level of service, sufficiently flexible and harmonized with those of the CSA.
Enforcement remains a key focus for IIROC, which seeks to deter wrongdoing by strengthening its ability to pursue meaningful enforcement action. IIROC has identified a desire to increase its legal authority across Canada and has recently announced expanded investigative powers in Alberta, a topic that will be discussed in an upcoming bulletin. IIROC has also been conferred the legal authority to enforce fines in the courts of Alberta, Quebec and Prince Edward Island, while Ontario has announced its intention to do the same. IIROC has stated that it is actively seeking similar legal authority in all other jurisdictions across Canada.
Complaints received by IIROC have increased over the past year. Investigations conducted have increased since 2015, but remain lower than any of the years 2012, 2013 and 2014. Last year also saw the introduction of IIROC’s Consolidated Enforcement, Examination and Approval Rules (Consolidated Rules). The Consolidated Rules combine and replace various provisions of IIROC’s Dealer Member Rules and the Universal Market Integrity Rules, forming a new set of rules that introduces a number of changes to IIROC’s regulatory regime, including its Enforcement Department. Key changes include the consolidation of existing standard of conduct rules (section 1402), changes to the authority to enter business premises without notice (section 8103) and a new rule requiring that disciplinary proceedings be initiated within six years of the events in question (section 8206).
IIROC has indicated that it will begin a multi-year project to implement an “enhanced market surveillance system” building on its current capabilities. This project is no doubt a response to the increasing complexity and sophistication of market manipulation techniques. IIROC’s stated goal is to enable it to conduct cross-dealer, cross-product and cross-asset surveillance. IIROC will also undertake a review of market supervision approaches with the stated goal of evolving its market surveillance to keep up with market advances.
IIROC has also identified an objective of streamlining data gathering from market participants and complementary sources. In this vein, IIROC plans to work with regulatory partners to define data-sharing needs and, more generally, has indicated a desire to continue to collaborate with other regulators who oversee the financial service industry.
Finally, IIROC has issued cybersecurity “report cards” to dealers following self-assessments that were completed in 2017. IIROC has stated it intends to meet with dealers with reports at a moderate and/or high-risk rating to review business models and systems.
In addition to its stated priorities, IIROC articulates an overarching goal of delivering “timely, relevant, comprehensible and proportionate regulation that minimizes undue impact.” This commentary hopefully signals an attempt by IIROC to strike a balance between oversight that does not unduly impede dealer activity while continuing to ensure investor protection and market integrity.