An update on self-regulation in the Canadian securities industry (2009-2016). Funnel in, funnel out and funnel away
| Pages | 324-344 |
| DOI | https://doi.org/10.1108/JFRC-05-2018-0075 |
| Published date | 02 May 2019 |
| Date | 02 May 2019 |
| Author | Mark Lokanan |
An update on self-regulation
in the Canadian securities
industry (2009-2016)
Funnel in, funnel out and funnel away
Mark Lokanan
Faculty of Management, Royal Roads University, Victoria,
British Columbia, Canada
Abstract
Purpose –This paper aims to analyze the processing of complaints against investment advisors and
Member firms through the Investment Industry Regulatory Organization of Canada (IIROC) enforcement
system between2009 and 2016. The paper used the misconduct funnel to show the numberof complaints that
are “funneled in,”and how these complaints are subsequently “funneled out”and “funneled away”at the
investigationand prosecution stages of IIROC enforcement system.
Design/methodology/approach –The paper uses data from IIROC enforcement annual reports
from 2009 to 2016. A combination of descriptive statistics and correlation matrices was used to analyze
the data.
Findings –The findings indicate that whileIIROC “funneled in”more complaints, a significant proportion
of complaints were “funneled out”of its enforcementsystem and funneled “away”from the criminal justice
system. Fines imposed were often not collected from individual offenders.IIROC, it seems, is ineffective in
handlingthe more serious and systematic industry problems.
Practical implications –It is hard not to see the findings from this study being used by the provincial
securities commissions and the federalgovernment to support the call for a national securities regulator in
Canada.
Originality/value –This is the first study of its kind to systematically analyze the enforcement performance
of IIROC.
Keywords Self-regulation, Compliance and regulation, Investment fraud, Penalties, Suitability
Paper type Research paper
1. Introduction
The Investment Industry Regulatory Organization of Canada (IIROC) is a non-profit,
national self-regulatory organization (SRO) that is responsible for policing debt and equity
trading in Canada’s marketplaces. IIROC currently has 28,000 registrants approved to work
with its registered Member firms. As a national SRO, IIROC is responsible for setting its
own education standards and regulatoryrequirements. Registered representatives and their
respective member firms are expectedto comply with these standards and requirements or
face disciplinary sanctions ranging from fines to permanent bans from the Association for
non-compliance.
When IIROC replaced the Investment Dealers Association (IDA) in June of 2008, its
justification for the name change was to free itself from the IDA’s baggage of lax regulation
andweakenforcement(
Lokanan, 2017a;Williams, 2012). As such, it is expected that IIROC
with its increased enforcement budget and mandate will continue to work with the provincial
securities commissions, the RCMP’s Integrated Market Enforcement Team (IMET) and other
JFRC
27,3
324
Received3 May 2018
Revised16 September 2018
Accepted24 September 2018
Journalof Financial Regulation
andCompliance
Vol.27 No. 3, 2019
pp. 324-344
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-05-2018-0075
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
SROs to protect investors and increase inefficiency in Canada’s capital markets. However,
anecdotal evidence posits that IIROC is not holding registrants accountable to law and ethical
standards (Gray and McFarland, 2017a;Robertson and Cardoso, 2017). As a matter of fact,
investors are still being swindled of their life savings by their advisors (Johnson, 2017), and
punishment for such contraventions remains lax and inadequate (Lokanan, 2015a;Gray and
McFarland, 2017a). Given that Canada does not have a national securities regulator, the
investment industry is now in a precarious position and expects IIROC to take regulatory
action on its registrants to ensure that their deficiencies are addressed and resolved.
On the basis of data from IIROC’s annual enforcement report, the present study will use
the SRO misconduct funnel that was developed by Brockman and McEwen (1990) and
further refined by Brockman (2004) and Lokanan (2015a) to examine the enforcement of
complaints by IIROC from 2009 to 2016. The misconduct funnel is the white-collar crime
version of the crime funnel that was developed to show how the number of casesinvolving
street crime shrinks as they are processed from arrest to sentencing through the criminal
justice system (CJS) (Lokanan, 2015a, p. 457). In the same manner, the misconduct funnel
shows the disposition of complaintsfrom case assessment to prosecution through the SROs’
enforcement system and is built on three fundamental concepts: “funnel in”,“funnel out”
and “funnel away”(Brockmanand McEwen, 1990;Brockman, 2004;Lokanan, 2015a).
“Funnel in”tests the claimmade by SROs that they enforce more complaints than would
not have otherwise been enforcedby government regulators (Brockman and McEwen, 1990,
p. 3). “Funnel out”examines the prospects of offenders who might escape formal
disciplinary actions and the potential leniency of penalties imposed on those who are
formally sanctioned (Brockman, 204, p. 73). “Funnel away”examines the claim that SROs
may divert cases with criminal elements away from the CJS to protect their members
(Brockman and McEwen, 1990, p. 3). Given these claims, this paper attempts to answer the
following question:
Q1. To what extent is IIROCholding market participants accountable to law and ethical
standards?
In evaluating Q1, the study makes two interrelated contributions to theory and practice.
First, the study contributes to the literature on securities fraud and transgression in
financial markets/security trading by examining the enforcement practices of theSRO that
are at the forefront of regulating market participants in Canada –IIROC. Second, the issues
discussed in this study are of significanceto the wider public and policy interests in Canada.
Canada is the only G7 country without a nationalsecurities regulator. As such, it is hard not
to see the results from this study being part of a wider discussion by legislatorsin Ottawa to
show the significance of a national securitiesregulator.
The rest of the paper proceeds according to the following format. Section 1 earlier
provides a brief overview of IIROC’s positionin the wider context of securities regulation in
Canada. Section 2 provides a critical review of the theoretical foundation and extant
literature on self-regulation.Section 3 briefly describes the methodology used to collate and
assemble the data used in the study. Section 4 provides an analysisof the findings. Finally,
Section 5 discusses the findings in relation to the literature and concludes by highlighting
areas for future research.
2. Literature review
2.1 Self-regulation and industry regulation
The theory of self-regulation is often touted as superior to government regulation because
self-regulatory regimes are able to scrutinize a wider variety of behaviors and achieve
Canadian
securities
industry
325
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