enforcement 2016 report · 2016 enforcement report joint message from the ceo & vice president,...

Protecting Investors and Supporting

Healthy Capital Markets Across Canada

ENFORCEMENT REPORT

2016

THE ROLE OF ENFORCEMENT

TABLE OF CONTENTS

1 About IIROC

2 Joint Message from the CEO and Vice President, Enforcement

4 IIROC’s Enforcement Process

6 Enforcement Activities

7 Selected Case Highlights

16 Enforcement Priorities

21 Enforcement Statistics

28 Appendix A – IIROC Disciplinary Actions

29 Appendix B – Enforcement Information Sources

30 Appendix C – Types of Disciplinary Proceedings

31 Glossary of Terms

IIROC’s Enforcement Department (Enforcement) is responsible for the enforcement of IIROC’s Dealer Member Rules, relating to the sales, business and financial conduct of its Dealer Members and their registered employees, as well as the Universal Market Integrity Rules (UMIR) relating to the trading activity on all Canadian debt and equity marketplaces.

IIROC’s Enforcement plays a key role in protecting investors and supporting healthy capital markets across Canada. Enforcement works with IIROC’s other departments (including Complaints and Inquiries, the various compliance groups, Trading Review & Analysis, and Registration) to ensure timely identification, investigation and prosecution of regulatory misconduct, as well as the detection and pre-emptive disruption of potential misconduct.

Enforcement must be:

FAIRIIROC’s enforcement process is fair and impartial. Prosecutions are based on thorough investigations; hearings are transparent and conducted by impartial hearing panels, chaired by legal

professionals.

EFFECTIVE Enforcement aims to promote compliance within the investment industry by sending strong regulatory messages that deter potential wrongdoers and help to build investor confidence in the Canadian capital markets.

TIMELYTimely investigation and prosecution of misconduct protects investors and strengthens the public’s confidence in self-regulation.

ABOUT IIROC 1

The Investment Industry Regulatory Organization of Canada (IIROC) is the national, self-regulatory organization (SRO) responsible for the oversight of Canada’s investment dealers, as well as trading activities on debt and equity marketplaces in Canada.

IIROC is one part of the Canadian securities regulatory framework that consists of 10 provincial and three territorial securities regulators (collectively the Canadian Securities Administrators [CSA]), as well as SROs including IIROC and the Mutual Fund Dealers Association (MFDA), whose activities are overseen by CSA members.

IIROC’s regulatory mandate is to set and enforce high-quality regulatory and investment industry standards, protect investors and strengthen market integrity while supporting healthy capital markets. IIROC pursues this mandate by developing, testing for compliance with and enforcing a broad spectrum of member and market proficiency, conduct and prudential rules.

All investment dealers (also referred to as Dealer Members) and Canadian marketplaces overseen by IIROC are subject to a rigorous regulatory approval process. Individuals wanting to work at IIROC-regulated firms in specific roles (for example, client-facing advisors and individuals in a supervisory role who have responsibility for ensuring compliance with IIROC rules and other applicable regulations) must apply to IIROC for approval. Individual applicants must satisfy all of IIROC’s proficiency requirements and be assessed to be “fit and proper” before IIROC will approve them to work at a Dealer Member in these types of roles. They must also invest in their professional development by completing a minimum number of continuing education requirements over the course of a three-year continuing education cycle.

IIROC’s vision is to be known for its integrity, transparency, fairness and balance. IIROC aims for excellence and regulatory best practices. Its actions are driven by sound, intelligent deliberation and consultation.

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2016 ENFORCEMENT REPORT

JOINT MESSAGE FROM THE CEO& VICE PRESIDENT, ENFORCEMENT

We are pleased to present IIROC’s 2016 Enforcement Report. This report highlights our investor protection efforts and charts our progress in pursuing more effective legal enforcement tools. With a mandate to protect investors and support healthy Canadian capital markets, IIROC sets and enforces high regulatory standards in the investment industry through fair, effective and timely enforcement.Our enforcement actions send a strong deterrent message to potential wrongdoers and hold accountable those who harm investors.

This past year we saw significant results from our work to ensure the fines we impose are collected, when two jurisdictions announced changes that will make IIROC’s enforcement actions more effective.

Most recently, in March 2017 the Ontario government announced its intention to strengthen investor protection in that province by introducing legislative amendments to give IIROC the ability to pursue the collection of disciplinary fines directly through the courts.

Ontario’s announcement followed a similar move by the Prince Edward Island Office of the Superintendent of Securities in January 2017, when it granted IIROC the authority to directly register our disciplinary decisions with the Supreme Court of PEI.

As a public interest regulator, having this enforcement tool in two additional provinces will enable us to provide stronger protection to the investing public and collect fines – which IIROC uses to fund investor protection, investor education and financial literacy initiatives – from wrongdoers who have previously evaded paying the penalty for their misconduct. This will also send a strong message of deterrence to potential wrongdoers: if you harm investors, you will be held accountable for your actions and pay the penalty.

Ontario and PEI join Alberta and Quebec as provinces that have granted IIROC the ability to collect disciplinary fines directly through the courts. Our collection rates are significantly higher than the national average over sustained periods of time in Alberta and Quebec and we expect similar results in PEI and Ontario over the years to come.

Over the past year, we’ve had ongoing discussions with other provincial and territorial governments across the country urging them to give us the legal authority to collect unpaid fines. Since IIROC was established in 2008, almost $32 million in fines remains uncollected from individuals who simply walk away from discipline without facing any repercussions. Last year our national collection rate among individuals was only eight per cent.

In the effort to gain more effective legal authority, we’re heartened by the support we’ve received from many stakeholders: consumer advocates like CARP, Prosper Canada and the Canadian Foundation for Advancement of Investor Rights; and those in the investment industry - market participants and industry associations - who want to see wrongdoers pay the price for breaching our rules and harming investors.

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To quote Prosper Canada: “Effective protection against financial fraud and wrongdoing is critical to Canadians’ capacity to build their financial health and security and includes both well-crafted laws and regulations and the ability to enforce these. This is particularly important for vulnerable Canadians who are often the targets of financial wrongdoing, but lack the resources to bring perpetrators to justice on their own.”

In addition we are seeking broader authority to collect evidence more effectively for our investigations and disciplinary hearings. We are also seeking statutory immunity for actions taken in good faith to protect investors under the regulatory responsibilities assigned to us by members of the Canadian Securities Administrators (CSA).

This year we also continued our collaboration with our regulatory and government partners across Canada to strengthen protection for consumers by closing a number of gaps in our regulatory system. For example, we executed co-operative and disciplinary information-sharing agreements to ensure that rule-breakers cannot evade fine payment or their past misdeeds by simply ceasing to work for an IIROC-regulated firm.

In 2016 and early 2017, IIROC signed agreements with the Financial Services Commission of Ontario, the Insurance Council of British Columbia and the Alberta Insurance Council, allowing us to share relevant information in a timely fashion including recent disciplinary actions and conduct joint investigations where warranted.

Investors in these provinces will benefit from early detection of wrongdoing because of our collaboration and coordination with these regulatory authorities. Investors will also be protected from investment advisors who have broken IIROC’s rules and try to avoid sanctions by moving to another part of the financial services industry where potential clients and other regulators are unaware of what they’ve done.

We will continue to negotiate similar agreements with other regulators to provide more effective and consistent regulation across Canada and give investors greater confidence in our regulatory system.

IIROC dedicates its enforcement resources to actively prosecuting wrongdoers with a focus on behaviours that harm investors. This year, our report once again highlights cases and decisions that demonstrate our continuing focus on unsuitable investment recommendations and protecting seniors and vulnerable investors. It also highlights how working in collaboration with our regulatory partners, particularly the CSA and its members, can result in even stronger enforcement results that protect the investing public.

Securities commissions across the country continue to be our strong regulatory partners and we appreciate their ongoing support in our quest to strengthen our enforcement abilities and to ensure a consistent level of consumer protection coast to coast.

Moving forward, we will continue to take concrete steps to make our enforcement actions even more effective while ensuring investors are protected and Canada’s investment industry is well regulated.

ANDREW J. KRIEGLERPresident & CEO

ELSA RENZELLAVice President, Enforcement


4 IIROC’S ENFORCEMENT PROCESS

CASE ASSESSMENTInitial review to determine whether there is sufficient

evidence of a breach of IIROC’s rules that warrants

the opening of a formal investigation.

INVESTIGATIONSCollection, review of relevant evidence relating to the case. If the evidence can establish a

breach of IIROC’s rules, the matter will be forwarded to

prosecutions.

EXTERNAL SOURCES

Public Complaints &

ComSet* Reports

Referrals from Outside Agencies (Securities Commissions, other SROs,

police & other agencies)

IIROC’s Whistleblower Service

(For more information go to Appendix B)

Closed with no action or the

issuance of a Cautionary Letter

Referrals

Refer to Securities Commissions, other domestic or foreign regulators/agencies or police if there is evidence

of criminal activity.

INTERNAL SOURCES

Registration Department

Compliance Departments (Business Conduct Compliance (BCC),

Financial & Operations Compliance (FinOps), and Trading Conduct Compliance (TCC))

Trading Review & Analysis (TR&A)/ Market Surveillance

Complaints & Inquiries (C&I)


DISCIPLINARY PROCEEDINGS

Contested Hearings

Settlement Hearings

Expedited Hearings

Temporary Order Applications

Protective Order Applications

(For more information go to Appendix C)

PROSECUTIONSThe initiation of formal disciplinary action against a Respondent (Dealer

Member or individual registrant). The formal hearing will take place before an IIROC hearing panel, an

expert administrative panel consisting of an independent chair

from the legal community and two industry members.

Penalties

If a Dealer Member or individual registrant is found to have violated IIROC rules, the following penalties may be imposed:

FIRMS

A reprimand

Fines, up to a maximum of $5 million per contravention or an amount equal to three times the profit made, or loss avoided

Imposition of conditions on membership

A period of suspension

Expulsion

INDIVIDUALS

A reprimand


Imposition of conditions on registration


A permanent ban

Use of Fines and Cost Awards

Generally speaking, all fines collected and payments made under settlement agreements can only be used for the benefit of investors through education programs, the administration of disciplinary panels and/or the development of programs or systems to address emerging regulatory issues. See Fine Collection rates on page 27. The Canadian Securities Administrators’ Recognition Order of IIROC requires that all fines collected and all payments made under settlement agreements entered into with IIROC can only be used for the above purposes.

* IIROC rules require Dealer Members to report client complaints and disciplinary actions through IIROC’s Complaint and Settlement Reporting System.

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CASE ASSESSMENTInitial review to determine whether there is sufficient

evidence of a breach of IIROC’s rules that warrants

the opening of a formal investigation.

INVESTIGATIONSCollection, review of relevant evidence relating to the case. If the evidence can establish a

breach of IIROC’s rules, the matter will be forwarded to

prosecutions.

EXTERNAL SOURCES

Public Complaints &

ComSet* Reports

Referrals from Outside Agencies (Securities Commissions, other SROs,

police & other agencies)

IIROC’s Whistleblower Service


Closed with no action or the

issuance of a Cautionary Letter

Referrals

Refer to Securities Commissions, other domestic or foreign regulators/agencies or police if there is evidence

of criminal activity.

INTERNAL SOURCES

Registration Department

Compliance Departments (Business Conduct Compliance (BCC),

Financial & Operations Compliance (FinOps), and Trading Conduct Compliance (TCC))

Trading Review & Analysis (TR&A)/ Market Surveillance

Complaints & Inquiries (C&I)


DISCIPLINARY PROCEEDINGS

Contested Hearings

Settlement Hearings

Expedited Hearings

Temporary Order Applications

Protective Order Applications

(For more information go to Appendix C)

PROSECUTIONSThe initiation of formal disciplinary action against a Respondent (Dealer

Member or individual registrant). The formal hearing will take place before an IIROC hearing panel, an

expert administrative panel consisting of an independent chair

from the legal community and two industry members.

Penalties

If a Dealer Member or individual registrant is found to have violated IIROC rules, the following penalties may be imposed:

FIRMS

A reprimand


Imposition of conditions on membership


Expulsion

INDIVIDUALS

A reprimand


Imposition of conditions on registration


A permanent ban

Use of Fines and Cost Awards

Generally speaking, all fines collected and payments made under settlement agreements can only be used for the benefit of investors through education programs, the administration of disciplinary panels and/or the development of programs or systems to address emerging regulatory issues. See Fine Collection rates on page 27. The Canadian Securities Administrators’ Recognition Order of IIROC requires that all fines collected and all payments made under settlement agreements entered into with IIROC can only be used for the above purposes.

* IIROC rules require Dealer Members to report client complaints and disciplinary actions through IIROC’s Complaint and Settlement Reporting System.


6 ENFORCEMENT ACTIVITIES

For IIROC Enforcement, 2016 was a very active year. We experienced an increase in activity in terms of complaint intake, investigative work and actions pursued.

Specifically, we:• Received 1,459 total complaints1, an increase from 1,341 in 2015.

• Completed 138 investigations, a 10 per cent increase from 2015.

• Commenced 55 proceedings2, a 25 per cent increase from 2015.

• Conducted 21 contested hearings3, an increase from 13 in 2015.

The increase in the number of hearings this past year, some of which were still continuing in 2017, resulted in a marginal decline in the total prosecutions. This active hearing list demonstrates our willingness to pursue even the more difficult and contentious cases and seek the appropriate sanctions that we feel are necessary to send a strong regulatory message and deter future wrongdoing.

Suitability and cases involving seniors remained two key areas of focus. Suitability was once again the top complaint reviewed by our Case Assessment unit, and represented over 40 per cent of our prosecutions. Cases involving seniors represented approximately one-third of both the Case Assessment matters reviewed and prosecutions completed.

Enforcement also pursued a variety of other cases to ensure the proper protection of investors and the integrity of the capital markets. Some highlights include the following:

• We pursued more cases involving manipulative and deceptive trading. Specifically, we disciplined three individuals for spoofing/layering or artificial pricing and issued a proceeding against a fourth individual (scheduled to commence in 2017) for trading conduct that created a false or misleading appearance of trading activity.

• We prosecuted four misappropriation cases (a four-fold increase from the previous year).

• We experienced an uptick in the number of matters where individuals failed to cooperate with IIROC, thereby resulting in permanent bans (five cases up from two the previous year).

• A stable level of supervision cases both against the firms and individual supervisors including an Ultimate Designated Person and Chief Compliance Officer. We also initiated a proceeding against a Chief Financial Officer, which will take place in 2017.

1 Complaints include direct complaints received from the public and matters reported to Dealer Member firms and reported to IIROC on ComSet. For a breakdown of complaint sources go to page 21.

2 The initiation of proceedings means cases which started by way of an issuance of a Notice of Hearing, a Settlement Agreement between the parties, or the commencement of an expedited hearing.

3 This includes hearings which may not have been completed and/or continued from prior years. It does not include settlement hearings.

7SELECTED CASE HIGHLIGHTS

Enforcement started to use some new and innovative approaches for some of its prosecutions. This year, IIROC’s mediation program was introduced and the litigation team participated in two mediations for cases which were ultimately resolved by way of settlement. In addition, we used technology, namely Skype, in two contested hearings to facilitate the testimony of witnesses including a senior.

Suitability of Leveraged & Inverse Exchange-Traded FundsIn 2016, IIROC Enforcement completed a number of discipline cases against advisors who made unsuitable recommendations to purchase leveraged and inverse exchange- traded funds to their clients.

In its simplest form an exchange-traded fund (ETF) is a security that trades on an exchange and tracks the performance of an underlying benchmark or index. That underlying benchmark or index may be a commonly known index such as the S&P 500, a more sector specific one such as the TSX Junior Gold Index, or other assets such as commodities or currencies.

ETFs may be further characterized as “leveraged” or “inverse or short”. Leveraged ETFs seek to double, triple, or achieve some other multiple of the performance of the index or benchmark they track. An inverse or short ETF seeks to deliver the opposite performance. If the index or benchmark that it tracks goes down, the inverse or short ETF will go up and vice versa. To add further complexity, some ETFs are leveraged and inverse or short at the same time.

As IIROC explained in June 2009 in the published Guidance Notice 09-0172, leveraged and inverse or short ETFs “reset” daily, meaning they are designed to achieve their stated objectives on a daily basis and therefore should not generally be held for longer periods. Due to the effects of compounding, their performance can differ significantly from the performance of the underlying benchmark or index over longer periods of time. Despite IIROC’s clear guidance some advisors continued to make unsuitable recommendations of these products.


8 SELECTED CASE HIGHLIGHTS

Kim Husebye (Disciplinary Hearing) – Oakville, OntarioIn this case, the advisor was a portfolio manager who had 26 years of experience. Following a market recovery, Husebye believed that markets would go down and that the Canadian dollar would decrease in comparison to the U.S. dollar. Husebye purchased ETFs that were both leveraged and inverse for two clients in their managed accounts.

After a contested hearing, an IIROC hearing panel ruled that the purchases were unsuitable. The first client was a married couple in their 50s. They lost approximately $130,000 or roughly 30 per cent of their $400,000 portfolio. The second client was a 52-year-old woman who lost approximately $25,000 or roughly 30 per cent of her portfolio. She was compensated by the Dealer Member firm.

After noting that Husebye had already been out of the securities industry for almost three years at the time of its decision, the IIROC hearing panel added a further six-month prohibition against future registration and ordered Husebye to pay a fine of $20,000 and $10,000 toward IIROC’s costs.

Christian Cloutier (Disciplinary Hearing) – Mont-Laurier, QuebecIn this case, Cloutier formed his own opinion that it was suitable to hold leveraged ETFs for a period of approximately three years. He indicated that he came to this opinion based on his own research, and from a one-day introduction “course” and discussions he had over lunch with a salesperson for Horizons BetaPro, a company that manages and markets these products.

Cloutier recommended the purchase of leveraged ETFs for a client in her 60s who had no spouse or children, a net worth of approximately $170,000 and limited investment knowledge. Although there were no new purchases of leveraged ETFs after IIROC’s guidance notice in 2009, the advisor did not fully sell all the leveraged ETFs until late 2011, which was a holding period of more than 32 months. Still, the IIROC hearing panel felt that slowness in selling these positions was certainly better than continuing to buy them. In total $52,000 was invested in leveraged ETFs which declined 35 per cent. The client suffered a monetary loss of $18,000. She was compensated for her losses.

In its decision the IIROC hearing panel noted that Cloutier had not worked for an IIROC-regulated firm for almost five years. It ordered that any future re-approval to work at an IIROC Dealer Member be conditional on a combined one-year period of strict and close supervision. The hearing panel also ordered Cloutier to pay a fine of $15,000 and pay $5,000 in costs.

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Suitability of Fee-Based Accounts

Scott Douglas Ford (Settlement) – Richmond Hill, OntarioThis case dealt with a failure to know your clients and unsuitable recommendations including the inappropriate use of fee-based accounts. In 2008, Scott Ford opened accounts for two related clients who had no tolerance for high-risk investments. One client was a senior citizen whose main income was a disability pension. The clients required their investment funds for retirement and assisting their children to attend university. When the accounts were opened, the risk tolerance was accurately stated as 100 per cent medium risk. However, subsequently the accounts were updated to reflect 30 per cent high risk which was inaccurate and unsuitable for the clients given their personal and financial circumstances. Further, the clients’ holdings were in excess of the stated risk holdings (which were already too high), and consisted at times of a 20 per cent concentration in precious metal issues.

In early 2012, Ford moved the clients’ assets from two registered accounts to fee-based accounts. The clients were receptive to this idea as they felt they were paying too much in commissions. Ford did the same with another couple in 2012. Ford opened these accounts without considering other fee options available at his firm that would have been more suitable and economical for them. His actions resulted in the clients paying higher fees than they would have paid in commission-based accounts.

Ford was fined $30,000 and was required to re-write the Conduct and Practices Handbook course (CPH) and be subject to strict supervision for six months. He was also ordered to pay costs of $5,000. Disgorgement was not ordered because Ford partially reimbursed his clients.

Inappropriate Mutual Fund Switches

Nadir Janmohamed (Settlement) – Toronto, Ontario Janmohamed engaged in a pattern of selling mutual funds and then repurchasing similar funds for four of his clients, three of whom were seniors. As a result, these clients incurred Deferred Sales Charges (DSC) and other unnecessary fees including approximately $3,900 in redemption fees paid by the clients to the mutual fund companies.

The advisor also obtained undue commissions from the mutual fund companies by purchasing new DSC funds for his clients that re-set the redemption fee period and using distributions to purchase the same or different funds, instead of automatically reinvesting them.

Janmohamed admitted that his trading was not within the bounds of good business practice and that such a high turnover of mutual funds purchased in this manner was not consistent with the clients’ best interests.


SELECTED CASE HIGHLIGHTS10

Janmohamed also engaged in discretionary trading when he failed to discuss the mutual fund investments with his clients, and did not accurately explain the locked-in period and the redemption and switch fees.

Janmohamed was fined $25,000 and required to disgorge commissions of $22,000. In the event of re-registration with IIROC, he would be required to re-write the CPH and be subject to six months close supervision. Janmohamed was also ordered to pay costs of $3,000.

Suitability & Vulnerable Clients

John Phillips Watts (Settlement) – Charlottetown, Prince Edward IslandOver an approximate three-year period, Watts engaged in a trading strategy for four of his clients involving high-risk securities of Chinese companies including small capital and/or start-up companies. Notwithstanding that Watts conducted extensive research on the securities in question, it was admitted that these securities were unsuitable for these clients. The clients affected were vulnerable with many having limited income. One client was retired. As a result of these unsuitable investments, the clients incurred significant losses ranging from approximately $30,000 to over $120,000.

Watts also admitted that he did not obtain the necessary authorization from an estate client. There were three executors of the accounts who were required to provide instructions on the account. However, over the course of a few months, Watts executed six purchases upon the instruction of only one of the executors.

As part of the settlement, Watts agreed to pay a fine of $115,000 (inclusive of disgorgement), a period of prohibition from applying for re-registration with IIROC until June 30, 2017, to be subject to a period of strict supervision for six months should he become re-registered, and pay

costs to IIROC of $20,000.

Misappropriation

Wasseem Dirani (Disciplinary Hearing) – Hamilton, OntarioDirani engaged in numerous acts of misconduct between 2012 and 2015. His misconduct included misappropriating $68,000 in funds from a couple instead of investing the funds on his clients’ behalf as the clients expected. He executed unauthorized transactions in clients’ accounts in order to deposit funds into their bank accounts which were presented as dividends from the alleged yet fictitious investments. Dirani also engaged in personal financial dealings with another client couple by borrowing $50,000 from them and issuing three promissory notes for the loans. As well, he promised to compensate another client for account losses and executed five agreements to reflect that promise. Dirani also failed to cooperate with IIROC by failing to attend an interview.

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Most of Dirani’s conduct occurred after Dirani had entered into a previous settlement agreement with IIROC Staff in 2014. The hearing panel found Dirani’s conduct to be a serious, egregious and intentional breach of IIROC Rules involving significant harm to the investing public, the integrity of the markets and the securities industry. Dirani’s misconduct involved an element of criminal or quasi-criminal activity, and his actions were intentional and reckless regarding regulatory requirements. Dirani demonstrated a resistance to governance by IIROC and could not be trusted to act in an honest and fair manner in dealing with clients and the securities industry.

As a result, Dirani was permanently banned from approval with IIROC in any capacity, and ordered to pay a fine of $266,000 and costs of $12,000.

Shaun Wayne Howell (Settlement) – Red Deer, AlbertaOver the course of seven years, Howell fraudulently solicited approximately $692,000 from his clients by claiming to have access to certain attractive investment opportunities. He then misappropriated the funds by depositing them into a personal bank account, and used them for his own benefit. He paid approximately $290,000 to certain clients for what he falsely represented to them was an investment return, and provided falsified account statements to some of his clients when they requested documentation as evidence of their investment.

Howell’s actions constituted a fraud on his clients and a breach of their trust. Many of Howell’s clients were long-time personal friends, and relied on him to act in their best interests.

Howell also engaged in personal financial dealings with a client by borrowing $50,000 without his Dealer Member firm’s knowledge. He made some interest payments but did not repay any of the principal.

In approving the settlement hearing, the Panel concluded that this was clearly an egregious case, and that Howell had preyed upon his clients, exploiting their trust and friendship in order to defraud them. Howell was permanently banned from registration in any capacity with IIROC, fined $500,000, and ordered to pay costs of $10,000.

Manipulative and Deceptive Trading

Robert Sole (Settlement) – Toronto, Ontario Sole was a proprietary trader who agreed that over two separate three-month periods he entered orders that he ought reasonably to have known could be expected to create an artificial price for the securities.

Specifically, in the first period, Sole entered orders that he did not intend to execute during the pre-opening session of the TSX Venture Exchange with the intent of affecting the Calculated Opening Price (the price at which a security will open trading) of securities to his own advantage. This practice is commonly known as “spoofing”.


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In the second period, Sole entered orders that he intended to execute on one side of the market while simultaneously placing non-bona fide orders on the other side of the market in order to induce other market participants to react and trade with one of his bona fide orders at an artificial price. This practice is commonly known as “layering”. Sole’s manipulative and deceptive trading strategies misrepresented the supply, demand, and/or price for the securities in question. As a result of his misconduct, Sole was able to secure a price advantage for the purchase or sale of securities. This conduct was in violation of UMIR.

Sole was suspended from access to IIROC-regulated marketplaces for one month and fined $10,000. In addition, Sole was ordered to pay costs of $1,000.

Teymur Englesby & Cale Nishimura (Settlement) – Vancouver, British Columbia Englesby and Nishimura were registered representatives who failed in their roles as gatekeepers to the capital markets and to be alert to potentially manipulative and deceptive trading activity which occurred over a four-month period.

Englesby was the broker of record for certain client accounts and Nishimura was his assistant. They both entered orders and executed trades in the client accounts that may have maintained and supported the price of securities of an issuer at a level predetermined by the clients, and thereby may have created an artificial price for the securities. The client accounts were controlled by individuals whom Englesby and Nishimura ought to have known may have been acting in a collective manner to increase the share price.

The entered orders and executed trades in the client accounts also caused numerous upticks in the share price and had the effect of raising the price of the securities so that the exercise of certain share purchase warrants became economically feasible. This resulted in cash proceeds to the issuer, which were then used to further a mining development project in which one of the client account holders had an interest.

Englesby agreed to a two-month suspension from access to IIROC-regulated marketplaces and a fine in the amount of $45,000. Nishimura agreed to a one-month suspension from access to IIROC-regulated marketplaces and a fine in the amount of $15,000. Englesby and Nishimura agreed to pay costs in the amount of $5,000 each.

SELECTED CASE HIGHLIGHTS

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Misleading IIROC Staff

Kelly Robinson (Settlement) – Vancouver, British Columbia For six and a half years, Robinson maintained two offshore brokerage accounts in Panama and Switzerland without the knowledge or consent of his Dealer Member firm. During his interview with IIROC Staff, Robinson misled them about his involvement with a certain corporation, in addition to some of the activity in his Panamanian offshore account.

During the interview, questions were asked regarding a certain company, shares of which were held in Robinson’s offshore account. Robinson stated that he did not know any of the principals of the corporation in question, when in fact Robinson’s own cousin was a senior officer and director. He also misled Staff about how and when he first learned of this company. Further, he falsely stated the source and payment of his purchase of shares in this company. Specifically, he stated that he sent a wire transfer to one of his offshore accounts for the purchase of shares of the corporation, when in fact he did not. Robinson also stated that he did not know why his offshore account statements indicated a transaction of a share certificate deposited into his offshore account, when in fact the share certificate was for shares that had been purchased earlier by Robinson’s wife.

The hearing panel considered, among other things, that Robinson’s failure to disclose to his firm the existence of his outside accounts compromised his firm’s ability to properly discharge its supervisory activities, and heightened the possibility of damage to the integrity of the securities market.

Robinson was fined $50,000, suspended for one year, and ordered to pay costs of $5,000.

Retail Account Supervision

Edward Jones (Settlement) – OntarioThis case addressed Edward Jones’ failure to meet the minimum standards for retail supervision in regards to five of its advisors who were also disciplined for failing to know their clients and/or making recommendations that were not suitable.4

During the relevant time, Edward Jones supervised its retail account activity with a centralized supervisory system consisting of a dedicated team of Field Supervision Directors (FSDs) who were responsible for the daily and monthly supervision. FSDs also conducted reviews of the Know Your Client (KYC) information at the time of account openings/updates. In the five specific cases, Edward Jones did not sufficiently review KYC information submitted by the advisors as

4 See Re Dirani 2014 IIROC 09, Re Sloan 2014 IIROC 36, Re Opaleke 2015 IIROC 10, Re Munro 2016 IIROC 47, and Re Austin 2017 IIROC 09.


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contained in the clients’ New Client Account Forms (NCAFs). The information was approved without any or sufficient query. In some instances, the firm did not query the frequent and significant increases in risk tolerances over a short period of time. In other instances, the firm failed to query KYC updates that followed in response to trade queries.

Edward Jones did not effectively carry out its responsibility to identify or question trading which appeared suspicious or potentially unsuitable for the client, and did not sufficiently monitor the performance of its Field Supervisor Directors. This included oversight of FSD queries and responses, to determine whether they were substantively adequate and effectively addressed the issues identified, or required further queries and, if necessary, escalation.

As part of the settlement, Edward Jones took continual and proactive steps to improve its compliance system. Improvements include: (1) new procedures for KYC information collection to ensure that the risk tolerance and objectives recorded by advisors are consistent with client circumstances and are suitable; and (2) enhanced procedures and tools for trade review, with the addition of several new tools and enhanced systems to better assist FSDs in identifying patterns and isolated issues.

Edward Jones agreed to pay a fine of $250,000 and costs of $50,000.

Walter Nick Silicz (Settlement) – Winnipeg, ManitobaThis case deals with Silicz’s failure as a branch manager to supervise 18 client accounts which were investing in the high-risk securities of Flow-Through Limited Partnership Units. The advisor for all of the accounts was Donald Earl Phillips who was disciplined by IIROC the previous year.5 Silicz failed to adequately supervise the opening of these 18 client accounts or the trading that took place in these client accounts, or both.

The clients involved were mainly retired railway workers who were referred to Phillips by their mutual fund representative. The referral was part of a strategy that involved these clients investing a portion of their pension proceeds in Flow-Through Units in order to reduce this tax burden, as they could potentially receive a 100 per cent tax deduction for the amount invested. While Silicz was branch manager, 80 accounts were opened at the firm as part of this referral arrangement. Silicz failed to supervise 18 of the client accounts by failing to take further supervisory action as the circumstances required. Some of the factors which should have prompted some query included the significant amount of money invested given some of the clients’ assets and net worth; and the high risk and complex nature of the investments being made for clients who were at or near retirement.

SELECTED CASE HIGHLIGHTS

5 See Re Phillips 2015 IIROC 20.

15

Had Silicz taken further supervisory action in regard to these 18 clients, he would have been in a better position to assess whether or not the recommended trading strategy, and the amount of money that was invested in Flow-Through Units, was suitable for them.

Silicz agreed to pay a $30,000 fine, a two-year suspension from acting in a supervisory capacity and pay costs of $10,000.

Failure to Conduct Strict Supervision

IPC Securities Corporation (Settlement) – OntarioThis case stresses the importance of a Dealer Member firm’s obligation to fulfil the strict supervision requirements imposed by IIROC. IPC Securities Corporation (IPC) was the employer of Wasseem Dirani, who was under investigation by IIROC Staff for conduct which took place at another firm.6 As a result of Staff’s ongoing investigation, terms and conditions were imposed on his registration including that he would be subject to strict supervision. IPC provided acknowledgement and consent to IIROC to conduct strict supervision over Dirani.

As part of an IIROC settlement, Dirani was required to extend the period of his strict supervision. It was around this time, and as a result of a Business Conduct Compliance (BCC) examination of the firm, IIROC learned that IPC did not conduct all of the requirements of strict supervision. Some of the failures included: (1) a failure to conduct full pre-trade approval reviews; (2) failure to review client signatures documents to ensure authenticity; and (3) failure to send executed client documents back to clients to ensure no discrepancies with clients.

The firm agreed to pay a fine of $65,000 and costs of $5,000.

6 See page 10 in this Report.


16

IIROC STRATEGIC PLAN (2016-2019)In May 2016, IIROC published its three-year Strategic Plan which serves as the blueprint to achieve its mission to protect investors and support healthy capital markets. As part of the Plan’s five principal strategies, Enforcement’s strategic focus is to pursue credible enforcement action in a timely, responsible and robust manner using a variety of tools and remedies by:

1. Increasing our fine collection through expanded legal authority;

2. Developing alternative forms of disciplinary action; and

3. Strengthening the process of compliance referrals to Enforcement.

Enforcement is also pursuing two additional legislative amendments to strengthen its effectiveness:

1. Statutory immunity for IIROC and its personnel when acting in the public interest; and

2. Additional powers to strengthen evidence collection.

1. Authority to Collect Fines The ability to collect fines continued to be a key priority for Enforcement this past year. While firms and individuals must pay their fines if they wish to remain Dealer Members or registrants of IIROC, many individuals choose to avoid payment by simply leaving the securities industry and abandoning their registration with IIROC. While IIROC generally collects 100 per cent of fines against Dealer Members, collecting from individuals has proven to be much more challenging. In 2016, IIROC collected approximately eight per cent of penalties levied against individuals nationally.

IIROC’s limited collection ability undermines the credibility and integrity of its disciplinary process and the sanctions imposed. Individuals who break IIROC rules should be subject to real penalties which can be collected by IIROC.

Currently, IIROC has the legal authority to enforce fines in Alberta, Quebec and since January 2017, in Prince Edward Island (PEI). As well, in March 2017 the Ontario government announced its intention to introduce legislative amendments that would give IIROC the ability to pursue the collection of disciplinary fines directly through the courts. Over time, these powers can result in improved collections rates (such is the case in Alberta and Quebec). Extending this authority further would send a strong message of deterrence to potential wrongdoers and would increase investor confidence in the system. At the time this report was published, IIROC has taken active steps to pursue this authority, reaching out to various stakeholders, namely the securities regulators and government officials responsible for securities regulation across the country.

ENFORCEMENT PRIORITIES

17

Authority granted in PEI

IIROC sought and in September 2016 received an Order from the PEI Superintendent of Securities that authorized IIROC to file one of its disciplinary decisions7 with the Supreme Court of PEI. That Order allowed us to take steps to enforce payment of the fine. As a result of further collaboration with PEI, in early 2017, and prior to the publication of this report, the PEI Office of the Superintendent of Securities issued a broader authorization Order which gives IIROC the authority to collect fines against disciplined individuals directly through the Supreme Court without having to seek approval in every individual case. The Order also authorizes IIROC to summon and enforce the attendance of witnesses at disciplinary hearings, which is further discussed below.

As IIROC continues with this pursuit, it still makes every reasonable effort to collect penalties imposed against disciplined firms and individuals. A disciplined party’s failure to pay their fine will result in IIROC taking immediate steps to suspend them until payment is made. IIROC also publishes the Unpaid Fines Report which lists individual registrants who, since 2008, have failed to pay fines, disgorgement, and/or costs imposed as a result of disciplinary action taken against them. This list is available on IIROC’s website (www.iiroc.ca) and is updated on a quarterly basis.8

2. Alternative Forms of Disciplinary ActionIt is important for Enforcement to be both strong and fair in the execution of its mandate. We recognize that this requires us to have the right complement of tools that will ensure a properly tailored enforcement response that is firm, timely and proportionate to the circumstances. For this reason, as part of our three-year Strategic Plan, we are considering alternative forms of disciplinary actions and tools that will provide greater variety and flexibility and result in a more responsive Enforcement department.

This past year, we have commenced a review of potential options to consider. It is our intention to seek public and stakeholder input in the coming year regarding these potential Enforcement measures.

3. Compliance ReferralsIIROC’s three compliance departments (BCC, FinOps and TCC) are the source of some of our most significant prosecutions. These cases often deal with systemic firm issues and highlight IIROC’s expectations of a strong and effective compliance structure. Given the potential severity of the issues, the timely identification, referral and investigation of such matters is

7 See Watts at page 10.8 Please note that the report is intended to enhance transparency relating to IIROC’s collection rate for fines and

other monetary sanctions and is not meant to be a list of individuals currently indebted to IIROC. Accordingly, the report may include the names of individuals who received a bankruptcy discharge subsequent to the order being made.


ENFORCEMENT PRIORITIES18

of paramount importance. As a result, we have undertaken to review the compliance referral process. We are committed to making any necessary improvements to create a more robust approach that ensures firm deficiencies that warrant an Enforcement response are promptly identified and referred to Enforcement for swift and appropriate action.

4. Statutory Immunity IIROC is seeking statutory immunity for its good faith performance of all of its regulatory functions undertaken pursuant to its Recognition Orders, including action taken by Enforcement. While there are limited common law protections, statutory immunity would ensure that IIROC and its employees have the same protection as provided to the provincial securities commissions and other regulatory bodies. We strongly believe that this immunity is necessary in order to allow us to take appropriate regulatory action in the public interest

without fear of reprisal.

5. Powers to Strengthen Evidence CollectionTo more effectively ensure compliance with IIROC rules and take the necessary enforcement action, IIROC has taken steps to seek additional legal authority that would allow us to compel evidence in our disciplinary investigations and hearings. Under our current rules and jurisdiction, IIROC can compel its registrants and Dealer Members to cooperate with our investigations and prosecutions. With few exceptions, IIROC has no ability to compel cooperation of individuals and entities that are not regulated by us, even where they may have relevant evidence to give to us. Not surprisingly, this imposes limitations on our ability to fully investigate certain cases and obtain the best evidence.

Currently, we have the ability to compel individuals and evidence not under our jurisdiction in both Alberta and recently in PEI9 for IIROC disciplinary hearings. This past year, we have reached out to all CSA jurisdictions and their governments to obtain similar powers as well as the authority to allow us to obtain potentially critical evidence for our investigations. This would better ensure that we have the tools necessary as a public interest regulator to protect investors and maintain confidence in the capital markets.

9 As part of the authorization Order obtained in early 2017 which also included the ability to register IIROC disciplinary decisions directly with the court.

19

INFORMATION SHARING AGREEMENTSAs a public interest regulator, IIROC recognizes the importance of collaborating with the other regulators who oversee the financial services industry to strengthen investor protection and provide more effective regulation. Over the years IIROC has entered into various Memoranda of Understanding (MOUs) with several regulators in Canada and abroad, including a MOU with the Chambre de la sécurité financière in Quebec in 2015. In our continuing efforts of collaboration, we entered into two similar accords in 2016.

In March, IIROC entered into a MOU with the Financial Services Commission of Ontario which allows the two regulators to share their respective disciplinary information and prompt a review of the sanctioned individual’s activities by the recipient regulator to consider the suitability of the individual for approval, licensing or registration. This agreement will also facilitate, where appropriate, joint investigations and the sharing of relevant records and documents when both regulators are investigating the same individuals.

In July, IIROC entered into a MOU with the Insurance Council of British Columbia (ICBC). Under the agreement, IIROC and ICBC will inform each other of refusals of registration/licensing of individuals who are registered/licensed with the other regulator and inform each other of new investigations of individuals who are dually registered with both of them. As well, IIROC and ICBC may conduct joint investigations and share relevant information where appropriate.

In January 2017, IIROC signed a similar MOU with the Alberta Insurance Council.

These arrangements aim to prevent disciplined individuals from avoiding regulatory consequences by merely changing their registration to another organization, carrying on business with unsuspecting consumers and regulators under another designation or continuing to work in an unregistered capacity.


20 ENFORCEMENT PRIORITIES

CONSOLIDATED ENFORCEMENT RULES PROJECT On September 1, 2016, the IIROC Consolidated Enforcement, Examination and Approval Rules (the “Consolidated Rules”) came into effect. The Consolidated Rules combine and replace various provisions of IIROC’s Dealer Member Rules and the Universal Market Integrity Rules and constitute a new rule set. A number of the Consolidated Rules bring important changes to the work of the Enforcement Department. These changes include:

• a new rule consolidating the existing standard of conduct rules (Section 1402);

• the authority to enter business premises without notice (Section 8103);

• the possibility of obtaining an order maintaining the confidentiality of an IIROC investigation (Section 8106); and

• a new rule requiring that disciplinary proceedings be initiated within six years of the events in question (Section 8206).

The Consolidated Rules will also affect the powers of IIROC hearing panels. Some notable changes in Sections 8209 and 8210 include:

• an increase to the maximum fine that a hearing panel can impose on an individual at the conclusion of a disciplinary hearing from $1 million to $5 million per breach of IIROC Rules;

• the power to impose a monitor over the business and affairs of a Dealer Member firm; and

• the power to prohibit an individual from being employed by a Dealer Member firm in any capacity in the future.

In addition, the Consolidated Rules give IIROC hearing panels the power to impose a new type of order, namely Temporary Orders. Under Section 8211 of the new rules, IIROC Staff can bring an application without notice to an individual or Dealer Member firm requesting a temporary order imposing certain restrictions on their registration and/or membership privileges in addition to other terms and conditions considered appropriate. These applications can only be brought in certain defined circumstances and will only last for 15 days unless a further extension is granted by a hearing panel or by a securities commission.

The new rules also have renamed expedited hearings and require that such hearings must provide notice to the party in question. These proceedings are now called Protective Order applications but essentially operate similar to the previously known expedited hearings. They are intended to address urgent matters where a Dealer Member or individual registrant is not able to continue in business without contravening IIROC’s rules. The hearing panel can take certain immediate action in the form of a Protective Order where certain circumstances are met. (Section 8212).

21

Sources of Complaints Received by IIROC Enforcement

SOURCE 2016 2015 2014 2013 2012

Public 198 209 222 280 252

ComSet* 1,207 1,076 1,058 1,307 1,529

Internal (from other IIROC departments) 32 43 53 78 52

Other SROs and Commissions 20 11 12 17 26

Other (media, Dealer Member firms and whistleblowers) 2 2 5 8 13

TOTAL 1,459 1,341 1,350 1,690 1,872

*IIROC Complaints and Settlement Reporting System

Most Common Complaints Received By IIROC and Opened by Case Assessment

(Per cent)

Unsuitableinvestments

Unauthorized and discretionary trading Misrepresentation

0

5

10

15

20

25

30

35

40

2016

37

33

17

12

73 5

16 16

4

35

14

8

35 36

2015 2014 2013 2012

ENFORCEMENT STATISTICSCOMPLAINTS


22 ENFORCEMENT STATISTICSINVESTIGATIONS

2016 2015 2014 2013 2012

Number of Investigations completed 138 124 174 200 256

Percentage of files referred to Prosecutions 49% 59% 59% 58% 50%

ONTARIO

86

MANITOBA

2SASKATCHEWAN

2

ALBERTA

6

BRITISHCOLUMBIA

20QUEBEC

16

NOVASCOTIA

4

NEW BRUNSWICK

1

PRINCE EDWARDISLAND

1

NEWFOUNDLANDAND LABRADOR

NUNAVUT

YUKON

NORTHWESTTERRITORIES

0-2020-4040-6060-8080-100

Investigations – by Source

Investigations – by Province

6%BCC

3%REGISTRATION

<1%FIN OPS

1%TCC

9%SECURITIES COMMISSIONS/SROS

30%COMSET

19%PUBLIC

17%ENFORCEMENT

15%TR&A

23ENFORCEMENT STATISTICSPROSECUTIONS

PROSECUTIONS

ONTARIO

25

MANITOBA

1

SASKATCHEWAN

ALBERTA

2

BRITISHCOLUMBIA

11QUEBEC

6

NOVASCOTIA

NEW BRUNSWICK

PRINCE EDWARDISLAND

1

NEWFOUNDLANDAND LABRADOR

NUNAVUT

YUKON

NORTHWESTTERRITORIES

0-1010-2020-30

Prosecutions – by ProvinceProsecutions refers to completed prosecutions where an IIROC hearing panel, Securities Commission or court has made a final decision including any sanction ordered. Any decisions under appeal are not included.


24 ENFORCEMENT STATISTICSPROSECUTIONS

AppealsIn general, either a disciplined individual or IIROC staff can appeal IIROC disciplinary decisions to the relevant provincial/territorial securities commission or applicable reviewing body. An appeal will involve a review of the merits of the liability and/or penalty decision. Where an appeal is dismissed, this means that the original IIROC decision remains in effect including any penalties imposed. In 2016, appeals were launched and/or argued in a number of matters including:

Shaun McErlean (Ontario) – Appeal dismissed.

Paul Darrigo (Ontario) – Appeal dismissed.

Lucy Marie Pariak-Lukic (Ontario) – Appeal dismissed.

Krishna Sammy (Ontario) – Appeal pending.

Ravindra Suppal (Manitoba) – Appeal pending.

All the above appeals were initiated by the individual respondents.

Lucy Marie Pariak-Lukic (Appeal) – OntarioIn 2016, the Ontario Divisional Court dismissed an appeal by Pariak-Lukic stemming from a 2014 IIROC disciplinary decision. Between 2006 and 2008, Pariak-Lukic was an investment advisor who persuaded a number of her clients to invest in a private company. Pariak-Lukic’s husband was the sole director and officer of this company and received a percentage of any funds invested in it as a management fee. Pariak-Lukic did not inform her Dealer Member firm that she was soliciting her clients to invest in this company, and did not disclose the fact that her clients had invested nearly $3 million in it. The entire amount of this investment appears to have been lost when the company later became insolvent.

In its merits decision, the IIROC hearing panel found that Pariak-Lukic had facilitated off-book investments for her clients, and that the investments in this company constituted an illegal distribution of securities. As a result, they found that she had engaged in conduct unbecoming and not in the public interest. The hearing panel imposed a fine of $50,000, a six-month period of close supervision, the completion of two industry courses, and costs of $45,000.

IIROC Staff appealed the sanction decision to the Ontario Securities Commission (OSC), arguing that the hearing panel’s sanctions were too lenient and should also have included a two-year suspension of her registration as an advisor. In a decision released in June 2015, the OSC agreed and imposed the requested suspension. Pariak-Lukic appealed the OSC’s decision to the Divisional Court. The Divisional Court upheld the OSC’s decision to impose the two-year suspension.

25

Prosecutions – by Respondent Type

Prosecutions – by Hearing TypeSee Appendix C for description of Hearing types

Firms Individuals

0

20

40

60

80

2016

40 40 47 45 56

12

12

12

6

46 52

10 12

57 57 7317

2015 2014 2013 2012

Discipline Settlement

0

20

40

60

80

2016

46 52 57 57 73

2015 2014 2013 2012

31 39 36 38 54

1513 21 19

19


26 ENFORCEMENT STATISTICSPROSECUTIONS

Prosecutions – by Regulatory Violation

Individuals Disciplined 2016 2015 2014 2013 2012

Suitability/Due Diligence/Handling of client accounts 19 19 18 19 25

Inappropriate personal financial dealings 7 6 5 7 9

Misappropriation 4 1 1 3 8

Misrepresentation 3 5 8 3 9

Discretionary trading 10 9 5 5 5

Forgery 0 5 4 3 6

Unauthorized trading 7 6 10 1 6

Manipulative & deceptive trading 3 1 1 3 4

Outside business activities 4 2 3 4 4

Supervision 7 5 6 4 5

Gatekeeper 0 4 2 2 3

Failure to cooperate 5 2 5 3 4

Trading conflict of interest 0 2 0 0 2

Off book transactions 1 0 2 5 1

Trading order violation 0 0 0 0 1

Trading without appropriate registration 0 0 0 1 1

Fraud 0 0 0 2 0

Undisclosed conflict of interest 1 1 0 0 0

Inadequate books and records 0 0 2 1 0

Firms Disciplined

Supervision 4 8 5 5 10

Expedited Hearing - Firm Winding Down 1 3 4 1 3

Failure to handle client accounts 1 0 0 0 2

Failure to meet best price obligations 0 0 0 0 2

Inadequate books and records 0 2 2 0 1

Internal controls 1 2 1 2 2

Capital Deficiency 1 2 0 4 1

27

Sanctions Imposed

Individuals 2016 2015 2014 2013 2012

Decisions 40 40 47 45 56

Fines $2,684,000 $2,283,000 $3,035,500 $4,382,500 $11,245,355

Costs $412,000 $337,500 $366,000 $655,454 $590,667

Disgorgement $24,084 $331,569 $20,637 $220,117 $142,189

TOTAL $3,120,084 $2,952,069 $3,422,137 $5,258,071 $11,978,211

Suspension 20 26 21 25 32

Permanent bar 6 5 8 8 10

Conditions 21 23 23 23 20

Firms

Decisions 6 12 10 12 17

Fines $360,000 $1,495,000 $224,000 $2,220,000 $1,361,667

Costs $65,000 $97,500 $27,000 $100,000 $309,333

Disgorgement $0 $0 $0 $310,000 $0

TOTAL $425,000 $1,592,500 $251,000 $2,630,000 $1,671,000

Permanent suspension 0 3 2 3 4

Termination 2 0 2 2 0

Fine Collection Rates

The chart below sets out the percentage of fines assessed in a given year collected as of December 31, 2016. Assessed fines do not include fines imposed during the year for cases that have been appealed or are still within the time period to appeal.

While we typically collect 100% of fines from firms, there are circumstances where firms do not pay such as insolvency issues and/or where they are suspended by IIROC. Firms who do not pay fines are no longer allowed to operate as an IIROC-regulated firm.

2016 2015 2014 2013 2012

Individuals 8.3% 15.8% 21.3% 16.3% 16.4%10

Firms 100% 84% 100% 100% 89.6%

10 This rate has been updated due to a calculation error discovered since the 2015 Enforcement Report.


28 APPENDIX AIIROC DISCIPLINARY ACTIONS

Individuals

Discretionary TradingRichard Stanford SmithShaun Gerard McErleanFerdinand RenaudKenneth GottfredYu Qioung (Kevin) LiNadir JanmohamedSherman DahlPaul Wayne LynchHenry SojkaMatteo Marricco

Suitability/Due Diligence/Handling of Client AccountsAllen Samuel MendelmanJohn Phillip WattsShaun Gerard McErleanPaul Christopher DarrigoFerdinand RenaudKenneth GottfredKim HusebyeScott Douglas FordChristian CloutierMichael William SawiskyPatrick LillyAndrew MunroDaniel DesautelsNadir JanmohamedSherman DahlHenry SojkaJeffrey Edward GebertSamuel KlodaMatteo MarriccoDenyse Giroux-Garneau

Failure to CooperateWasseem DiraniKenneth GottfredYu Qioung (Kevin) LiHenry SojkaJeffrey Edward Gebert

Inappropriate Personal Financial DealingsAllen Samuel MendelmanWasseem DiraniShaun Gerard McErleanPaul Christopher DarrigoJack Jason TruemanShaun Wayne HowellSamuel Kloda

Manipulation & Deceptive TradingRobert SoleTeymur EnglesbyCale Nishimura

MisappropriationWasseem DiraniThi Sen ChherShaun Wayne Howell Denyse Giroux-Garneau

MisrepresentationRizwan SuleimanKelly Robinson Yu Qioung (Kevin) Li

Off Book TransactionsLucy Marie Pariak-Lukic

Outside Business ActivitiesAllen Samuel MendelmanJack Jason TruemanPatrick LillyKelly Robinson

SupervisionRobert Graydon OldfieldJohn DonnellyPatrick LillyLinda KennedyDennis DenischukWalter Nick Silicz

Unauthorized TradingWasseem DiraniJohn Phillip WattsDominic TersigniDaniel DesautelsYu Qioung (Kevin) LiPaul Wayne LynchDenyse Giroux-Garneau

Undisclosed Conflict of InterestPatrick Lilly

Firms

Capital DeficiencyUnion Securities Ltd.

Expedited Hearing – Firm Winding DownE3m Investments Inc.

Failure to Handle Client AccountsD&D Securities Inc.

Internal ControlsD&D Securities Inc.

SupervisionW.D. Latimer Co. LimitedD&D Securities Inc.IPC Securities CorporationEdward Jones

January 1 to December 31, 2016

29APPENDIX BENFORCEMENT INFORMATION SOURCES

Internal Sources

Registration Department:On occasion, the circumstances surrounding the termination of an individual registrant requires further investigation.

Compliance Departments (Business Conduct Compliance (BCC), Financial & Operations Compliance (FinOps), and Trading Conduct Compliance (TCC)):Issues and deficiencies noted in compliance examination reports sometimes form the basis for some of Enforcement’s most significant disciplinary cases.

Trading Review & Analysis (TR&A)/ Market Surveillance:The TR&A and Market Surveillance Departments oversee all equity and debt trading on Canadian marketplaces and serve as Enforcement’s primary source of market-related information and enforcement referrals.

Complaints & Inquiries (C&I): The C&I team is the primary contact for direct investor inquiries and complaints. C&I refers the majority of the complaints it receives, involving alleged regulatory violations, to Enforcement for further assessment. C&I can be reached by phone (1-877-442-4322), email ([email protected]) or by filing an online complaint form (www.iiroc.ca).

External Sources

ComSet ReportsIIROC rules require Dealer Members to inform IIROC, using IIROC’s Complaints and Settlement Reporting System (ComSet), when certain events occur, including when a Dealer Member receives a written client complaint, when criminal charges are laid against a Dealer Member or any of its individual registrants, or when a securities-related civil claim is brought by a client. These reportable events represent Enforcement’s primary source of external enforcement-related information, and the most significant source of Enforcement cases.

Outside AgenciesEnforcement receives referrals from Canadian provincial securities regulators, international securities regulatory bodies and other public agencies, including law enforcement officials.

IIROC’s Whistleblower ServiceIIROC operates a Whistleblower Service designed to receive, evaluate and take prompt and effective action on information based on first-hand knowledge or tangible evidence of potential systemic wrongdoing, securities fraud and/or unethical behaviour by IIROC-regulated individuals or firms. The Whistleblower Service can be reached by phone (1-866-211-9001) or email ([email protected]).

Enforcement cases are based upon information drawn from a variety of internal and external sources.


30 APPENDIX CTYPES OF DISCIPLINARY PROCEEDINGS

Formal disciplinary action will take the form of either a contested hearing or a settlement hearing.

Contested Hearings Where the Respondent does not admit the alleged violation of IIROC rules, a contested hearing will be held. In that case, staff must prove the allegations set out in the Notice of Hearing – the formal document that initiates disciplinary action. Similar to traditional court proceedings, an IIROC hearing involves staff presenting documentary evidence and oral evidence, through witnesses, in making its case. Respondents have the right to challenge IIROC’s case by cross-examining witnesses and presenting their own evidence.

The hearing panel, which is normally comprised of one former judge and two active or retired industry members, decides whether IIROC has proven its case against the Respondent and if so, determines the appropriate penalty.

If a Respondent fails to attend the hearing, the hearing may still proceed in the Respondent’s absence and the hearing panel may accept the allegations as proven without any formal evidence being called.

Settlement HearingsSettlement hearings are held when staff and the Respondent agree, in writing, on the rule(s) violated by the Respondent, the underlying facts and the penalties to be imposed on the Respondent for the agreed violations. The parties must present the agreement to the hearing panel and explain why the panel should accept it. The panel may accept or reject the settlement agreement.

Like many other professional regulatory bodies, the majority of IIROC’s disciplinary matters are resolved by way of settlements.

Enforcement also has the ability to initiate two other types of proceedings: (1) Protective Order Applications and (2) Temporary Order Applications.

Protective Order ApplicationsGenerally speaking, a protective order application is an emergency proceeding that permits Enforcement staff to quickly initiate a proceeding against a Respondent. The purpose of the proceeding is to protect investors in circumstances where the Respondent is not able to continue in business without contravening IIROC’s rules. Typically, such circumstances include:

• Bankruptcy;

• Financial or operating difficulty of a Dealer Member firm; and

• Criminal charges laid against the Dealer Member firm or individual registrant.

At the conclusion of a protective order proceeding, the hearing panel has the authority to impose a variety of sanctions on the Respondent similar to those available in the regular disciplinary process. Examples of potential sanctions include:

• The suspension of IIROC membership;

• A requirement to immediately cease dealing with the public; and

• A requirement to preserve books and records for a specified period of time.

Temporary Order ApplicationsTemporary order applications are another form of emergency proceeding, and are brought when Enforcement staff believe that the length of time required to convene a disciplinary hearing could be contrary to the public interest. A temporary order proceeding can be brought without prior notice to the Respondent. The order can either suspend the Respondent’s registration with IIROC or impose terms and conditions on that registration. Temporary orders last for 15 days, after which time they can be further extended by a hearing panel or by a securities commission.

Following the completion of an investigation, Enforcement staff will assess the evidence collected and decide whether to prosecute a Dealer Member or individual registrant for a breach of IIROC rules. When the decision is made to prosecute, formal disciplinary action will be initiated against the Dealer Member or individual registrant (both referred to as the Respondent in a disciplinary proceeding).

31GLOSSARY OF TERMS

AMF (Autorité des marchés financiers) The AMF regulates Quebec’s financial markets and provides assistance to consumers of financial products and services. It was established under an Act respecting the Autorité des marchés financiers on February 1, 2004, and oversees the regulation of Quebec’s financial sector, notably in the areas of insurance, securities, deposit institutions (other than banks) and the distribution of financial products and services.

COMSET (Complaints and Settlement Reporting System) IIROC requires registered firms to report client complaints and disciplinary actions including internal investigations, denial of registration and settlements; and civil, criminal or regulatory action against the firm or its registered employees. This information is reported through IIROC’s computerized Complaints and Settlement Reporting System.

CPH (The Conduct and Practices Handbook Course) This is a course offered by the Canadian Securities Institute. Individuals seeking to become an investment advisor or investment representative with IIROC must pass this course in order to meet IIROC’s proficiency requirements. The course covers the rules, policies and by-laws of the securities commissions and SROs, in addition to the standards of conduct and practices when dealing with client accounts, special transactions and products.

CSA (Canadian Securities Administrators) The CSA is the council of ten provincial and three territorial securities regulators in Canada. The mission of the CSA is to facilitate Canada’s securities regulatory system by protecting investors from unfair fraudulent practices and by promoting fair, efficient and transparent markets through the development of harmonized securities regulations, policies and practices.

ETFs (Exchange-traded funds) An investment fund that holds a group of investments such as stocks, bonds, commodities that trades on a stock exchange like a stock. ETFs generally track an index, such as a stock index like the S&P 500. Leveraged ETFs aim to deliver multiples of the performance of the index they track. Some leveraged ETFs are “inverse” or “short” funds, meaning that they seek to deliver the opposite of the performance of the index they track.

Flow-Through Limited Partnership A flow-through limited partnership is an investment vehicle managed by a portfolio manager. The limited partnership invests in flow-through shares of resource companies. Resource companies flow-through eligible Canadian Exploration Expenses and Canadian Development Expenses to shareholders, in this case, to the unit holders of the limited partnership, providing tax benefits to the investors.

MFDA (Mutual Fund Dealers Association)The MFDA regulates the operations, standards of practice and business conduct of its members and their representatives. Its mandate is to enhance investor protection and strengthen public confidence in the Canadian mutual fund industry.

NCAF (New Client Account Form)Securities firms and registered representatives are required to have new clients complete this form to ensure the firm and the representative is aware of the client’s financial position and investment objectives so that the firm and the representative can assess the suitability of their advice.


32 GLOSSARY OF TERMS

Spoofing/Layering Both are trading strategies that are considered manipulative and deceptive. Spoofing is a practice using limit orders that are not intended to be executed to manipulate prices. Some spoofing strategies are related to the open or close of regular market hours that involve distorting prices through the entry of non-bona fide orders, checking for the presence of an “iceberg” order, affecting a calculated opening price and/or aggressive trading activity near the open or close for an improper purpose. Layering is a strategy which initiates a series of orders and trades in an attempt to ignite a rapid price movement either up or down and induce others to trade at artificially high or low prices. An example is a “layering” strategy whereby a market participant places a bona fide order on one side of the market and simultaneously “layers” the book with non-bona fide orders on the other side of the market to bait other market participants to react to the non-bona fide orders and trade with the bona fide order.

SRO (Self-Regulatory Organization)SRO refers to an organization that sets standards, monitors members for compliance with those standards and takes appropriate action when those standards are not met.

UMIR (Universal Market Integrity Rules)Market Regulation Services introduced the Universal Market Integrity Rules as a common set of equity trading rules designed to ensure fairness and maintain investor confidence. The UMIR continues to be IIROC’s market integrity rules.

Protecting Investors and Supporting

Healthy Capital Markets Across Canada

1-877-442-4322

www.iiroc.ca

MONTREAL5 Place Ville Marie, Suite 1550 Montreal, Quebec H3B 2G2Tel.: (514) 878-2854 Fax: (514) 878-3860Enforcement Matters only Fax: (514) 878-6324

TORONTO 121 King Street West, Suite 2000 Toronto, Ontario M5H 3T9Tel.: (416) 364-6133 Fax: (416) 364-0753Enforcement Matters only Fax: (416) 364-2998

CALGARYBow Valley Square 3 255-5th Avenue S.W., Suite 800 Calgary, Alberta T2P 3G6Tel.: (403) 262-6393 Fax: (403) 234-0861Enforcement Matters only Fax: (403) 265-4603

VANCOUVERRoyal Centre 1055 West Georgia Street, Suite 2800 P.O. Box 11164 Vancouver, B.C. V6E 3R5Tel.: (604) 683-6222 Fax: (604) 683-3491Enforcement Matters only Fax: (604) 683-6262

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