Self-regulation and compliance enforcement practices by the Investment Dealers Association in Canada. 1984 to 2008

Author:Mark Lokanan
Position:Department of Management, Royal Roads University, Victoria, Canada
Pages:2-21
SUMMARY

Purpose This paper aims to examine the enforcement practices of the Investment Dealers Association of Canada (IDA) and argue that self-regulation simply does not work in the financial sector, as the sanctions available are neither applied with sufficient severity nor are the responsibilities for enforcement adequately divided between self-regulation, provincial securities commissions and... (see full summary)

 
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Self-regulation and compliance
enforcement practices by the
Investment Dealers Association
in Canada
1984 to 2008
Mark Lokanan
Department of Management, Royal Roads University, Victoria, Canada
Abstract
Purpose This paper aims to examine the enforcement practices of the Investment Dealers Association of
Canada (IDA) and argue that self-regulation simply does not work in the nancial sector, as the sanctions
available are neither applied with sufcient severity nor are the responsibilities for enforcement adequately
divided between self-regulation, provincial securities commissions and the police.
Design/methodology/approach The core compliance data for the study came from the IDA’s tribunal
cases that were heard between 1984 and June 2008. The theoretical approach involves the invocation of classic
articles by the likes of Stigler, Posner and Becker, the essence of whose conclusions is that institutions will act
in their own best interests and cannot be expected to act in the public interest.
Findings The ndings show that over the period from 1984 to 2008, the severity of the sanctions increased
consistently over the period. When penalty ceilings were increased, penalties increased. When in the latter
phase of the period, public members (i.e. non-members of the industry) chaired the tribunals, penalties also
increased.
Research limitations/implications Researchers can use the data to write a paper which asks “Why
did the IDA tribunal penalties increase so consistently with time?” Future research could canvass various
possible explanations, including the one presented in this paper, to focus sustained attention on the issue of
self-regulation.
Originality/value This study is the rst to systematically examine the enforcement performance of the
IDA.
Keywords Fraud, Self-regulation, Securities enforcement, Public interest
Paper type Research paper
1. Introduction
Meet Chris Morgis. In 2001, a Toronto real estate developer named Chris Morgis, “lost $2
million due to unauthorized trading by the now-defunct brokerage [rm named] Thomson
Kernaghan & Co” (Hamilton, 2007). Morgis “led complaints with the Investment Dealer
Association (IDA) in March 2001[,] […] but the agency did not respond for more than a year”
(Hamilton, 2007). In 2002, Thomson Kernaghan & Co. went bankrupt and “its former Chair,
Mark Valentine, was later found guilty of securities fraud in the USA (USA)” (Hamilton,
2007). Morgis noted that dealing with Canadian regulators was a “disappointing process”
(Hamilton, 2007). Morgis contended that there “was smoke” and then “there was a re, but
the IDA did [not] go in” (Hamilton, 2007). He charged that, as Thomson Kernaghan & Co. was
a member of the IDA, he was complaining to the very people that he had an issue with, and
they were “reluctant” to put their members in a situation in which they could face criminal
charges (MacNeil and Solomon, 2008).
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
25,1
2
Journalof Financial Regulation
andCompliance
Vol.25 No. 1, 2017
pp.2-21
©Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-04-2016-0038
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)[1]. 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-prole 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 signicant 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 specically, 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
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Compliance
enforcement
practices

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