Originally published on the Securities Litigation Blog of the Advocates' Society.

Bennett Jones lawyer Usman Sheikh sits down with Susan Wolburgh Jenah, President and CEO of the Investment Industry Regulatory Organization of Canada (IIROC), to discuss a No Contest Settlement Policy for IIROC, Regulating High Frequency Traders and Dark Pools, Advancing the Role of Women, A Possible IIROC / MFDA Merger, Learning from Market Crises and more.

Susan Wolburgh Jenah serves as the President and CEO of the Investment Industry Regulatory Organization of Canada (IIROC), the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada. She has held the position since the organization was founded in June 2008. She was appointed President and CEO of the Investment Dealers Association of Canada (IDA) in June 2007 and was responsible for leading the merger of the IDA and Market Regulation Services Inc. (RS) to form IIROC. Before joining the IDA, Ms. Wolburgh Jenah served as Vice Chair of the Ontario Securities Commission from 2004–2007 and as Acting Chair of the Commission from July to November 2005. In April 2014, Ms. Wolburgh Jenah announced her intention to retire from IIROC, effective October 31, 2014.

On Stepping Down from IIROC…

US Ms. Wolburgh Jenah, thank you for taking the time to speak with me.

SWJ You can call me Susan.

US Thank you. You recently announced that you will be stepping down in your role as President and CEO of IIROC. My first question for you: Why now?

SWJ It's always good to leave on a high note. You have goals, you accomplish them and it's time to move on.

On Learning from Market Crises…

US I wanted to take this opportunity to ask you to reflect. You've served for almost three decades now as a regulator, a policy-maker and also as an adjudicator in the securities industry, including during several market crises such as the WorldCom and Enron crisis of the early 2000s, the Credit Crisis of 2007-2008 as well as the Flash Crash in 2010.

President Obama's Chief of Staff once said, "never let a serious crisis go to waste."

I wanted to know from you: what did you learn from those experiences over the years? What should regulators learn?

SWJ We've certainly had a very tumultuous period and changes in the industry over the last decade and a half.

You look back to WorldCom and Enron – very, very significant governance changes took place as a result of that.

You had fundamental accounting misstatements and fraud taking place. There was a loss of confidence in governance: good looking Boards on paper but a lot of people questioning where were they? Where were the directors when all this was happening? These people had terrific credentials but they weren't able to spot, identify, prevent or deal with what happened to these companies – nobody suspected there was anything remiss.

I think it really caused a lot of people to rethink their ideas about a lot of things. There was talk about the need for directors to be more independent. And the push towards having Boards that weren't just comprised of the people you knew.

There was more of a sense of directors as a profession — so the professionalization of the role of a director took root. There was a time when people might have served on eight or nine Boards — very difficult to do today. The standard of what is expected of a director has evolved significantly.

The standards and the legislation haven’t changed, but the expectations have. When you think about that, it's really interesting.

You have to do your homework, use your judgment and, frankly, be prepared to ask tough questions and constructively challenge.

That independence – not just definitional independence, but independence of thought, independence of judgment and the importance of that check and balance on management was very much the focus in the aftermath of the WorldCom / Enron crisis. And, of course, making sure that problems with the accounting standards were properly addressed through the creation of CPAB and PCAOB and the like.

So we had that behind us – but then we went into the financial crisis.

In my three decades in this business, I had never experienced anything like that – the uncertainty, the feeling of not knowing what was around the corner and what shoe was going to drop next. It was a very difficult time for policymakers and central bankers who had no rulebook for what was happening – and all trying to do the best they could to ensure that the global financial system stayed afloat.

We're still feeling the reverberations. Not surprisingly, a great deal of legislative reform came out of the 2008 financial crisis.

You talked about not letting a good crisis go to waste. The big challenge for policymakers is to find that balance between solving yesterday's problems as opposed to looking forward and ensuring that we're properly focused on what the next problem is likely to be. I think the last few years have been an exercise in trying to do both.

The focus on OTC derivatives reform, excess leverage, excess risk-taking, on trying to ring fence the activities of the banks that were engaging in proprietary trading with depositors' money.

These issues are systemic, and they need to be addressed globally. We're still dealing with the aftermath and trying to get those rules in place.

Canada did very well through that crisis, but we're not an island and we're impacted by what's happening elsewhere. If the standards change with respect to capital and other matters, we have to (and want to) be cognizant of the new global standards.

On Keeping Up With the Markets and Market Innovation…

US You talked a little bit about looking forward. Throughout the years, you've seen first-hand how the market has gone through considerable structural evolution.

We've also seen an extraordinary amount of complex product and market innovation – virtual currencies, algorithmic trading, apparently there are now triple inverse China ETFs.

How do regulators keep up with the markets and market innovation?

SWJ As regulators, it's really important to have some basic principles to guide you. Markets change, products change, and new products come and go out of vogue. Basic principles of fairness, integrity, and transparency provide guideposts to deal with new innovations.

We see risk committees being formed where people want experts in risk mitigation and management on Boards — people who have experience in dealing with risk, knowing how to spot risk, how to mitigate risk and how to manage risk. This whole evolution is happening in response to a more complex and innovative environment.

Technology has introduced complexity into the markets and into our world in a way we wouldn't have foreseen.

Let’s put it in market structure terms: about a decade ago, we had one exchange in the country, and we now have about 13 exchanges and alternative trading systems that are basically all trading equities. In the States, they have about 13 exchanges and 40 to 50 alternative trading platforms and broker internalization networks. That's a whole lot of fragmentation and complexity.

You have to find ways to deliver smart regulation. You have to find ways to leverage technology to help you to focus on where the risks are.

That means using technology to mine the data that you have and the trends that you can discern from it. We’re trying to use technology to zero in on where the problems might be. Because, frankly, trying to just spot-check files is like trying to find a needle in a haystack.

On High Frequency Trading and Dark Pools…

US I wanted to ask you a few questions specifically about enforcement, if I may. Following on your point on technology, one matter that is garnering considerable attention from the media as well as regulators, including here in Canada and around the world, has been the use of high frequency trading, co-location and dark pools. In your view, are these practices fair or is it too early to tell?

SWJ Let’s talk about them separately because they're not all the same things.

You talk about high frequency trading and, of course, Michael Lewis' book, Flash Boys, has brought this issue to the realm of mainstream debate.

The problem is that, with any topic like this, it is complex; there are various facets to it.

When you talk about HFT, people mean different things. HFT involves the use of technology to trade frequently. Generally, we've used it to define a type of trading which involves a high order-to-trade ratio.

We still have “designated market makers” but what has replaced or superseded them in the marketplace are these algorithmic trading firms. Not all of them are created equal; they don't all have the same objectives.

We've tried to approach this issue not from the perspective of whether HFT is good or bad, but rather, from the perspective of identifying the practices that certain HFT firms or traders are engaged in that concern us.

There are forms of HFT activity that are predatory and harmful to market integrity.

The regulatory challenge is to identify the trading practices and behaviours that are problematic – that are taking advantage of other participants in inappropriate ways. For example, flooding the market with orders without an intention to trade is illegal under existing rules.

We need to focus on identifying problematic trading behaviours, communicating (which IIROC did through our guidance on manipulative behaviour relating to HOT [high order to trade] trading), and then ensuring that our systems are helping us to identify the activity.

Increasingly, we see regulators around the world taking a similar approach because these issues are not as simple as: all HFT is good or bad.

HFT is the natural consequence of market fragmentation. Multiple markets, decimalization and electronic trading – it was those three conditions that created the environment for HFTs to flourish and take advantage of pricing inefficiencies between multiple markets.

To those who say HFTs are providing market making liquidity, the difficulty is that they, unlike designated market makers, don’t have any formal obligations.

Certain studies have been done (including by the Bank of England) that concluded that, to a point, HFT can add liquidity but when markets experience sudden shocks or extreme volatility they can pull out of the market suddenly.

So that’s the struggle you have in terms of looking at these issues. They are not simple and they're not uni-dimensional.

We need to use available data to help us analyze what HFT participants are doing in our market. So let's understand how they behave, what they're doing, where and when they're trading.

You asked about dark pools – that’s a different issue.

We start from the premise that the market should be transparent – that’s fundamental. You have lit transparent exchanges offering pre- and post-trade transparency.

Dark pools were really an exception to that and they came into being at the urging of the buy side (big institutional investors, pension plans and the like) who were concerned about the market impact of exposing their large orders.

What we've seen happen in the U.S. is that there's been a significant migration of trading to dark pools and internationalization networks with 40% or so of all of the trading activity in the equity markets in the U.S. now taking place off-exchange.

At that point, the concern is the impact on the price discovery process on the transparent exchanges.

And if you don’t have enough liquidity in the lit transparent market can you trust the prices that securities are trading at?

Which is why we intervened (“we” being IIROC and the CSA) to create a framework for permitting dark pools.

We introduced the requirement for meaningful price improvement on dark pools. This is intended to ensure that there is incentive to post quotes on the lit transparent market.

The volume of trading that takes place on dark pools in Canada is very low as compared to the U.S.

We introduced our dark pool framework and the Australians did something similar – and the U.S. is now also looking at trying something similar, on a pilot basis.

On Whether IIROC Should Adopt a No Contest Settlement Policy…

US I wanted to ask you another question on the enforcement front. We have recently seen significant debate on both sides of the Canada/U.S. border about the use of no contest settlements or no-admit no-deny policies by securities regulators.

The rationale usually put forward for such settlements is that they are necessary for securities regulators in order to resolve enforcement matters more quickly, conserve limited resources, free up their staff to go after other cases, and achieve sanctions closer to the time of the misconduct.

It seems now that the OSC and the SEC have become somewhat aligned in their approach – they both now allow no-contest settlements but they will be prohibited in certain limited circumstances.

I was curious about your views on that. Where do you fall in the debate on no-contest settlements and is that, in your view, something that IIROC should adopt as a policy?

SWJ It's interesting what you say about the OSC and the SEC now being aligned in their approach. They started at two different ends of the spectrum.

In the U.S., the approach was that it permitted no-contest settlements.

That was for a lot of reasons, which are probably too complicated to get into here but some of which you've mentioned. The other being that, in the U.S., it is a very litigious environment and so if you had required respondents to admit guilt there would have been fewer settlements.

There is always that trade-off between having the admission versus having the matter resolved, and having it resolved in a way that is efficient and that conserves resources that can then be put into the next case.

There was a lot of political and judicial pressure brought to bear on the SEC. Judge Rakoff in the U.S. rejected a couple of the SEC's proposed settlements. So he basically sent the parties back to the drawing board and had some very harsh words about no-contest settlements.

It's all in the facts, of course. In some cases, it might be entirely appropriate while in other cases the public interest in an admission of some sort overrides the no-contest policy.

The SEC has since moved away from a policy of always allowing no-contest settlements. Where there has been fraud or criminal activity, the SEC will require some form of admission and not allow a no-contest settlement.

The OSC started at the other end of the spectrum – it did not permit no-contest settlements.

As a public policy matter, the view was that it’s important, from a deterrence point of view, that when an enforcement proceeding is settled, there be an admission of wrongdoing. To own up and take accountability for your actions – that’s the concept.

Where the OSC has ended up in terms of its own review and consultation process is not far off of where the U.S. ended up but it got there from two completely different points and moved into the middle.

We don’t see signs that other regulators in Canada are per se going down that road, although it might be too soon to say whether other jurisdictions or other securities regulators will consider this approach.

Years ago, the IDA did permit no-contest settlements and there was considerable pressure brought to bear from the OSC and others to not allow no-contest settlements. That continues to be IIROC’s approach and hasn’t proven to be a major impediment to settlements.

On Advancing the Representation of Women on Boards…

US The OSC recently proposed rules in relation to the representation of women on Boards and in senior management.

Their approach follows a “comply or explain” model –by that I mean, instead of requiring companies to adopt (for example) a diversity policy, issuers are required to disclose whether they have such a policy and if not, why not. They are also requiring companies to disclose the number and proportion of women on the issuer's Board and in executive positions.

I was interested to hear your views on that issue. Is this a move in the right direction? Is this the correct approach?

I’m mindful of the fact that, when you served as President of the IDA, you were the first woman to hold that position since the IDA was formed in 1916. I was hoping that, perhaps, you can relate this back to your own personal experience as well.

SWJ Diversity, generally – including gender diversity – is an important governance issue.

Diversity in the boardroom, just as in any other context, gives you the benefit of different points of view and can help us avoid groupthink.

It's human nature that people don’t want to appear confrontational. In a boardroom environment, it can take courage to speak one’s mind.

Diversity is not important as an end. It’s important as a means to an end. And the end would be better decisions, more effective governance and improved performance.

If diversity contributes to that goal, and many have offered up studies to show that it does, then I think that’s something we should encourage.

Governments around the world have tackled this issue differently.

Some put mandatory quotas in place and it works. I am not personally an advocate for quotas as a mandatory measure. There are a lot of well qualified prospective directors out there and half the population is female. We shouldn’t have to put mandatory quotas in place for women to be considered for jobs and board positions for which they’re eminently qualified.

So the idea of putting the onus on companies to explain their gender diversity practice is a good way to sensitize companies to the importance of the issue. When you have to write down what your policy is it causes you to be pretty thoughtful about your approach with respect to this issue.

It remains to be seen what impact a comply or explain requirement will have. What sort of disclosure do we get coming out of this requirement? Is it meaningful? Is it boilerplate? We will have to wait and see. I suspect we’ll see both good and poor examples. But I do think it’s a step in the right direction.

On the IDA / RS Merger and a Possible Merger with the MFDA…

US Seven years ago, you were responsible for leading the merger of the IDA and RS.

When stating the case for the establishment of (now) IIROC you highlighted numerous benefits, including that a combined regulator would:

  • provide a more complete view of a members' operations to identify overall risks, compliance issues and risk profile;
  • help reduce regulatory gaps; and
  • allow for a single set of rules with a harmonized regulatory philosophy.

Looking back, how has the merger benefited your members? And has the time now come for potentially a merger with the MFDA?

SWJ The benefits we talked about at the time of the merger have been realized.

If you have a group that is responsible for the trading activity of the dealers on the markets and then another group that is responsible for looking at all their other business activities, it makes sense to combine them.

You end up with greater accountability – again, breaking down silos and looking at issues cross-functionally and inter-departmentally. We’ve promoted that culture at IIROC. We’re a stronger organization as a result of bringing the two SROs together and having a more holistic view of the members that we regulate and the markets we oversee. And having the expertise that exists within the combined organization is really important.

It’s beneficial to members as well given greater efficiencies.

We brought together, for example, the enforcement rules. RS had a set of enforcement rules [and the] IDA had a set of enforcement rules. One of our projects has been to harmonize, consolidate, streamline and update them. We just got through our second comment process on that.

We’ve had the opportunity to look at the policy development process for both market and member regulation to make sure that it's consistent – that we're taking the best of the practices and combining them.

It’s the same thing with respect to our new proposed sanction guidelines. Our approach to sanction guidelines was different at RS versus the IDA, so now we've developed a harmonized approach on that as well. These are all a few examples of the benefits that have resulted from the merger.

In terms of your question about the MFDA, we often do get asked that question.

Clearly, there is a compelling case for that merger to occur. Much of what we do is similar, if not the same, and, therefore, there are synergies to be gained as a result of a combination. This is very different from the RS/IDA merger, because actually what RS did and what the IDA did was very different. That's why that merger wasn't about cost savings; it was about combining a group that did market regulation with a group that did member regulation.

With the MFDA, there is greater similarity, more duplication. There is opportunity for some real efficiency gains as a result.

The business environment is also changing and there is pressure coming from the members to find ways to reduce costs.

Where regulatory structure stands in the way of preferred business models and efficiency gains, in the absence of any investor protection concerns, we should be willing to rethink that.

On What’s Next…

US I suppose my final question for you is (and many people have asked me to ask you this question): What do you have in store, after you've stepped down from your role at IIROC?

SWJ In January, I'm going to Osgoode Hall for a term as a Fellow. I'll be doing a little bit of teaching, advising on a clinical program and generally interacting with the students. That will be interesting.

Beyond that, I’ll take some time to think about what I want to do next.

US We will be watching with great interest. Susan, thank you for your time.

SWJ Thank you. My pleasure.