Member Regulation
Presentation to Members
By: Paul C. Bourque
September 9, 2005
Quick Facts about Member Regulation
2
•
Regulates activities of 202 (211 in 2004) Member
firms and their 24,852 registered individuals and
13,271 employees
•
Recognized as an SRO pursuant to provincial
securities legislation in:


British Columbia, Alberta, Saskatchewan, Ontario, Quebec,
Nova Scotia and Manitoba
Application still pending in Newfoundland
Chart showing trend in SRO membership
compared to IDA jurisdiction members
3
IDA Audit Jurisdiction Firms
(1970 - 2005)
Number of
Firms
SRO Membership
IDA Jurisdiction
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
1970
1975
1980
1985
1990
1995
2000
2001
2002
2003
2004
2005
With the transfer of member regulation functions from the Bourse de Montreal Inc.
on January 1, 2005, all firms came under IDA Jurisdiction.
Oversight of Member Regulation
4
•
Member Regulation Oversight Committee of the Board
(MROC)

IDA Vice Chair, President, 2 independent and 1 industry
director
• Canadian Investor Protection Fund


Minimum Standards for Financial Compliance
Examinations of Member Firms
• Canadian Securities Administrators



Recognition process
By-Law approval
Oversight examinations
Performance
5
•
The performance of Member Regulation will be
measured by enhanced investor protection through
increased industry compliance with regulatory
standards, measured by:
 The achievement of all benchmarks
 Zero (0) calls on the CIPF due to insolvency (excluding
fraud)
 Reduce and maintain at zero (0) the number of capital
deficiencies for firms in Early Warning
 Reduce Residual Risk Score of the highest risk firms
Performance – Results (as at June 30/05)
6
Financial Compliance
Achieve an average examiner
utilization rate of 70%.
Achieved 73.1%
Examine every Member annually
(except for firms approved for
biennial review).
The schedule is on track.
Completion and issuance of field
examination reports:
• within 8 weeks of completion of
fieldwork for 60%
• within 6 months for all others
Completion and issuance of
preliminary report for new member
application within 2 weeks.
• Achieved 74%
• Achieved 100%
Achieved 100%
Performance – Results (as at June 30/05)
7
Sales Compliance
Achieve a staff project
utilization rate of 70%.
Achieved 72.3%.
Complete all mandated
The review schedule is on
reviews (including scheduled track.
branch reviews) as established
at beginning of year.
Performance – Results (as at June 30/05)
8
Sales Compliance
Completion and issuance of
field examination reports:
• within 15 weeks of
completion of fieldwork for
60%
• within 6 months for all
others
Completion and issuance of
preliminary report for new
member application within 2
weeks.
•
Achieved 82%
•
Achieved 100%
Achieved 75%
Performance – Results (as at June 30/05)
9
Enforcement
Achieve a project utilization rate of
70%
Achieved 79.7%
Complaints Resolution Rates –
Resolve 80% of closed complaints
within 75 days
Achieved 80%
Investigations Resolution Rates –
Resolve 60% of closed
investigations within 365 days
Achieved 86%
Prosecutions Resolution Rates –
Resolve 60% of closed prosecution
files within 10 months of receipt of
file
Achieved 69%
Performance – Results (as at June 30/05)
10
Registration
80% of all applications will be either approved or
the Member sent a first deficiency letter within 5
business days.
Consolidated result
for quarter is 65%
All transfers of registration will be completed
Consolidated result
within 2 business days provided no extenuating
for quarter is 94%
circumstances require a longer processing time (i.e.,
exemption request).
Completion and issuance of a preliminary
deficiency letter on review of suitability of
management as per By-law 7 and applicant
submissions received through NRD within 2 weeks
of receipt.
Achieved 100%
80% Statement of Grounds and Particulars to be
issued within 2 business days of Registration
Committee decision.
Achieved 100%
Performance – Results
11
•
Zero calls on the CIPF due to insolvency (excluding
fraud as the proximate cause of the insolvency)
 There were no calls on the fund in 2005. Insolvencies
of Essex (1999), Rampart (2001) and Thomson
Kernaghan (2002) are still ongoing
•
Reduce and maintain at zero the number of
capital deficiency occurrences for firms
designated in early warning.

No Members in Early Warning became capital deficient
during the first half of 2005.
Performance – Results
12
• Reduce risk scoring level with the highest risk firms
progressively over time in Financial and Sales
Compliance – through RTR monitoring
• Reallocate Enforcement resources to more serious /
complex / high risk cases

Tracking against this measure will commence in Q3 2005.
Strategic Direction
13
• Use Leading Risk Indicators to identify industry
wide risk trends
•
Use Risk Reduction Tools to prioritize and allocate
staff resources effectively
•
•
Continually Improve MR Performance
•
Use Enforcement action to send clear messages for
serious misconduct
Use Early Warning Systems to identify problem
firms and intervene at an early stage
Strategic Plan Results
14
• Early Warning
• Enforcement Results
• Risk Assessment Model for Financial Compliance
• Risk Assessment Model for Sales Compliance
• Case Tracking System
• Complaints and Settlements Reporting (ComSet)
• NRD Implementation
•
•
•
Quebec participation
CFO Certification – deadline July 5, 2005
Quebec Recognition and Delegation – June 2004
Transfer MR from Bourse – January 1, 2005
IDA Audit Jurisdiction Member Firms
EW and RAC deficiency trend
January 2001 – June 2005
15
IDA Audit Jurisdiction Member Firms
EW and RAC deficiency trend
(January 2002 - June 2005)
Number of
Firms
18
Capital Deficiencies
17
EW 1 and EW 2
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Month / Year
2004
Jun
Apr
2005
May
Mar
Jan
Feb
Dec
Oct
Nov
Aug
Sep
July
June
Apr
May
Mar
Jan
Feb
Dec
Oct
Nov
Sep
Jul
2003
Aug
Jun
Apr
May
Mar
Jan
Feb
Dec
Oct
Nov
Sep
Jul
2002
Aug
Jun
Apr
May
Mar
Jan
Feb
0
Early Warning
16
• By Law 30.5(i) – the Association may require the
member to pay the reasonable costs and expenses
incurred in connection with the administration of the
By Law
• Less EW costs being collected due to fewer Members
in EW
Enforcement Results
17
Penalties Comparison
Jan – Jun. 2005
2004
2003
2002
Total Fines
$100,000
$20,583,577
$191,654
$4,110,000
Costs
$13,500
$280,069
$73,535
$337,675
Firms
Disgorgement
Total
$20,978,577
$113,500
$41,842,223
$265,189
$4,447,675
5
10
6
6
Average Fine
$20,000
$2,058,358
$31,942
$658,000
Median Fine
$35,000
$47,500
$50,000
$450,000
Average Costs
$2,700
$28,007
$12,256
$56,279
Median Cost
$6,750
$17,500
$12,173
$5,500
Total Decisions
Average Disgorgement
$2,097,858
Median Disgorgement
$8,462,651
Suspensions
2
0
2
Terminations
0
0
1
2
Warning Letters
1
5
13
16
Enforcement Results
18
Penalties Comparison
Jan – Jun 2005
2004
2003
2002
$1,137,500
$4,147,000
$2,401,250
$2,292,000
Costs
$176,886
$773,015
$531,035
$323,400
Disgorgement
$653,862
$573,881
$312,996
$34,740
$1,968,248
$5,493,896
$3,245,281
$2,650,140
7
64
41
46
Average Fine
$162,500
$64,797
$58,567
$49,826
Median Fine
$42,500
$25,000
$30,000
$25,000
Average Costs
$25,269
$12,078
$12,952
$7,030
Median Cost
$11,262
$7,500
$5,000
$5,000
Average Disgorgement
$93,409
$8,967
$7,634
$755
Median Disgorgement
$207,138
$4,252
$2,006
$3,967
Average Total Penalty
$281,178
$85,842
$79,153
$57,611
Warning letters
3
19
27
76
Suspensions
3
7
2
10
Conditions on Registrations
8
37
19
25
Permanent Bars
3
17
9
6
Individuals
Total Fines
Total
Total Decisions
Enforcement Results
19
AGING REPORT FOR OPEN FILES > 1 YEAR
No. of Files
20
15
10
5
Dec 31, 2003
Dec 31, 2004
Mar 31, 2005
INVESTIGATIONS
Jun 30, 2005
Enforcement Results
20
No. of Files
AGING REPORT FOR OPEN FILES > 1 YEAR
25
20
15
10
Dec 31, 2003
Dec 31, 2004
Mar 31, 2005
PROSECUTIONS
Jun 30, 2005
Leading Risk Indicators
21
IDA Financial Compliance
Risk Assessment Model
Risk Score Comparison (2001 vs 2004)
4.00
Residual Risk - 2001
Residual Risk - 2002
3.50
Residual Risk - 2003
Residual Risk - 2004
3.00
Risk Score
High risk
2.50
Medium - High
risk
2.20
Low - Medium risk
1.50
Low risk
1.00
0.50
0.00
1
11
21
31
41
51
61
71
81
91
101
IDA Audit Jurisdiction Members
111
121
131
141
151
161
171
181
Strategic Initiatives 2005-06
22
• Leading Risk Indicators

Develop Registration Risk Model

Develop and implement a secure intelligence data base
• Risk Reduction Tools

Develop and implement Compliance Report Trend Report
(RTR)

Develop a certification for Chief Compliance Officers

Implement the equity margin automation project

Knowledge Transfer
Strategic Initiatives 2005-06 Status
Leading Risk Indicators
23
• Registration Risk Model

Objective is to ensure registered representatives are ethical
and proficient

Project being coordinated with CSA

Planned to be completed Q1-06
Strategic Initiatives 2005-06 Status
Leading Risk Indicators
24
•
Secure Intelligence Database




Management information
Program support
File selection
Strategic Partnerships with other enforcement agencies
Strategic Initiatives 2005-06
Improve Performance
25
• Improve the Performance of Member regulation



Develop benchmarks that measure the quality of our
regulatory products
Development of the Unified Business System Solution
platform
Assess, investigate and prosecute supervision cases more
effectively
Strategic Initiatives 2005-06 – Status
Risk Reduction
26
• Chief Compliance Officer Certification



Ensure persons designated as Chief Compliance Officers
meet defined proficiency standards in order to:
 reduce the number of valid suitability and
discretionary trading complaints and
 Reduce the cost of satisfying those complaints.
Develop and implement a Chief Compliance Officer
certification that that ensures CCO’s meet defined standards
of proficiency
Planned completion June 2006
Strategic Initiatives 2005-06 – Status
Risk Reduction
27
•
Equity Margin Automation Project
 Phase I

replaced the existing methodology for determining
margin rates with a custom method that more
accurately reflects market risk combining both price
and liquidity risk (the “basic margin rate”)
 Phase II

in order to implement this new “basic margin rate”
methodology, develop and test software to automate
what is currently a manual process
Strategic Initiatives 2005-06 – Status
Risk Reduction
28
•
Knowledge Transfer


Regulatory Resource Management Project
 Rule Book and related website enhancements
Other D&T Recommendations
 Implementation plans
 Best Practices
 Interpretations Data Base
 More consultations with Members
 Member Services Unit
Strategic Initiatives 2005-06 – Status
Risk Reduction
29
•
Compliance Risk Trend Report (RTR)


•
Reports for High Risk firms issued June 2005
Others being finalized in batches
Objective is to get Members to reduce their risk
profile
ComSet Risk Model
30
•
Policy 8 requires firms to report the following types of
matters on a web based tool known as ComSet:






Written client complaints about trading in their accounts
Client complaints regarding allegations of theft, fraud, market
manipulation, money laundering,
Domestic or International investigations or convictions of a
firm or registrant by a regulator or criminal authority
Civil Suits alleging impropriety in relation to trading or client
accounts
Internal investigations
Denial of Registration
ComSet Risk Model
31
• Collection of the information was initiated on October
•
•
15, 2002
The statistical algorithms takes into account the
number of events a firm reports and normalizes the
information to take into account the number of
registrants, the relative seriousness of the types of
events reported
The tool allows assessment of the relative risk of a firm
on a firm basis, branch basis or individual basis
ComSet Risk Model
32
Event Type
Civil Claims
Criminal Charges
Customer Complaints
Denial of Registration or Approval
External Disciplinary Action
Internal Disciplinary Action
Internal Investigation
Total
Oct 15 to
Dec 31
2002
Jan 1 to
Dec 31
2003
Jan 1 to
Dec 31
2004
Jan 1 to
Jun 30
2005
87
3
405
628
11
1,934
1
10
26
57
2,667
499
9
1,276
2
20
44
46
1,896
237
4
701
1
17
22
34
1,016
3
6
7
511
Top 5 Violation Categories
33
ComSet
Top 5 Violations by Month
100
90
Number of Events
80
70
60
50
40
30
20
10
0
Ja
Ju
Ju
Se
Oc
No
De
J
J
J
Fe
Ma
A
Ma
n-0 Feb- Mar- Apr-0 May n-0
l-0 Aug p -0
t-0
v -0
c -0 an-0
b-0
r-0 pr-0
y -0 un-0 5 ul-05
4
04
04
04
4
04
4
4
5
4
4
4
4
5
5
5
5
Months
Unsuitable invts
Unauth/Discret Trading
Misrepresentation
Other
Transfer of Accts
ComSet Data and Analysis of Individual
Registrants
34
Number of Events in ComSet
25000
22700
Number of Registered Individuals
Currency Employed by Firms
20000
15000
10000
5000
1992
499
188
76
41
16
29
9
0
6
15
0
0
1
2
3
4
5
6
7
Number of ComSet Events (Oct 15 02 to Jun 30 05)
8
9
10
>10
ComSet Analysis on Firm Basis
35
A Firm with an Increasing Rate
FIRM 165
20
15
10
Estimated
Rate = 6
0
100
200
300
400
Number of Days Since ComSet Inception
1/16/04
12/16/03
9/30/03
6/30/03
3/31/03
0
12/31/02
5
10/15/02
Number of Events per 1000 Broker Days
(1 Severe Event = 10 Non-Severe Events)
25
500
Current Regulatory Issues
36
•
Sales Compliance








Chief Compliance Officer Qualification
Conflicts of Interest Rules
Beneficial Ownership of non individual accounts
IDA/MFDA business arrangements
Trade Reporting and Electronic Audit Trail Systems
(TREATS) Committee
Debt Market Rules – Policy 5
Electronic access to Members’ records
Automation of Compliance work flow
Current Regulatory Issues
37
•
Financial Compliance


Implementation of new Chief Financial Officer Qualifying
Exam
Automation of Compliance work flow
Current Regulatory Issues
38
•
Regulatory Policy




Implementation of new Equity Margin rates
Implementation of Value at Risk models for regulatory
capital calculation – alternative to net capital model
Business Continuity Planning for Members
Client account transfer
Current Regulatory Issues
39
•
Registration

Maximizing the potential of the National Registration
Database

Implementation of national registration System

Developing a Risk Assessment Model for registration
Current Regulatory Issues
40
•
Enforcement
 Pursuing more important complex cases
 Obtaining additional enforcement powers
 Compel evidence for investigations and hearings
 File discipline decisions as court decisions
 Statutory immunity for regulatory decisions made in good


faith
Move quickly to deal with firm and individual instances of
failure to cooperate with IDA investigation
Supervision cases
High Profile Regulatory Issues
41
• Market timing cases
• Hedge Fund Report
• Use of Expedited Hearing process (By-law 20)
Major IDA Initiatives
42
• Push to consolidate IDA, RS Inc. and MFDA
• Deal with the perceived conflict of IDA’s dual mandate
• Task Force to modernize securities legislation in Canada
• Move to amend CIPF’s role in industry regulations
• Ongoing effort to reduce regulatory burden
Vision for the Future
43
• Move towards a mix of principle and rule-specific
•
•
•
•
regulations
Empower Members to take on more responsibility for
self-regulation
Move to enhance the use of risk models
Members taking responsibility for operational rules
Restructure Member Regulation to better deal with
emerging issues