Member Regulation Presentation to Members By: Paul C. Bourque September 9, 2005.

Member RegulationMember RegulationPresentation to Members

By: Paul C. Bourque

September 9, 2005

2

Quick Facts about Member RegulationQuick 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 Chart showing trend in SRO membership compared to IDA jurisdiction memberscompared to IDA jurisdiction members

IDA Audit Jurisdiction Firms (1970 - 2005)

0102030405060708090

100110120130140150160170180190200

SRO MembershipIDA Jurisdiction

Number of Firms

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 RegulationOversight 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 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)Performance – Results (as at June 30/05)

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%

Financial Compliance

7


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


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


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


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 – ResultsPerformance – Results

There were no calls on the fund in 2005. Insolvencies of Essex (1999), Rampart (2001) and Thomson Kernaghan (2002) are still ongoing

• Zero calls on the CIPF due to insolvency (excluding fraud as the proximate cause of the insolvency)

No Members in Early Warning became capital deficient during the first half of 2005.

• Reduce and maintain at zero the number of capital deficiency occurrences for firms designated in early warning.

12

Performance – ResultsPerformance – 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 DirectionStrategic 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 ResultsStrategic 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 FirmsIDA Audit Jurisdiction Member FirmsEW and RAC deficiency trendEW and RAC deficiency trend

January 2001 – June 2005January 2001 – June 2005

IDA Audit Jurisdiction Member FirmsEW and RAC deficiency trend

(January 2002 - June 2005)

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18Ja

n

Fe

b

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Se

p

Oct

No

v

De

c

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Se

p

Oct

No

v

De

c

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

e

July

Au

g

Se

p

Oct

No

v

De

c

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

2002 2003 2004 2005Month / Year

Capital Deficiencies

EW 1 and EW 2

Number of Firms

16

Early WarningEarly 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 ResultsEnforcement 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


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


AGING REPORT FOR OPEN FILES > 1 YEAR

5

10

15

20

Dec 31, 2003 Dec 31, 2004 Mar 31, 2005 Jun 30, 2005

No.

of F

iles

INVESTIGATIONS

20


AGING REPORT FOR OPEN FILES > 1 YEAR

10

15

20

25

Dec 31, 2003 Dec 31, 2004 Mar 31, 2005 Jun 30, 2005

No.

of F

iles

PROSECUTIONS

21

Leading Risk IndicatorsLeading Risk Indicators

IDA Financial Compliance

Risk Assessment Model

Risk Score Comparison (2001 vs 2004)

0.00

0.50

1.00

1.50

2.20

2.50

3.00

3.50

4.00

1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181

IDA Audit Jurisdiction Members

Ris

k S

core

Residual Risk - 2001




Low risk

Low - Medium risk

Medium - High

risk

High risk

22

Strategic Initiatives 2005-06Strategic 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 StatusStrategic Initiatives 2005-06 StatusLeading Risk IndicatorsLeading 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 StatusStrategic Initiatives 2005-06 StatusLeading Risk IndicatorsLeading Risk Indicators

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

25

Strategic Initiatives 2005-06Strategic Initiatives 2005-06Improve PerformanceImprove 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 – StatusStrategic Initiatives 2005-06 – StatusRisk ReductionRisk 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 CCO’s meet defined standards of proficiency

Planned completion June 2006

27


• 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


• Knowledge Transfer Regulatory Resource Management Project

Rule Book and related website enhancements Other D&T Recommendations

Implementation plans Best Practices Interpretations Data Base More consultations with Members Member Services Unit

29


• 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 ModelComSet 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


• 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


Event Type Oct 15 to

Dec 31 2002

Jan 1 to Dec 31 2003

Jan 1 to Dec 31 2004

Jan 1 to Jun 30 2005

Civil Claims 87 628 499 237 Criminal Charges 3 11 9 4 Customer Complaints 405 1,934 1,276 701 Denial of Registration or Approval 1 2 1 External Disciplinary Action 3 10 20 17 Internal Disciplinary Action 6 26 44 22 Internal Investigation 7 57 46 34

Total 511 2,667 1,896 1,016

33

Top 5 Violation CategoriesTop 5 Violation Categories

ComSetTop 5 Violations by Month

0

10

20

30

40

50

60

70

80

90

100

Months

Nu

mb

er

of

Ev

en

ts

Unsuitable invts Unauth/Discret Trading Misrepresentation Other Transfer of Accts

34

ComSet Data and Analysis of Individual Registrants

22700

1992

499 188 76 41 29 16 6 0 9 15

0

5000

10000

15000

20000

25000

Num

ber

of R

egis

tere

d In

divi

dual

s C

urre

ncy

Em

ploy

ed b

y Fi

rms

0 1 2 3 4 5 6 7 8 9 10 >10

Number of ComSet Events (Oct 15 02 to Jun 30 05)

Number of Events in ComSet

35

ComSet Analysis on Firm Basis

0 100 200 300 400 500

0

5

10

15

20

25

12/3

1/0

2

3/3

1/0

3

6/3

0/0

3

9/3

0/0

3

12/1

6/0

3

1/1

6/0

4

10/1

5/0

2

Nu

mb

er

of

Eve

nts

pe

r 1

00

0 B

rok

er

Da

ys

(1 S

eve

re E

ve

nt

= 1

0 N

on

-Se

ve

re E

ve

nts

)

Number of Days Since ComSet Inception

FIRM 165

Estimated Rate = 6

A Firm with an Increasing Rate

36

Current Regulatory IssuesCurrent 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


• Financial Compliance

Implementation of new Chief Financial Officer Qualifying Exam

Automation of Compliance work flow

38


• 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


• Registration Maximizing the potential of the National Registration

Database

Implementation of national registration System

Developing a Risk Assessment Model for registration

40


• 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 IssuesHigh Profile Regulatory Issues

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

42

Major IDA InitiativesMajor IDA Initiatives

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

43

Vision for the FutureVision 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

Member Regulation Presentation to Members By: Paul C. Bourque September 9, 2005.

Documents

Transcript of Member Regulation Presentation to Members By: Paul C. Bourque September 9, 2005.