Morgis’ claims reinforced what others have asserted to be the problem with securities
regulation in Canada. It is alleged that a “patchwork system of thirteen provincial [and
territorial securities] regulators and self-regulatory organizations (SROs)” are ineffective at
policing Canada’s securities market (MacNeil and Solomon, 2008). This allegation has led
self-regulation in the securities industry to come under intense scrutiny from regulators and
investors’ advocates. Small wonder, then, that, to eliminate “potential regulatory gaps or
overlaps arising from member regulation and market regulation being split into two SROs”,
the IDA (the SRO responsible for regulating investment and brokerage rms in Canada) and
Market Regulation Services Inc. (RS – the SRO responsible for regulating the marketplace)
merged in June 2008 to create the Investment Industry Regulatory Organization of Canada
(IIROC) (Jenah, 2008,p.2). As a “national self-regulatory organization”, IIROC polices
broker-dealer rms (Member rms) and their employees (known as registered members) who
sell brokerage and investment services to prospective investors (Jenah, 2008, pp. 1-4). IIROC
sets the compliance rules that govern the conduct of its registered members who must
comply with them or face penalties for violations that range from a written reprimand, to
permanent bans from participating in the market (Jenah, 2007, pp. 2-15).
It is expected that a case study of the IDA’s enforcement practices, more generally, will
advance our understanding of self-regulatory enforcement in the securities industry. But
before this can be done, it is useful to bring the story on the enforcement of complaints by the
IDA’s replacement, IIROC, more up-to-date. Because of data constraints, it is not feasible to
analyze IIROC with the same rigor and detail as is possible for the earlier IDA period. This is
because IIROC has only been in existence for seven years, and data from the limited cases
that have been heard since then will not allow for rigorous quantitative comparison between
the IDA and IIROC to be carried out at this point. It is possible, however, to provide a more
qualitative commentary on IIROC’s enforcement performance to date.
Anecdotal evidence posits that IIROC is sending mixed messages to market participants
in their enforcement of complaints (Baines, 2012). In some cases, IIROC’s enforcement staff
seems to be imposing proportionate penalties for offences committed by registrants, while, in
others, penalties seem to be grossly inadequate (Baines, 2012). These claims are corroborated
by the Canadian Foundation for Advancement of Investor Rights (FAIR Canada). In a study
of 15 high-prole cases, FAIR Canada noted that the penalties imposed by securities
regulators were lax and the nes imposed were often not collected (FAIR Canada, 2011b,
p. 26). A signicant proportion of these cases involved registered individuals and member
rms which are members of IIROC (FAIR Canada, 2011b, pp. 3-4).
Given that IIROC is in its elementary stages and there are not enough cases for a rigorous
study, this study will focus on the enforcement of complaints by IIROC’s predecessor, the
IDA, and use it as a prototype case to evaluate the effectiveness of self-regulation in Canada’s
securities industry. The enforcement of self-regulation is complex and, to a large extent,
depends on the regulatory will of the regulator to enforce the rules fully upon its members.
Yet, it is surprisingly assumed that somehow laws are self-enforcing and complied with by
industry members. The point to keep in mind here is that SROs have considerable discretion.
They can enforce (or choose not to enforce) the rules as they see t; that is, they are not
compelled to invoke sanctions that will have adverse consequences on their members
(Brockman, 2004;Lokanan, 2014a). Hence, the present study seeks to evaluate the extent to
which the IDA is policing its members and enforcing compliance by holding them
accountable to rules and regulations. More specically, the study examines securities fraud
and transgression by market participants in nancial markets/security trading in Canada.
The paper is anchored with Stigler’s (1971) economic theory of regulation to assess the