Member Regulation

1
Member Regulation
Presentation to Members By Paul C. Bourque
September 9, 2005
2
Quick Facts about Member Regulation

• 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

3
Chart showing trend in SRO membership compared to
IDA jurisdiction members
With the transfer of member regulation functions
from the Bourse de Montreal Inc. on January 1,
2005, all firms came under IDA Jurisdiction.
4
Oversight of Member Regulation

• 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

5
Performance

• 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

6
Performance Results (as at June 30/05)
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 Achieved 74 Achieved 100
Completion and issuance of preliminary report for new member application within 2 weeks. Achieved 100
7
Performance Results (as at June 30/05)
Sales Compliance
Achieve a staff project utilization rate of 70. Achieved 72.3.
Complete all mandated reviews (including scheduled branch reviews) as established at beginning of year. The review schedule is on track.
8
Performance Results (as at June 30/05)
Sales Compliance
Completion and issuance of field examination reports within 15 weeks of completion of fieldwork for 60 within 6 months for all others Achieved 82 Achieved 100
Completion and issuance of preliminary report for new member application within 2 weeks. Achieved 75
9
Performance Results (as at June 30/05)
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
10
Performance Results (as at June 30/05)
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 within 2 business days provided no extenuating circumstances require a longer processing time (i.e., exemption request). Consolidated result for quarter is 94
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
11
Performance Results

• 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.

12
Performance Results

• 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.

13
Strategic Direction

• 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 Early Warning Systems to identify problem
  firms and intervene at an early stage
• Use Enforcement action to send clear messages for
  serious misconduct

14
Strategic Plan Results

• 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

15
IDA Audit Jurisdiction Member FirmsEW and RAC
deficiency trendJanuary 2001 June 2005
16
Early Warning

• 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

17
Enforcement Results
Penalties Comparison
Firms 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
Disgorgement 20,978,577
Total 113,500 41,842,223 265,189 4,447,675
Total Decisions 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
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

18
Enforcement Results
Penalties Comparison
Individuals Jan Jun 2005 2004 2003 2002
Total Fines 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
Total 1,968,248 5,493,896 3,245,281 2,650,140
Total Decisions 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

19
Enforcement Results
20
Enforcement Results
21
Leading Risk Indicators
22
Strategic Initiatives 2005-06

• 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

23
Strategic Initiatives 2005-06 StatusLeading Risk
Indicators

• Registration Risk Model
• Objective is to ensure registered representatives
  are ethical and proficient
• Project being coordinated with CSA
• Planned to be completed Q1-06

24
Strategic Initiatives 2005-06 StatusLeading Risk
Indicators

• Secure Intelligence Database
• Management information
• Program support
• File selection
• Strategic Partnerships with other enforcement
  agencies

25
Strategic Initiatives 2005-06Improve Performance

• 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

26
Strategic Initiatives 2005-06 StatusRisk
Reduction

• 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 CCOs meet
  defined standards of proficiency
• Planned completion June 2006

27
Strategic Initiatives 2005-06 StatusRisk
Reduction

• 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

28
Strategic Initiatives 2005-06 StatusRisk
Reduction

• Knowledge Transfer
• Regulatory Resource Management Project
• Rule Book and related website enhancements
• Other DT Recommendations
• Implementation plans
• Best Practices
• Interpretations Data Base
• More consultations with Members
• Member Services Unit

29
Strategic Initiatives 2005-06 StatusRisk
Reduction

• 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

30
ComSet Risk Model

• 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

31
ComSet Risk Model

• 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

32
ComSet Risk Model
33
Top 5 Violation Categories
34
ComSet Data and Analysis of Individual Registrants
35
ComSet Analysis on Firm Basis
36
Current Regulatory Issues

• 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

37
Current Regulatory Issues

• Financial Compliance
• Implementation of new Chief Financial Officer
  Qualifying Exam
• Automation of Compliance work flow

38
Current Regulatory Issues

• 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

39
Current Regulatory Issues

• Registration
• Maximizing the potential of the National
  Registration Database
• Implementation of national registration System
• Developing a Risk Assessment Model for
  registration

40
Current Regulatory Issues

• 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

41
High Profile Regulatory Issues

• Market timing cases
• Hedge Fund Report
• Use of Expedited Hearing process (By-law 20)

42
Major IDA Initiatives

• Push to consolidate IDA, RS Inc. and MFDA
• Deal with the perceived conflict of IDAs dual
  mandate
• Task Force to modernize securities legislation in
  Canada
• Move to amend CIPFs role in industry regulations
• Ongoing effort to reduce regulatory burden

43
Vision for the Future

• 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