Turnover an issue at western regulator: audit

(September 16, 2005) Western regulatory watchdogs charged with overseeing securities markets are doing a satisfactory job, but need to address key issues before problems develop, according to an audit conducted by the BCSC and the ASC.

The audit covered operations at Market Regulation Services Inc.’s Western Region, the body responsible for market integrity on the TSX Venture Exchange, between March 1, 2002 and August 31, 2004, but also noted deficiencies creeping into the system more recently.

“Enforcement proceedings initiated during January to December 2004 declined dramatically when compared to the first two years. Recent activity, since January 2005 indicates that this trend may have reversed,” the audit report says. “Staff turnover is very high and contributed to a lack of results and must be addressed before it impacts any further on RS results.”

The audit says the body performed well, up to February 2004, but in the final eight months of the review, investigations resulted in “only minor actions.”

“Between January and December 2004, enforcement results declined dramatically as there were no disciplinary hearings, contested or otherwise, and no settlements.”

With a total staff of just 18, the SRO has seen the departure of seven investigators since its inception in March 2002. The only original management level staffer is a regional vice president.

“Turnover impacted on the timely completion of files as some investigation files took longer than expected due to the departure of investigators,” the audit report says “Of the 26 closed investigation files reviewed in the sample, four files were not completed in a timely manner due to staff turnover.”

The report says eliminating the Manager of Investigations position is a possible cause of the downturn in enforcement actions.

The BCSC and ASC have made the following recommendations:

• Produce more substantial enforcement results over the next fiscal year.
• Expeditiously complete investigation reports for all current investigations.
• Clarify and define Chief Counsel duties, create specific performance objectives and include these duties and functions in the Investigations and Enforcement Policies and Procedures Manual.
• Reconsider hiring a separate Manager of Investigations to manage files and allow the Chief Counsel to focus only on prosecution files.

The audit report did have praise for RS Western Region though, pointing to the SRO’s educational efforts among advisors, traders and compliance staff at western-based firms. RS conducted these presentations at the firms’ offices, including improvement of trading supervision and audit trail standards.

“These are significant activities and must be considered in analysis of the results of RS Western Region,” the report says. “We support RS’s focus on significant violations based on the degree that the violations impact on market integrity, its initiative to expedite file referrals, and its use of innovative real time approaches such as red flag letters.”

The audit also praised the investigations and enforcement branch for its “significant contributions to major projects,” including the development of the Cease Trade Order database, the Insider Trading Task Force and the front running review.

The surveillance and compliance arm of RS was also given a clean bill of health.

The full audit report is available on the BCSC website, or simply click here.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com