IIROC panel rejects firm's claim of slip-up, concludes CRM2 breach was a 'wilful business decision'
A hearing panel of the Investment Industry Regulatory Organization of Canada (IIROC) has issued a $4-million fine against TD Waterhouse Canada (TDW) for its failure to include position cost information for certain securities positions within quarterly retail client account statements.
In an 18-page decision, the IIROC panel said that the firm has “failed to include position cost information within the quarterly account statement for certain securities positions,” which was among the requirements set out in clauses 200.2(d)(ii)(F) of Rule 200.
“In Staff’s submission, the breach by the Respondent of Rule 200 was a wilful business decision, done without the knowledge of IIROC, and which was in direct contravention of its obligations as a member of a self‐regulated industry,” the panel said.
Definition of “book cost”
Effective December 31, 2015, IIROC implemented requirements to provide retail customers with cost information on a quarterly basis for all account positions held at quarter end. Key to that disclosure was the use of the “book cost” calculation methodology, with a definition of “book cost” being set out in Rule 200.1.
Prior to the December 31 implementation date, members of the securities industry appealed for regulators to change to the definition which would take into account the fact that some firms provide tax-adjusted cost information to their clients.
But in a directive to the industry dated January 28, 2015, the Canadian Securities Administrators (CSA) denied the request. “Registered firms that wish to provide tax‐adjusted cost information to their clients can do so as supplementary information,” they said.
According to facts admitted by TDW and facts derived from admitted documents, TDW was capable of becoming fully compliant with position cost requirements by December 31, 2015. But in the spring of 2015, it determined that its proposed manner of compliance would result in potential litigation risks and client experience issues.
Because of that, an alternative solution was proposed and internally approved by TDW in May 2015, which included a “business risk” of having approximately 8% of client positions — representing approximately 175,301 client accounts — being non-compliant with the position costs requirements of Rule 200.
Mitigating business risk
To mitigate the business risk, the TDW project team responsible for CRM2 implementation was to develop updated information technology to bring non-compliant account position information in line with the rule by mid-2016, but the completion date for the proposed project was delayed until 2017, with no apparent attempt to revisit the issue until 2017.
TDW’s non-compliance was brought to IIROC’s attention by TD Direct Investing retail client, who had previously complained directly to TDW on numerous occasions. IIROC Staff later found that TDW was indeed non-compliant, requesting the maximum permissible fine of $5 million and costs of $28,497. TDW admitted that it was non-compliant, but argued that it always intended to comply, and therefore a fine in the range of $500,000 would be more appropriate to “accomplish all of IIROC’s benchmark regulatory goals.”
“Whether or not it was a ‘slip‐up’ by all concerned … in the Hearing Panel’s view it was a failure of governance that is equally as serious a misstep as the deliberate decision to be non‐compliant,” the decision read, adding that TDW should have consulted with IIROC as a first step.
Aside from the $4-million fine, the hearing panel required TDW to pay costs amounting to $28,497.
