By: James Langton, March 23, 2020
IIROC staff argued the non-compliance was “a willful business decision”
The Investment Industry Regulatory Organization of Canada (IIROC) has fined TD Waterhouse Canada Inc. $4 million for failing to comply with certain provisions of the Client Relationship Model (CRM2) reforms.
An IIROC hearing panel handed down a record fine after finding that the firm made a deliberate business decision not to comply with CRM2 requirements to provide position cost information in quarterly retail client account statements for certain securities positions.
The non-compliance resulted in an estimated 175,301 clients who held positions that were incorrectly reported as “not determinable” when the information was available, the panel said.
“A failure of such magnitude is not, by any measure, a minor transgression,” it said.
According to the panel’s ruling, the firm was capable of becoming fully compliant with the position cost requirements of CRM2 by the end of 2015.
“However, in the spring of 2015, the respondent identified what it considered to be potential litigation risks and client experience issues that might have resulted,” the ruling said.
The firm decided to adopt an “alternative solution to avoid the problem,” which resulted in about 8% of client positions being offside with the requirements, it said.
IIROC discovered that the firm wasn’t compliant after investigating a client complaint.
According to the hearing panel’s decision, the firm largely admitted to IIROC’s allegations, but argued that it intended to comply with the requirements. The firm suggested that a fine of around $500,000 was warranted.
However, IIROC staff argued that the non-compliance was “a willful business decision,” which merited the maximum fine ($5 million).
The hearing panel largely sided with IIROC staff. It said that it was “unpersuaded by the [firm’s] argument that it did not refuse to comply with the new rule.”
The panel found that this was a business decision that was signed off on by the firm’s senior management, and that it was a failure of governance.
“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. The fact that a premier financial institution acted in such a manner provides extremely poor leadership for the other members of IIROC,” the panel said in its ruling.
The panel declined to impose the maximum fine, citing the lack of client harm caused by the firm’s actions.
In devising sanctions, the panel said that the facts of this case are unique.
“There are no cases which come close to being comparable to the respondent’s willful decision not to follow [an IIROC rule] and to ignore the regulator until the misconduct was discovered and a complaint was made. We had to fashion a sanction that is appropriate for such an act of fundamental disobedience to the applicable rules,” it said.
“In short, we believe such a fine will provide both general and specific deterrence to all those inclined not to respect their obligations to obey the regulatory rules,” it said.
The firm was also ordered to pay $28,497 in costs.