On March 23, the Investment Industry Regulatory Organization of Canada (IIROC) released reasons (Reasons) for a hearing panel’s decision to fine TD Waterhouse Canada Inc. (TDW) $4 million for its failure to include position cost information in its quarterly account statements for about 8% of its accounts from January 2016 to mid-2017. In our view this case highlights the importance for registrants of communicating frankly with their regulator when they foresee difficulties complying with existing or new rules as written.
Background: As our Canadian readers are no doubt aware, the Canadian Securities Administrators (CSA), IIROC and the Mutual Fund Dealers Association (MFDA) adopted a set of regulatory amendments known as the Client Relationship Model (CRM), which were phased in over time. The requirement to provide retail clients with individual position cost information for the securities in their account was part of the second phase of CRM (CRM2). Effective December 31, 2015, IIROC required its members to provide retail customers with position cost information for all account positions held at quarter-end (Position Cost Requirements). The Reasons noted that the implementation date for these rules followed several years of discussion among IIROC members, IIROC and other regulators and was disclosed to IIROC members in January 2015.
TDW’s Calculated Risk: In the spring of 2015, TD Waterhouse identified what it considered to be potential litigation risks and client experience issues resulting from its planned approach to implement the Position Cost Requirements. After considering various options, management decided to accept the business risk that about 8% of client positions would not be compliance with the Position Cost Requirements for a period of time. The goal was to bring the non-compliant account position disclosures into compliance by mid-2016. The completion date was then delayed until 2017 and, as of the date of the hearing, the 2015 data still had not been supplied.
IIROC Learned of the Non-Compliance through a Customer Complaint: The Reasons indicate that the issue first came to IIROC staff’s attention when they received a complaint from a client about the non-compliance, after the client had complained directly to TDW.
Reasons for Sanction: In reaching its decision to impose a $4 million penalty on TDW, the hearing panel commented:
“[The] Respondent’s failure to consult or advise its regulator about the non-compliance is deeply concerning. Consultation with IIROC should have been the first step for TDW. Its failure to do so is damaging to the integrity of the regulatory regime.”
Other factors influencing the sanction include the hearing panel’s findings that, among other things;
- TDW’s failure to implement the Position Cost Requirements was intentional;
- TDW’s board and key committees were are aware, or should have been aware, that there was continuing non-compliance; and
- Although there were no complaints about harm, securityholders were deprived of information to which they were entitled.
The Hearing Panel rejected IIROC staff’s submission that the maximum penalty of $5,000,000 should be imposed, stating that the penalty should be seen as severe but also leave room for cases that involve “equally egregious” facts but also a significant harm component.
Our Takeaways: Especially in the current environment, where market participants are encountering unforeseeble situations as a result of the COVID-19 pandemic, it is important for registered firms to address potential compliance challenges promptly. AUM Law has substantial experience advising firms in difficult situations. We can help you identify and assess the potential deficiencies and compliance risks, help you develop plans for remediation, and liaise with regulators on your behalf. Please do not hesitate to contact us for assistance
March 31, 2020