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Member Regulation

Member Regulation. Presentation to Members By: Paul C. Bourque. September 9, 2005. Quick Facts about Member Regulation. Regulates activities of 202 (211 in 2004) Member firms and their 24,852 registered individuals and 13,271 employees

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Member Regulation

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  1. Member Regulation Presentation to Members By: Paul C. Bourque September 9, 2005

  2. Quick Facts about Member Regulation • Regulates activities of 202 (211 in 2004) Member firms and their 24,852registered individuals and 13,271 employees • Recognized as an SRO pursuant to provincial securities legislation in: • British Columbia, Alberta, Saskatchewan, Ontario, Quebec, Nova Scotia and Manitoba • Application still pending in Newfoundland

  3. Chart showing trend in SRO membership compared to IDA jurisdiction members With the transfer of member regulation functions from the Bourse de Montreal Inc. on January 1, 2005, all firms came under IDA Jurisdiction.

  4. Oversight of Member Regulation • Member Regulation Oversight Committee of the Board (MROC) • IDA Vice Chair, President, 2 independent and 1 industry director • Canadian Investor Protection Fund • Minimum Standards for Financial Compliance • Examinations of Member Firms • Canadian Securities Administrators • Recognition process • By-Law approval • Oversight examinations

  5. Performance • The performance of Member Regulation will be measured by enhanced investor protection through increased industry compliance with regulatory standards, measured by: • The achievement of all benchmarks • Zero (0) calls on the CIPF due to insolvency (excluding fraud) • Reduce and maintain at zero (0) the number of capital deficiencies for firms in Early Warning • Reduce Residual Risk Score of the highest risk firms

  6. Performance – Results (as at June 30/05) Financial Compliance

  7. Performance – Results (as at June 30/05) Sales Compliance

  8. Performance – Results (as at June 30/05) Sales Compliance

  9. Performance – Results (as at June 30/05) Enforcement

  10. Performance – Results (as at June 30/05) Registration

  11. Performance – Results • Zero calls on the CIPF due to insolvency (excluding fraud as the proximate cause of the insolvency) • There were no calls on the fund in 2005. Insolvencies of Essex (1999), Rampart (2001) and Thomson Kernaghan (2002) are still ongoing • Reduce and maintain at zero the number of capital deficiency occurrences for firms designated in early warning. • No Members in Early Warning became capital deficient during the first half of 2005.

  12. Performance – Results • Reduce risk scoring level with the highest risk firms progressively over time in Financial and Sales Compliance – through RTR monitoring • Reallocate Enforcement resources to more serious / complex / high risk cases • Tracking against this measure will commence in Q3 2005.

  13. Strategic Direction • Use Leading Risk Indicators to identify industry wide risk trends • Use Risk Reduction Tools to prioritize and allocate staff resources effectively • Continually Improve MRPerformance • Use Early Warning Systems to identify problem firms and intervene at an early stage • Use Enforcement action to send clear messages for serious misconduct

  14. Strategic Plan Results • Early Warning • Enforcement Results • Risk Assessment Model for Financial Compliance • Risk Assessment Model for Sales Compliance • Case Tracking System • Complaints and Settlements Reporting (ComSet) • NRD Implementation • Quebec participation • CFO Certification – deadline July 5, 2005 • Quebec Recognition and Delegation – June 2004 • Transfer MR from Bourse – January 1, 2005

  15. IDA Audit Jurisdiction Member FirmsEW and RAC deficiency trendJanuary 2001 – June 2005

  16. Early Warning • By Law 30.5(i) – the Association may require the member to pay the reasonable costs and expenses incurred in connection with the administration of the By Law • Less EW costs being collected due to fewer Members in EW

  17. Enforcement Results Penalties Comparison

  18. Enforcement Results Penalties Comparison

  19. Enforcement Results

  20. Enforcement Results

  21. IDA Financial Compliance Risk Assessment Model Risk Score Comparison (2001 vs 2004) 4.00 Residual Risk - 2001 Residual Risk - 2002 3.50 Residual Risk - 2003 Residual Risk - 2004 3.00 High risk 2.50 Risk Score Medium - High risk 2.20 Low - Medium risk 1.50 Low risk 1.00 0.50 0.00 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 IDA Audit Jurisdiction Members Leading Risk Indicators

  22. Strategic Initiatives 2005-06 • Leading Risk Indicators • Develop Registration Risk Model • Develop and implement a secure intelligence data base • Risk Reduction Tools • Develop and implement Compliance Report Trend Report (RTR) • Develop a certification for Chief Compliance Officers • Implement the equity margin automation project • Knowledge Transfer

  23. Strategic Initiatives 2005-06 StatusLeading Risk Indicators • Registration Risk Model • Objective is to ensure registered representatives are ethical and proficient • Project being coordinated with CSA • Planned to be completed Q1-06

  24. Strategic Initiatives 2005-06 StatusLeading Risk Indicators • Secure Intelligence Database • Management information • Program support • File selection • Strategic Partnerships with other enforcement agencies

  25. Strategic Initiatives 2005-06Improve Performance • Improve the Performance of Member regulation • Develop benchmarks that measure the quality of our regulatory products • Development of the Unified Business System Solution platform • Assess, investigate and prosecute supervision cases more effectively

  26. Strategic Initiatives 2005-06 – StatusRisk Reduction • Chief Compliance Officer Certification • Ensure persons designated as Chief Compliance Officers meet defined proficiency standards in order to: • reduce the number of valid suitability and discretionary trading complaints and • Reduce the cost of satisfying those complaints. • Develop and implement a Chief Compliance Officer certification that that ensures CCO’s meet defined standards of proficiency • Planned completion June 2006

  27. Strategic Initiatives 2005-06 – StatusRisk Reduction • Equity Margin Automation Project • Phase I • replaced the existing methodology for determining margin rates with a custom method that more accurately reflects market risk combining both price and liquidity risk (the “basic margin rate”) • Phase II • in order to implement this new “basic margin rate” methodology, develop and test software to automate what is currently a manual process

  28. Strategic Initiatives 2005-06 – StatusRisk Reduction • Knowledge Transfer • Regulatory Resource Management Project • Rule Book and related website enhancements • Other D&T Recommendations • Implementation plans • Best Practices • Interpretations Data Base • More consultations with Members • Member Services Unit

  29. Strategic Initiatives 2005-06 – StatusRisk Reduction • Compliance Risk Trend Report (RTR) • Reports for High Risk firms issued June 2005 • Others being finalized in batches • Objective is to get Members to reduce their risk profile

  30. ComSet Risk Model • Policy 8 requires firms to report the following types of matters on a web based tool known as ComSet: • Written client complaints about trading in their accounts • Client complaints regarding allegations of theft, fraud, market manipulation, money laundering, • Domestic or International investigations or convictions of a firm or registrant by a regulator or criminal authority • Civil Suits alleging impropriety in relation to trading or client accounts • Internal investigations • Denial of Registration

  31. ComSet Risk Model • Collection of the information was initiated on October 15, 2002 • The statistical algorithms takes into account the number of events a firm reports and normalizes the information to take into account the number of registrants, the relative seriousness of the types of events reported • The tool allows assessment of the relative risk of a firm on a firm basis, branch basis or individual basis

  32. ComSet Risk Model

  33. Top 5 Violation Categories

  34. ComSet Data and Analysis of Individual Registrants

  35. ComSet Analysis on Firm Basis

  36. Current Regulatory Issues • Sales Compliance • Chief Compliance Officer Qualification • Conflicts of Interest Rules • Beneficial Ownership of non individual accounts • IDA/MFDA business arrangements • Trade Reporting and Electronic Audit Trail Systems (TREATS) Committee • Debt Market Rules – Policy 5 • Electronic access to Members’ records • Automation of Compliance work flow

  37. Current Regulatory Issues • Financial Compliance • Implementation of new Chief Financial Officer Qualifying Exam • Automation of Compliance work flow

  38. Current Regulatory Issues • Regulatory Policy • Implementation of new Equity Margin rates • Implementation of Value at Risk models for regulatory capital calculation – alternative to net capital model • Business Continuity Planning for Members • Client account transfer

  39. Current Regulatory Issues • Registration • Maximizing the potential of the National Registration Database • Implementation of national registration System • Developing a Risk Assessment Model for registration

  40. Current Regulatory Issues • Enforcement • Pursuing more important complex cases • Obtaining additional enforcement powers • Compel evidence for investigations and hearings • File discipline decisions as court decisions • Statutory immunity for regulatory decisions made in good faith • Move quickly to deal with firm and individual instances of failure to cooperate with IDA investigation • Supervision cases

  41. High Profile Regulatory Issues • Market timing cases • Hedge Fund Report • Use of Expedited Hearing process (By-law 20)

  42. Major IDA Initiatives • Push to consolidate IDA, RS Inc. and MFDA • Deal with the perceived conflict of IDA’s dual mandate • Task Force to modernize securities legislation in Canada • Move to amend CIPF’s role in industry regulations • Ongoing effort to reduce regulatory burden

  43. Vision for the Future • Move towards a mix of principle and rule-specific regulations • Empower Members to take on more responsibility for self-regulation • Move to enhance the use of risk models • Members taking responsibility for operational rules • Restructure Member Regulation to better deal with emerging issues

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