A hearing panel of the Investment Industry Regulatory Organization of Canada (IIROC) has fined TD Waterhouse Canada, for failing to provide position cost information to all of its retail clients and for failing to involve the regulator once it knew it would not be complaint with IIROC rules.
The requirement to provide clients with individual position cost information was part of the second phase of the Client Relationship Model (CRM2). Effective December 31, 2015, IIROC members are required to provide retail customers with cost information on a quarterly basis for all account positions held at the quarter’s end. Although TD says it had the ability to become fully compliant with the position cost requirements by December 31, 2015, in the spring of 2015, “the respondent (TD Waterhouse Canada) identified what it considered to be potential litigation risks and client experience issues that might have resulted from its proposed manner of implementing compliance with the position cost requirements,” say the authors of IIROC’s decision and reasons in the case.
“An alternative solution to avoid the problem was proposed and internally approved by the respondent in May 2015. This alternative solution included the acceptance of business risk inherent in having a significant percentage (then believed to be approximately eight per cent) of client positions non-compliant with the position cost requirements of Rule 200.” The decision to use current book value as the position cost and accept the business risk that eight per cent of book values reported would not comply with CRM2 rules was discussed and in some cases approved by several internal committees and the company’s board of directors.
IIROC formally initiated the investigation into TD Waterhouse’s conduct in April 2017 when it received a written complaint from a TD Direct Investing retail client.
“The respondent did not at the time of making its decision to be non-compliant or at any other time thereafter, advise IIROC staff or any other securities regulatory authority that a certain percentage of its clients’ positions would be non-compliant,” they add. “Further, there is no reference anywhere in the documents before us that there ever was any consideration given to involving IIROC in the then pending non-compliance.” Documents go on to say that the failures should give rise to concerns about possible systemic weakness in the company’s governance systems.
In determining an appropriate penalty, IIROC staff called for the maximum permissible fine, $5-million, plus costs. TD says it always intended to comply with the CRM2 rules, and argued that a fine in the range of $500,000 would be more than adequate. IIROC eventually fined TD $4-million plus costs in the amount of $28,497.
“The central fact is that TD Waterhouse, as an experienced investment dealer, made a deliberate decision that not complying with a regulatory requirement for a material number of client positions was an acceptable business risk,” say the decision’s authors. “The sanction imposed on TD Waterhouse Canada Inc. must be significant enough that TD Waterhouse, industry participants and the public will not view it simply as a cost of doing business.”
