Following consultation on the proposals set out in IIROC Notice 10-0227 issued on August 24, 2010 relating to IIROC’s arbitration program (the “Program”), the IIROC Board of Directors has approved the following changes to the Program, effective on the date of this Notice:

1. the award limit under the Program is increased to $500,000; and
2. the rules of procedure under the Program have been changed to permit a claimant to opt, at the commencement of an arbitration proceeding, to eliminate the arbitrator’s discretion to award costs against a party, unless the arbitrator finds that the party has acted in a manner that may be characterized as unfair, vexatious, improper, in bad faith or has unnecessarily and unreasonably prolonged proceedings. 

This IIROC Notice sets out the changes to the Program and summarizes the comments received via the comment process.  A complete summary of comments, together with IIROC’s views, is provided as Appendix A to this Notice.

IIROC Arbitration Program – Background

There are currently a number of recourses available to investors to address disputes with Dealer Members, including the Program.  IIROC Dealer Member Rule 37.1 has been in place since 1996 and requires IIROC Dealer Members to participate in an arbitration program that has been approved by the Board of Directors.  Two independent arbitration organizations, ADR Chambers and the Canadian Commercial Arbitration Centre, are approved to conduct arbitrations under the Program and each organization has responsibility for cases arising in assigned jurisdictions.

In the fall of 2008, IIROC commenced a comprehensive review and evaluation of the Program.  Utilization of the Program had been declining since 2003 and dramatically so since 2005.  IIROC Notice 09-0359 issued on December 16, 2009 reported on the results of the review and efforts to improve and harmonize the operation of the Program nationally and sought public comment on the Program, including an increase in the award limit from $100,000 to $350,000 or other appropriate amount.  IIROC Notice 10-0227 issued on August 24, 2010 summarized the comments received and sought public comment on the proposals discussed in this Notice. 

Award Limit

Pursuant to IIROC Notice 10-0227, IIROC invited comments on its proposal to increase the award limit under the Program from $100,000 to $500,000 (plus interest and costs).    

All except one submission received on this point were in favour of an increase in the award limit to $500,000.  Three submissions recommended that this limit be reviewed no less than every two years and two submissions supported a larger increase to a minimum of $1,000,000.  One commenter expressed concern about the $500,000 limit and its impact on smaller dealers.

While concerns have been expressed about a higher award limit and its impact on smaller dealers given the binding nature of arbitration, there was sufficiently broad support to increase the arbitration limit to $500,000 received during the first comment period and in the consultation process.

IIROC feels the $500,000 award limit is appropriate and reflects a balance between providing greater access to recourse that is expeditious and cost-effective and ensuring adherence to the principles of natural justice and legal process.  IIROC will monitor the appropriateness of the limit as part of its ongoing monitoring of the Program and review the limit not less than every two years.

The award limit under the Program has been increased to $500,000.

Costs Awards

Pursuant to IIROC Notice 10-0227, IIROC invited comments on its proposal to change the rules of procedure under the Program to permit a claimant to opt, at the commencement of an arbitration proceeding, to eliminate the arbitrator’s discretion to award costs against a party, unless the arbitrator finds that the party has acted in a manner that may be characterized as unfair, vexatious, improper, in bad faith or has unnecessarily and unreasonably prolonged proceedings. IIROC also invited comments with regard to the appropriate point in the arbitration proceeding to require the claimant to make his/her election as to costs.  This opt-out relates to cost awards, which include fees of legal counsel or expert fees.  Parties to arbitration are also responsible for arbitration fees (the administrative fees and disbursements of the arbitration organization and the fees of the arbitrators) which are, in principle, divided equally between the parties with discretion of the arbitrator to reallocate those amounts.  IIROC has stated that the current approach with respect to sharing of arbitration fees is appropriate and will remain unchanged. 

Almost all investors and investor advocates supported either the elimination of costs awards or the ability of the claimant to make an election in respect of costs awards.  One Dealer Member and industry association opposed granting one party (the investor) the right to eliminate costs unilaterally on the grounds that it compromised the fairness of the process and eliminated an important safeguard to ensuring that participants act fairly and in an efficient manner.

IIROC notes that the election to eliminate costs continues to provide the arbitrator with the discretion to award costs against a party that has acted in a manner that is unfair, vexatious, improper, in bad faith or has unnecessarily and unreasonably prolonged proceedings.   IIROC continues to believe that the right to elect should reside with the investor as the election addresses the concern that the potential for adverse cost awards not be a deterrent for investors in choosing to pursue arbitration.  This may be particularly important where the investor does not retain legal counsel.  Those investors who have retained counsel and who are willing to take the risk of an adverse cost award can make an election to preserve the arbitrator’s discretion to award costs (as is the case in civil litigation).   

Three individual investors repeated requests to eliminate costs awards to cases already in progress.  IIROC is not in favour of an application of the new rule which would be, in effect, retroactive as this would prejudice parties relying on rules currently in effect at the time arbitration was initiated.  However, as a transition matter, the parties may by agreement apply the elimination of costs awards to a case in progress when the changes to the Program take effect. 

The rules of procedure under the Program have been changed to permit a claimant to opt, at the commencement of an arbitration proceeding, to eliminate the arbitrator’s discretion to award costs against a party, unless the arbitrator finds that the party has acted in a manner that may be characterized as unfair, vexatious, improper, in bad faith or has unnecessarily and unreasonably prolonged proceedings. 

One commenter requested that, in the absence of an election, the default should be no cost awards.  IIROC will ensure that the rules of procedure of the arbitration organizations clearly set out that an election is to be made at the commencement of the arbitration.  However, in the unusual circumstance where no election has been made, the default will be that the arbitrator will have no discretion to award costs unless he/she finds that the party has acted in a manner that may be characterized as unfair, vexatious, improper, in bad faith or has unnecessarily and unreasonably prolonged proceedings. The respondent will be advised of the election at the time that it is made. 

IIROC also requested comments as to when it would be appropriate to disclose the claimant’s election to the arbitrator (i.e., whether the election by the claimant as to costs should be disclosed at the outset of the proceeding or only after the merits are determined).  One submission was received recommending that the claimant’s election on costs be disclosed to the arbitrator at the outset of the proceeding.  IIROC supports disclosure to the arbitrator at the outset of the proceeding.  The arbitrator is a retired judge or lawyer.    IIROC believes that the election is reflective of the individual’s risk tolerance of an adverse cost award and will not be viewed by an arbitrator as indicative of his or her assessment of the merits of the claim. 

Other Comments

In addition to submissions on the specific issues for which comments were invited, comments were provided on other issues relating to the Program.  In many cases, similar submissions had been made in respect of the earlier request for comments

Funding of Investor’s Arbitration Fees:

One commenter referred to earlier submissions on this point to fund arbitration fees or to subsidize small claims out of membership fees or fines.   As previously noted, IIROC has negotiated favourable rates with the arbitration organizations, which rates are applied uniformly to all cases regardless of amount claimed.  IIROC understands that cost is a factor for investors and will continue to monitor the costs associated with the Program.

Investor Education and Assistance:

Several commenters repeated suggestions that IIROC provide investor assistance and education on dispute resolution options and arbitration issues such as drafting a claim, elements of loss and the implications of costs awards.  One submission noted that investor rights groups could also be given the opportunity to provide these types of services.  

As previously noted, IIROC has undertaken a number of information and education initiatives, including website disclosure, a brochure, and, most recently, a bilingual telephone information service on dispute resolution and monetary recourse options available to investors.  IIROC will continue to monitor the Program and to evaluate and seek opportunities to provide information to investors.

Rule 37.2 and OBSI:

One commenter repeated suggestions relating to OBSI, including a lower limit for OBSI and allowing Dealer Members to designate alternative dispute resolution/mediation service providers other than OBSI under Rule 37.2.  IIROC does not believe that it is practical or feasible for it to act unilaterally to decrease OBSI’s threshold in respect of the investment industry.  It is important to note that OBSI was established as a multi-sector solution for the banking and investment industry and, therefore, any review of the monetary threshold for OBSI rewards would more appropriately be undertaken as part of a broader, multi-sector review.

IIROC continues to receive comments from Dealer Members proposing to amend Rule 37.2 to allow Dealer Members to designate an independent dispute resolution/ombudsperson service.  Eliminating the current approach and placing the onus on investors to compare and evaluate each Dealer Member’s dispute resolution/ombudsperson service would diminish the current level of investor protection in a manner that is, in IIROC’s view, not appropriate in the current environment.

Arbitration Procedures:

There were a number of commenters repeating recommendations to revise certain procedures in the arbitration process, including streamlined procedures for smaller claims and three member arbitration panels for larger claims.   IIROC has considered a number of potential changes but is of the view that, at this stage of the Program, it should proceed with the changes proposed and evaluate their impact prior to undertaking further reforms.  IIROC also believes that there is value in maintaining the simplicity of the system for the benefit of investors and ease of administration.  Under the existing rules of the arbitration organizations, parties may agree to any simplified procedure, including decisions based on written pleadings only.  The rules also require that proceedings be conducted in a practical and cost-effective manner.

Statistics and Reporting:

Several comments were received supporting the publication of enhanced statistical information, including nature of complaint, cycle times and award amounts and actual decisions. As previously noted, IIROC has imposed new reporting guidelines for the arbitration firms in 2009 which will enable IIROC to accurately report certain statistical indicators regarding the Program on a going forward basis.  For the reasons outlined in the response to comments received, IIROC does not support publishing decisions at this time but consideration will be given to enhancing disclosure, whether through case summaries, aggregated data or other means.