Complaints against IDA decline in 2004 but penalties skyrocket

(February 1, 2005) The IDA received significantly fewer client complaints in 2004, but levied much higher penalties, mostly due to last December’s huge market-timing settlements, which involved three large bank brokerages.

The IDA released its annual report on complaints, enforcement and prosecutions last week. The brokerage industry association received about 1,200 complaints in calendar 2004, down from about 1,500 in 2003. The top types of complaints were unauthorized and discretionary trading (311), unsuitable investments (203), service issues (211) and misrepresentations (114).

The IDA requires its dealer members, which number more than 200, to report all disciplinary matters (including client complaints) to the ComSet database. That list also includes internal investigations, settlements, as well as civil, criminal and regulatory action against firms and reps. In 2004, nearly 1,900 ComSet “events” were reported, with unsuitable investments accounting for 41% of complaints, followed by unauthorized or discretionary trading at 12%.

Following receipt of the ComSet data, 659 files were sent to the IDA’s complaints unit. The IDA attempts to resolve 60% of its investigation files within one year, a benchmark it says it has surpassed at the national level over the past three years.

In the prosecution stream, 88 cases remained open at the end of 2004. The top three issues referred for prosecution involved unauthorized or discretionary trading, supervision, and falsification or forgery of documents.

Penalties against firms rose dramatically in 2004, mostly because of mutual fund market-timing violations that resulted in the largest fines ever to be imposed by the IDA. TD Waterhouse Canada was hardest hit, being penalized $20.7 million. RBC Dominion Securities was penalized $17 million, while BMO Nesbitt Burns was slapped with $3.7 million. The total came to nearly $42 million in IDA penalties. By comparison, the amount of penalties against firms in 2003 was just over $265,000.

Fines against individuals nearly doubled in 2004 compared to the previous year, climbing to $4.1 million. With the exception of Alberta, the IDA does not have the legal power to collect fines against brokers no longer working in the industry.

However, the Canadian securities industry includes nearly 24,000 registered individuals who handle approximately 35 million transactions annually. As the IDA notes in its annual report, “in this context, the number of violations and client complaints is relatively small. However, even one violation or one breach of client trust is one too many.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com