Manitoba Joins Emerging Trend of Granting More Legal Authority to Investment Industry Regulators, but is Investor Protection Really the Bottom Line?

26 March 2018

By Khrystina McMillan & Shakaira John

Last week, Manitoba’s Minister of Finance introduced proposed amendments to Manitoba securities legislation that would grant a national investment industry regulator enhanced enforcement powers. If approved, these amendments will make Manitoba the fifth province that has provided self-regulatory organizations (“SROs”) with more robust legal authority in the name of investor protection. It is not clear, however, that the goal of investor protection is actually served by giving SROs more enforcement powers.


The Proposed Manitoba Changes: Provincial securities regulators are empowered by statute to recognize and delegate regulatory responsibilities to SROs. The two primary SROs in the investment industry are the Investment Industry Regulatory Organization of Canada (“IIROC”), which regulates investment dealers and advisers, and the Mutual Fund Dealers Association of Canada (“MFDA”), which regulates mutual fund dealers and advisers.


Currently in Manitoba (as in other Canadian provinces apart from those noted below), fines and costs ordered by a SRO cannot be enforced through the province’s courts. If a dealer or adviser resigns and cancels registration with the SRO, the SRO does not have the legal authority to enforce its disciplinary decisions against the former member. This, even though both IIROC and MFDA have continued jurisdiction over former members to impose penalties and sanctions with respect to matters that occurred while the dealer or adviser was a regulated person (in accordance with the SRO’s rules and bylaws).


On March 19, 2018, Manitoba Finance Minister, Cameron Friesen, proposed Bill 23 to amend The Securities Act and The Commodity Futures Act of Manitoba and give SROs additional powers, including the ability to enforce their decisions as if they were judgments of the court (meaning that dealers or advisers could not avoid payment of fines or penalties by leaving the securities industry and resigning membership in the SRO). The bill would also give SROs civil immunity from lawsuits against them or their employees and agents for anything done or not done, while carrying out regulatory duties in good faith, even if the SRO’s investigation or prosecution was carried out negligently.


The Trend: Manitoba joins Alberta, Quebec, Prince Edward Island (“PEI”), and Ontario, where action has been taken to provide SROs with enhanced legal authority, as follows:

  • Over a decade ago, Alberta became the first province to give recognized SROs legal authority to collect fines through the courts. Then, on June 9, 2017, Alberta passed Bill 13, which amended Alberta’s Securities Act to grant SROs enhanced powers to collect evidence during investigations, and protection against lawsuits for any act done in good faith or negligent performance of regulatory duties or powers.
  • In June 2013, Quebec amended the Act respecting the Autorité des marchés financiers to allow SROs to request a court review of disciplinary decisions. If approved by the Quebec Superior Court, the SROs’ decisions become enforceable as judgments of the court.
  • In January 2017, the PEI Office of the Superintendent of Securities issued an Authorization Order that granted IIROC the authority to collect disciplinary fines directly through the Supreme Court of PEI, by filing decisions or settlement agreements with the court, as well as enhanced evidence collection powers at hearings.
  • On May 17, 2017, Ontario passed Bill 127, which amended the Ontario Securities Act to grant IIROC and the MFDA authority to file their decisions with the Superior Court and have their orders enforceable as orders of that court.

 

But Do These Changes Really Protect Investors? The oft-cited rationale for granting such authority to SROs is investor protection. IIROC praises these changes as providing “more effective tools” to protect investors, and has stated that it is actively seeking similar legal authority in all other jurisdictions across Canada “to ensure a consistent level of investor protection”. Consistent with this narrative, in announcing his proposed bill, Friesen explained that Manitoba’s Bill 23 will provide additional tools that “will enhance the confidence of investors that those who break the rules will be held accountable.”


But while enhanced SRO enforcement powers purport to strengthen investor protection, commentators across the country have observed that this assertion is (at the very least) debatable. Additional fines collected through these enhanced enforcement powers will not be used to compensate harmed investors and, indeed, may even diminish the amount of money a dealer or adviser has to satisfy victims’ claims through civil litigation or arbitration. Further, the additional fines could not be used to finance the SRO’s regulatory activities and operations, as this would create an obvious conflict of interest. The limited uses that the SRO can make of fines and penalties, such as public education funds, do not directly benefit or compensate investors for losses suffered as a result of dealer/adviser wrongdoing.


Nor do the enhanced SRO enforcement powers appear to be necessary to deter offenses or hold dealers and advisers accountable for wrongdoing. To avoid payment of fines or penalties imposed by an SRO by leaving the securities industry, an individual would be losing his or her career and livelihood. As one securities lawyer puts it: “A career-ending punishment is undoubtedly a significant deterrent and is considered sufficient for the disciplinary procedures of most other professions, including health professionals, lawyers and accountants. Why should it be any different for investment advisers?” In addition, the more egregious acts can be punished through other mechanisms, such as criminal or quasi-criminal prosecutions.


There is also concern that the new enforcement powers infringe on the rights of individuals who are subject to SRO investigations, given the limited due process rights in the context of a SRO disciplinary proceeding. Because SROs have the power to establish their own rules and procedures, the procedural rights that are granted to parties in court proceedings or public prosecutions need not apply.


The Takeaway: Manitoba’s Bill 23 would give SROs civil immunity and the ability to enforce payment of fines through the courts, making Manitoba the fifth province to join an emerging trend in Canada of granting SROs more legal authority. Rather than enhancing investor protection, however, these amendments appear to be transforming the role of SROs more into something resembling public prosecutors, without significant consideration or debate of the implications.


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