Is self-regulation working in the public interest?

IIROC’s findings of industry misconduct require a stronger response


The securities industry is quick to congratulate itself and promote the “value added” to investors due to investment advice it provides. However, investors should be concerned about revelations that investment dealers have tried to avoid liability for losses due to failures to meet regulatory obligations.


Last October, the Investment Industry Regulatory Organization of Canada (IIROC) revealed that an unspecified number of investment dealers had been using client account agreements that contain limitation of liability or exclusionary clauses to avoid responsibility for their regulatory obligations owed to clients.


Dealers are required by securities law and IIROC rules to be responsible for providing suitable investment advice to clients and for outsourced services. They cannot attempt to “contract out” of these responsibilities.


Dealers that use client agreements containing these clauses are violating IIROC rules that require dealers to observe high standards of ethics and conduct, act fairly and not engage in conduct unbecoming or detrimental to the public interest.


In Ontario, they are also offending the Ontario Securities Commission rule that dealers have a duty to deal fairly, honestly and in good faith with clients.The agreements used by these dealers undermine fundamental investor protections in securities laws and regulations.


It is offensive that these investment dealers have used contracts with wording that relieves the dealers from paying damages owed to clients for failing to meet their regulatory obligations — obligations that are supposed to protect clients from unscrupulous or negligent misconduct by dealers.FAIR Canada is pleased to see that IIROC discovered this problem and published its findings.


However, IIROC has not disclosed how widespread this issue is, and how long it was going on for. Is this a problem with a handful of dealers or is it more widespread among IIROC’s 180 member firms?IIROC also has not addressed harm caused to clients who have abandoned complaints or were denied compensation based on a firm’s reliance on exclusionary clauses.


In addition, IIROC has not stepped up to hold the offending dealers accountable or provided a deadline for compliance. IIROC has merely issued a guidance notice to “encourage” dealers to conduct a self-assessment to review their client agreements.

FAIR Canada’s view is that IIROC should send a stronger message to the industry. IIROC should disclose the extent of the problem and require dealers to complete the self-assessment and provide confirmation that they are in compliance by a specified deadline.


We also recommend that IIROC require any offending dealers to review client complaints during the period the offending agreements were in use and determine whether any clients abandoned their claims or were denied compensation due to the dealer relying on the defective client agreements. If so, appropriate compensation should be provided.


In appropriate instances, there should be enforcement proceedings brought against the offending dealers.It is timely that a review of self-regulation is about to be undertaken.


In December, the Canadian Securities Administrators (CSA) announced that they will be undertaking a review of the regulatory framework of the self-regulatory organizations (SROs) that oversee the investment industry (IIROC and the Mutual Fund Dealers Association of Canada).


The CSA said it will examine the reasoning that underpins the current regulatory framework for these SROs and how the framework has been working.FAIR Canada believes that there is a real need for the CSA to consider whether self-regulation is working in the public interest or the interest of the financial industry. Governance, transparency and regulatory enforcement practices of SROs raise serious concerns.


For instance, IIROC rarely disciplines firms in cases of investor harm. It generally settles for a sanction against the salesperson with no reference to any disciplinary action against the firm, or compensation of harmed investors.

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