Less than 20% of IDA fines paid

In the second last week of November the IDA announced more than $400,000 in fines representing roughly 10% of the monetary penalties it has handed out so far this year. But by the brokerage industry association’s own admission, they will be lucky if they see a fifth of that money.

According to the associations’ own figures, fewer than 20% of total fines are paid. While firms fined by the IDA almost always pay their fines, just 34% of individuals between January 2003 and the end of September 2005 did so.

Thanks to the market-timing cases and record-setting fines against HSBC Securities, BMO Nesbitt Burns, TD Waterhouse and RBC Dominion Securities last year, the IDA received a windfall of about $37 million. All of these firms paid their penalties to avoid losing their registrations.

Usually, the IDA receives just a fraction of that. In 2003 the monetary value of the IDA penalties (including fines, costs and disgorgements) was a little over $3.5 million, but the association received only about $700,000.

The IDA isn’t proud of the low payment rate, but can do little right now to improve it. Individuals ushered out of the IDA don’t have any incentive to pay up if they have no desire to return to the industry; and the IDA doesn’t have the power to force them to pay — in most jurisdictions, at least. So far the only province where the IDA can force a member to pay is in Alberta, and even there, the association can only claim mixed success.

“Obviously we are disappointed by it,” says Alex Popovic, the IDA’s vice-president of enforcement. He’s particularly frustrated by cases in which the individual has the means to pay, particularly if that individual derived that money from the improper action. “That is an extremely serious issue,” he says. “If an individual has the means to pay, he should be forced to pay; otherwise it is a very hollow discipline process.”

But if the IDA can’t force people to pay, why such steep fines? After all, the U.S. Securities Exchange Commission and the NASD, the primary private-sector regulators of America’s securities industry don’t impose fines when they impose a lifetime ban because of the inherent difficulty in collecting from those individuals.

“At some point we hope to have the authority [to collect],” Popovic says, adding that unlike U.S. regulators, the IDA views fines as an important deterrent. “In some circumstances, a fine is very important and very much a part of the general deterrence,” he says. The specific deterrence is taking that individual out of the industry, which has a great impact on an individual, he explains, “But from a general deterrence perspective I think a fine speaks loudly to others that might be inclined to get involved in similar types of activity.” In other words, sizable fines, even if they’re not paid, catch the industry’s attention.

Richard Powers, assistant dean and academic director of the directors education program at the Rotman School of Management at the University of Toronto, concurs. “Without a fine, it makes it that much easier for them [offenders] to come back into the industry,” he says. Powers would even like to see the maximum fine increased for an even stronger deterrent.

Still, that would compound concerns by those who feel the IDA fines are pulled out of thin air.

They’re not, of course. Sanctions are determined after weighing a number of factors, including harm to clients or markets, blameworthiness, degree of participation, how much a respondent benefited from the misconduct, prior disciplinary record, remorse and the level of cooperation the proceedings. But try telling that to one broker who’s been through the process.

“They were just making up numbers,” said the broker, who asked to remain anonymous. “At the time there was no standard.” In this instance the process dragged on for years before he finally settled. “I tried to carry on as long as I could, but it gets to you after a while.”

In the end, the judge knocked the fine down to about $5,000 and didn’t award costs to the IDA, although the association had been pushing for a fine in excess of $15,000. “They need to bring a balanced opinion to things, but they seemed to be out to get brokers,” said the broker, who is still in the industry. “I don’t blame them when there is a situation where there is an actual issue; they seem very vindictive.”

Of course this isn’t just a problem with the IDA or how it’s run. Self-regulatory organizations in general lack the teeth to do much more than ban offenders from their industry. Although all of Canada’s SROs recognize each others’ penalty decisions; failing to pay an IDA fine, for example, would exclude an individual from membership in the MFDA.

The IDA would be more effective if it is able to increase the percentage of compliance with the fines that individuals were forced to pay, Powers says.

Still, despite the IDA’s inability to force payment of fines, Powers feels the IDA does produce results. “If the end result is that the person isn’t in the industry then they’ve accomplished what they’ve set out to do,” he says. While the IDA may not get the fine, they’ve got rid of someone that was a stain on the profession, he adds. “I don’t feel so bad about that.”

Neither does Popovic, but the association isn’t content with the status quo. The optics of levying well publicized and substantial monetary penalties on individuals that aren’t paid undermines the IDA’s credibility, a point IDA president and CEO Joe Oliver conceded more than a year ago in a newspaper article.

In Alberta the IDA has the power to seek a court order to seize property and sell assets from a broker in order to pay the fine. Although the IDA has had this power for years, the association used it for the first time this spring when it seized a farm from a broker and sold it. But the IDA is still waiting to collect since the action ended in insolvency.

Getting this power in other parts of Canada has been a challenge. The IDA has filed its request with the other provinces, but it hasn’t had any success to date. Making matters worse, a number of supporters have moved on.

Oliver outlined the difficulty of involving the courts in a speech back in January 2004. “Unfortunately, the power to treat discipline decisions as if they were court orders as well as the power to compel testimony and documents for hearing purposes will depend on staff decisions on a commission-by-commission basis, perhaps even case-by-case,” he said. “This will guarantee disharmony and might mean we will lose the legislative provisions in the one province where they already exist.”

Although seeking a court order directly is the preferred route for the IDA, it’s not the only option. This past July, the IDA was able to charge Christopher Robinson in Nova Scotia with the backing of provincial securities commission.

The Nova Scotia Securities Commission viewed non-payment of a fine as a violation of their Securities Act, Popovic says. This was a test case, he adds. The NSSC and the association collaborated to try to find means to collect fines from IDA registrants who have been disciplined and failed to pay their fines. The commission ordered Robinson to pay an administrative penalty of $5,000 and $1,500 in costs.

The IDA hopes to try this approach in other provinces in the future. Unfortunately this is not a catch-all solution. Not all provinces have this ability and it is highly dependent upon the willingness of the commission staff to assist, and more importantly, whether the enabling statute permits this type of process, Popovic explains. Even still, this process would only be used in a select number of cases. “Obviously you are going to do that where there are assets to seize,” he says.

Powers is encouraged by this sort of partnerships. “It makes sense to partner with agencies that do have some teeth,” he says. Working with the RCMP’s Integrated Market Enforcement Team, the closest thing Canada has to a national enforcement agency, and the Ontario Securities Commission to bring formal charges is another way of improving enforcement and applying penalties that have to be paid.