2015-2016 was a transitional year that saw the creation of IIROC’s
new Strategic Plan, published in May 2016.
Our Statement of Priorities for 2015-2016 focused on the operational activities and significant initiatives that were to be completed in parallel with the creation of our longer term vision.
In keeping with IIROC’s commitment to transparency and accountability to our stakeholders, we are pleased to report our progress on those activities and initiatives. We will continue to measure and report on our progress each year.
Member Regulation Projects
Conduct a survey of Dealer Member practices in addressing conflicts of interest
In June 2015 we surveyed a representative sample of Dealer Members to review their overall framework for addressing conflicts of interest, the effectiveness of controls used to identify and address conflicts related to compensation practices, and the effectiveness of controls used to identify and address conflicts relating to the marketing and distribution of new products.
The study results revealed that most firms sampled lacked a meaningful process to identify, deal with, monitor and supervise compensation-related conflicts. As a result, we enhanced our compliance test procedures to more closely examine compensation and conducted a more comprehensive survey on the oversight and monitoring of compensation-related conflicts. The results of the examinations and the comprehensive survey will inform how we can help firms comply with best interest requirements and determine whether additional guidance or rule changes are necessary.
Participate in a Mystery Shopping exercise, jointly with the Ontario Securities Commission (OSC) and the Mutual Fund Dealers Association (MFDA), to assess and help firms improve the quality of service and advice provided by IIROC registrants to investors
IIROC, the OSC and the MFDA jointly published the final report summarizing the project in September 2015. Together with insights gained from IIROC’s “Know Your Client” (KYC) focus groups conducted in March 2015 (see below), the findings are helping IIROC improve investors’ experiences so that they are better served and protected. For example, IIROC published an Investor Bulletin to help investors better understand the KYC process and is producing a webcast to help advisors guide their clients through the process. We are also ensuring our compliance examinations promote KYC compliance among the firms and individuals we regulate and developing guidance to help them better explain to clients the importance of the KYC process and its requirements.
Conduct targeted compliance audits and surveys to assess Dealer Member practices in the use of social media
We analyzed the results from regular examinations of Dealer Members in 2015 to learn how social media/advertising is being used and how such use is being supervised. This information will help us determine whether there is a need for further guidance and/or rule changes to assist firms in supervising and monitoring their Approved Persons’ social media practices.
Review products, tools and services made available to Order Execution Only (OEO), otherwise known as “discount brokerage”, clients to assess compliance with existing rules and to inform possible policy development or guidance
IIROC established an OEO Working Group composed of OEO dealers and IIROC staff to consider the tools being used by OEO dealers in the context of current rules. We also conducted a quantitative survey of investors to learn their views on OEO services and tools and whether they viewed such tools as advice.
Based on what we found, IIROC has begun updating Dealer Member guidance to help clarify what constitutes a recommendation and what services may be offered on an OEO platform.
Publish proposed amendments to IIROC’s registration rules to conform to recent National Instrument 31–103 amendments and changes related to continuing education
The amendments will harmonize IIROC’s registration requirements with those of the Canadian Securities Administrators (CSA). They update IIROC’s continuing education program to change the length of the continuing education cycle to two years from three, as well as providing credit if an Approved Person repeats an approved ethics course. Importantly, the amendments will also institute automatic suspension if an Approved Person does not complete their continuing education requirements.
These proposed changes enhance the educational and experience prerequisites for approval on the IIROC platform, as well as the continuing education requirements that Approved Persons must meet, to ensure that individuals regulated by IIROC meet high proficiency standards.
Introduce amendments to the proficiency assurance regime for IIROC registrants
High proficiency standards, rigorous ethical requirements and mandatory continuing education are fundamental to investor protection and the integrity and efficiency of capital markets. IIROC announced a new proficiency assurance model in September 2015 after extensive consultation. Under the new model, competency standards will be set and published by IIROC for IIROC licensing courses. The new model also calls for a single provider to be selected through a transparent and competitive procurement process, providing the benefits of competition within a single provider context. IIROC retained the Canadian Securities Institute (CSI) to provide regulatory courses for an initial five-year term under an agreement that includes high performance standards, robust oversight and improved pricing caps.
Implement the consolidated enforcement rules
The Consolidated Rules were approved by the CSA in June 2016 and implementation is set for September 1, 2016, with the exception of certain requirements relating to hearing panels which were implemented in June 2016. A single consolidated set of rules will provide all stakeholders with greater clarity and transparency and ensure consistency in their application.
Publish the aggregated Plain Language Rule Book (PLR) for final review and comment
In March 2016, IIROC published the proposed PLR in its entirety for the first time, with a 120-day public comment period. Rules that are organized, clear and concise are beneficial to Dealer Members, their representatives and investors.
Use the results of our tabletop cyber-security test involving IIROC Dealer Members and key service providers to develop a plan to assist Member Firms to establish cyber-security protocols
We published two resources – Cyber-Security Best Practices Guide and Cyber Incident Management Planning Guide – to help firms manage cyber-security risks and prepare effective internal response plans for cyber-threats and cyber-attacks, conducted an interactive webinar highlighting the two Guides and have made the webinar available as a webcast. We are continuing to work with Dealer Members to assess and improve cyber-security preparedness.
Enhance Dealer Member Rule Book (DMR) web capabilities
The DMR was integrated with the main IIROC website in August 2015, enabling users to navigate and search all IIROC Dealer Member Rules and Universal Market Integrity Rules from a single interface. In November 2015 we conducted a survey to learn what further improvements to the DMR were important to users and in response to feedback we published the DMR in a consolidated, searchable format. We continue to make incremental improvements to navigation and functionality of the DMR ahead of a rebuild of the full IIROC website which is part of IIROC’s three-year Strategic Plan.
Market Regulation Projects
Consult with industry stakeholders on the results of IIROC’s high frequency trading (HFT) study and the implications of the results
In October 2015, IIROC hosted a public forum following publication of the final academic paper in the HFT study. The forum was held in collaboration with the Capital Markets Institute at the Rotman School of Management, University of Toronto, and provided an opportunity for academics, industry participants, regulators and other stakeholders to discuss the study results and implications, and other related market issues.
Commence surveillance of debt market activity by IIROC Dealer Members
Phase 1 of the debt transaction reporting initiative was implemented on November 1, 2015, and IIROC is now receiving reports of all over-the-counter debt transactions from Dealer Members who are Government Securities Distributors (GSDs) or affiliated with a GSD. Phase 2, which will require all other Dealer Members that trade debt instruments to begin reporting, is in development with planned implementation on November 1, 2016.
Implement a fair and transparent debt market fee model
IIROC has implemented a fee model based on usage or consumption of regulatory services, representing a fair and balanced approach for recovering costs associated with the provision of debt market surveillance.
Issue final guidance on marketplace thresholds
In August 2015, we published final guidance that establishes a framework for marketplaces to adopt price thresholds in order to mitigate short-term, unexplained price movements in the trading of individual securities. The guidance is in effect as of August 2016.
Consult with industry stakeholders on IIROC’s proposed dark rules anti-avoidance provisions
IIROC hosted a roundtable with stakeholders in June 2015 to explore alternatives to the dark rules anti-avoidance proposal. Based on these discussions and the results from IIROC’s best execution survey, we concluded that enhanced best execution requirements and guidance may help address concerns about systematic routing of small orders southbound. We are also proposing additional requirements to help Dealer Members better understand the circumstances under which routing to a foreign market may not achieve best execution. IIROC intends to withdraw the proposed dark rules anti-avoidance provisions.
Introduce rule amendments and/or guidance to address issues identified
in IIROC’s best execution survey of Dealer Members
In December 2015, we introduced proposed provisions and guidance to address issues identified in IIROC’s best execution survey of Dealer Members and an IIROC-hosted roundtable on the proposed dark rules anti-avoidance provisions. The proposals:
- clarify that the systematic routing of orders outside of Canada without considering domestically available liquidity is not compliant with best execution obligations;
- update and streamline existing best execution requirements for IIROC-regulated firms; and
- align IIROC requirements with proposed amendments by the CSA regarding best execution.
Begin implementing infrastructure to enable market-related data, reports and metrics to be shared with other Canadian regulators and stakeholders through interactive, self-service delivery channels
IIROC has launched an internal analytics data portal as part of foundational work towards providing access to information by partner regulatory agencies.
Responding to the Member Survey
Provide regular updates to Dealer Members on the status and timing expectations of each compliance examination
Communicating clear expectations is important to ensuring examinations are conducted in a fair and transparent manner. IIROC compliance staff update firms regularly on the status and timing of exams. A survey is issued to each Dealer Member at the conclusion of each compliance exam to solicit feedback on the examiners’ timeliness in communicating concerns, providing status updates and the timing of the final report.
Enhance our consideration and communication of potential impacts and consequences of regulatory actions on all relevant stakeholders
For each new policy project undertaken, IIROC staff conducts an initial qualitative analysis to determine the impact on relevant stakeholders of each alternative approach. These analyses, which are communicated to Dealer Members, help inform IIROC on the implications of pursuing policy projects and ensure IIROC does not impose unnecessary regulatory burden.
WORKING WITH OTHER REGULATORS AND STAKEHOLDERS
Participate in government consultations on the Cooperative Capital Markets Regulatory (CCMR) System
IIROC’s December 2015 submission to the CCMR System consultations highlighted the need for stronger enforcement powers related to two particular areas: the ability for IIROC to enforce sanction decisions through the courts in jurisdictions where we currently do not have that ability; and statutory immunity for IIROC and IIROC staff when actions are taken in good faith to carry out IIROC’s public interest mandate.
Participate in consultations on the Ontario government’s initiatives regarding the regulation of financial planning
In our June 2016 submission to the Ontario Government Expert Committee, IIROC articulated our view that fragmentation and inconsistent regulation of individuals who carry on the same or similar activities on different platforms can lead to consumer confusion, duplication, cost and regulatory gaps, and that it is in the public interest to ensure all those who hold themselves out as financial planners meet a defined and rigorous standard of competence, proficiency and ethical practice. We also stated our opinion that there should be greater overall harmonization among financial regulators, including consistent standards of proficiency, registration and discipline, and that the creation of a central registry co-ordinated among all financial regulators and mutual recognition of sanctions among financial regulators would be important first steps.
Use feedback from investor focus groups regarding their perceptions and experiences with the collection of know-your-client (KYC) information to develop an appropriate regulatory response and improve member and investor education
IIROC has started a policy project to consider the breadth and depth of KYC information collection and suitability assessment that is appropriate in relation to each type of service offering currently available, and to enhance our rules and/or guidance accordingly.
Informed by what we learned from the focus groups conducted in March 2015 and the Mystery Shop initiative, we published a new investor bulletin, Ensuring your investments are right for you, to explain the KYC concept and what to expect when working with an advisor and why the collection of KYC information is important. Additional investor and member education resources, including webcasts, are being developed to help improve the KYC process and to better serve investors.
Improving IIROC Operations
Determine a target operating model for IIROC’s market and member regulation functions to support our future business and regulatory objectives
As part of the strategic planning process, we conducted a current state assessment of IIROC systems, processes and resources, developing and prioritizing our target future state requirements, and completing a gap analysis.
Based on this analysis, we developed a business and technology roadmap which has been incorporated into the Strategic Plan and which will provide greater efficiency, flexibility, and cost-effectiveness in our market and member regulation activities.
Expand IIROC’s cost/benefit analysis process for significant proposed capital expenditures to include consistent post-expenditure reviews
We conducted a review and as a result we have identified the need to develop a new framework around the management of capital expenditures and projects more generally. Work on the new framework has begun and is expected to be completed in fiscal 2017.
Enhance IIROC’s enterprise risk management (ERM) framework by implementing semi-annual risk reporting and more effective verification of risk mitigation strategies
We implemented a semi-annual self-assessment process that requires risk management reports to be completed in June and January each year. For higher risk areas, we test the mitigating controls independently and incorporate the results into the overall risk evaluation.
Enhancement to our ERM framework and the addition of a second assessment provides IIROC with the ability to thoroughly assess its risks more frequently. This allows for more responsive action in areas requiring risk management. As well, control verification provides assurance that the identified controls relied upon for risk mitigation are operating as designed.
Adjust the focus of our internal audit function to include key processes in a greater number of departments
We developed an internal audit plan with input from the Executive Management Team to identify departments and key processes for focus, and to align audit resources with key areas of risk.
We expanded the scope of internal audit to include key processes based on our assessment of risk in each area.
Begin the phased migration of legacy applications to new supported platforms
We developed a roadmap to migrate old systems for which support will be discontinued to supported existing or new systems.
We completed significant upgrades of our telephony and call centre software and replaced our call recording software. Work was also completed on a revamped New Issues System, which has since been implemented, and on a comprehensive procurement process to select a new set of financial planning and management systems, which is being implemented in two phases during 2016-2017.
Improve employee engagement by responding to the latest employee survey using employee focus and work groups
Based on the latest employee survey and focus and work groups, follow-up action plans specific to each department were developed and implemented to address four key areas: career development, performance management, recognition and work processes. Corporate-wide initiatives have also been undertaken in these and other areas identified in the survey.
We have described below additional initiatives that are key to IIROC’s work in the public interest. Further, IIROC’s Enforcement Report
and Compliance Priorities Report
contain other notable highlights of our activities and progress.
The Client Relationship Model (CRM) initiative
The CRM initiative enhances investor protection and understanding, raises industry standards and helps to promote confidence in the quality of advice and integrity of those who provide it. For example, specific elements of CRM improve transparency of fees and account performance, ensure that conflicts are identified and addressed, and enhance suitability assessment.
IIROC finalized all elements of the CRM reform initiative for implementation by IIROC-regulated firms, with publication in May 2015 of final Dealer Member rules regarding revised trade confirmation and account statement requirements, and new annual performance and fee/charge reporting requirements. These amendments are being phased in over a two-year period ending in 2016.
To support firms in effectively implementing CRM requirements, IIROC has been compiling and publishing frequently asked questions (FAQs).
Effective policy development
An effective policy development process includes communication and consultation with stakeholders and reflects key and emerging issues.
IIROC regularly engages stakeholders, communicates regulatory expectations and publishes timely and clear rules, guidance and FAQs to help ensure policies reflect the evolving investment landscape. This helps all IIROC-regulated firms, which represent differing sizes and business models, to exercise an appropriate level of flexibility.
In 2015-2016, IIROC issued for comment proposed rule amendments on best execution and requirements for disclosure of IIROC membership. We also issued four Guidance Notices in final form related to marketplace thresholds, inside order marking, synchronization of clocks and short-sale and short-marking exempt order designations; and implemented amendments in final form to various rules including those governing research report quiet periods, dark order price improvement obligations when trading against an odd-lot order, short-marking exempt orders, Basis Orders, and unprotected transparent marketplaces and the order protection rule.
Helping investors make informed decisions
IIROC is helping Canadians make informed investment decisions by producing a suite of investor resources.
In 2015-2016, IIROC published three bulletins for investors: