1. MINOR CONTRAVENTION PROGRAM

1. Background

Currently, after an investigation is completed, Staff can close a matter with no action, issue a Cautionary Letter, or initiate formal disciplinary proceedings.

Where there is clear and convincing evidence to support an allegation of a contravention of IIROC requirements, Staff generally pursue formal disciplinary proceedings, which must be resolved through either a settlement agreement or a full disciplinary hearing before an IIROC hearing panel. Pursuing formal disciplinary proceedings requires a minimum expenditure of resources and costs regardless of the seriousness and scope of the contravention and the specific circumstances of the conduct.

A Cautionary Letter represents Staff’s opinion that an IIROC requirement may have been contravened and outlines Staff’s concerns about the conduct.  A Cautionary Letter has limited value.  It provides Staff with historical information about a particular Approved Person or Dealer Member and it may be a factor considered in commencing a future investigation or prosecution. However, a Cautionary Letter has no legal effect and does not constitute a finding that an IIROC requirement has been contravened. The deterrent effect of a Cautionary Letter is minimal and it does not materially enhance confidence in IIROC’s enforcement efforts.

In Staff’s view, there are cases that require a more serious regulatory response than a Cautionary Letter, but do not warrant the initiation of formal disciplinary proceedings, which are resource intensive.   An option, other than a settlement or contested hearing, will highlight the importance of progressive discipline and ensure enforcement outcomes are proportionate yet meaningful.   

Staff believes the MCP would provide the necessary flexibility to achieve a more efficient and effective Enforcement response.  In developing the proposal, Staff have considered analogous programs adopted by other regulators including the United States (FINRA), Australia (ASX) and Quebec (the Bourse).2

1. Purpose

The purpose of the MCP is to provide for the imposition of a meaningful sanction for a minor contravention of IIROC requirements.  The MCP would provide additional flexibility in handling cases, allowing for a regulatory response that is proportionate to a minor case, in terms of both resources and costs expended and the consequences to the Approved Person or Dealer Member.  The program would address cases that warrant a more meaningful regulatory response than a Cautionary Letter, but do not warrant the increased expenditure of time, resources and costs associated with proceeding with formal disciplinary action.

1. Process and Key Features

In appropriate cases, based on the criteria set out below, Staff would issue a Minor Contravention Program Notice (the MCP Notice) to an Approved Person or Dealer Member in lieu of commencing a disciplinary proceeding by way of a Notice of Hearing and Statement of Allegations. The MCP Notice would specify the alleged IIROC requirement contravened, the facts relied on to support the allegation and the fine sought. 

The sanction would be fixed at $2,500 per contravention for an Approved Person and $5,000 for a Dealer Member.

An Approved Person or Dealer Member receiving an MCP Notice would have a prescribed time within which to accept the terms of the MCP Notice and make payment of the fine. 

By agreeing to the MCP Notice, the Approved Person or Dealer Member would admit to contravening the specified IIROC requirement. Staff would not be permitted to initiate a disciplinary proceeding based on the admitted contravention in the MCP Notice.  The admission would not constitute a formal disciplinary record and therefore an Approved Person or Dealer Member would not be required to disclose it as disciplinary history, for instance on an individual’s application for registration. However, Staff could rely on the admission at a future disciplinary proceeding against the Approved Person or Dealer Member.   

On a quarterly basis, Staff would issue a public notice setting out all matters resolved by way of MCP Notice, specifying the contravention and a summary of the facts set out in the MCP Notice without identifying the Approved Person or Dealer Member.  IIROC would promptly notify the Recognizing Regulators of all MCP Notices.  

Staff would retain the ability to commence a disciplinary proceeding pursuant to Consolidated Rule 8200 if the Approved Person or Dealer Member chose not to agree with a MCP Notice.

1. Principles and Factors for issuing a MCP Notice

The cases resolved by way of MCP Notice would be at Staff’s discretion based on principles consistent with those set out in the IIROC Sanction Guidelines.  The objective of the MCP is to discourage future misconduct by the individual or firm in question by imposing a sanction that is proportionate to the conduct at issue and appropriate for the individual or firm who engaged in the misconduct.

1. Eligibility

The MCP would be available to both Approved Persons and Dealer Members.  However, individuals with prior disciplinary records will likely be disqualified from being considered for a MCP Notice.  Factors to consider will include the age and relevance of the prior disciplinary record. 

Staff believes that the MCP would be more applicable and relevant to cases involving individual misconduct.  It is also not anticipated that the MCP would be offered more than once to a particular individual.

1. Types of Contraventions

MCP Notices will be issued for contraventions of IIROC requirements that are isolated and result in limited or no harm to the public and the capital markets.   

Staff will consider the following criteria in making a determination about whether a contravention of IIROC requirements may be resolved by way of a MCP Notice:

1. the contravention is technical;
2. the contravention is an isolated incident;
3. the contravention resulted in:
   • limited or no harm to clients or other market participants;
   • limited or no harm to market integrity or the reputation of the marketplace;
   • limited or no benefit to the firm or individual engaged in the conduct or any related parties; and
4. the conduct was unintentional or inadvertent.

If the above criteria are met, Staff will also consider additional factors such as whether:

1. the conduct is admitted;
2. the conduct is self-reported;
3. the conduct has been the subject of internal discipline by the Dealer Member;
4. corrective or remedial measures were taken in response to the contravention;
5. there have been voluntary acts of compensation, including voluntary disgorgement of commissions, profits or benefits.

The nature of the contravention, applying the criteria set out above, will determine whether a matter may be resolved by way of the MCP.  Self-reporting, an admission of wrongdoing and remedial or compensation acts are additional factors to be considered.  For example, the following factors would generally result in Staff pursuing formal disciplinary proceeding, regardless of the post-conduct steps taken by the Approved Person or Dealer Member:

1. the conduct is deliberate;
2. a prior disciplinary history;
3. significant harm to investors or the reputation of the capital markets;
4. the seriousness and complexity of the issues involved in the conduct; and
5. the conduct relates to whether a firm fully and properly supervised securities-related activity.

2. EARLY RESOLUTION OFFERS

1. Background

Currently, Enforcement cases may be resolved by entering into a settlement agreement that is subject to approval by an IIROC hearing panel. A settlement agreement is typically reached after a full investigation is completed and extensive negotiations between Staff and the Respondent have taken place. Staff have always encouraged early settlement of cases and have adopted measures to facilitate timely resolution, including:

1. the Staff Policy Statement on Credit for Cooperation, which provides for the imposition of a reduced sanction if a respondent demonstrates proactive and exceptional cooperation; and
2. the Enforcement Mediation Program, which provides for the use of an independent third-party mediator to facilitate the settlement of proceedings or proposed proceedings.3  

Despite the implementation of these measures, the settlement process has not been significantly impacted. While there are often valid reasons for delayed or protracted negotiation in certain circumstances, Staff believes there is an opportunity to achieve early resolution in more cases and that early resolution would benefit both parties involved, protect investors and deter wrongdoing.  For example, early resolution would be desirable in cases involving discrete violations where there are no on-going related civil actions, the misconduct has been acknowledged and compensation or remedial measures taken.

1. Purpose

Early Resolution Offers will promote the timely resolution of cases, increase the application of the Staff Policy Statement on Credit for Cooperation and encourage firms to implement timely compensation and remedial measures.  An Early Resolution Offer will constitute Staff’s best offer by granting substantial credit in the determination of the fine and costs sought in exchange for entering into a settlement agreement.

1. Process and Key Features

In cases that meet the criteria set out below, Staff will make formal offers of settlement at an earlier point in time in the enforcement process.  For example, in cases where  the relevant facts can be established at, or shortly after, the commencement of the formal investigation. In those circumstances, conducting a further, more extensive investigation can result in a substantial use of regulatory resources without significantly advancing Staff’s understanding of the relevant facts.  

While an Early Resolution Offer may be subject to negotiation between Staff and the
respondent, the time for acceptance of the offer would be strictly time-limited.  If an Early Resolution Offer is rejected or the time for acceptance expires, the matter would proceed through the normal enforcement process. Any subsequent settlement negotiations would take into account the terms offered pursuant to the Early Resolution Offer.

Staff intends to make transparent to the respondent, the public and other stakeholders why and how credit was granted pursuant to an Early Resolution Offer.

A settlement agreement reached through an Early Resolution Offer would still be subject to acceptance by an IIROC hearing panel pursuant to Consolidated Rules 8200 and 8400.  The adoption of this proposal does not entail any change or amendments to the Consolidated Rules or the practices and procedures currently in place with respect to disciplinary proceedings.

1. Criteria for making an Early Resolution Offer

Staff will consider the application of the following criteria in determining whether to make an Early Resolution Offer:

1. Staff reasonably believe that the extent, scope and harm of the misconduct, non-compliance, or regulatory breach, has been determined;
2. the extent to which the subject has demonstrated proactive and exceptional cooperation in accordance with Staff’s Policy Statement on Credit for Cooperation;
3. the extent to which the non-compliance which is the subject matter of the case has been remedied or will be remedied as part of the settlement;
4. whether the respondent has or agrees to disgorge the amounts obtained or loss avoided as a result of the contravention(s);
5. whether the respondent  has compensated or agrees to compensate any client(s);
6. in the case of individuals, whether they have been internally disciplined; and
7. whether the respondent, through counsel, an agent or otherwise, has expressed a willingness to resolve the matter in a timely manner.

1. COMMENTS REQUESTED

IIROC Staff welcome any comments on the two proposed programs.  Staff is particularly interested in comments in response to the following questions.

1. Minor Contravention Program

1. Do you believe that the proposed MCP would be useful? 
2. Should a Dealer Member be eligible for the MCP?
3. What aspects of the proposed MCP, if any, should be public?
4. What legal or regulatory effect should acceptance of a MCP Notice have?
5. Do you agree that the sanction should be a fixed amount? 
6. Do you agree with the quantum of the proposed sanctions?

1. Early Resolution Offers

1. Do you believe that the Early Resolution Offers initiative is necessary?  Will it meet its objective?
2. How can Staff best demonstrate the credit given for accepting an Early Resolution Offer?
3. To what extent should Staff factor internal discipline into the decision to make an Early Resolution Offer?

1. Other Considerations

1. Are there other initiatives or programs that Staff should consider in order to provide more flexibility and options in addressing breaches of regulatory requirements in a fair and proportionate manner? 

Appendix

Schedule A – Comparable Regulatory Program

• 2See Schedule A, Comparable Regulatory Programs
• 3Enforcement Mediation Program.