SROs to protect investors and increase inefﬁciency in Canada’s capital markets. However,
anecdotal evidence posits that IIROC is not holding registrants accountable to law and ethical
standards (Gray and McFarland, 2017a;Robertson and Cardoso, 2017). As a matter of fact,
investors are still being swindled of their life savings by their advisors (Johnson, 2017), and
punishment for such contraventions remains lax and inadequate (Lokanan, 2015a;Gray and
McFarland, 2017a). Given that Canada does not have a national securities regulator, the
investment industry is now in a precarious position and expects IIROC to take regulatory
action on its registrants to ensure that their deﬁciencies are addressed and resolved.
On the basis of data from IIROC’s annual enforcement report, the present study will use
the SRO misconduct funnel that was developed by Brockman and McEwen (1990) and
further reﬁned by Brockman (2004) and Lokanan (2015a) to examine the enforcement of
complaints by IIROC from 2009 to 2016. The misconduct funnel is the white-collar crime
version of the crime funnel that was developed to show how the number of casesinvolving
street crime shrinks as they are processed from arrest to sentencing through the criminal
justice system (CJS) (Lokanan, 2015a, p. 457). In the same manner, the misconduct funnel
shows the disposition of complaintsfrom case assessment to prosecution through the SROs’
enforcement system and is built on three fundamental concepts: “funnel in”,“funnel out”
and “funnel away”(Brockmanand McEwen, 1990;Brockman, 2004;Lokanan, 2015a).
“Funnel in”tests the claimmade by SROs that they enforce more complaints than would
not have otherwise been enforcedby government regulators (Brockman and McEwen, 1990,
p. 3). “Funnel out”examines the prospects of offenders who might escape formal
disciplinary actions and the potential leniency of penalties imposed on those who are
formally sanctioned (Brockman, 204, p. 73). “Funnel away”examines the claim that SROs
may divert cases with criminal elements away from the CJS to protect their members
(Brockman and McEwen, 1990, p. 3). Given these claims, this paper attempts to answer the
Q1. To what extent is IIROCholding market participants accountable to law and ethical
In evaluating Q1, the study makes two interrelated contributions to theory and practice.
First, the study contributes to the literature on securities fraud and transgression in
ﬁnancial markets/security trading by examining the enforcement practices of theSRO that
are at the forefront of regulating market participants in Canada –IIROC. Second, the issues
discussed in this study are of signiﬁcanceto the wider public and policy interests in Canada.
Canada is the only G7 country without a nationalsecurities regulator. As such, it is hard not
to see the results from this study being part of a wider discussion by legislatorsin Ottawa to
show the signiﬁcance of a national securitiesregulator.
The rest of the paper proceeds according to the following format. Section 1 earlier
provides a brief overview of IIROC’s positionin the wider context of securities regulation in
Canada. Section 2 provides a critical review of the theoretical foundation and extant
literature on self-regulation.Section 3 brieﬂy describes the methodology used to collate and
assemble the data used in the study. Section 4 provides an analysisof the ﬁndings. Finally,
Section 5 discusses the ﬁndings in relation to the literature and concludes by highlighting
areas for future research.
2. Literature review
2.1 Self-regulation and industry regulation
The theory of self-regulation is often touted as superior to government regulation because
self-regulatory regimes are able to scrutinize a wider variety of behaviors and achieve