Investment Industry Regulatory Organization of Canada's Enforcement Performance

Dr. Lokanan received a SSHRC Insight Development Grant to study how the Investment Industry Regulatory Organization of Canada can promote ethical behaviour and regulate using administrative sanctions.

The Investment Industry Regulatory Organization of Canada (IIROC) is the national self-regulatory organization (SRO) that is responsible for policing investment dealers and brokerage firms that are involved in debt and equity trading in Canada's capital markets. Of late, however, IIROC has been accused of light touch regulation for its failure to litigate and prosecute investment advisors who peddle investments and other cases of financial misconduct. A recent Globe and Mail series on securities fraud noted that even when cases are prosecuted, individuals rarely go to jail and when fines are imposed, they are rarely collected by securities regulators. Given IIROC's legal and accountability framework as the oversights body for certain aspects of market operations on the basis of self-regulation, this study seeks to evaluate IIROC's ability to promote ethical behavior and regulate in the public interest through administrative sanctions.
The proposed study makes two important contributions to the advancement of knowledge in financial market regulation. First, the Global Financial Crisis (GFC) of 2008 triggered an ongoing assessment of the utility of self-regulatory systems in the financial industry. This assessment has driven financial supervision, regulation, and governmental policies. To date, such policy responses reflect a common recognition that the numerous and far reaching benefits associated with self-regulation are not without risks, particularly the risk associated with enforcement and the subsequent possibility of a future domestic and global financial crisis that accompanies “light touch” regulation, which can be harmful to public confidence in the market. Second, the study has the potential to unearth a body of knowledge on the enforcement of complaints by SROs and apply that knowledge to domestic and global systemic jurisdiction where SROs continue to play a major role in regulating the securities market.
Successful self-regulation in Canadian finance is important because government regulation is so completely ineffective. Canada is unique in having its "patchwork" system of inept provincial regulators. It is also notable for lax criminal enforcement for crime in the sector. And yet, Canada is often treated as a case of notable regulatory success in financial market regulation. As such, there is a clear need to better understand the efficacy of SROs in the face of enforcement of securities fraud and transgression in financial markets/security trading in Canada. Such a topic is of academic and also significant wider public and policy interest and will help illuminate issues related to self regulation in Canadian securities markets. Canada's securities industry stands in stark contrast to the United States where one federal regulatory agency, the Securities and Exchange Commission (SEC), has engaged in much stronger enforcement than is found in Canada. The SEC has shortcomings, yet it remains as one of the strongest national securities regulators in the world. The SEC may stand as an example of the importance of federal securities regulatory agencies. Canada is the only G7 country without a national securities regulator. Consequently, it is hard not to see the results from this study being part of a wider discussion by legislators in Ottawa to show the significance of a national securities regulator. In particular, the results from the study can be used to inform the apparatus of the proposed Capital Markets Regulatory Authority (CMRA) and can be used by the initial board of directors to build a strong foundation from the outset.
The whole issue of self-regulation in financial markets is contextualized to consider why a broader audience from other disciplines might be interested in 1) a paper on the effectiveness of self-regulation in Canada’s securities industry, and 2) the ineffectiveness of Canadian financial regulation in general. These are the kinds of concerns in relation to which I could see researchers from public administration and white collar criminology citing the findings from the study. While the issues of administrative sanctions versus criminal proceedings for seeking redress is important, it is the broader comparative public policy implications of the study that are probably of more importance. For example, it is hard not to see the findings from the study as more evidence of the need for regulatory reform and (perhaps) a national securities regulator in Canada.