2006 saw steady enforcement, better compliance: IDA

The Investment Dealers Association has released its 2006 annual report in financial compliance and enforcement, finding that real gains have been made in the financial compliance of IDA members.

The IDA’s enforcement statistics from 2006 show that 1,269 cases were brought forth during the year, compared to 1,237 in 2005. The number of new investigations received decreased from 212 in 2005 to 154 in 2006.

Last year, the IDA surpassed its goal of trying to resolve 80% of cases within 75 days of receiving a complaint, settling within that time frame 1,188, or 91%, of the 1,304 cases it closed.

Cases that progress into the investigation stage are tending to take longer to resolve, though. Thirty per cent of closed investigations took more than a year to resolve, a substantially higher number than in 2005, when only 18% of closed investigations took more than year.

Although the IDA was moderately slower in the prosecution stage in 2006, 74% of closed prosecutions were resolved within 10 months, comfortably above the organization’s benchmark of 60%. Because of its success in consistently resolving its prosecutions within 10 months, the organization says it is setting a new goal of trying to resolve 60% of prosecutions within 180 days.

Prosecutions in 2006 resulted in 11 firms and 34 individuals facing penalties and fines by the IDA. The penalties of firms have remained relatively stable the past few years — the median fine has hovered around $50,000. However, the penalties levied against individuals have continued to climb. The median fine for individuals dropped from $35,000 to $27,500, but the average fine increased from $50,012 to $96,641.

This jump is primarily due to the record $1.3 million that the IDA levied against two individuals, topping the previous year-high fine of $585,000.

Since 2005, the IDA Financial and Sales Compliance departments have jointly developed a risk-trend report for member firms, evaluating their members’ risks and performances, and then meeting with the companies’ executives to discuss the results and show them where they stand in comparison to their peers. The RTRs complement IDA’s early-warning system, which highlights firms that are high risk for things like capital deficiencies and insolvency.

The IDA’s push for more stringent compliance with the RTRs has been a success in catching problems before they happen, says Paul Bourque, the IDA’s senior vice-president in charge of regulation. He emphasizes that there has been a gradual decline in the number of problems by firms in the industry.

“We issued the first risk-trend reports in the spring of 2005. This will be our third tranche. We’re seeing a real response to our recommendations. [Companies] are not all successful in implementing them, and they don’t accept them all, but there is a significant uptake of the recommendations that we’re making,” Bourque says.

This response has helped even the industry’s most high-risk firms start cleaning up their act, Bourque points out. “The financial compliance annual report highlights there were 18 fewer early-warning reports than there were before. Capital deficiencies are down, with 17 caused by seven members compared to 49 caused by 14 members in the previous year,” he says. “Even those firms that have remained high risk have had their residual risk scores going down.”

Bourque thinks that while the declines are gradual, they are having a cascading effect in the industry from the top down — not just the firms are coming around but individual brokers are as well.

“Another thing that we track is the number of complaints against individual brokers. So, there are 27,310 registered people in the IDA world. We track the numbers of complaints. Right now 97% of our registered people have no complaints against them. One per cent have two or more complaints, and 2% have one complaint,” he says. “That is the lowest it’s ever been. That is another objective indicator of our improving compliance performance. That might change, but the reason we track it is so that we know where it’s going.”

Bourque adds that while his organization has been instrumental in enforcing change in the industry, he sincerely believes its member firms want to increase standards and that they recognize that a lot of the areas assessed in the IDA’s risk model are also key factors for improving overall company performance.

“It tends to be, in my view, fairly persuasive because the firms accept the methodology that underlies the risk model. They accept the fact that these are relative criteria, but you have to look at things like the strength of the board, the experience of management, the number of sales compliance findings. These are all understood to be credible indicators [of performance], and that’s what underlies our risk model,” he says.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(03/06/07)

Mark Noble