The Enforcement Department investigates situations where our Members and their Approved Persons may have breached our requirements. The Enforcement Department operates on several general principles:
- The Enforcement Department considers general and specific deterrence in its decision making.
- Members and Approved Persons are provided opportunity for input before a decision is made on disciplinary action, except in urgent cases involving potential public harm.
- In all cases, the level of supervision by the Member of its Approved Persons will be part of the review.
- Cases are reviewed proactively, with a view to identifying possible associated misconduct and assessing root causes.
- The Enforcement Department works on a cooperative basis with other regulatory agencies and law enforcement organizations.
- The Enforcement Department works on a cooperative basis with the MFDA Compliance and Policy departments to refer cases and issues where appropriate.
The Enforcement Department has four main functions:
How the Enforcement Department Operates
The Enforcement Department receives information about potential violations of MFDA Rules, By-laws, Policies and applicable securities regulations, in various ways. The most common are event reports filed on the Member Event Tracking System (METS) that are made when Members receive a complaint or identify issues through their branch review programs and other supervisory activity. As well, event reports come from the public, other regulators, and the MFDA Compliance Department. This information is screened and cases are opened where there is a possibility of a violation of MFDA requirements.
Once a complaint has passed the intake stage, a case is opened. The Case Assessment group obtains further information and assesses whether there are grounds to believe a violation has occurred. Where there are such grounds, the Case Assessment group may deal with the matter by way of an administrative resolution or may escalate it to the Investigations group.
An administrative resolution typically consists of either a Warning Letter or Cautionary Letter. Warning Letters are issued in circumstances where the violation is one that the MFDA could have escalated to a formal disciplinary hearing, but due to the existence of screening factors, has chosen not to. Cautionary Letters are issued when the violation is minor or less serious in nature and one that the MFDA would not generally escalate to a formal disciplinary hearing. While Cautionary Letters are disciplinary in nature, they are often issued for educational purposes.
Screening factors include the seriousness of the alleged misconduct, whether the alleged misconduct resulted in significant losses or harm to investors, and whether the victim is part of a vulnerable or priority group. The screening factors include many of the same considerations in the MFDA’s Penalty Guidelines.
The Investigations group conducts in-depth examinations of cases which include gathering documentation, conducting interviews, analyzing cases and preparing reports and recommendations. This work is conducted with the aim of determining whether a violation of MFDA By-laws, Rules, Policies or applicable securities legislation has occurred. The screening process is similar to the process implemented by the Case Assessment group. The Investigations group also coordinates investigation activity with other regulatory bodies and law enforcement.
As part of its regulatory mandate, the MFDA is authorized to commence disciplinary proceedings against its Members and Approved Persons who have allegedly engaged in misconduct.
Disciplinary proceedings are carried out by Enforcement Counsel before Hearing Panels of the MFDA Regional Councils. The responsibilities of Enforcement Counsel relate to all aspects of the litigation process, including providing advice and assistance in the course of an investigation, reviewing the Investigation Report prior to the escalation of the matter to the litigation phase, preparing the Notice of Hearing and other proceeding-related documents and the timely prosecution of the matter to a conclusion. Enforcement Counsel are also required to be able to deal appropriately with the various parties who may have an interest in the process, including complainants and other regulators.
Key Elements of the Litigation Process
Hearing Panels are made up of representatives serving on one of the MFDA’s four Regional Councils. Hearing Panels are comprised of three Regional Council representatives: one Public representative and two Industry representatives. The Public representative serves as the Chair of each Hearing Panel, and is either a retired judge or practicing lawyer with litigation or administrative law experience. Hearings are conducted in the region where the alleged misconduct occurred. The Hearing Panel is responsible for determining whether any misconduct occurred and if so, whether any penalties should be imposed on the Member or Approved Person. Hearing Panels must provide written Reasons for their decisions.
Hearing on the Merits: Any time after an Approved Person or Member is served with a Notice of Hearing, they may contact MFDA Staff to initiate settlement discussions. Where the Approved Person or Member wishes to dispute any of the facts or allegations in the Notice of Hearing, or if they are unable to reach a Settlement Agreement with MFDA Staff, the matter will proceed to a Hearing on the Merits. The hearing is open to the public, unless and to the extent that the Hearing Panel determines that all or part of the hearing should proceed in the absence of the public. MFDA Staff and each Respondent are given an opportunity to make an opening statement, present documentary evidence, examine and cross-examine witnesses, and make a closing statement summarizing the evidence that was presented along with any relevant arguments. Settlement: A Settlement Agreement contains a description of the facts acceptable to MFDA Staff and the Respondent, an admission by the Respondent to some or all of the allegations of misconduct, and an agreement as to the penalties to be imposed. At a Settlement Hearing, a Hearing Panel reviews the Settlement Agreement and hears the arguments of the parties to the Settlement Agreement in support of the proposed terms of settlement. The Hearing Panel then determines whether the proposed settlement is reasonable and in the public interest. The Hearing Panel is only permitted to accept or reject the Settlement Agreement in its entirety – it is not permitted to modify the Settlement Agreement or substitute its own terms of settlement. If the Hearing Panel accepts the Settlement Agreement, it will issue an order imposing the agreed-upon penalties on the Approved Person or Member, and the Settlement Agreement and the Hearing Panel’s Reasons for Decision will be released to the public.
Use of Penalty and Cost Monies
Monies received by the MFDA in connection with enforcement proceedings can consist of fines, disgorgement of profits and/or MFDA cost recoveries imposed by order of an MFDA Hearing Panel at the conclusion of the disciplinary hearing or settlement.
Monies received by the MFDA from cost recoveries are added to the general revenues of the MFDA and used to off-set operating expenses of the MFDA’s regulatory activities as such regulatory work would not have been done by MFDA staff but for the non-compliance of the Member or Approved Person.
Fines/Disgorgement of Profits
Monies received by the MFDA from fines or disgorgement of profits are deposited into the MFDA Discretionary Fund. Monies may be disbursed from the MFDA Discretionary Fund in the following circumstances:
- for reasonable costs associated with the administration of the MFDA’s hearing panels
- for funding the MFDA IPC
- for the development of systems or other expenditures that are necessary to address emerging regulatory issues and are directly related to protecting investors or the integrity of the capital markets, provided that any such use does not constitute normal course operating expenses
- for education or research projects that are directly relevant to the investment industry, are in the public interest, and which benefit the public or the capital markets
- to contribute to a non-profit, tax exempt organization, the purposes of which include the protection of investors, or those described in section 5(d) above
- for such other purposes as may be subsequently approved by the Recognizing Regulators