Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.
The Investment Industry Regulatory Organization of Canada, or IIROC, both sets and enforces industry regulations and standards.Wealthsimple Invest is an automated way to grow your money like the worlds most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
What is IIROC?
The Canadian investment industry is self-regulating. That means the industry itself is responsible for setting standards, protecting investors, and policing its members. IIROC maintains the capital markets (such as stock exchanges). It watches the market carefully for any unusual activity that could signify cheating, rule infractions, or fraud. It has the power to halt trading and cancel orders if it suspects something is amiss, and it can take action even after a trade has been completed.
IIROC oversees almost everyone selling, buying, or brokering investments in the country. All investment firms are required to be members of IIROC, which maintains a list of dealers it regulates and maintains a database where you can check to see if your advisor has ever been disciplined.
Who investigates IIROC?
IIROC is subject to The Canadian Securities Administers, which consists of provincial and territorial securities regulators. This agency seeks to develop a harmonized approach to securities regulation across the country. It does annual oversight reviews of IIROC and investigates when necessary.
For example, about five years ago, IIROC lost the personal financial data of 52,000 brokerage clients because it failed to encrypt the details. The Canadian Securities Administers, led by the Ontario Securities Commission looked into the breach.
Advantages of IIROC
IIROC is effective in keeping Canada’s markets operating honestly and successfully. It helps Canadians feel confident that their money will be dealt with fairly and orderly. Without trust in the system, Canadians and institutional organizations would not feel comfortable financing corporations and the entire financial structure would likely collapse.
Limitations of IIROC
Yet, IIROC is not perfect. Like any self-governing body there can be a perception of bias. IIROC builds its policies after seeking input from its stakeholders—generally from members of the investment community, such as institutional investors, firms, underwriters, and financiers—but rarely from retail investors. (Retail investors are ordinary Canadians and individual shareholders as opposed to large-scale investors like pension and mutual funds.)
To balance its focus on industry, IIROC provides some funding to The Canadian Foundation for the Advancement of Investor Rights, a non-profit organization that educates and promotes the rights of individual shareholders.
The Foundation has raised questions about whether IIROC goes far enough in disciplining its members who break the rules and does enough to protect retail investors.
For example, IIROC recently fined RBC Dominion Securities, Scotia Capital, and TD Securities $1.5 million for breaking the rules in a cross-border deal. They helped sell off Royal Dutch Shell 8% stake in Canadian Natural Resources but failed to put the order in the marketplace or seek an exemption as required.
Another example is how IIROC recently told firms that they must stop inserting limited liability clauses in contracts with retail clients—a clear violation of the rules. Firms have been trying to shirk their responsibility for investor losses, even when they’re directly at fault, such as when they recommend an investment too risky for a client, or when their website had a technical issue. Ordinary investors were prevented from seeking compensation for losses caused by the firm and through no fault of their own. IIROC now encourages its dealers to revise these clauses and notify clients. If the clauses persist, IIROC will recommend corrections or possibly investigate.
But the Foundation claims that IIROC is being too gentle with its dealers and not acting in the best interest of investors. Instead of demanding dealers comply by a specific date, IIROC is merely “encouraging” them to. Furthermore, there is no attempt to discover which and how many clients have been hurt by these clauses and fix the situation.
How does IIROC protect investors?
IIROC attempts to protect investors largely by regulating the kind of people that are allowed to sell investments. Investment advisors must take certain courses, be of good character, and pass a background check. Before recommending any investments they must gather “know your client” information to assess your financial goals and determine your risk level.
But advisors are also allowed to sell investments on commission, which can make it hard to trust their stock picks. Are they selling you an investment because it’s the most suitable one for you, or because that’s the investment with the biggest commission? It’s hard to untangle unless your advisor is fully transparent, and IIROC found very few that are.
IIROC went mystery shopping for investment advice and found that a full 75% of advisors did not discuss their compensation, 68% did not gather “know your client” information and 48% did not discuss the risk-return relationship. The mystery shoppers went to 88 investment dealers and none gave a detailed explanation of how the advisor and the advisor’s firm are paid.
IIROC also has some measures in place to protect your money should the investment firm go belly up. The firm must have enough money on hand as a “cushion,” and it must keep your investment separate from its own assets. If a firm does become insolvent, the Canadian Investor Protection Fund covers up to $1 million dollars per account. Note that the Fund does not protect your investment returns—your investment can still lose money. Rather, it protects your investment from the dealer going bankrupt.
Let’s say you buy 10 shares of XYZ company for $1,000 through an investment firm. The investment firm goes under and the 10 shares are missing from your account. The fund will compensate you based on the value of the missing shares on the date the firm went bankrupt.
Plus, if you feel your investment advisor or firm has broken any of IIROC’s rules, you can complain directly by email or by calling.
Some infractions include recommending an investment that is too risky for you (based on the “get to know your client” intake process) and buying or selling investments without your approval. While IIROC cannot compensate you itself, nor force your dealer to, they can warn, fine, and ban advisors and firms.
How to become an IRCOC Registered or Approved Individual
Before individuals can work at IIROC-regulated firms, they must be registered or approved. The Registration Department acts as kind of gatekeeper to screen all applicants and protect industry standards. You can apply online.
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