Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.
Small Investor Protection Association Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:
The SIPA Report
Five Year Review
Investor Protection in Canada
December 31, 2003
Letter from SIPA
This report presents the small investor perspective on investor protection. Many studies have been carried out but they are generally sponsored by the investment industry. This report is based largely upon anecdotal evidence collected over five years of SIPA operation supplemented with public documentation.
SIPA was founded because the small investor was not getting a fair deal. The small investor has difficulty to find his way amongst the proliferation of investment products. Investment advisors appear only too willing to guide the small investor and so he placed his trust in investment advisors and the industry. In many cases this trust is betrayed with the resultant life changing financial loss.
SIPA's mission is:
- To aid investor awareness
- To provide guidance for investors with a complaint
- To pursue improved regulation and enforcement
In a brief five years SIPA has witnessed improvements in the investment industry but some fundamental issues remain unchanged. Today SIPA still hears the same complaints as it did five years ago.
Many small investors are reluctant to come forward for varying reasons with the result that the magnitude of their problem of loss experienced due to wrongdoing has remained hidden from the public eye. This report is meant to help bring attention to this issue and provide better insight to those who are interested in resolving the problem.
The small investor needs and deserves better investor protection.
Stan Buell, P. Eng.
The public perception is that the investment industry is well regulated and that the regulators provide investor protection that will protect the small investor from wrongdoing. There is a distinct lack of understanding of the regulatory approach to investor protection and the weaknesses inherent in the system. After investors have a negative experience they discover investor protection is inadequate.
The small investor voices included in this report are excerpts selected from the many communications received since SIPA was founded in mid 1998. These voices are representative of the hundreds of voices that have been heard and come from all walks of life including doctors, lawyers, health care workers, teachers, widows, and seniors. From all these voices a composite perception of the investment industry has evolved.
The Canadian public does not understand how the regulatory system works. There is great disparity across the country and amongst the dealers, mutual fund companies, insurance companies and banks. Investors do not know where to turn. The Wise Persons Committee Report issued in December 2003 calls for a Canadian federal regulator to provide consistent regulation for all Canadians and a united Canadian voice in the global marketplace.
The lack of investor awareness is acknowledged. Attempts at investor education will not resolve the underlying problems of industry wrongdoing faced by small investors, but the small investor needs to become aware of the risks that are not market related. Canadians are busy with earning a living and participating in family life. The investor trusts his advisor and trusts our government to provide industry regulation and control.
The investment industry tends to follow widespread practices that are contrary to the rules and regulations and not in the best interests of small investors. These practices are being exposed in the United States. Canadian investors are becoming aware that these same issues are prevalent in Canada. Our Canadian society is based on trust and that trust is being betrayed by the investment industry.
The primary complaint of the small investor is that he placed his trust in his advisor but his advisor seemed more motivated by commission generation. Fiduciary duty has been breached. This has resulted in the serious erosion of savings with the resultant negative impact on lifestyle.
Investors have found that it is not clear how complaints are dealt with and it is difficult to get an appropriate response. Those who complain are stalled and encounter delaying tactics. Dispute resolution mechanisms are ineffective and tend to be industry sponsored.
Investor losses amount to billions of dollars. The BCSC estimates $100 million annually in 'reported losses' in British Columbia. Many small investors are not even aware that they have had a negative experience as a direct result of industry wrongdoing. The amount of investor losses has not been quantified and the public is not aware.
The small investor needs a federal agency to provide investor protection that is fair to all Canadians. It is not acceptable that the agency be industry sponsored or employ mainly industry staff. It must be sympathetic to investor needs.
Too much time and too much money, with too little public debate is being invested in unending discussion that is unlikely to improve investor protection for Canadian citizens and could very well reduce it.
1. Investor Protection – What does the small investor think?
The small investor believes the industry is well regulated and that the authorities provide investor protection through agencies governed by legislation. He does not know exactly who is responsible for regulation or what protection is provided, but he has faith that if there is a problem and he brings it to the attention of the appropriate authorities the problems will be resolved. With this belief he places his trust in the investment industry.
|"I truly believe that the vast majority of people just are not aware of how unprotected we are. They falsely believe that our laws will protect them against criminals. On the other hand, people tend to be protective of their money. Their failing is their faith (in) people." – A small investor|
Initially the small investor is not aware that investor protection is largely delegated to industry self regulatory organizations (SROs) and that the regulators will not get the investor's money back. The small investor does not learn how the regulatory system works until he encounters a problem. By then it is often too late to provide any benefit.
|These 4 years have been a horrible nightmare, a lifetime of hard work and saving and dreaming is gone. What has happened to me seems incredible. Not only is my money gone, but also the broker continues to work and the wheels of justice just don't seem to be working at all. – A small investor|
The Canadian Securities Administrators (CSAs) are the provincial organizations responsible for enforcing securities legislation. The function of the Ontario Securities Commission (OSC) is typical of the provincial securities administrators.
The OSC administers and enforces securities legislation in the Province of Ontario. Their mandate is to:
- Protect investors from unfair improper and fraudulent practices
- Foster fair and efficient capital markets
- Maintain public and investor confidence in the integrity of those markets.
Most CSAs delegate supervision of the dealers and companies to Self Regulatory Organizations (SROs). The SROs serve as trade associations as well as regulators.
The Investment Dealers Association (IDA) is one of Canada's SROs and bills itself as "Canada's national self-regulatory organization for the securities industry". The IDA claims to regulate the activities of investment dealers and states that Investor protection is a top priority.
The IDA's stated mission is to protect investors and enhance the efficiency and competitiveness of the Canadian capital markets. However it also states "Under supervision of securities commissions, it aims at a balanced approach to regulation taking into account the often complementary, but occasionally conflicting, goals of investor protection, efficiency and competitiveness. And it achieves its objectives, in the public interest, at no cost to the investing public."
The SROs have an inherent conflict of interest because they represent the industry yet claim to afford investor protection. Talk of a balanced approach suggests that investor protection will be traded off when it conflicts with benefits for industry participants.
The Wise Persons Committee Report states -
The adequacy of Canada's enforcement has been seriously questioned for some time. The criticism intensified following the wave of corporate scandals in the United States involving companies such as Enron, WorldCom and Tyco. In Canada a number of high-profile corporate scandals have also occurred, including Bre-X and the massive fraud it represented. There is a perception both in Canada and abroad that serious misconduct in Canada too often goes unpunished. "
The Wise Persons Committee Report also incorporates a statement submitted by Jarislowsky Fraser Limited of Montreal, Quebec:
The greatest weakness of the regulatory system is that it does not protect investors.... There is ever more red tape and no real enforcement! The crooks rarely go to jail....
The Wise Persons Committee also comments on the failure of the current regulatory system to provide equal investor protection for all Canadian citizens due to the lack of a central regulatory authority:
Why should Canadians in one province have different standards of legislated investor protection than in another?
Regional differences in enforcement also result from disparate enforcement budgets and levels of expertise among the regulators. Robert MacLellan, former chair of the Nova Scotia Securities Commission and former vice-chair of the CSA, notes in his submission that the disparity in enforcement resources diminishes investor protection, stating that if a "local regulator does not have the resources to ensure and enforce compliance, the investor's rights are 'rights' in name only".
We believe that inadequate enforcement is one of the most significant weaknesses of the current system. Enforcement resources are inefficiently allocated. Coordination difficulties can both impede investigations and result in a multiplicity of proceedings, leading to further inefficiencies and potential injustices to respondents. Investor protection suffers from a lack of uniformity. There is no legitimate reason why investors should have different protection depending on the province in which they happen to live.
In terms of investor protection, the problem with the current regulatory system is that those involved speak of a balance between fostering capital markets and investor protection. This applies to finance ministries as well as to the CSAs and SROs. When self-regulation is delegated to the industry there is the risk that it will be self-serving. Feedback from small investors suggests that is so.
With the SROs providing investor protection there is a fundamental conflict of interest. They may say that investor protection is important but the primary purpose is to act on behalf of industry participants. There are countless situations where seniors and others with limited income are being preyed upon by unscrupulous "financial advisors" who appear to have no sense of ethics or morals and seem motivated only by profit.
Letter to Compliance Officer Mutual Fund Co.
This fund was purchased December 18, 1998 for $150,000 and sold July 9, 1999 for $99,978.20 ... a loss of more than $50,000.
As a senior of 78 years I don't feel this was the right type of investment for me, as I cannot afford this type of loss. – A small investor
There are many situations where widows in their 70s, 80s and 90s have been taken advantage of by ruthless financial predators and these actions are condoned by managers and compliance officers.
Adequate investor protection will not be provided by the industry or industry sponsored agencies.
Agencies that strive to achieve a balance between Investor Protection and fostering capital markets will fail to provide adequate investor protection. Industry sponsored agencies have an inherent conflict of interest. To provide effective investor protection a regulator must have that as a primary function and be independent from industry.
2. Small Investor Voices – What do the voices say?
The voices of the small investor say that their trust in the investment industry is being betrayed on a regular basis due to practices that are condoned or even demanded. These practices are widespread and include the use of leverage, discretionary trading without authority, inappropriate securities, and failure to follow instructions or Know Your Client (KYC) criteria. Falsified KYC information such as total assets, annual salary, and risk tolerance is not uncommon. Even forged signatures are not unusual.
|His boss, who happened to be a Director of the Investment dealers Association and chairman already of the Discipline Committee, promised a "forensic investigation" the product of which has stalled ever since. I accused my then broker of churning $60,000 in commissions out of my account in 1996. I'm debating with myself whether to sue over that and a dozen items of damages. ... I am retired; I practiced law for some 45 years and am now contemplating litigation. – A small investor (lawyer)|
There are widespread practices across the investment industry, including securities dealers, mutual fund companies, insurance companies and banks, that are leading directly to significant small investor losses. Canadian citizens from all walks of life are losing their savings because they have placed their trust in the investment industry.
Banks seem only too willing to provide loans or mortgages to small investors at uncompetitive rates when requested by investment advisors even when the investments are inappropriate as long as the bank sees sufficient security for the loan. These arrangements often include the right of the investment advisors firm to sell out the small investor if the value of investments guaranteeing the loan deteriorates to a point where the bank could be at risk.
Many of the products sold to small investors are totally inappropriate given the circumstances of the investor. The selection of product often appears to be based upon commission generated rather than client needs.
Hundreds of small investors have contacted SIPA by telephone, letter and e-mail. The telephone messages are not recorded but are similar in substance to written communication received. It is improbable that investors will gain sufficient investment knowledge to avoid the pitfalls of an investment system that fails to provide adequate investor protection. A sampling of the many comments received is included in Appendix II.
From these many stories SIPA has developed a composite profile of the small investor. These stories have come from doctors, lawyers, dentists, professors, teachers, professional managers, workers, trades people, bus drivers, widows, retired persons, new Canadians ... a good representation of Canadian society.
The one common element of all of these small investors is that they trusted their investment advisor. They may be professionals with professional obligation and expect no less I return. They may be simply too busy with their work and family to have the time to learn about investing. Or they may have little education and need to depend on others for help. In all cases they believe Canada is a society in which citizens can place their trust in our systems.
|We naively assumed we were dealing with people who were totally open, moral and ethical. We assumed that the accountants and lawyers involved would protect our interests and warn us of the pit-falls. After all, I was a busy preacher; my wife was a busy teacher. Our religion taught us to have faith and trust in people. I now know this is false teaching. – A small investor (minister)|
Initially the small investor:
- believes the industry is well regulated
- believes the authorities provide investor protection
- trusts his investment advisor
- is not aware of the different types of risk
- is not familiar with the many products being sold
- does not understand account statements and depends on the I.A.
- believes that any problems can be easily resolved
When a problem arises:
- he approaches his I.A. and the I.A.'s company for resolution
- is surprised by the reaction of those he trusted
- finds compliance officers support the firms and do not help the client
- feels betrayed and humiliated
- does not know where to turn
- still believes the regulators will resolve his problem
- finds the regulators are slow to investigate if at all
- discovers the regulators will not get his money back
- finds the ombuds service little better than compliance officers
- discovers arbitration is not as good as advertised
- discovers criminal litigation will not get his money back and is not likely to happen
- discovers civil litigation is the best solution
- learns that civil litigation is a long costly process
The problems revealed by the voices of small investors across Canada suggest that investor loss due to industry wrongdoing is of great magnitude. This is impacting on the lives of many Canadians. Instead of small investors becoming financially independent and providing for a comfortable retirement, many are losing their savings and becoming more dependent upon social services. Many lose not only a lifestyle for which they have worked and saved for a lifetime, but many lose their health, their family and their hope. Some lose their lives.
3. Regulation – How does it help the small investor?
Many small investors do not understand how the regulatory system works or who is responsible. Although Investment Dealers, Mutual Fund Companies, Insurance Companies and Banks all seem to sell the same products, they fall under different regulators so the small investor has difficulty in determining who is responsible when they need help from the regulators. Many do not realize that the regulators either do not have the authority to order restitution in cases of industry wrongdoing or if they do are unwilling to use it.
In the fall of 1994 we realized we were being taken. We tried to contact the OSC without success at that time. Next we tried going through our M.P.P. nothing. Again in 1996 we tried our second M.P.P. his reply was to give us the phone number of Consumer Affairs. They responded that it didn't fall under their responsibilities. We then tried the Investment Dealers Association. Their rude reply was that they don't deal with individual complaints from the public.
Next was the Investment Funds Institute and they helped as a third party going between ourselves and the fund companies in obtaining copies of our investment transactions.
Again we contacted the O.S.C. in February 1998 with a letter. The file was passed on to a couple of people. In December 1998 the O.S.C suggested if we want to recover any of our money we should seek legal assistance and that they would provide as much help to our lawyer as they could. We should also contact Big Broker's compliance Officer, which we did. He told us we should have complained while our advisor was still employed with them and they consider the file closed. – A small investor (bus driver)
The investment regulatory system is largely a provincial responsibility. Each province has a securities regulator, or provincial securities commission responsible for administering the provincial Securities Act. These acts vary from province to province. Some of the regulatory responsibilities are delegated to self-regulatory organizations such as the Investment Dealers Association and the Mutual Fund Dealers Association.
The regulators tend to be staffed by industry people who often migrate between the regulators and industry participants. While many argue that it is necessary to staff the regulators with individuals that have industry experience, the result is that the regulators often seem industry biased.
|Our question to the O.S.C is: Does (Big Mutual Fund Co) not have a responsibility to their clients to see that their representatives act in the best interest of their clients? What kind of ethics does (Big Mutual Fund Co) have? – A small investor|
The public is led to believe that our regulators provide investor protection. Yet they are let down when they encounter a problem and try to find resolution.
|This has left me at my weakest, most vulnerable and depressing time of my life without proper funds. The Ontario Securities Commission and the Investment Dealers Association could not help which has further deepened my depression. When I tried to resolve this problem I was in pain, sick, low in funds and saw no way out. Suicide seemed to be my only solution. ... - A small investor|
There is currently much discussion regarding centralized regulation or regionalized (provincial) regulation. There are strong arguments put forward for both alternatives and the Canadian Securities Administrators are far from being unanimous in an opinion. The Stromberg Report of 1998 recommended a federal regulator and this is supported by the OSC. SIPA has always supported this option. However both the BCSC and the CVMQ are strongly opposed.
The Wise Persons Committee Report of December 2003 also supports the centralized regulator with a Uniform Securities Act to provide equal treatment for all Canadians and a unified voice for Canada in a global market.
Whether the regulatory system is centralized as a federal system or whether it is regionalized with harmonization, as is being promoted by many in the industry, any system will not materially change the situation for the small investor if enforcement and investor protection are not improved.
As long as the regulators fail to adequately audit industry participants accused of wrongdoing related to small investor losses, don't have a mandate to order restitution when wrongdoing is discovered, and delegate investor protection to industry sponsored agencies, small investors will continue to suffer.
Many Canadians hold the opinion that the United States Securities and Exchange Commission is a superior approach to industry regulation. While that may be so the Office of New York State Attorney General Eliot Spitzer has recently shown that investor protection has been sadly lacking south of the border as well as in Canada. Spitzer has recently taken action against the investment industry because of the failure of the investment industry to provide adequate investor protection.
The Attorney General's Investment Protection Bureau is charged with enforcing the New York State Securities Law, commonly known as the Martin Act, which protects the public from fraud by regulating sales of investment securities in New York and by requiring brokers, dealers, salesmen and investment advisors to register with the Attorney General's Office. Where appropriate, the Bureau's attorneys undertake investigations, criminal prosecutions and civil litigation on behalf of the investing public.
The activities of the Bureau have resulted in the levying of major fines across the industry and highlighting the widespread investor abuse. There is no doubt that the same situation prevails in Canada. We lack a Canadian Eliot Spitzer with appropriate enabling legislation to provide investor protection.
Bill Hanley wrote in the National Post today:
"When there is a void and you have an enormous issue that is going unaddressed and there is exposure for small investors, somebody has got to step in and do it," Mr. Spitzer told an interviewer recently. "The reality is that other people should have done it first and yet they didn't."
When an industry fails through self-regulation to ensure that participants operate in accordance with acceptable moral and ethical codes to establish best practices and provide adequate investor protection, there is no alternative except to provide legislation for a regulatory system that is independent from industry that has the power to provide investor protection for all Canadian citizens.
4. Investor Awareness – What does the small investor know?
Most small investors have a limited knowledge of investing or the risks associated with various investment products. Financial education has not been a part of the Canadian educational curriculum. Canadian citizens are not prepared to deal with the investment industry. They are not aware of how industry participants are regulated or who is responsible for regulation. They are not aware that the industry is commission motivated and that the industry is more interested in selling financial products than providing advice and service beneficial for small investors. The additional risks of leveraged investments are also not understood. Instead the small investor believes he can place his trust in his investment advisor.
I had my accounts transferred to an account under his jurisdiction. This arrangement went all right for a while until he found he couldn't contact me when he felt I should be making a trade because I was traveling most of the time. He then suggested I consider giving him authority to operate my account on a discretionary basis, which I did. I understood he would watch all the stocks, etc. that he got me into and make the trades he felt were timely, even taking a loss sometimes to get into something else.
The discretionary account went on for quite some time and he would send a transaction slip each time he made a trade. Operating this way I had no knowledge of the stocks he purchased for me, but I trusted him. – A small investor
Most Canadians lead extremely busy lives. With job responsibilities and family responsibilities there is little time to learn about investing. Also, there are so many products being sold that is difficult for the average Canadian to spend the time to become familiar with what is available to be in a position to make appropriate decisions.
At the same time the small investor is bombarded with advertising that suggests he can trust in the investment firms and that the investment advisors are there to help you accumulate wealth for your future.
Canadian society is based on trust. The small investor believes he can trust his investment advisor. He depends upon his advisor for advice and guidance. If the advisor recommends he take a bank loan or mortgage loan to invest because that is how the wealthy have achieved their fortune, he believes this to be true and acquiesces even though he may have some reservations.
Many small investors lack the knowledge of how the regulatory system works and end up placing their trust in their investment advisor and relying on him to look after their best interests.
The investor's lack of awareness and trust in the industry is not only anecdotal. Proof may be found from many sources.
The Investor Education Fund provides the following:
Gaps in basic and financial literacy leave consumers vulnerable to any number of potential problems; for example: mismanagement of credit, churning within their investment portfolio, or even vulnerability to fraud.
Studies have found that Canadians, Americans and residents of the UK score poorly when surveyed for financial literacy.
- Only twenty percent of Canadian investors claim to be "very knowledgeable" about financial, investment or money matters. This figure has remained more-or-less constant since 1994
- A 1997 poll found that sixty-seven percent of adult Canadians do not have a financial plan for retirement. The same survey found that eight-four percent of Canadians did not know the RSP allowance for foreign content4
- A survey conducted for the Canadian Securities Administrators in 1999 found that fifty-five percent of Canadians incorrectly believed that mutual fund investments are insured by the Canadian Deposit Insurance Corporation
- An American Survey conducted two years ago found that over fifty percent of investors, there, lack the basic knowledge to make good investment decisions. This number has remained the same for six years
- Only one in five US investors passed an investment quiz sponsored by the Securities Investor Protection Corporation and the National Association of Investors
- In a controlled study conducted at Cornell University, less-well informed investors were revealed to be overconfident in comparison to the more well informed
- In the UK, forty percent report difficulty understanding financial information
- Thirty-eight percent had no idea how much they would need to save to maintain their expected lifestyle in retirement
During the Ontario Securities Commission investigation into the penny stock dealers one of the registered representatives, Norm Frydrych, who had worked for Marchment and MacKay gave testimony in which he stated:
|"I was able through the selling technique to load a client with securities based on the price increase of the stock from the time that it was initially purchased and by soliciting the customer's trust. It was not necessary for me to say very much about the securities themselves. Many customers relied on my recommendation to buy more securities."|
The RBC/Ipsos-Reid found that:
36 per cent of Canadian RRSP investors are not sure of the current value of their portfolio. Twenty-one per cent of investors also revealed that they do not know the current rate of return on their RRSP. The poll also found that 51 per cent of Canadian RRSP investors have RRSP investments in mutual funds, with 36 per cent having mutual funds as the greatest portion of their portfolio. However, 41 per cent of investors do not know what type of mutual funds they hold.
In the United States a recent NASD survey revealed that
- almost all (97%) said it was important to increase their investment knowledge, and nearly half (44%) called it "very important"
- almost half (45%) said they could have avoided a negative experience in the market had they known more about investing at the time
- only 35% of investors answered at least seven out of the ten of NASD's Basic Market Knowledge questions correctly
only a fifth of investors (21%) correctly identified the definition of a "no load" mutual fund and over a third (37%) would not venture to guess
The NASD survey suggests that almost half of the investors surveyed admitted they had a negative experience because of their lack of awareness. It is probable a survey in Canada would produce similar results.
Canadians tend to believe in honesty and truth. They tend to trust their fellow man. This trust is portrayed in society by the way we live. Canadians tend to believe in the spoken word and rely more upon what they are told by the individual they deal with rather than the written word that has been prepared by someone they have never met.
However as Canadians become increasingly aware of widespread wrongdoing in the investment industry the erosion of confidence will continue. They are learning that often they would be better off if they had avoided the investment industry. Many former investors in the investment industry have opted for that approach and are now "out of the market". This tendency was developing before the recent downturn and is likely to accelerate.
Glorianne Stromberg states in an article entitled "Listen up, Bay Street in the Toronto Star:
The reality is that many people would be better off in the long term (or at least no worse off) if they confined their investments to Government of Canada bonds and bank deposit certificates rather than expose themselves to the increased risks and expenses embedded in many of the products and services offered by financial services providers.
It is not enough for regulators to suggest that investor education is the solution to the small investors' problem. Most Canadians are totally occupied with their profession or earning a living and raising a family. We live in a society that has a reputation for fairness, civil liberty and justice. Canadians old and new depend upon our government to provide a safe society. We are a great attraction for refugees from around the world.
It is fair to say that investor awareness must be improved. Our educational system should prepare Canadians for handling personal finances. However as long as we purport to have a society that is based on trust we must also have a regulatory system that provides protection for citizens against being cheated by those who would scoff at our laws and ignore accepted moral and ethical codes.
5. The Investment Industry – What is the small investor's perception?
The general perception of the small investor is that the industry is well regulated and that they can place their trust in their financial advisor. This perception is fostered by the industry. Canadians are bombarded with advertising on T.V., newspapers and magazines that promote the benefits of investing. The advertising convinces the small investor that the investment industry will provide the means to have their savings safely invested for growth to provide security and a comfortable lifestyle for their retirement years.
I started investing with (Reg Rep) in 1986 when he was with (Big Broker). He changed brokerages from (Big Broker) to (Big Broker 2), next to (Big Broker 3), then to (Big Broker 4), which merged with (Big Broker 5). Each time that he changed brokerages he would send me new forms to fill out; I would always fill them out and send them back without question – He had my trust.
(Reg Rep) was in a respected position of trust; first as Vice President of the company and secondly as my financial advisor. He abused this relationship. You would think that as Vice President of a company and financial advisor that he would have carried out the terms of (the Big Brokerage Management Account), which was to preserve my capital and income, in a more prudent manner. I am sure there are other investors that are having the same set of problems or did have the same problems. – A small investor
Many Canadians are still trusting of the investment industry but are not aware of the risks involved in borrowing to invest. Many small investors succumb to the siren call of the lending institutions to borrow for investment. In particular seniors are susceptible to this ploy and often are granted loans that are totally inappropriate when the investments for which they are utilized have a degree of risk that is inappropriate for seniors or others with insufficient earning capacity to repay the loan.
Until the small investor is burned he believes that the investment industry provides a service to help him grow his assets. Recently more and more investors are becoming increasingly dissatisfied as they realize the erosion of their savings is not so much due to market trends as it is due to widespread practices and wrongdoing in a commission motivated investment industry.
With recent revelations of wrongdoing in both the United States and Canada, there are a growing number of small investors who no longer trust the industry or the regulators. There are many who have withdrawn their savings to invest in Canada Bonds, other cash investments, or other forms of investment including real estate.
Many younger people are reluctant to invest as they have already experienced loss and now question why they should invest their hard earned money to see it wasted away by so-called investment advisors.
Older investors, who have lost substantial portions of their life savings, are prepared to speak out in the hope that they can help other small investors avoid the disastrous losses they have experienced.
Glorianne Stromberg states in an article entitled "Listen up, Bay Street ":
The lack of trust in Wall Street (and by extension Bay Street) is said to be unparalleled since the 1930s. Polls indicate that a growing number of people believe the stock market is no longer a fair and open way to invest one's money and that the market is rigged by and for insiders. A recent New York Times article bluntly stated that the hidden hands of speculators profiting from bad-news rumourmongering, good-news insidership, and no-news accounting has made markets unsafe for ordinary investors.
Arthur Levitt, the former chair of the U.S. Securities and Exchange Commission, refers to the failures that the corporate scandals have revealed as "societal." These failures, he says, reflect a deterioration of values and the recognition that many people have no standards or values, which is something we should all be gravely concerned about.
Many are becoming concerned about the apparent moral breakdown amongst the business leaders in our society. It has been said that some of our leaders are amoral and not concerned with moral and ethical distinctions. They have no sense of right or wrong.
David A. Brown, Q.C., Chair, Ontario Securities Commission, has also played a role in the Canadian Centre for Ethics & Corporate Policy as a member of the Board of Directors and later as Executive Director. In his remarks "Beyond Product Sales: Considerations Other than the Bottom Line" to the Centre, in Toronto on April 1, 1999, he stated:
The basis of any ethical system is values; including the way individually and corporately we treat one another on a micro and macro scale, the manner in which we support the larger community and the care with which we preserve or restore this fragile planet, our home.
Founded in 1988, the center is dedicated to promoting and maintaining an ethical orientation and culture in Canadian organizations with a mission to champion the application of ethical values in the decision-making process of business and other organizations.
In her New Year's message Governor General Adrienne Clarkson said:
The public good is expressed in the way we live ... we can look confidently towards the future in whatever we do if we know that we have anchored ourselves today in what is good and what is right. Let's make 2004 a year in which we all reflect on what we've done in the past. And go forward as Canadians with our values, our acceptance and our dreams.
Some leaders of the investment industry have displayed a widespread practice of greed and dishonesty. Corporate fraud and breaches of securities laws appear rampant. There are fears that moral and ethical codes are breaking down in our society. It is time for Canada's leaders to take affirmative action to prevent further degeneration of Canadian society.
6. Investor Complaints – What are the small investor's complaints?
The fundamental complaint of small investors is the breach of fiduciary duty. Some of the hardest hit are doctors, engineers, health care workers and others with a strong sense of social responsibility. Most Canadians with a sense of social responsibility conduct their lives within the law and following long established moral and ethical codes. Most religions encompass teachings that are fundamentally the same. Killing, stealing, and harming your neighbour are considered not right. Canadian citizens expect no less when they entrust their life savings to an investment advisor.
I have depended upon (Big Bank Brokerage) for investment advice and my account lost $20,000 plus from December 16, 1996 to May 5, 1997. The loss becomes even more significant when calculated on a percentage basis, predicated on total account dollar values.
Amongst other things I believe (Big Bank Brokerage) have breached their fiduciary duty. At age 67, and retired, capital preservation is important for future security. – A small investor
|It is my understanding that Big Bank Brokerage and my broker, Reg Rep, have a fiduciary duty to their clients to ensure that their financial interests are fully safeguarded. Big Bank Brokerage and Reg Rep both failed in that duty. – A small investor|
Canadians believe that their investment advisor is professional and therefore place their trust in him. When fiduciary duty is breached and their trust is betrayed the small investor suffers a loss that is much greater than financial and results in disillusionment. It often takes several years for a complaint to be formalized. Investors do not generally complain until they have lost significant amounts of money. By the time the money is gone it is too late to take preventative action. Recovery is never easy.
The common complaints are that the amount of the account has suffered serious degradation. In most cases the investor has been concentrated in one product or one type of product and often has been leveraged with a bank loan, a mortgage loan, or a margin loan. In all cases the investor has trusted his investment advisor.
The circumstances are common whether the product is mutual funds, securities, limited partnerships or other financial product.
Many investors complain that the Investment Advisor
- Did not explain the products fully
- Did not complete a Know Your Client (KYC) form and return a copy
- Did not explain the risks associated with the investment
- Did not provide a prospectus
- Failed to provide meaningful reports
- Did not revise the KYC form when there were major life changing events
- Overstated income and assets in the KYC form
- Made discretionary trades without authority
- Failed to act on instructions
- Encourage investor to borrow for investing
- Traded excessively to generate commissions
- Purchased inappropriate securities
Most complaints are the direct result of breach of fiduciary duty. By the very nature of their business, Investment Advisors have a fiduciary duty to clients. Their failure to properly exercise this duty leads to major financial losses and negative impact on investor's lives. The current regulatory system fails to provide sufficient disincentive to discourage regulation breaching.
|With my father's limited investment experience (until the above unfolded, he had never invested in mutual funds or the stock market) and limited education (grade 7), I tend to get called upon in times of financial or legal confusion, which is what my father did when he began to suspect that something wasn't quite right. I firmly believe that (Big Brokerage)'s actions were unprofessional, and very possibly illegal, but I'm frustrated at not knowing where to turn. I've thought about suing them, but neither my father nor I have the time or money to put into a court battle. - A small investor's son|
To reduce the number of complaints it will be necessary to eliminate the major cause. Revising the regulatory system by providing for the effective prosecution of those who flagrantly breach the law would eliminate many complaints. It should not be profitable for anyone to breach the law as that simply encourages rather than discourages those who are prepared to ignore moral and ethical codes in the quest for greater profit.
7. Dispute Resolution – What is the experience?
Small investors are often slow to make a complaint. They have placed their trust in an industry and find it hard to believe that something could be done that is wrong. As most small investors do not talk to others about their investments they are not aware of the issues that many others face. When the idea that something could be wrong is finally precipitated either by a news article or a comment by others, they do not know where to start to have their dispute addressed.
|We have found out with our case there are at least three others with the same complaint about the same broker. It was very difficult to find out what to do, where to go, and who didn't have a conflict of interest just to get the ball rolling. – A small investor|
|I was advised to inform the manager of this brokerage firm what had happened; and when I did he said he would settle things. To date this has not occurred. Then I was advised to contact the Ontario Securities Commission and all they did was forward my letter of complaint to the Investment Dealers Association. The initial investigator indicated to me that there were problems with my account. My file is now in the hands of another investigator and nothing is being done. – A small investor|
Investors often find out that it is difficult to get professional help because most of the large firms are committed to helping the big companies. This results in an uneven playing field and a reduction in the small investor's chances of gaining a just and fair resolution of the dispute.
Many investors who have suffered loss have approached their investment advisor, his manager and the compliance officer in the hope that they will receive reasonable consideration. They often find that there are extensive delays.
|His boss, who happened to be a Director of the Investment dealers Association and chairman already of the Discipline Committee, promised a "forensic investigation" the product of which has stalled ever since – A small investor|
Based upon feedback from small investors, the initial response often seems sympathetic with an explanation of why nothing can be done about the investor's loss. Common reasons are:
- It's the market
- Nothing wrong was done
- He is the only one to complain
- He was aware of what was going on
- He waited too long to complain
- It's too late to take corrective action
- The investment advisor has a different story
- The investment advisor no longer works there
If the investor insists that something must be done, the company may offer to refund some of the recent commissions or even make a small cash settlement to show how they value their clients. The amount will normally be less than 10% of the losses and this is done only in cases that appear to be a blatant disregard of the rules and regulations.
Compliance officers tend to sound sympathetic but appear more intent on protecting the firm and not so interested in investor protection. They often bring up the same arguments, and then place the blame on the investor. The "could've - should've" argument is introduced. You should have been checking closely. You could have checked what your advisor was doing. Many investors actually begin to believe they are at least partly to blame.
One Compliance Manager writes:
"Up until I received your phone call and then letter in October of 1998 we have no record of any complaints from you on file. If you had come to management back when you say these unauthorized trades started taking place, the problem would have been looked after."
It is not unusual for compliance officers to make false statements to dissuade clients from pursuing complaints. They are there to protect the company. It is apparent that they are not interested in resolving the dispute in an equitable fashion, but would like to dismiss the dispute by any means possible short of offering appropriate restitution.
After repeated non-productive contacts with the Manager I telephoned the Compliance Department of (Big Brokerage) on October 12th and was advised by the Compliance Officer there was no record of the complaint on the computer. He agreed to accept a fax of my correspondence with the local manager and ensure I received a confirmation. On October 19th I telephoned the Compliance Officer who informed me that the file was in Ottawa with the Complex Issues Manager. She advised that she would get back to me within the week.
I do not feel I can afford arbitration but I definitely will file a grievance with the Securities Commission. I feel these large companies are aware that on smaller accounts the legal costs for arbitration are prohibitive. – A small investor
At worst the small investor is treated with arrogance and is intimidated or humiliated. He may be told to try litigation that they will defend vigorously with resultant delays and costs. Many treated in this fashion will not proceed further with a complaint.
|Out of weeks of despair, work, stress, and worry and concerned that his (I.A.) latest promise was not kept in an attempt to discourage us, I telephoned you on April 16 to bring this matter to your attention. Needless to say I was astounded by your abrupt, bullying and belligerent tone – A small investor|
Investors who do not buy into these arguments may then move on to the ombudsman if the firm has one. They may find this route a little more pleasant but inevitably will discover that there exists the problem of lack of written evidence and the investment advisor's recollection is often at variance with the complainant. In the case is settled in this way the restitution is generally pennies on the dollar. However it does avoid the need to proceed with civil litigation, is low cost and provides some closure. Feedback indicates the ombudsman is similar to the compliance officer but a little friendlier. The end result is not much different.
The Ombudsman for Financial Services and Investments is the final step in this process. OBSI claims to be objective in resolving disputes and also claims to be quite successful. However feedback suggests that this industry sponsored service may still have some shortcomings. There is also the problem of Advisors recollection of events being at variance with that of clients and this often results in action not being taken. An ombudsman letter to a small investor refers to this issue:
Both (Registered Representatives) specifically deny that you instructed them not to sell any of your shares. They also deny that you requested a follow-up letter.
(Registered Representative) denies that you made the telephone calls that you say you made upon receipt of the various confirmation slips.
Clearly there are many critical points of disagreement between your version of events and that described by (Big Bank Brokerage).
The "could've - should've" argument is also used to suggest that the investor should have taken action to mitigate the loss when he learned that something was wrong. Many investors will accept this argument and accept a proposed settlement. They are unaware that a Supreme Court decision has held that the investment firm is responsible and can't lay the blame for losses on the investor while the account is still open.
Those who proceed to the regulators find that the regulators will only investigate to determine if the rules and regulations have been breached but will be unable to get the small investor's money back. They will helpfully suggest that civil litigation is available.
Those who address their complaint to an SRO often find they are met with extended delays, a lack of transparency, and often a decision that seems biased towards the industry. The industry operates on verbal transactions and it is common for the Investment Advisor's recollection of events to be at variance with the investor's. In these situations the SRO refuses to make a decision based on probability (that the Investment Advisor is lying) and closes the file saying there is not sufficient evidence that the rules were breached.
The feedback received from small investors is that the IDA takes a long time to investigate a complaint and accepts its members delaying the submission of documentation required to complete an investigation. Members of SIPA have reported that some of these investigations take over a year.
|The IDA has finally granted me an interview, however, not until the week of January 14, 2002. I was hoping the IDA would be able to do this in less than 14 months after the initial complaint. – A small investor|
These investigations are not open and the parties are questioned separately. In some cases investors are not even questioned.
In many cases the I.A.'s recollection of events is at variance with that of the investor. The IDA does not rely upon probability or other facts but relies upon the veracity of the I.A. In these cases the IDA simply says there is not sufficient evidence to prove that the rules have been breached and closes their file.
SIPA has received documentation from a senior who suffered significant loss when the broker purchased equities for his account. The average knowledgeable investor would have considered many of these equities to be inappropriate for a senior and the asset mix to also be inappropriate. A senior officer in the brokerage firm wrote a letter stating that each of the equities purchased for the senior was appropriate even though a significant loss was incurred.
The subsequent IDA investigation that took over a year admitted in writing to the senior that some rules had been breached. The IDA assured the senior that action was being taken and that a "letter of reprimand" was being issued. The brokerage was a major bank owned brokerage. This action was meant to satisfy the senior but letters of reprimand are not made public. Not only was the senior's problem not resolved but also there was no deterrent to repeat rule-breaching activity.
A private interview with an IDA inspector provided some insight into regulatory problems. This investigator had several years of police investigation experience and took the Canadian Securities course in preparation for a change in career to carry out investigations in the investment industry.
Having completed an investigation he returned to the IDA and prepared a written report outlining his findings in detail. He was surprised when his manager told him he would have to rewrite his report. He questioned why there was a need to re-write his report when he was only reporting fact as a good investigator is taught to do. He was told that it was unacceptable to submit a report like this about that particular firm.
The investigator found that he was not alone. Other investigators had the same experience and faced a choice of making compromises or seeking employment elsewhere. This investigator left his employment with the IDA and sought employment elsewhere.
|I was advised to inform the manager of this brokerage firm what had happened; and when I did he said he would settle things. To date this has not occurred. Then I was advised to contact the Ontario Securities Commission and all they did was forward my letter of complaint to the Investment Dealers Association. The initial investigator indicated to me that there were problems with my account. My file is now in the hands of another investigator and nothing is being done. – A small investor|
Even when the Investment Advisor is disciplined there is no mechanism to provide restitution and the small investor is left with few options.
The best available solution is civil litigation. There are very few complaints that actually reach court and result in decisions that are made public. This helps to reinforce the public perception that the industry is well regulated and deserves public trust.
There are reasons so few cases reach court. The industry employs delaying tactics to run up the costs and frustrate the small investor. They defend "vigorously" cases that seem indefensible. The Plaintiff sees that it will take many years and incur large legal bills to achieve a court decision. Often a trade-off is made to accept a partial settlement for a quick resolution.
There have been several significant decisions in favour of small investors during the last several years. However the case of Armand Laflamme illustrates how unsuitable this process is for seniors. The Supreme Court issued a 7-0 decision that Prudential should pay Laflamme the total of his losses, some $2 million. Laflamme started his action at 61 years of age. He was 71 years when he received the decision. He had spent at least 25% of the rest of his life, the best years, fighting a protracted legal battle. These should have been his golden years.
Many of the court decisions substantiate what the investors' voices are saying.
An article by Derek DeCloet in the Financial Post March 12, 2002, entitled "Judge slams TD Evergreen compliance" quotesJustice Peter Hambly of the Ontario Superior Court of Justice.
"Their investigation of the complaints of Melville Hunt and Marion Hunt that Mark Schram sold their BCE stock without authority was a sham," ... "The letters of Robert Strickland and Jacqueline Hatherly are patronizing, demeaning and insulting," wrote Justice Hambly. "In a word, the conduct of compliance is disgusting. In dealing with the complaints, Toronto-Dominion Evergreen did not comply with their fiduciary duty to the Hunts."
Note: Justice Hambly found in favour of the Plaintiff.
Justice Morneau's judgment on the Lizotte v. RBC Dominion Securities case in November 11, 1999 reads in part:
"Although certain commitments were made in 1994, ... , some of the documents had still not been sent at the time of the trial. The defendant claimed at the time that they did not exist. Their sudden appearance during the hearing and the fact that they were available to witnesses for the defence in the meantime point not only to the defendant's reluctance to submit to the judicial process, but to its resistance to doing so. ... This behaviour is shocking and inexcusable.
The Court sees here a deliberate effort on the part of RBC to wear down, not to say exhaust, the plaintiff in order to evade its responsibilities. ... The defendant's attitude throughout the case, including its tardy tender, justifies the plaintiff's fears. Despite its initial reticence to consider the possibility of complying with this request, the Court believes that the circumstances justify ordering provisional execution of part of this judgment, notwithstanding appeal. The Court is convinced, in fact, that otherwise the plaintiff will sustain serious and irreparable injury through the repetition by his powerful adversary of the manoeuvres proven in the first instance."
Note: Justice Morneau found in favour of the Plaintiff.
The Wise Persons Committee reported there are a need and an opportunity to make significant improvements to our current regulatory structure to correct its flaws:
Enforcement must be significantly improved. Insufficient resources are directed towards enforcement. Wrongdoers too frequently go unpunished, and adjudication is unduly delayed. Coordination difficulties impede investigations and can lead to multiple proceedings that are inefficient and unfair. There are disparate priorities and a lack of uniform investor protection. All of this undermines confidence in Canada's capital markets.
The regulators investigate only to determine if rules have been breached and advise small investors that they cannot get their money back but civil litigation is a possible course of action. For many it is not an option because they do not have the financial, mental and physical, or time resources to mount an extended legal battle.
There is just too much evidence, anecdotal and fact, to believe other than that the Investment. Advisor will not tell the truth even in a court setting. In the case of Zraik vs Levesque, Justice Archibald said he did not believe the broker and did not believe the client but was finding in favour of the client because the broker breached the rules.
The regulatory system should not allow the resolution of these disputes to take such a long time. Many small investors feel the whole process is controlled by industry to introduce delay and make it difficult for small investors to resolve their disputes. Many will simply accept their losses and make necessary adjustments to survive.
One couple that suffered significant loss at the hands of their investment advisor had to adjust from being a two-car family with a modest home and winters in Florida to having no car, no winter holiday, and struggle to keep their home, which had been mortgaged upon the suggestion by their I.A.
It is no secret in the industry that the investor is not protected. The regulators have failed the small investor. However, class actions may offer some relief to investors.
An article in the Financial Post Saturday, April 29, 2000 edition by Rod McQueen entitled "A Bay Street Man in Full" quotes Thomas Kierans, Chairman of the Canadian Institute for Advanced Research:
"Class action suits are coming to Canada. You can smell it. When you're living in the world I'm living in, you know it's coming like a freight train. I certainly acknowledge the impatience that people have with the scandals that we have had [saying] 'Where were the directors, where were the regulators?' "
The small investor's experience with dispute resolution is generally negative. His initial attempts to resolve the dispute are rejected. As he proceeds further he realizes he is not dealing with a level playing field. The industry-sponsored regulators are reluctant to act against the industry participants and fail to take appropriate action even in the face of overwhelming evidence of wrongdoing including fraud. The investor is left with civil litigation as the only possible solution.
Civil litigation is not an acceptable remedy for dispute resolution. Seniors do not have the resources required in physical and mental stamina, financial capacity, or time to pursue a legal battle that can take ten years to achieve justice. This is why most cases are settled out of court at substantial discounts from what would seem to be just.
The Canadian Government needs to act upon the recommendations of the Wise persons Committee and establish a Canadian Securities Commission to administer a Canadian Securities Act to provide equal treatment for all Canadians. It also needs to establish better investor protection and better dispute resolution mechanisms that are not industry sponsored or controlled and are fair to small investors.
8. Investor Losses – How much have small investors lost?
The amount of small investor loss due to industry wrongdoing is greater than anyone realizes. The media has exposed many frauds by small fraudsters but there are also many cases of significant loss where the advisors represent large insurance companies, mutual fund companies, and bank owned brokerage firms. Investor losses due to breach of rules and regulations by these large firms are probably many times larger than the losses due to small time fraudsters.
|On Friday, December 12, 1997, we reviewed Big Broker's performance with Registered Representative and Manager, expressing our concern with the losses, despite a reduction of the management fee from 3.5% down to 2%. As it turned out by December 31st our total accounts had fallen to $250,137 from $501.367 twelve months earlier. – A small investor|
|I have full and accurate documentation of all events, as well as statements showing the depletion of the account from approximately $170,000 in early 1994 to almost zero. – A small investor|
|(Big Bank Brokerage) and (Registered Representative) both failed in that duty. In addition to the loss of inheritance, I have spent to date $30,000 in legal fees. - A small investor|
|I invested a large sum of money, $125,000 with a broker at Big Bank Brokerage and through mismanagement, inappropriate securities selections, not following directions, and various other infractions, he managed my portfolio in a matter of approximately14 months down to a value of about $60,000. – A small investor|
|My loss of $40,000 may not substantiate making an individual claim, as I believe the court expenses could exceed that amount. – A small investor|
|October 14, 1999, within a time frame of less than 8 months, the value of Ms. (small investor)'s assets in her account dropped from the original of $50,000 to less than $10,000. Among the loss nearly $26,000 were taken as commission for over 350 transactions. – Interpreter for a small investor|
|Fourteen months after his taking over the account $100,000 turned into $45,000 – A small investor|
|I decided to take time off to go to his office to talk with him, because my portfolio had decreased from an originating value of approximately $150,000 to today's value of approximately $25,000. – A small investor|
|I have depended upon (Big Bank Brokerage) for investment advice and my account lost $20,000 plus from December 16, 1996 to May 5, 1997. – A small investor|
|I lost hundreds of thousands of dollars on two speculative mining stocks. The firm lent me the money, I'm finding out now, fifteen years later, that they had a position in the stock. – A small investor|
|In 1995 a group in Port Elgin lost over $1.8 million. The process that we followed has led us down many roads but they all ended up in the same place. In front of a lawyer looking for $50,000 to even look at the case. – A small investor|
|My wife and I have suffered a 37% loss over one year from mutual fund investments managed by (Registered representative) of (Mutual Fund Dealer). The money invested represents a major portion of our assets. – A small investor|
It is difficult to quantify the extent of small investor losses due to wrongdoing by the industry but preliminary estimates run to billions of dollars.
A survey of members carried out by SIPA a couple of years ago indicated the average loss was about $80,000 and the average age of the investor who suffered significant loss was over 60 years. The data collected did not include known multi-million dollar losses within SIPA's membership, as litigation in those cases was ongoing.
Anecdotal evidence indicates that many seniors have lost over several hundred thousand dollars and yet they are reluctant to get involved with a lengthy dispute or civil litigation. Still others are reluctant to admit that they have suffered loss, as they do not want family and friends to know.
Industry participants are well aware of the financial predation that exists in the industry. A retired lady broker writes:
|I watched brokers trade with abandon on accounts and the women had absolutely no idea what was happening. I watched one single retiree account go from $175,000 to $15,000. Her concept of money still left her with the impression that there were lots of funds. This view was promoted by the broker. We are not talking fly by night companies. I am talking (Big Bank Brokerage) brokers that I worked with. Yes, the managers knew what was happening. – A retired lady broker|
Part of the problem in quantifying the extent of this problem of loss is the industry attitude towards covering up the problem rather than dealing with it in a socially responsible way. When a situation is exposed, the industry promptly brands one of their own as "rogue brokers". He is forced to pay the price for getting caught. In this age of computerized control it is improbable that a registered representative can do very much that escapes the attention of compliance and management.
Evidence indicates that companies are aware of these malpractices but choose to cover-up because these practices generate excessive commissions. Because these practices are covered up it is difficult to obtain accurate figures of small investor losses due to wrongdoing. It is necessary to extrapolate from known data to arrive at estimates of these losses.
There are some records of complaints but there has not been a requirement for companies to disclose all complaints. The Ombudsman for Banking Services and Investments provides some statistics regarding the number of complaints to the ombudsman service but does not provide any quantification.
The IDA does report on the number of complaints but does not provide any quantification.
The British Columbia Securities Commission reports:
- The number of complaints received by the British Columbia Securities Commission that resulted in the opening of a case (investigation) for each of the last five fiscal years are:
- 845 (fiscal year 1999-2000)
- 729 (fiscal year 2000-2001)
- 645 (fiscal year 2001-2002)
- 410 (fiscal year 2002-2003)
- With respect to the dollar value of the alleged losses, we have estimated that reported investor losses in British Columbia amount to approximately $100 million each year. This statistic is an estimate only, based on data for the fiscal year 2001-2002, and may no longer be valid.
According to the 12th Annual RBC/Ipsos-Reid poll, reported in January 2003:
- Seven out of 10 (67%) Canadians approaching retirement feel their retirement plans have been impacted by the market and, among this group, 60 per cent state their plans to retire have been set back by up to five years or more.
- 59 per cent of those aged 45 and up, who are not yet retired, are feeling far or somewhat behind in meeting their retirement goals; and surprisingly, 56 per cent have not determined the amount they will need to save to ensure they have a comfortable retirement. Even among those with RRSPs, 39 per cent have less than $50,000 saved in their RRSP.
- retirees are also feeling the pinch. Eighty-one per cent of this group has been adversely affected by the markets, to the extent that 74 per cent have made changes and cutbacks to their retirement lifestyle, with another 7 per cent having gone back to work.
Although this report does not provide any quantification of losses it does indicate that small investor problems are widespread.
The recent NASD survey reports that 45% of investors surveyed believed they could have avoided a negative experience if they had been more aware. This fact suggests that approximately half of investors have suffered loss and it highly probable that a significant portion would have been due to widespread industry practices of wrongdoing.
While the magnitude of investor losses in financial terms probably amounts to billions of dollars, the impact upon investors is far greater in other terms.
Investors do not give their life savings to the care of someone they do not trust. Investors trust the big banks, insurance companies, investment dealers, and investment advisors. They trust the registered representatives of these companies. They trust in our Canadian society.
When they experience significant loss of their life savings they feel their trust has been betrayed. For many the financial loss leads to family break-up, health problems due to the stress created, and negative impact on lifestyle due to lost savings and uncertainty for the future. The more damaging impact is that often the individual's sense of trust and hope is decimated. The impact of this loss can be overwhelming.
Lives are destroyed.
9. The Solution – What do small investors need?
Investor protection has largely been left in the hands of industry. The regulatory bodies tend to be staffed by those with industry experience. This results in an approach to regulation that seems to be industry biased. Widespread industry practices in a commission driven environment result in a conflict of interest when investment advisors are coerced into generating commissions often at the expense of their investor clients.
|Investment firms such as Big Broker will fight the lonely investor even when this much evidence is stacked against them. One has to ask, "How can an investment firm let a broker get away with such conduct and then allow him to keep working?" This is much bigger than the Broker, the Branch Manager and the Compliance are implicated by letting this misconduct go on. This is more than just a case of discretionary trading and lack of suitability ... - A small investor|
The Frog and the Scorpion report, commissioned by the Consumers Council of Canada, was authored by David Yudelman. He states:
The financial industry must always be true to its nature, "which is to maximize returns to shareholders and to be well rewarded as employees and executives for doing so.
"The complexity of the financial services marketplace makes it unusually difficult for consumers to understand the self-serving nature of much of the information and advice they receive, and the fact that it is vendor-driven."
Actual or potential conflicts of interest are pervasive because the sellers are frequently the advisors as well, says Yudelman, who once worked in a major Canadian bank.
The financial services industry provides a torrent of information in the hope that educated consumers will be active investors instead of passive savers. The industry makes more from selling stocks or equity funds than from savings bonds.
SROs are unable to offer adequate investor protection. There is no mandate to enable the ordering of restitution even when industry representatives are found guilty of wrongdoing, including breach of fiduciary duty and fraud. Indeed, in the case of fraud it is rare that criminal proceedings are initiated.
The Wise Persons Committee reported to the Minister of Finance in Ottawa:
We have concluded that major change to Canada's regulatory system is both necessary and overdue.
There are a number of weaknesses in the present system. Insufficient resources are directed towards enforcement. Wrongdoers too frequently go unpunished, and adjudication is unduly delayed. Coordination difficulties impede investigations and can lead to multiple proceedings that are inefficient and unfair. There are disparate priorities and a lack of uniform investor protection. Policy development is characterized by compromise and delay. Canada cannot respond as effectively or innovate as quickly as it should in the fast-changing global marketplace. The system is too costly. The multiplicity of regulators leads to an inefficient allocation of resources and unnecessary opportunity and compliance costs. Internationally, Canada's securities regulatory structure is recognized as being unnecessarily complex. No one is mandated to represent the national interest in dealing with international securities regulators and other policy makers.
We commend those who, despite the limitations of their mandates, are working hard within the present system to achieve good results. Even their best efforts, however, cannot overcome the limitations of the current structure. Canada's regulators need an improved platform.
Small investors need investor protection that is not industry sponsored, and is not staffed solely by industry professionals. While some have suggested a federal regulator similar to the Securities and Exchange Commission in the United States would be appropriate, recent action by the New York State Attorney General reveals S.E.C. limitations.
Studies, reviews and reports have for many years examined the regulatory system, recognized the problems and recommended solutions. The investment industry has been unwilling to change and has co-opted efforts to provide improved investor protection. Some recent proposals appear to be contrary to investor best interests.
Glorianne Stromberg's 1998 report entitled "Investment Funds in Canada and Consumer Protection" provides a good assessment. In part she writes:
"The unsatisfactory situation for the consumer/investors that results from continuing the fragmented regulatory structure reinforces the need for an integrated regulatory and supervisory structure and, in particular, the need for a single, strong, effective, self-regulatory organization that will operate on a national basis and in which membership will be compulsory for all who provide investment advisory and financial planning services to the public."
Industry sponsored organizations will never provide objective investor protection due to the inherent conflict of interest. Investors need the support of consumer associations that regard investor protection as a priority and not as something that is only considered part of a balancing equation.
As Yudelman writes in the Scorpion and the Frog report:
"Consumers need to be able to rely on consumer associations which are knowledgeable, independent and dedicated, and such associations are not likely to emerge without the support of government to help them attain the critical mass necessary for them to have a real impact on consumer education and protection."
It is time that the responsibility for investor protection is mandated to a federal government agency that is more responsive to the need for consumer protection than the need for providing viable capital markets. To allow any agency to establish a balance between fostering capital markets and investor protection is just not acceptable for Canadian investors. An independent watchdog is needed with a sole function to provide investor protection.
Event: Ontario Securities Commission
Investor Town Hall
Time: 18H30 E.T.
Reference: CNW Group - Toronto
Length: Approximately 114 minutes
Date: May 31, 2005
MIKE HORNBROOK (Town Hall Moderator; National Economics reporter, CBC Radio): Ladies and gentlemen, good evening. Welcome to the Investor Town Hall, organized by the Ontario Securities Commission. This is your opportunity to raise concerns, as consumers of financial services, with the people who regulate those services and the securities market, and as well, with some advocates who are appearing with us tonight. It's their chance to hear directly from you.
This Town Hall is the first of its kind, and the panel thanks you for coming and for taking part.
My name is Mike Hornbrook. I'm the National Economics reporter for CBC Radio. Some time ago, the OSC asked me to be your moderator at the Town Hall tonight, and I agreed, but I must stress that I'm not here as an agent or an employee of the Ontario Securities Commission, nor am I here representing the CBC, even though we are here in the Atrium of the CBC, at the heart of the CBC's headquarters.
I accepted the challenge because I believe the public interest is best served when regulators are open and accountable.
One message from the turnout that we can see here tonight is there's a real desire for action, and that's an important step in finding ways to resolve complaints from consumers of financial services, such as yourselves. In fact, the interest is even greater than the turnout that we see physically here in this room. The Town Hall is being streamed onto the Internet, live, so many people besides the people who are here are going to be listening in.
We'll be hearing from people here in Toronto, and from your Internet audience in just a few moments, but before that, though, I want to introduce our panel, and give them a chance to make a few brief remarks.
So, in alphabetical order, proceeding from my right, your left -- oh, I guess that would be your right -- the Chair of the Ontario Securities Commission, Mr. David Brown. The President of the Small Investor Protection Association, Stan Buell.
The CEO of the... They can't see you. Maybe you should raise your hand, or show folks who you are. The CEO of the Ombudsman for Banking Services and Investments, that's Michael Lauber.
President and CEO, Investment Dealers Association of Canada, Joe Oliver. And the President and CEO of the Mutual Fund Dealers Association of Canada, Larry Waite.
First, we go now to David Brown of the OSC for a few remarks.
DAVID BROWN (Chair, Ontario Securities Commission): Thank you, Mike, and welcome, everybody, to our first Investor Town Hall. We're delighted with the turnout, that so many of you have been able to come and join us this evening.
The Ontario Securities Commission is quite proud of its record of protecting investors. We've made it a priority to deal with such investor protection issues as proper disclosure by companies, corporate governance, accounting and auditing issues.
We've become increasingly aware that we may not have placed sufficient emphasis on protecting the investor as a consumer of financial services, and that includes assisting people to obtain restitution when they've been badly dealt with by the system. The need for making this a greater priority was underscored last summer, in testimony that was given to the Legislature Standing Committee on Finance and Economic Affairs. Consumers of financial services must have available to them an effective, fair means of seeking satisfactory resolution of their complaints.
This is a complicated area in Canada, with a number of regulatory players. In Ontario, responsibility for providing pieces of the existing system has been allocated to the OSC, to the Mutual Fund Dealers Association of Canada, to the Investment Dealers Association of Canada, the Ombudsman for Banking Services and Investments, and the justice system, as administered by our courts. We need to find out whether these pieces are working, and if not, why not. The test should be simple. Will these regulatory services, taken as a whole, consistently provide satisfactory redress to consumers who have not been treated fairly by players in the financial services industry? We felt that a good first step would be gathering together as many people as possible, to talk candidly about their own experiences with the regulatory system and with the industry.
We're not just bringing people together to share complaints. We want your assistance in designing solutions. We want your help in identifying gaps in the system, and discovering problems, and in correcting them. We're here to listen. Our mission tonight is not to defend the system, but to improve it: in some instances, explain it; in other instances, frankly, to find out where the system has failed.
You can help us by telling about your experience, the impact your dealings with the regulatory system have had on you, and how you think it can be improved.
When we've completed this evening's review, we'll take away what we've learned. We'll analyze it, we'll provide a public report, and we'll start a public dialogue on improvements we can make to ensure that the regulatory system meets your needs.
This is a priority of the Ontario Securities Commission. We're determined to meet the needs of consumers of financial services. That's an important part of our mandate, and it's one that we're determined to fulfill.
Thank you all for coming.
MIKE HORNBROOK: I call on, now, Stan Buell of the Small Investor Protection Association.
STAN BUELL (President, Small Investor Protection Association):
I'd like to thank the OSC for organizing this Town Hall Meeting, to initiate dialogue with small investors. I also thank those who are participating on the panel this evening to respond to your questions and comments; the moderators, for facilitating questions; and all of you, for supporting this important OSC event.
The Small Investor Protection Association was founded in 1998, and is incorporated as a national non-profit organization. SIPA acts as a voice for small investors, and has over 500 members in 9 provinces.
We believe the problem of investor losses is much greater in magnitude than most people realize. To increase awareness, SIPA issued a report based upon anecdotal evidence in 2004. On February 27, we delivered it to 25 of our leaders across Canada. On that day, I delivered a copy to David Brown. He said he would read it on the weekend, and I believe he did.
Recognizing that many victims of financial loss are reluctant to come forward, the OSC invited SIPA to have members submit anonymous questions and comments, to protect their privacy. The moderators have a list of these questions, but with the turnout, time will not permit answers to all questions tonight, but in time, answers will be provided.
Many SIPA members are actively participating in speaking out across the country. Many have made submissions to regulatory bodies and some have participated on committees and round-table discussions. So we are here tonight to enable small investors to talk to the regulators. So please ask your questions, and make your comments.
I hope all of you have entered the draw at the SIPA table. We will have people there until after the event, and we'll have a draw tonight, and we'll announce the winners later.
Thank you for coming. Enjoy the evening.
MIKE HORNBROOK: I now call on Michael Lauber, the CEO of the Ombudsman for Banking Services and Investments.
MICHAEL LAUBER (CEO, Ombudsman for Banking Services and Investments): Thank you, Mike. Thank you, David, for hosting tonight. I appreciate the opportunity to join with the regulators and with the audience this evening to discuss investor protection. When I scanned the attendance list for tonight's event, I recognized a significant number of names who have been in contact with our office at one time or another, so I say welcome to you.
I'd like to take this opportunity to explain the role of OBSI, and where we fit in under the umbrella of investor protection.
OBSI is an independent organization that is the final stage of dispute resolution within the investment process. After completion of the internal complaint handling processes in the firm, you can escalate your complaint to OBSI, and we will investigate the complaint, we'll provide you with a written report or our investigation and our findings, and we will provide you with an explanation of our decision, and we'll have reasons for that. And that's the service that we undertake to provide to people.
Now, our mandate is to make a recommendation for redress based on fairness in the circumstances, having regard to good business practice, industry standards, codes of conduct, regulations, and of course, the law. But the principal thing is to make a recommendation based on fairness. Now, OBSI is not a regulator, and I can't emphasize that too much -- we are not a regulator. We do not make rules or regulations. We do no have oversight over the firms or the financial advisors, and we cannot discipline or fine them. OBSI does not protect investors in the normal sense. Regulators establish and police the system. They're designed to control the markets and protect investors. Our role is to provide fair compensation for investors if something goes wrong.
OBSI is also not an advocate. OBSI is a neutral arbiter of disputes within the banking and investment sector. We cannot be seen to advocate for one position and then be accepted as a neutral by the other party to every dispute. Both parties to the dispute have the right to a neutral analysis and a neutral decision, and that's why we cannot be an advocate. And I know many people here feel that we should take a more active role in that regard. Some of you in this room are investor advocates, and I applaud you for your diligence. You work hard, and you're effective. In the last 18 months, we have investigated 238 investment complaints, and we've made recommendations for compensation to the firms in 54 of those cases, about 23 percent. A lot of money has been involved in those decisions.
I look forward to the discussion this evening. I hope everyone learns more about all aspects of the process this evening, as a result of the questions. Thank you.
MIKE HORNBROOK: Joe Oliver now, from the Investment Dealers Association.
JOE OLIVER (President and CEO, Investment Dealers Association of Canada): Good evening, ladies and gentlemen.
The IDA is committed to protecting investors, especially the most vulnerable. That's the heart of our mandate. We protect investors by providing information, by pursuing regulatory infractions, and by supporting financial restitution.
There are basically two ways we can help you deal with your concerns. If your complaint concerns an IDA regulatory infraction, we may launch an investigation. We may prosecute the offender, and then impose a penalty against your broker or his or her firm. Our goal is to deter future infractions and remove wrongdoers from operating in the marketplace.
You may take your complaints directly to your broker, or to the IDA. Member firms must report all client complaint, and IDA staff monitor these reports daily.
In the past three years, we conducted 173 disciplinary hearings, fined individuals and firms $60 million, and banned 32 individuals for life. So our enforcement is tough but fair.
However, we do not have the authority to get your money back. For that, you can use the National Arbitration and Ombudsman services. The IDA has absolutely no involvement in their investigations or decisions, nor does any member of the industry. They are totally independent and objective.
Member firms must send new clients a brochure describing their rights, and again, whenever a client makes a written complaint. Last year, 1,900 investors phoned our complaint line. Over 23,000 used our online info service to check the disciplinary record of firms and brokers. And I encourage you to use these services and tell others about them. Do we empower investors to register complaints and seek compensation? Yes, we do. Is our system as robust as any in the world?
Yes, it is. Can it be improved? I'm sure it can be, so I'm looking forward to your constructive suggestions tonight. Thank you.
MIKE HORNBROOK: And now, last but not least, the Mutual Fund Dealers Association of Canada, President and CEO Larry Waite.
LARRY WAITE (President and CEO, Mutual Fund Dealers Association of Canada): Thanks, Mike. As requested, I'll keep my remarks to within two minutes, as our purpose here tonight, as the others have said before me, is to hear from the people in this room.
I want you to know that the MFDA does want to hear about your experiences, and hopefully, as a result of those experiences, you will have suggestions for making the regulatory system work better for the retail investor.
The MFDA is pleased to be here tonight, and we are taking this meeting very seriously. I have 20 of our staff here tonight, from our Complaints area, from our Investigations area, from our Litigation area, Compliance and Policy departments, in order for them to hear first-hand from you what you have to say this evening. It might be helpful if I quickly describe what the MFDA does have responsibility for.
The MFDA is a self-regulatory organization, recognized by and monitored by the OSC and other securities commissions. We are a regulator with a single-purpose mandate, which is to regulate the distribution side of the mutual fund industry. We regulate 180 mutual fund dealers across the country, and their 70,000 representatives. These include all bank-owned mutual fund dealers, as well as small, independent firms. The 180 firms represent approximately 50 percent of the $500 billion Canadian have invested in mutual funds.
The MFDA became fully operational in November of 2002, with the completion of our Enforcement branch. We began taking complaints and conducting investigations at that time.
It is important, I believe, to clarify that the MFDA has no regulatory role over the mutual fund companies. That remains with the OSC and the other commissions.
I don't want to repeat what others have said before me, but as a person who has spent his whole working life as a securities regulator, I would like to make it very clear that I agree that our regulatory system is not perfect, and can be improved. Only by working together will we be able to make the system work better of the small retain investor.
I believe tonight is a first step, and I would like to thank Stan and David for their efforts in organizing this meeting. Thank you very much.
MIKE HORNBROOK: Thanks to our panelists. Now, you took one of mine. Oh, that's okay.
This Town Hall is designed to give investors a chance to express their concerns, and two people are helping to make that happen tonight. They are the floor monitors -- they're people who will circulate amongst you with microphones that you can speak to. One of them is Linda Leatherdale, the Money editor for the Toronto Sun. Linda, can you wave? I guess she's in back.
And the other person is James Daw, a personal finance columnist for the Toronto Star. James? He's on that side.
Like me, neither Linda nor James are agents of the Ontario Securities Commission, nor are they here representing either the Star or the Sun. They are here very much as concerned journalists.
This Town Hall is meant to facilitate direct dialogue between the consumers of financial services and the regulators, watchdogs, and overseers that you just heard from. It gives everybody a chance to hear your views about how the current investor complaint and arbitration mechanisms work, and if you don't think they work well enough, recommend how they might be improved. We invite you to speak as candidly as possible about your experience with the system.
But before we start, there has to be some ground rules. This is not a forum, I would stress to you, to discuss your personal complaint, or any complaint you might have against a particular person or company. The panelists will respond to the issues that you raise, but they are not free to discuss or comment on complaints against specific individuals or firms. And they're also not free to comment on any ongoing investigations by the regulators, or any details which have not been made public yet. With the exception of these sensitive areas -- and they are sensitive for legal reasons -- the floor is open tonight to air your views.
If you have a comment, please identify yourself to Linda or to James, who are roaming the floor. Please state your name, and limit yourself to one comment or question, if you don't mind. The goal tonight is to hear from as many people as possible.
And we will also hear from people, incidentally, through the Internet. We have received many, many queries by email in the period leading up to this.
Now let's open the floor to comments and questions. And I see hands are going up. James is going to come and select one of these three in the front here, James.
KAREN GOWAN [phon]: My name is Karen Gowan, and I have several questions, but in keeping with the rules tonight, I will ask one, to start with.
The IDA says that they collect penalties on people who are found to be guilty of whatever. Who, then... Is that fine, is it collected, and is it then paid back to the investors who have lost money, or is it a collecting keep?
JOE OLIVER: The fines which the Investment Dealers Association collects are kept in a separate fund, which is used for a number of specific purposes, which has to be authorized by our Board. The money is not paid to investors. We do not compensate investors, as a rule, but I'll give you one exception in a second.
The money has to be allocated to public-interest projects. For example, we participated in the National Registration Database, which is a system, in cooperation with the Securities Commission, that registers all brokers and all investment firms. That's a 30-plus-million-dollar project, and so, we contributed to that, and we use the fined money for that purpose.
So the money can never be used to reduce fees. The money is never used for ordinary expenses. It's used only for public-interest projects. An apparent exception, related to the money we collected for the market timing cases that we completed at the end of last year. Over $7 million was paid to the fund companies to be allocated to unitholders who had paid... who had suffered a loss as a result of trader fees which they paid in relation to market timing cases. So that was a specific allocation, and so we gave the entire amount that had been paid by the mutual fund unitholders, in this respect, back to them.
MIKE HORNBROOK: Okay. Linda, back there, please.
PAUL LAWRENCE [phon]: Hello, my name is Paul Lawrence, and my question has to do with the mutual fund industry.
To the extent that the mutual fund industry is very good at getting our money, charging us various fees -- up-front fees, trailer fees, management fees -- what support do you offer us, as investors, in recovering funds that you made on our behalf, that eventually evolve into losses due to fraud?
MIKE HORNBROOK: You're directing that to Larry Waite, Mutual Fund Dealers Association?
PAUL LAWRENCE: Yes.
MIKE HORNBROOK: Larry?
LARRY WAITE: If you're talking about the mutual fund companies themselves -- and as I said in my opening remarks, that relates... under the jurisdiction of the OSC. But with respect to the dealers, the distribution side of the mutual fund industry, we... Again, we don't get your money back. We do compliance reviews, we investigate investigations, we initiate enforcement proceedings where appropriate. We put people out of business, where appropriate. We shut them down, if appropriate. But we do not get money back for investors.
Now, the only exception I can say to that, again, is in the market timing case. It's the only... As I said, we're a relatively new SRO. We've had one major settlement, involving approximately $5 million. Half of that went back into the fund to reimburse unitholders that were harmed. The other half, our Board has authorized to go into our Investor Protection Fund, which is scheduled to start up on July 1. So none of that money stayed within the MFDA.
MIKE HORNBROOK: James? [inaudible]
GLORIA HUTTON [phon]: My name is Gloria Hutton, and I would like the Ontario Securities Commission, I would like to ask them why they went to great lengths and expense in an attempt to prevent the public release of the 1999 audit of the Investment Dealers Association.
MIKE HORNBROOK: David, for you.
DAVID BROWN: The report that Ms. Hutton is referring to is a report that we did as a result of our very first oversight review of the Investment Dealers Association. I think the review was done in 1999. The report was probably... it was probably given to the IDA in 2000.
We did that investigation, we did that report, on the basis that that report would be confidential. And clearly, within that report, we talked about issues that we thought the IDA needed to address, areas where we thought that there needed to be some significant improvement. The good news is, I must tell you, the IDA reacted very well to that, and all of the suggestions and requests that we made were followed through.
That was in the year 2000. We've... we've done a lot of thinking about it since then. We now do not do any of those reviews, on the basis that those reports will be maintained confidentially. That report now has been released, by the way, but it is five years old. Going forward, we're not approaching it on that basis any more.
MIKE HORNBROOK: Okay, one question, and your question is, who is the OSC accountable to?
DAVID BROWN: The... Again, we're talking about an evolution in thinking here. We started, as I said, five years ago, approaching our ability to, or our need to, oversee the SROs in a way which we don't approach now. And as I said, that was the very first review of the IDA that we had ever done. And as I said, we did that on the basis that it would be maintained in confidence. We're not doing that any more. So that's not an issue any longer. That report is five years old -- it's now been released. So this is not an issue, going forward.
MIKE HORNBROOK: Okay, we're going to move on to another question now. Linda, you have somebody back there?
DAVID FENIMORE [phon]: My name is David Fenimore, and I have -- it's not so much a question but a suggestion for the IDA, Mr. Oliver. And it concerns a rule that requires brokers on bid prices, or on orders that have a good-through date, for the brokers to reduce the prices, or the amount of the bid, by the amount of the distribution or dividend, on the ex-dividend date.
Now, in my opinion, particularly on income trust units, which are paid monthly, this is really a very small item, and there's a whole list of factors that have a greater bearing on market prices. The big thing today seems to be the price of crude oil. You have changes in interest rates, terrorism activities, patent infringement court cases, insider trading, accounting practices, and all these items have a greater effect than a security going ex-dividend.
Now, the rule that I'm referring to is in Section 11, Chapter 3, of IDA's Conduct and Practices handbook. And in a nutshell, I think it's time to rescind this rule. Thank you.
MIKE HORNBROOK: Any comment from our panel?
JOE OLIVER: Well, I spoke... I had the opportunity to speak to Mr. Fenimore before the session started, and we're going to examine that issue about the pricing of shares when they go ex-dividend. That's a technical matter, but it's an important matter, and we'll look into that.
Can I just make one comment? I was trying to get your attention earlier. Going forward, and for the last year, we are putting on our website all the reviews done of the Investment Dealers Association, by not only the Ontario Securities Commission, but the other three commissions which regularly provide oversight -- the Quebec, Alberta, and British Columbia commissions -- so they will be available, and are available, on a regular basis, on our website.
MIKE HORNBROOK: We have another question up here. Oh, I'm sorry, I missed that.
UNIDENTIFIED FEMALE SPEAKER: Yeah, I tried to--... Oh, it echoes. I tried to condense five years of frustration into five pages, but I'm not going to be allowed to read it. So I'll read you the last paragraph, I guess.
LINDA LEATHERDALE: [inaudible] your name.
JANET GILLIS [phon]: Janet Gillis. When I was young, your bank manager was the most respected member of your community. Your life savings were safe in a bank. That is not the case in today's world. There are scandals almost every week. It is time for our government to prosecute these officials, and help small investors regain their confidence that their life's savings are in safe hands in banks. We lost a third of our life's savings in less than two years, and it took us 15 years to accumulate this money in mutual funds. And we were with a small outfit, and we went to a bank that we'd had an account with for 30 years, a respected bank, one of the top banks in Canada, and we put all of this 15 years of life's savings in their hands, in their mutual funds, and we lost a third of our life's savings. I mean, we were devastated. And—
MIKE HORNBROOK: I'm sorry. You go ahead.
JANICE GILLIS: Well, I guess there's nothing that can be done.
MIKE HORNBROOK: We have to--... we can't ask you specific questions about what funds they were, what bank—
JANICE GILLIS: Oh, no, no.
MIKE HORNBROOK: I'm wondering if we could have a response from one of our panelists. David Brown.
DAVID BROWN: Well, as Mike Hornbrook said, we can't ask you specifics, but it would really help us if -- and it would help me to understand where the system has apparently failed you -- if you could describe what efforts you took to get your money back.
JANICE GILLIS: [inaudible]... to everyone involved, and all we got back out of the... In less than two years, we lost $170,000. They gave us back our fees -- $30,000 fees. That's what we got back. And this is why I'm upset. Oh, and we'd signed a release to get that cheque for $30,000, and the bank has told us they'll take us to court if I make it public. [overlapping speakers]
JANICE GILLIS: And I've got the [inaudible] papers to prove it.
MIKE HORNBROOK: Have you taken this up with any of the regulatory agencies?
JANICE GILLIS: No, I haven't. All I took it up with was with the president of the bank, and he passed it on down the line.
MIKE HORNBROOK: What would you recommend?
DAVID BROWN: Well, may I ask—
JANICE GILLIS: And these individuals—
DAVID BROWN: Was the... was the bank... Did you try the bank ombudsman? Did you take your case to the bank ombudsman to—
JANICE GILLIS: No. All I did was write letters to the president of the bank, and the two people responsible at the bank branch are still working there. I felt they should have lost their jobs. Apparently, one of them has been in a lot of trouble before this. We found out that... I guess it's too late for us. We've signed a release, and we took their 30,000 in fees, and we needed the money at the time, and...
MIKE HORNBROOK: I'm going to ask Michael Lauber to comment on this. You are the Ombudsman and CEO for Banking Services and Investments?
MICHAEL LAUBER: Well, that... Yes, well, hopefully, at the time, that should have been referred within the bank system into their compliance group, and then to the internal ombudsman office to have your complaint investigated and reviewed at those stages, and then been able to come to our office, OBSI, for an independent review of your file.
Unfortunately, at this point, you've signed a release, so that can't happen now, but that is the process. And I think if you weren't made aware of that information, then there was a problem there. Now, if this was prior to October of 2002...
JANICE GILLIS: [inaudible]
DAVID BROWN: 2000?
JANICE GILLIS: [inaudible]
DAVID BROWN: Yes, well, okay, that was sort of... That was before the... Well, even within a bank... Within one of the large banks, you should still... it should still have happened. But, obviously, it didn't, and—
MIKE HORNBROOK: Does she have any avenues of remedy at this point?
DAVID BROWN: We've taken the position, we have to respect releases. If people want to challenge a release, then they have to do that in the court system. And if the release is set aside, we would be happy to review any file. But—
MIKE HORNBROOK: So, basically, you're saying it was all over as soon as she signed the release.
DAVID BROWN: I think it's all over, in this particular case, unfortunately, yes.
JANICE GILLIS: ... [inaudible]... top litigation lawyers.
MIKE HORNBROOK: Yes, we need this microphone on over here, where James is.
JANICE GILLIS: Yes, I did contact a couple of Toronto's top litigation lawyers, and it was like $300 an hour, and there was no guarantee of success. We just don't have that kind of money. We lost a third a our life's savings in less than two years. And it took us 15 years to accumulate that money. You know, I didn't sleep for two years. It made me sick. This is a major bank that we had an account with for 30 years, you know? It's a trusted bank. This was the worst thing of everything that happened. It was being disappointed in this major bank. It wasn't some little two-bit storefront operation, where you invest in mutual funds -- this is a major bank.
MIKE HORNBROOK: We have to move on now -- there are other questions. But I'm just wondering, would it do the lady any good to contact your organization?
MICHAEL LAUBER: Feel free to call, but you know, the problem is, once a release is signed, it's difficult to [inaudible].
MIKE HORNBROOK: Now to the back, Linda. Yes, sir. Can't hear you.
DAVID COFFLER [phon]: Hello? I'm David Coffler. I don't know where to start. I haven't even opened my briefcase, because we're limited to one question a person.
I gave an order to my broker, on recommendation, three years ago, to buy a certain quantity of stock, out of my pension fund and my retirement fund. I had to go down to Florida to have a serious eye operation. My brother phoned me, and told me that he got a letter from my broker, stating that he didn't feel that the stock that I'd ordered was worthy of his attention. I had no way of coming back and arranging for a purchase of this stock at another broker. The result was, the stock went up from $14 to $124 per share, and I got no apology for it, except for the fact that there are other brokers, and I could try the other brokers. What can I do? I've spoken with a couple of other brokers, prestigious brokers, and they said, "You haven't got a hell of a chance to collect anything back." What do I do? MIKE HORNBROOK: Joe Oliver, are you the person to handle that? JOE OLIVER: Well, if I understood the situation correctly, you're talking about an opportunity, a loss, rather than actual loss, and I wasn't clear -- I'm sorry, I didn't hear it -- why it was you weren't able to put in that order. I mean, what you should do, if you feel you have a complaint, is register it with the firm, and if the firm has decided that it won't give you satisfaction, then you can speak to OBSI, and that's free, and then they will decide whether they should make a recommendation or not to the firm, to reimburse you in some way, or you can go to the IDA, and we would determine whether there's been an infraction in respect of some of our rules. I don't know enough to know what our reaction would be, after an investigation, but I certainly would welcome your inquiry.
Every written complaint to a member of the IDA, which is all the brokerage firms, must result in a brochure being sent to the complainant. Some 5 million of our brochures have been ordered, over the last couple of years, and they're available in the back. And they indicate the various alternatives that you, as an investor, have if you have a financial dispute with your broker. That information must be sent to you, and then you can decide which of the alternatives meets your needs.
MIKE HORNBROOK: Question to the gentleman who just asked that question -- did you take your complaint anywhere, sir?
DAVID COFFLER: [inaudible]...
MIKE HORNBROOK: Linda's going to get to you with the microphone.
[microphone cutting out]
DAVID COFFLER: Thank you. I asked two prestigious brokers what procedure I should take. [inaudible] I wouldn't have [inaudible] of getting anything back at all. What do I do further?
MIKE HORNBROOK: You were told by other brokers, then, that you wouldn't have—
DAVID COFFLER: That's right.
MIKE HORNBROOK: But you never took your complaint to the IDA or to the—
DAVID COFFLER: No, they made it quite clear to me that I didn't have a chance of getting back any part of my investment, and it was close to $100,000.
MIKE HORNBROOK: This far away from the--... How long ago was that, sir?
DAVID COFFLER: [inaudible]
MIKE HORNBROOK: Well, is it too long now, that they could... if there's any hope of—
JOE OLIVER: Well, I think there's something instructive here. Without in any way dealing with the merits of this particular case, I think that there are people who have given up before they started, and they sort of make an assumption that they don't have a case, based on information that they may have gotten from people who may have an interest, or may not be knowledgeable. It doesn't cost anything to make a complaint with OBSI, and it doesn't cost anything to register a complaint with the IDA. So if you're not sure -- even if you're pessimistic -- register the complaint, and then you'll find out for sure whether you have a case or not.
MIKE HORNBROOK: There is a place to go, if you get mad as hell. To James, back there.
DIMITRI LASCARIS [phon]: Yes, my name is Dimitri Lascaris, and I have a question for the Ontario Securities Commission. Obviously, a dominant theme this evening is investor restitution, and as you gentlemen know, there has been on the books in the province, for a couple of years now, a private right of action for misrepresentations in the secondary market. That law has not been called into force. It's my understanding that its calling into force has been delayed yet again, because of the intervention of some large issuers. And my question is, if investor restitution matters in this jurisdiction, why hasn't that law been called into force yet, and when will it be called into force?
MIKE HORNBROOK: David Brown.
DAVID BROWN: You're right, the issue is with respect to a new law that was passed but not proclaimed in force, that allows investors to sue and, indeed, to come together in class actions to sue, when there's been misrepresentation by a corporation.
The Minister has completed a second round of consultation with respect to that. He has confirmed that that consultation is over. He has confirmed that it is his intention, and the government's intention, to proceed now, to proclaim that in force. I can't tell you the date, because I think the date has not been chosen. But this is government policy, and the government has confirmed it.
In fact, most of you wouldn't have gotten all the way through the Budget papers that were part of the provincial Budget a couple of weeks ago, but the Budget also promised that that law would be brought into force. So yes, that will be in force. We're hoping that it will not be too long. But it is under way.
MIKE HORNBROOK: Okay, we'll take a question over here. Linda? CYRUS QUARRIE [phon]: Hi, my name is Cyrus Quarrie, and my question is directed to the Ontario Securities Commission.
What efforts have the OSC made in the past to investigate and prosecute cases that involve the failure of companies, due to accounting and audit-related deficiencies? And what changes does the OSC foresee in the near future?
DAVID BROWN: Well, that's a complex question, and it could be a long answer. Let me try to give you a summary.
We have... There are requirements for companies to make continuous disclosure of their financial affairs. That means, on a quarterly basis, they have to publish financial information, and they are required to ensure that that information is correct when they publish it. And in addition, they are required to publish any changes, any material changes in their financial information, as it occurs. So they can't wait for the end of the quarter.
We have a team, a Continuous Disclosure Review team, that is constantly monitoring what companies are publishing, constantly looking at the quarterly information, and constantly monitoring the information that is made available in between quarters. And wherever we find issues or problems, we first of all deal with the company, to ensure that any misstatements have been corrected. If we find that Ontario securities law is breached, we will bring enforcement actions against that company. We have a number of those under way. We've brought a number of them, in the past. We've gone after auditors in the past, where we thought that the auditors also failed in their duty. So it's very much a part of what we do, and I think that we are making some very good progress.
CYRUS QUARRIE: So why, then, have the accounting and auditorrelated deficiency cases still continue?
DAVID BROWN: I'm sorry, I missed that.
MIKE HORNBROOK: It's hard for us to hear this, but we've asked for one question. So maybe you could line up again. There's a gentleman up here, Linda, who would like to speak. I'll go to this microphone now, James.
JIM MURRAY [phon]: My name is Jim Murray. My question is, on a "Know Your Claim" form, is the advisor required to follow the general direction of the form, or if deviating from it, to notify the client that they are doing so? And secondly, what is the implication of not having signed it? Why is it industry practice that it is not signed and then not regarded because it's not signed?
MIKE HORNBROOK: Who wants to handle that?
JOE OLIVER: Well, perhaps I can make a comment on it. The Client Account form that people enter into, when they open an account, is designed to enable the broker to know his or her client, because there's a dual responsibility. There's a "Know Your Client" rule, understand what the financial condition, investment objectives, of a client are, and then make sure that any recommendation is suitable. So this is a responsibility on the part of the individual broker, to be aware of what the financial condition and investment objectives of the client are, and to keep up to date, in terms of any material changes.
The issue about whether the account forms should be signed or not is one we're looking at right now. Most firms do require it to be signed, but it isn't a universal rule, and we, in conjunction with the Ontario Securities Commission and the other members among the Canadian securities administrators, as part of the OSC's Fair Dealing model initiative, are looking at a number of matters relating to the client-broker relationship, and the user-friendliness of the account form, and whether it ought to be signed is certainly one of the issues, and we're inclined to think that it should be.
MIKE HORNBROOK: Okay, a question here from somebody who is listening in on the Internet tonight, and they've sent an email, and the question is: "I think..." -- no identity on this -- "I think all financial advisors should be required to be registered, and files kept on their performance, which the public should be able to access. Will this be happening any time soon?" I think that's a question for David Brown of the OSC.
DAVID BROWN: Well, financial advisors are indeed required to be registered, although there are categories of people who are providing financial plans who are not required to be registered. But anybody who is advising with respect to the purchase of securities is required to be registered with the Ontario Securities Commission.
And people can check to see whether people they're dealing with are registered, and they can check to see what category of registration they have, to ensure that the type of advice that they are purporting to give is within the competency of their category registration, and they can check to see whether those people have been disciplined. All of that is on our website. It's quite user-friendly, and indeed, for any of you who are dealing with investment advisors who you don't know, I urge you to check and make sure that they are properly registered, and that you're comfortable with their level of registration.
MIKE HORNBROOK: The OSC website is www.osc...
DAVID BROWN: www.osc.gov.on.ca -- "Govonca", as we say -- osc.gov.on.ca.
MIKE HORNBROOK: To Linda, over here.
PAUL GURNIN [phon]: My name is Paul Gurnin. That gap between the lowest-paid employee in the company and the highest, 15 years ago, was 45 times, and now it's several hundred times. What has happened? I believe that the compensation committee on public Boards have, of course, gone to consulting companies that consult on compensation and benefits, and those two groups have indeed shaken hands, but good, and it is the very worst it's ever been. What is to stop these people from making this huge handshake? The shareholders are paying! The Boards and senior management's coming right out of shareholder pockets.
MIKE HORNBROOK: Is that a question for anybody here, sir, or is it more a comment?
DAVID BROWN: The question is, are we as regulators, imposing any regulations on the maximum salaries that directors of corporations can award to senior officers or other employees? The answer is no, we're not. And in fact, it's not something that we would contemplate doing. We think that this is an issue for markets, this is an issue for shareholders. If the shareholders and other market participants believe that the compensation levels are not appropriate, then they should be voicing their concerns. And we're seeing that happening all the time. We're seeing some of the major institutional investors now, not only voting against compensation packages, but making their views known. They have the ability now to talk to other institutional investors -- they're doing that. That's the way the process should happen. People who are unhappy with that should be registering their unhappiness, making the Boards aware of that unhappiness, and, frankly, voting with their feet and going to other corporations. We do not see that that is an issue that we as regulators should get into.
And when you think of it, it's a pretty slippery slope. If we start to dictate to Boards how they can compensate and award their people, then we're starting to interfere with a business model that has served us well in this country.
MIKE HORNBROOK: This microphone.
KEN CAVENCO [phon]: Hi, Ken Cavenco. The Ontario government passed a law called the Ontario Limitations Act, which took effect last year, reducing the period where you can file a claim, to two years, from six. And as you can tell from the audience, people who are not financially literate, or ill, or don't even know that they've lost money, may not discover just how serious things are in the two-year period, and then they would lose their right to file legal claim. The only person I can address this to -- I think all of you should have helped prevent that -- would be David Brown, since he reports to a Minister. Is there any way we could have that amended, jigged around, so we go back to a longer period for the investor to file a claim when he discovers it?
DAVID BROWN: Thanks, Ken. This is actually one of the benefits of having the Town Hall, because as we began to prepare for this, and as Stan asked his members to start feeding into us, issues that they want to discuss, this issue was raised, and I must admit, this is the first time that I realized that this omnibus amendment that had been passed by the government was having the effect that it appears to be having on those who have complaints against their brokers or other members, other people in the financial community.
We became aware of the issue, but only a very narrow piece of it, because, under the Securities Act, we have a six-year limitation period to bring in an enforcement action against somebody, and it would have been swept in under that omnibus bill, and so we made representations to the government that we should be carved out. I must admit, we didn't think, when we were making those representations, about the effect that the omnibus bill is having on the kinds of things you're talking about.
I think it's a legitimate issue, and we're quite prepared to talk to the government about it, and see if we can somehow assist in at least bringing to the government's attention perhaps an unintended consequence of this bill.
MIKE HORNBROOK: A question right here.
JOE GREEN [phon]. Mine is very short. Name is Joe Green. This is to Mr. Brown, and others who might want to comment. Is it fair that not all common shares in Ontario carry equal voting rights?
DAVID BROWN: Again, it's another market... another marketplace issue. There are multiple voting shares in a number of companies, as you know. I'm not sure of the exact number, but it could be as high as 20 percent of the companies that are listed on the Toronto Stock Exchange have a class of shares that are multiple voting shares.
But investors buy those shares, and we take the view, so far, that this is a disclosure issue. We want to make sure that investors who purchase the subordinate voting shares are aware of what they're purchasing, that there is a class of multiple voting shares out there. But again, our view is that if investors understand that, then they're free to make their own investment choices.
We see it, again, as a slippery slope, if we start to regulate the types of investments that investors can be given an opportunity to buy. We think that investors should be able to make those choices.
MIKE HORNBROOK: I'll go to this side now.
BARBARA MARSHALL [phon]: Barbara Marshall. First, I have a comment. It's really great to see so many people in the same situation as myself, and as I look around, I think about Jack Canfield, and I think he should be writing a book, "Chicken Soup for the Illiterate Investor." It might give us some levity.
Anyway, my situation is that I belong to a group of about 70 investors, and we have invested approximately $8.5 million in a private company, a small cap company, and since 2000, we have had no financial reports, and just recently, I found out that the directors dissolved the corporation. Where do I go?
MIKE HORNBROOK: Goodness gracious.
DAVID BROWN: You mentioned that it's a private company. Is this a company that shares are listed on a stock exchange or is it indeed a private company?
BARBARA MARSHALL: No, it hasn't gone public, but it has been approved for both... Or, it has been approved for RRSP investment funds.
DAVID BROWN: Well, if it's been approved for RRSP, then it's probably a public company, so I'm not entirely certain about your circumstance. We as securities regulators have no authority over private companies. We have authority over public companies. So let's assume for a moment that your situation is a public company. There is a... there is a complaints service through the OSC. We have investor hotlines, and indeed, we have set up special investor hotlines and websites as a result of tonight's gathering. So by all means, contact the OSC. We'll help you determine whether indeed it's a company that we have any authority over, or whether you've got to go to either lawyers, or to government officials.
MIKE HORNBROOK: Have you gone to anyone yet, ma'am?
BARBARA MARSHALL: We're searching legal consultation as well as other alternatives.
MIKE HORNBROOK: Have you been in touch with the Ontario Securities Commission?
BARBARA MARSHALL: Well, my understanding is that the Ontario Securities Commission is not able to get any of our money back. Now, that might be an incorrect conclusion on our part, but that's what I understand. So we have not gone to the Ontario Securities Commission, as of yet.
DAVID BROWN: Well, we're—
MIKE HORNBROOK: Sorry, go ahead, David.
DAVID BROWN: I was just going to say, there are two issues here. What you've described may well be a breach of the Securities Act, and I think we need to find that out. If there is a potential breach of the Securities Act, then that is something that we would investigate, and there may well be an enforcement action that we would bring, in these circumstances.
You're quite right -- the Ontario Securities Commission does not have restitution power. We do not have the ability to assist you in getting your money back. That is really something that has to be done through the private courts, or through the courts, and you need to consult a lawyer, in order to be able to figure out what your best route is. But I would suggest that you start with our people, and we can help you determine whether this is a matter that we should be investigating, and then also direct you where you might go from there.
BARBARA MARSHALL: Thank you very much.
MIKE HORNBROOK: Go to this side of the room now.
PETER SINCLAIR: Yes, hello, my name is Peter Sinclair, and my question is about an annual shareholders meeting. There's a public company which is 18 months and counting, and delinquent, and I've tried to go to the OSC and market regulation services, and try and find out who can police or enforce that they'll have a shareholders' meeting. Both those organizations, surprisingly, told me to engage a private lawyer to sue them, and I find that incredible, to have to sue a public company to get a shareholders' meeting. Could someone on the panel help me?
DAVID BROWN: Under the securities rules, companies are required to prepare financial information and mail financial information to their shareholders, with a finite period of time. We can't force companies to do that, but we can bring disciplinary proceedings against them, or we can issue a cease-trade order against companies, when they fail to do that. And we have a process where we will issue cease-trade orders just against the senior directors and officers of the company, to give them some incentives to finalize and file the financial information.
We don't have authority over the actual holding of the shareholders' meeting. That's something that is under the Corporations Act, and that's really something that the shareholders police, and do it through the courts. It's not part of our mandate.
PETER SINCLAIR: So no one makes the Corporation Act... there's no regulatory body that supervises that, other than private legal action? Because they did file a financial report, but...
DAVID BROWN: The financial statements have been filed?
PETER SINCLAIR: Yes, but they just won't hold a shareholders' meeting. It's been November of '03...
DAVID BROWN: I don't believe that there is a governmental body that forces corporations to do that. I think that has to be done through shareholder activism.
MIKE HORNBROOK: We'll go now to this side of the room. Yes, ma'am?
PATRICIA COSGROVE [phon]: Good evening. My name is Patricia Cosgrove, and I have a question for the OSC. Recognizing that no piece of legislation is perfect or without flaws, under the current Ontario Securities Act, is it possible for an investor to be bound by a KYC form that the broker has unilaterally taken upon himself or herself to change without the client's knowledge? Is the client, the investor, bound by a document he or she knew nothing about?
DAVID BROWN: Well, that's not a matter of securities law. It's a matter of general law, and no one could be bound by a document that they knew nothing about. The Know Your Client form is really just part of a mechanism for brokers to understand what a client's investment objectives, a client's financial circumstances are, so that the broker can satisfy the suitability requirements when recommending investments to that client. So I'm not sure what you mean by the client being bound by the form, but if the client indeed has not given the information to the broker, as it appears on the form, then the client can't be bound by it.
PATRICIA COSGROVE: Thank you.
MIKE HORNBROOK: Joe Oliver, do you have anything to add to that? JOE OLIVER: No, I don't.
MIKE HORNBROOK: Over here.
JOE KILLORAN: My name is Joe Killoran. I'm an educator and an investor advocate.
The October 2004 issue of Atlantic Monthly had two quick paragraphs in a great article on Eliot Spitzer, and Mr. Spitzer's modus operandi is, if the agencies of the federal government -- and this is in the United States -- the Securities and Exchange Commission, the FDA, the Federal Communications Commission, whatever -- if these agencies of the government abdicate their authority to protect the marketplace, Spitzer says, "I view it as my responsibility to 20 million New Yorkers who are investors, who work in the marketplace, to assume it." So he's assumed it down there.
The second thing he says is we need competition. "I understand that a market needs to have rules by which it lives. If you have a marketplace unbridled by rules that mandate integrity and transparency, then the market will not work."
Now, my question, and I'll really be brief. In 1995 -- this is a "smoking gun" document. It is proprietary for a major fund company, one of the top fund companies in the company. I hired an independent consultant. He analyzed their computer data, and the fund company could identify advisors who were churning for commissions. I presented this document on April 13, '95, to Ed Waitzer in the OSC Chairman's office, saying, "Let's use data mining of sales data to police the marketplace, or churning, for lack of Know Your Client suitability, for market timing." And Mr. Waitzer said then, "I'm given $17 million by the Ontario government to run the OSC. I can't afford data mining" -- pro-active policing of the marketplace. I then had to wait a year and a half. Mr. Brown came into the OSC, I believe it was April '98, and I met with Mr. Brown in his office on August 14, '98, and I went to get out this document and I mentioned the fund company name to him. And Mr. Brown gave a comment which is in The Naked Investor on page 14: "We don't give awards to whistleblowers." And Mr. Waite was called from his Director of Enforcement office by Mr. Brown, and Mr. Waite took me downstairs, and Mr. Waite asked if he could take a photocopy of this document. And I said, "Sure, take a photocopy." He used an OSC photocopier.
Mr. Waite left the OSC 6 weeks later, for the MFDA. And in November '98, I asked Mr. Waite, "Who did you leave it with at the OSC?" And he said it was an unofficial hand-off.
MIKE HORNBROOK: I'm not sure where you're going with the this—
JOE KILLORAN: The question is... Have any of you gentlemen... What did you, first of all, do with this report? And have you abdicated your personal responsibility, as a government agency, and/or your professional code, meaning C.A., law degree, or your personal code?
LINDA LEATHERDALE: The question is...?
JOE KILLORAN: Have you abdicated your responsibility, in handling this document, Mr. Waite?
LARRY WAITE: No. No, I have not. I recall the incident that you just described. That was photocopied, it was put in a file, and as you say, I left the Commission very shortly after. All my files were in boxes in my office.
DAVID BROWN: Joe, let me talk about first part of your question.
Now, you raised the quote from Eliot Spitzer, which we've seen many times before. But let me point out the obvious to you. Eliot Spitzer is a law enforcement agent. He's got law enforcement powers, he's got a law enforcement mandate. He is saying -- and, I think, quite rightly -- as a law enforcement agent, if other agencies, be they regulatory agencies or others, are not following through on issues that fall within the purview of a law enforcement agent, he's going to pick them up. I would hope that law enforcement agencies in Canada take exactly the same view. That's what they're there for.
We're regulators. We are regulating a market. We have enforcement powers as part of our tools, but I would hope that the law enforcement agencies are watching us like a hawk, just like Eliot Spitzer is watching agencies in the U.S., and that they're moving in if they find that we are not performing our job.
JOE KILLORAN: [inaudible] This was a sales data mining presentation that could have saved multi-billions of dollars... [inaudible]. Thank you.
MIKE HORNBROOK: Okay. Can we move on? Over here, please.
JASON BURNS [phon]: Hi, my name is Jason Burns, and I have an [inaudible]. In 2004, my wife and I lost our life's savings, $50,000, to a certified financial planner from Toronto. He worked for a public company called [...]... Okay. And his name is [...] [phon]...
MIKE HORNBROOK: I'm sorry, sir. We had some ground rules here. You've just broken two of them. So can we move on, please?
JASON BURNS: Okay. Excuse me. This gentleman targeted primarily the elderly, until he declared bankruptcy last year. In December of last year, Toronto police charged him with defrauding over 50 people, primarily the elderly, of over $3.4 million. A Bay Street lawyer advised us as a group that the legal fees for a civil suit against this gentleman would cost over $1 million, so we have given up trying to get our money back. Going through a lawyer isn't a real option for someone with a wage earner's salary.
I was upset to learn that the gentleman had already declared personal bankruptcy once before. I don't think he should have been allowed to become certified as a financial planner again.
MIKE HORNBROOK: Is there a question?
JASON BURNS: Just a comment.
MIKE HORNBROOK: A comment. Okay. Does anybody want to respond to that comment? Please go ahead.
MICHAEL LAUBER: We're... you know, it's difficult, in the circumstance of what we understand from this, but it's possible, at the OBSI, we could help. You know, you're dealing with a bankrupt person. You don't know where responsibility and liability lies, but that's the type of thing that we could look into. Now, you'd have to start with making your complaint formally to the firm that the person was associated with, or worked for, and then escalate it to our office. I assume you've already started the formal complaint process. It's worth going ahead and trying.
JASON BURNS: Thank you.
MIKE HORNBROOK: We'll go over here.
MADELEINE CAMERON [phon]: Hello, my name is Madeleine Cameron. In 1978, I invested money in a registered debenture maturing in 1983. At the time, I was told to put it in a very safe place. Well, guess what -- I did, and I just found it about a month ago. [laughing] Now, I have the debenture, but I can't find out where my money is, because the company that I invested with had change-overs and change-overs and changeovers. So... where do I go from here?
MIKE HORNBROOK: Great question. Does anybody have an answer for that? [inaudible]
JOE OLIVER: Well, if you've purchased the debenture from an investment firm, from a broker, that broker has the responsibility to tell you—
MADELEINE CAMERON: It's not a broker. My lawyer did inform me, it's a reputable company -- they're still on the Toronto Stock Exchange, but I don't know... Like, I've been sent from one company to another, because they've had takeovers.
LINDA LEATHERDALE: I'll help you. Okay. I know [inaudible] the Toronto Stock Exchange, okay?
MIKE HORNBROOK: [inaudible]...
LINDA LEATHERDALE: Well, no, I've done this before, and I know somebody who can help, so I'll see you after.
MIKE HORNBROOK: I'm not clear [inaudible]... Did this lady—
LINDA LEATHERDALE: Yes, I—
MIKE HORNBROOK: Excuse me, just before we go ahead. Would this lady be well advised to spend a few hours on the Internet and research some of the history of the company that she... It's already been done?
LINDA LEATHERDALE: Well, there are some companies that will do stock market research and stock researches, but also, you can phone the TSX and you can literally find out whether they're still in operation, and I certainly have done that before. Sometimes, you're totally out of luck, if the company's been bought out, bought out, and it's not in existence. You say it's still publicly traded. So I think—
MADELEINE CAMERON: [inaudible]
LINDA LEATHERDALE: Yes, okay. Well, it's... Anyway. That's, I think, going to the TSX might be able to help us and I think we can try to find out if it's still in existence, or a good stock... or a debenture.
MIKE HORNBROOK: Does that help you, ma'am? Ma'am? It does. [inaudible] I'll take one over here.
MR. TEMPLETON [phon]: My name is Templeton. I just wanted to comment. I think we desperately need some agency with the clout and power to provide a needed remedy for the small investor, in case of dealer wrongdoing. Ombudsmans don't cut it, and most people can't afford a lawyer and going to court.
I'd like to give just two quick examples of the problems I've had.
Unknown buying occurred in my account a couple of years ago. Nobody could or would explain how these trades were on my monthly statement. I was assured that it would be straightened out by the next month. It wasn't. Nobody could still give me an explanation.
After that, a few weeks later, I contacted the IDA. They said no breach of security regulations had occurred, and they couldn't help. If unauthorized trading in an account doesn't breach security regulations, I wonder what the devil does!
MIKE HORNBROOK: [inaudible]
MR. TEMPLETON: When I opened my first RIF some years ago, it was under the old plan. Anyone who knows about RIFs knows that the minimum required withdrawal is smaller under the old plan than it is under the new plan. The first year I was to get a withdrawal, the dealer told me the amount. It looked fishy. I did the calculation. He was drawing my money, calculating on the new plan. They apologized, and sent me the right amount of money, which, of course, was a lower withdrawal.
The second year, the same dolgone thing. I asked them what the devil was going on -- did they expect me to do the calculation each year and tell them how much I'm supposed to get? That's their job.
So then they coughed up the information. Their computer wasn't set to calculate the old plan. When I complained to higher-ups, there was no action, and the ombudsman told me he was sorry the dealer didn't live up to my expectations. I moved the plan.
MIKE HORNBROOK: Joe Oliver, can you tackle that?
JOE OLIVER: Well, I mean, this... the problem here is that we're dealing with a specific case, and the case is described in a way that makes it clear that we should act, or should have acted, but I have to... I would have to take a look at the case. I mean, clearly, if there's a breach of securities rules, that's what we pursue. And we have pursued thousands of cases, and have fined firms and individuals, as I mentioned -- over $60 million in the last three years -- and have temporarily suspended licences and have permanently barred a number of people from operating in the industry. So, you know, we take these matters very seriously. As to your specific complaint, I... you know, I don't know what all the facts are, so I can't really comment on it.
MIKE HORNBROOK: Is there a statute of limitations on... Is there a timeframe, in other words, that complaints have to be filed with the investment firms?
JOE OLIVER: No. No, there isn't. The statute of limitations to which David Brown referred earlier related to civil cases. The regulatory matters aren't subject to that kind of statute of limitations. The only issue with older cases is the difficulty, sometimes, of gathering the evidence. But it's not a limitation issue.
MIKE HORNBROOK: David Brown, you've got a comment?
DAVID BROWN: Did I understand from the gentleman's description that he also contacted the ombudsman, and the ombudsman said that he was unable to help? Is that true?
MR. TEMPLETON: Pardon? I didn't understand what you said.
DAVID BROWN: Did you—
MR. TEMPLETON: About the trading in the account?
DAVID BROWN: Yes. Did you—
MR. TEMPLETON: No. No. No, I did not.
DAVID BROWN: You did not contact the—
MR. TEMPLETON: The ombudsman was the other case, about the RIF payments.
DAVID BROWN: And did you contact the ombudsman to see if the ombudsman could give you some assistance? And the reason I ask is, you asked whether there was somebody in the system who had the clout to be able to deal with the dealers, and to help small investors, and I just want to make the point that that's the role of the ombudsman. And the ombudsman has only been in this role for about a year-and-a-half, I think, Mike, and so—
MICHAEL LAUBER: Two-and-a-half.
DAVID BROWN: Two-and-a-half years. And so there are some, I think, some stories that we're hearing that pre-dated the time of the ombudsman. But the point that I wanted to make is, there is somebody out there who has that clout, who can listen to your story, and attempt to get a solution that, hopefully, is satisfactory, and that's the ombudsperson.
MR. TEMPLETON: Well, from everything I've read and seen in the consumer articles and everything, all the ombudsman can do is to recommend and suggest. He can't pick up a phone and say, "Give this man $5,000" or $10,000 or whatever it is that's at stake.
DAVID BROWN: I think that's true, but I also believe that there's never been a suggestion of the ombudsman that hasn't been acted upon by one of the dealers or one of the banks.
MICHAEL LAUBER: That's correct.
DAVID BROWN: So, theoretically, you're correct, but in practice, it hasn't worked out that way.
MIKE HORNBROOK: Thanks for your question, sir. I'll go over here, to Linda.
MRS. NIKLEWICZ [phon]: Yes, my name is Mrs. Niklewicz. I'm the only person here talking with the accent, I noticed. But I feel very bad about it. I'm 70 years old. I came 21 years to Canada. I worked all my life. I've been defrauded by a company here in Toronto, the [inaudible] [...].
MIKE HORNBROOK: Please don't give us the name. We don't want the name.
MRS. NIKLEWICZ: No, I'm not saying the name. It's a capital corporation. First he was at a registered company in '98. He went to a private company. He took my $180,000 U.S. He has 5 million from other inventors. And now, I phoned the security commission. Your people said to me, "Hire a lawyer." A lawyer was hired by 10 other people. And now the lawyer wants $2,000 from me every two months. He sends me a notice. "Pay 2,000 more, and 2,000 more."
MIKE HORNBROOK: So you hired a lawyer. You didn't go to the Securities Commission or—
MRS. NIKLEWICZ: The 10 people. Oh, I went to the Securities Commission too. They advised me to hire a lawyer.
MIKE HORNBROOK: Okay.
MRS. NIKLEWICZ: I want the Securities Commission to have power over the [inaudible] companies, and close those people down! What business they have here, to sit in Toronto, and take old people's money? And now I'm left with nothing!
MIKE HORNBROOK: I'd like to get a response from—
MRS. NIKLEWICZ: I can't pay any lawyer!
MIKE HORNBROOK: I'd like to get a response from the panel. Mr. Brown?
MRS. NIKLEWICZ: Control them! I told the police of them too, and nobody doing nothing!
DAVID BROWN: Again, it's difficult to tell from the woman's experience. It sounds as though that you did contact the Securities Commission, and the Commission was not able to find that there had been a breach of securities law. And for us to commence any kind of a disciplinary action or an investigation, there has to be a breach of the securities law. That's what our enforcement power are about.
And so, from the sounds of your story, the Commission could not find that there had been a breach of securities law. As I explained earlier as well, we don't have the power of ordering restitution. In fact, that's not part of our mandate. We are... we are responsible for ensuring that companies and brokers comply with the law. That's not to say there aren't complaints from people, where there has been no breach of the law. But I think the advice was correct -- if there's been no breach of securities law, and you still believe you have a claim, then that's a private claim that you have to make, between you and the company.
MIKE HORNBROOK: Okay. Thank you, ma'am, thank you for your comments. Over here, please?
HUGH LISSAMAN: Yes, thank you. My name is Hugh Lissaman. I'm a lawyer that practices in this area. I've done both sides of this area. And the question I have is, we've heard a lot about lack of restitution for clients, lack of access to it. We know the court system is time-consuming and costly. The IDA, of course, has the Alternate Dispute Resolution system in place, available for investors, and I'm wondering if there's interest in expanding the limits on that program, and devoting more resources towards it, if there's any thought in that direction.
MIKE HORNBROOK: Your question is for whom, sir?
DAVID BROWN: It's for Joe.
HUGH LISSAMAN: Primarily, the IDA.
MIKE HORNBROOK: The IDA.
HUGH LISSAMAN: But also the MFDA, if they're looking at putting similar vehicles in place for investors.
MIKE HORNBROOK: [inaudible]
JOE OLIVER: Yes, we have two systems of consumer redress. One is OBSI, and we've been talking a lot about that, and in my opinion, that is the preferred route for most investors, because it's free. Also, if you don't get satisfaction, you're not precluded from taking other alternatives: going to court, or using our second system, which is arbitration. Now, a
rbitration is not free. The cost of the arbitration must be shared between the two parties. However, arbitration is faster, cheaper, less contentious than the court system.
There's a limitation right now of $100,000. We originally set it up prior to OBSI's being created, as an alternative to the court system, in cases where accessing the courts was uneconomic, cases under $100,000, and in those cases, before OBSI, that was clearly a preferable route to the courts.
But we have been discussing the issue of whether that $100,000 should be increased or not. OBSI's number is $350,000 and because, with the creation of OBSI, the number of cases that the arbitrators have been looking at has declined, it didn't seem as pressing an issue to deal with arbitration. There have been, I think, about 80 cases in Ontario that were decided through arbitration, where the final decision by the arbitrator is not appealable. Some people are a bit uncomfortable about that, but what it means is, you can get something definitive, and it is binding.
MICHAEL LAUBER: I think the ombudsman system is going to be a more friendly system for most investors. Where we do an investigation, we try to make sure that we have a full understanding of the investor's information, of their situation and so forth, and whereas in arbitration, you know, it's head to head, arbitration is adversarial, and it's tough to make an effective presentation in an adversarial role, against an investment firm that's going to have a top-end lawyer there, representing itself. So I think it's, in general, the ombudsman system will be more suitable. And it's free, I should point out.
MIKE HORNBROOK: Thank you very much. It's 8 o'clock now, and we would start to wrap things up, but because of the volume of questions, we'll keep going to 8:20, says the note I have here.
A question from the Worldwide Web. Doesn't say where it comes from, but it's somewhere out there. This is for David Brown. "If the public asks for a public audit by the Ontario Auditor General of the activities of the OSC, as they serve or do not serve the small investor, will it comply with such an audit, or will it do what the Alberta Securities Commission is doing, by hiring lawyers to evade such a public audit?" Mr. Brown?
DAVID BROWN: Well, clearly, we would comply with any request of the Auditor General of Ontario. The Auditor General is indeed our auditor, and audits our financial records, as you would expect an auditor to do. I would point out, though, that in the Alberta case, the government is acting on specific information that was provided to the government by people internally, within the Securities Commission, who -- at least, apparently -- are in a position to be able to observe what's going on. And so, I think that there is perhaps a very strong reason why the government would want to react as they have in Alberta.
We don't have those kinds of complaints here in Ontario. If they were to surface, then we would welcome the Auditor General to come in and do that kind of work.
MIKE HORNBROOK: Over here, to Linda.
LINDA LEATHERDALE: Yes.
MIKE HORNBROOK: Next question.
JOHN LAWRENCE REYNOLDS: Yes, my name is John Lawrence Reynolds. I wrote a book called The Naked Investor. And I'd like to...
Thank you. I'd like to direct my question to both Mr. Brown and Mr. Oliver. Both the Ontario Securities Commission and the Investment Dealers Association fulfill two functions. One is to represent the securities industry, one way or the other; and the other is to represent retail investors, the people here tonight. I'd like to ask Mr. Oliver specifically, why, of the 23 directors on the board of the IDA, all 23 represent the securities industry, and nobody represents the investors?
JOE OLIVER: That's apparently a popular point, but it's not correct.
There are eight members of the public, who are fully independent, who are on our Board.
JOHN LAWRENCE REYNOLDS: [inaudible]
JOE OLIVER: And the new Board will have eight members of the public -- very distinguished people, from across the country -- and so far, on the Board, amongst the industry people, there will be about 10 additional people.
Now, the point... There are a couple of points to make. First of all, we're committed, over the next two years, to move to a 50-50 split between public and industry members. We're now at about 40 percent, or, I guess, a little higher than that.
But the other thing to note is that there has never been a time, in my recollection or anyone else's, where the public directors, as a group, have been outvoted. If the unthinkable were to happen, that matter would be immediately brought to the attention of the Securities Commission.
JOHN LAWRENCE REYNOLDS: For the purpose of the audience here tonight, could you identify those eight members and their affiliation for us, please?
JOE OLIVER: Well, I can try to remember, yes. I mean, they're... Jim Baillie, who's a former Chairman of the Ontario Securities Commission, and a lawyer; Ken Copland, who is a retired person; Alain Rhéaume, who works at an affiliate of BCE; Daniel Leclair—
JOHN LAWRENCE REYNOLDS: Of BCE? And a board member of the Ontario Securities Commission?
JOE OLIVER: Pardon me?
JOHN LAWRENCE REYNOLDS: I thank you for your response, Mr. Oliver, but I don't hear any one of those gentlemen who would be sitting in this audience tonight -- that's my point.
UNIDENTIFIED MALE SPEAKER: That's right.
MIKE HORNBROOK: I'm sorry -- you had a question for Mr. Brown as well?
JOHN LAWRENCE REYNOLDS: Well, as I understand, and Mr. Brown can correct me on this as well—
MIKE HORNBROOK: You're getting two, because you wrote a book.
JOHN LAWRENCE REYNOLDS: All of the members of the OSC Board are, in fact, within the Ontario Securities Commission exclusively. Is that not correct?
DAVID BROWN: I don't know what you mean by "within the Securities Commission exclusively." We have a 12-person Board. Three of them are full-time members of the Securities Commission -- myself, and two Vice-Chairs -- and 9 are independent part-time Commissioners, who are chosen to fill a variety of skill-sets that we need in order to perform our functions.
JOHN LAWRENCE REYNOLDS: My point is, they are Commissioners, though.
DAVID BROWN: But they are Commissioners, yes.
JOHN LAWRENCE REYNOLDS: Thank you. Thank you.
MIKE HORNBROOK: Thanks for that one. Over here, on this microphone.
DIANE URQUHART [phon]: My name is Diane Urquhart, and I have a question for the Ontario Securities Commission. The question relates to the statement made this evening that the Ontario Securities Commission does not have a mandate to seek restitution for investor losses that are caused by malfeasance of either financial advisors or insiders of public corporations. I'd like to ask Mr. Brown to comment on two issues.
In December and following January of 2005, a settlement agreement was reached with five mutual fund companies whose management agreed to permit market timing to occur, which was to the detriment of the longterm investors in the funds. A $205-million settlement agreement was reached, wherein it was determined that the mutual fund companies were to repay those settlement funds to the investors who lost money. That's one point. The second part of my question—
MIKE HORNBROOK: Is there a question there?
DIANE URQUHART: Yes. The question is, if you do not make arrangements for restitution of investor losses, 205 million seems to be a lot of money, and we don't want to deal with legal semantics here. The practicality is that, as a result of the intervention of the Ontario Securities Commission, $205 million is going back into the pockets of aggrieved investors, and that would not have happened without the intervention of the OSC. So my observation on that: how does that stack up with the view that you do not feel you have a mandate to make arrangements for restitution of losses?
The second part of the question—
MIKE HORNBROOK: Why don't we just handle that one?
DIANE URQUHART: Oh, we'll go with the first.
MIKE HORNBROOK: David Brown, do you want to comment on the settlement in the market timing cases?
DAVID BROWN: Whenever we get involved in an enforcement action, one of the first things we look at is to see whether investors have been harmed or hurt by this, and whether, in the course of our enforcement action, there is a way that we can try to return money to investors.
That's different than the answer that I gave previously, as to when investors believe they've been harmed, and we're not involved in an enforcement action and not looking, as part of that enforcement action, to see if we can return money to investors.
As you point out, though, that was a settlement. That was not an action that we brought as a Commission, because had we brought that action as a Commission, we would not have had the ability to provide restitution. It's one of the reasons why we were interested in entering into a settlement agreement with those funds, because we could see that, through that settlement process, we had an opportunity to make a very significant return to investors.
MIKE HORNBROOK: We have not that much time, and I still see six or seven questions there. If you could make your... I'm able to let you make your second point, if you do it very quickly.
DIANE URQUHART: The second point is, Section 128, subsection 7, of the Ontario Securities Act, enables the Ontario Securities Commission to make an allegation of a violation of the Ontario securities law, and to go to a court, and to prove this, and to have the judge have the opportunity to reach the same agreement, and to seek a restitution order for specific payment to the aggrieved investors. To my knowledge, the Ontario Securities Commission has never used this power, and so I disagree with the position of Mr. Brown, that the Ontario Securities Commission has no such authority within its enforcement operations.
MIKE HORNBROOK: Thank you.
DIANE URQUHART: Why not? Why should I agree with you, Mr. Brown? MIKE HORNBROOK: Do you want to respond to that?
DAVID BROWN: Yes. Section 128 of the Securities Act enables us, in appropriate circumstances, to go to a court, and to seek from the court an order that securities laws have been broken, and to ask the court, in the course of making that order, to provide, among other things, restitution.
And in fact, there are probably 18 or 20 things that we can ask the court to provide.
And Ms. Urquhart is right -- that section has not been used by the Commission. In fact, it has been used once by the Commission, and it has not been a very satisfactory result.
We're looking at that, to see if there are either ways that we can have the government amend that section, to make it work better for us.
Our theory is that we will get bogged down quite significantly in the court system if we use that section. We just don't think that it's designed in a way that will enable us to adequately provide that remedy.
Frankly, it's one of the reasons why we've asked people to come here tonight. We're trying to determine ways, changes that we can make, that will indeed assist us, or assist investors, in getting restitution, and that's one of the things that we will be considering.
MIKE HORNBROOK: To this microphone now.
MOHAMMED SHOAGA [phon]: Hello, my name is Mohammed Shoaga. In 1997, I invested $51,000 U.S. with a brokerage firm. In 1999, the brokerage firm says to me, "Your stock is going down." Another firm is recommending the same stock for 'buy.' The brokerage firm sold my account out, but there's still money in it. What protection do you have for false margin call, Mr. Oliver?
JOE OLIVER: Sorry, could you repeat the last question? The last sentence? What... No, just the last sentence. I didn't hear the...
MOHAMMED SHOAGA: The brokerage firm is recommending the same stock, they did an analysis that this stock should be bought. The same day, another brokerage firm sold my account out, but there's still money in the account, and I'm asking now, the OSC or you, what protection do you have against false margin calls?
MIKE HORNBROOK: Oh, margin calls.
JOE OLIVER: Oh, it's a margin call. Oh, I see.
MOHAMMED SHOAGA: Margin calls.
JOE OLIVER: Okay. Well, on the assumption the margin call was incorrectly taken, well, then you have a legitimate complaint and you should register that complaint with us, and you should speak to OBSI, because I mean, if you've been sold out inappropriately, then you have some rights, and you should inquire.
MIKE HORNBROOK: Go to this microphone over here. I'm sorry that we are not going to get all the questions, all the people who want to get in, in the time we have left. To you, madam.
PAMELA REEVE [phon]: My name is Pamela Reeve. I have a question for Mr. Brown. It's a general question about investor protection, and the regulatory regime in Ontario.
The OSC administers and enforces the Securities Act and the Commodity Futures Act. Now, if an inventory brings forward a complaint, however, relating to a broker or a firm that is a member of the IDA, then they're sent to the IDA to review that complaint. However, the IDA does not have the authority to administer or enforce securities law. So how are investors who have dealings with IDA member firms, protected by those laws, when the IDA does not have the authority to enforce or administer them?
DAVID BROWN: Well, let me start, but I'll turn it over to Joe. Your assumption that the IDA does not have the ability to discipline brokers if they breach securities laws is wrong, and indeed, that is very much part of the mandate of the IDA. And although the laws are set by the legislature, or by some of the rules that we pass, the IDA is responsible for ensuring that their members comply with those laws. We do oversight reviews of the IDA, to ensure to our satisfaction that the IDA is performing under that mandate, but that's very much part of their responsibility.
MIKE HORNBROOK: And Joe Oliver, you get...
JOE OLIVER: Well, that's right. I mean, we conduct financial audits and business conduct audits of all our firms -- in most cases, every year. They're very extensive, it's a great deal of time devoted to them, and as a result of those investigations, or those audit reviews, we may decide to pursue firms for non-compliance with our rules. So there are really two sources of issues that result in prosecution. One are the complaints, which we will receive from investors or others. And secondly, our own internal investigations of each of the firms.
DAVID BROWN: Mike, can I just supplement that?
MIKE HORNBROOK: Very briefly.
DAVID BROWN: Because I think there's another issue here. I think there are two levels here that you perhaps should be concerned about. One is, if a firm is not complying with securities law, and the answer that Joe and I have given is the one, I think, that is correct. But if you're also concerned that you've lost money, and you're looking to recover money from a firm, then that's where the ombudsperson comes in, and that's why we're encouraging you to go to the ombudsman with your complaint. It's a free service. You're looking for someone who's got the clout and the authority, and that's what the ombudsman can do.
MIKE HORNBROOK: Thank you for that. Linda, over here. Yes, sir.
UNIDENTIFIED MALE SPEAKER: I'm on the horns of a bit of a dilemma here, because Mr. Brown, at the beginning of the evening, suggested that we talk about our experience with the regulatory system -- gaps, problems, things that can be improved. Unfortunately, though, my experience with this system is limited to Ground Rule #2, which is a major case under investigation. So I can't talk about it. But what I can do is make a very general point on lessons of experience arising from this nonmentionable case, that will respond to Mr. Brown's request.
And that is that I think the OSC has a major communications problem, in terms of dealing with individual investors, and I think that you need to establish a correspondence unit so that when you are sent emails with specific recommendations on regulatory procedure for dealing with major issues that affect investor interests and investor asset values, those emails get answered. Because emails and letters that I have sent to you personally, and to Minister Phillips and Mr. Sorbara, have been ignored.
MIKE HORNBROOK: Thank you for your question, sir.
MIKE HORNBROOK: You wish to comment, Mr. Brown?
DAVID BROWN: Thank you very much. That's exactly the advice and the information that we're looking for. I'm dismayed that that indeed has happened to you. But we'll make sure that we address that. So thank you.
MIKE HORNBROOK: We have time for two more questions. And I see three people at the mike down here, and... hard to see, on the other side. So I'm going to take one from either side. My apologies to the people who are in line down there -- we won't get to you. I'm sorry about that. To this microphone. Yes, sir.
ROBERT KYLE [phon]: Yes, thank you. My name is Robert Kyle. I have a question for Mr. Brown. To preface my question, I would ask, do you know who Mr. David Wild is, and who Mr. Frank Quennell is?
DAVID BROWN: I'm sorry -- Mister who?
MIKE HORNBROOK: David Wild, is it?
ROBERT KYLE: Yes.
MIKE HORNBROOK: Why don't you tell us who he is.
ROBERT KYLE: Well, the Saskatchewan Financial Services Commission, and the Attorney General of Saskatchewan, have both been contacted by myself, because I have provided, or tried to provide them, with information for the purposes of investigation. I don't know whether I should mention the mutual fund company or not.
MIKE HORNBROOK: We'd rather you didn't.
ROBERT KYLE: It's on the public record.
MIKE HORNBROOK: We've asked people not to name individuals or firms.
ROBERT KYLE: Right. Then my question is this. A whistleblower, who is now deceased, produced a transcript of allegations against a large mutual fund company, and an individual in Saskatchewan, and admitted that before the SFSC, the Saskatchewan Financial Services Commission, on February 6, 2004.
I tried to produce information for the Saskatchewan Financial Services Commission. I issued letters to that Commission, as well as the Attorney General.
Why has the Ontario Securities Commission not contacted me, for the purposes of collection this information, when they have been directed twice by the Attorney General of Saskatchewan, as well as the Saskatchewan Financial Services Commission, to collect that information? And secondly, how does this inaction on the part of the OSC instill confidence in the investing public, that your organization is there to investigate and to protect the investors, and to administer the Ontario Securities Act?
MIKE HORNBROOK: Thank you for your question. Mr. Brown?
DAVID BROWN: Well, Mr. Kyle, as you say, this is a matter that's under investigation in Saskatchewan by the Saskatchewan securities commission. It's the first I've heard of it, if the Attorney General in Saskatchewan is involved, but I'll take your word for it.
know of no unfulfilled requests that have come to us from either of those bodies, and I know that we cooperate with our regulatory colleagues across the country, on a daily/weekly basis. If there was unfulfilled information, I would hear from David Wild within hours. And so, I'm afraid I can't comment on your allegation because I'm just not aware of any such deficiency.
ROBERT KYLE: Mr. Brown, I have... A woman up front, Sandra Gibson [phon], just provided you with the letters that were addressed to me from the Attorney General. Now you have full knowledge of it.
MIKE HORNBROOK: Thank you for that, sir. Thank you for your question. And here's our last one tonight.
DON SLOMAN [phon]: My name is Don Sloman, and I understand that every financial advisor that works for a reputable company, they are bonded, that if they default, that they're insured, that the depositor will get their money. Is that right? I'd just like to know the answers. Are financial advisors bondable, or bonded?
MIKE HORNBROOK: Are they bonded? Mr. Oliver, do you have an answer [inaudible] financial advisors?
JOE OLIVER :I don't.... I don't think that... I don't think that they are. I'm not certain, to tell you the truth...
MIKE HORNBROOK: Anybody else?
JOE OLIVER: ... on this issue. I mean, the important thing, of course, is whether the firm will back up the individual when there is a problem. And of course, they must do so. And, furthermore, there's a Canadian Investor Protection Fund that protects people in the event of a bankruptcy of a member firm. So there really isn't... There should not be an issue of the inability of the firm to make good on losses that are... that they're ordered to make good on. And that, I think, is the important thing.
MICHAEL LAUBER: In our case, in the case of the Ombudsman, we make our recommendation to the firm, not to the advisor. If the firm chooses to collect the money from the advisor, that's the business of the firm. So we just deal with the organization.
MIKE HORNBROOK: Ladies and gentlemen—
MICHAEL LAUBER: The important issue is that you're being protected. That's the issue.
MIKE HORNBROOK: Ladies and gentlemen, we've learned a lot from the audience and the panel tonight. I hate to call the evening to a close, but we have run out of time. We're going to get one-minute wrap-up remarks from each of the members in the panel, in reverse order from how we started, so I'll call on Larry Waite from the Mutual Fund Dealers Association for some brief remarks.
LARRY WAITE: Thanks, Mike. I was told we had 30 seconds for the closing remarks, so my remarks will be very, very brief. First of all, again, I would like to thank each and every one of you for taking the time to be here tonight. I really do, and can, appreciate how painful it must have been for some of you to relive some of these experiences. But I assure you that the MFDA has listened, and we take your comments and suggestions seriously. Thank you very much.
MIKE HORNBROOK: Thank you. Joe Oliver, from the Investment Dealers Association. You can do it right there, Joe.
JOE OLIVER: I'll come over. I just want to tell you, I think this has been an informative meeting for me, and I hope it has been for you. My objective tonight -- and I think, the objective of everyone -- was partly to tell you what we're doing to protect Canadian investors, but it was mainly to listen to your concerns and to your ideas.
I just want to tell you there are a number of ideas we intend to pursue over the next few months, in conjunction with the regulators, and some of them, we talked about this evening. Developing more user-friendly account-opening documents, I think, is really important; getting more clarity about fees, and providing some investment performance data for you, in your statements.
There was a comment about statute of limitations, and we're going to modify our consumer protection brochure to alert investors about these changes that have occurred, and they do differ from province to province, across the country.
On the question of criminal pursuit of wrongdoers, we have been trying for some time to get the governments to create special courts for white-collar crimes, and we're going to continue to pursue that, and also to tighten up some rules relating to parole, which we think are a little bit lax. But generally speaking, what we want to do is respond to your ideas, and when we speak about the public interest mandate, you're the public we're talking about. So thank you very much for attending.
MIKE HORNBROOK: Thank you, Joe.
MIKE HORNBROOK: I'll call now on Michael Lauber, the Ombudsman for Banking Services and Investments.
MICHAEL LAUBER: Thank you. I'd just like to thank everybody for being here tonight. I would just encourage people that if they feel that they have been dealt with poorly, that they've experienced loss, or been disadvantaged as a result of the action of their broker, their advisor, don't be afraid to complain to the firm. I think the comment made at the start, that many people are very reluctant to bring their issues forward, to bring their complaints forward and talk about their situation. But do contact our office. Do contact your firm first, and make them aware of your concerns. But the Ombudsman office is there, the whole complaint handling system is there to help you, and so we look forward... Well, we don't look forward to you having an experience and coming to us -- we look forward to you having success. But if you don't, that's what we're there for.
MIKE HORNBROOK: Stan Buell, you're on the other side of the divide here. You're an advocate for investors. Your comments, please.
STAN BUELL: I've been listening very carefully tonight, and certainly, I've heard a few questions. I know there are a great number of questions that were submitted by our members to the OSC, and they've made an undertaking to respond to all of the questions that have been recorded, and those will be displayed on websites as we go forward. I'd also like to say that I recognize there are problems in getting disputes properly addressed. I would suggest your first call should be to the OSC inquiries section. We're particularly concerned about the Ontario Limitations Act, which reduces the limitation period from six years to two years. The initial legal advice we have is that this could impact on any of you who have had a problem since the 1st of January, 2004. So I suggest your first call should be to the OSC. Get some direction from them. Find out from a lawyer how the limitation period will affect you, and then you can decide whether you should go to OBSI, through the process that the industry describes, and many of you have tried, and you've taken several years to get through that process, and you could be barred from civil action if you wait several years when you're aware of the Act.
MIKE HORNBROOK: Michael?
MICHAEL LAUBER: [inaudible] It comes back to the Limitations Act, and we've been researching the Limitations Act and the effect it has, and one of the things is, there's a deferral period in the Act, where if you're in a complaint handling process, the clock stops. And we're doing the research, legal research and so forth, to make sure that we qualify -- we put the customer in the position that we qualify for the clock to stop when they're within our process. We can't guarantee that, but it looks like we can do that. And that will mitigate some of your concerns.
STAN BUELL: Well, we're really concerned about the time element, because in our experience, very few people are able to get their... If it's a life-altering event, like losing your life's savings, most people take more than two years just to learn to deal with the issue. Then they spend a couple of more years trying to get it resolved. Now, we've approached the Attorney General of Ontario, and I believe that the OSC will join us in that effort, to try to get that limitation period restored. In the West, they have a limitation period of up to eight years. Most of the other provinces -- and we haven't heard from all of them yet -- but they still have the six-year limitation period. My question is, why have the regulators who offer investor protection allowed this limitation period to be reduced from six years to two years?
MIKE HORNBROOK: We'll take that as a rhetorical question, Mr. Buell.
STAN BUELL: Yes.
MIKE HORNBROOK: I'm going to turn now to David Brown, who's stepping down as the Chairman of the Ontario Securities Commission at the end of June. His replacement has not been named yet. I just throw that out there, as you give us your final remarks, David.
DAVID BROWN: Well, thank you very much. As Stan mentioned right at the beginning of our proceedings, that about a year ago, he brought to our attention the report that the Small Investor Protection Association had prepared. I did indeed read it over the weekend, Stan, and I must say, I was appalled at some of the stories that I read. And so, out of that report came the idea that I would like to bring investors together, to tell us their stories, to help some of those stories come alive. I frankly wanted my colleagues from the Ombud's office and from the IDA and the MFDA to hear some of these stories, and I wanted to see if we could determine from those stories whether there are areas of the system that aren't working, whether the areas of the system are not working together, and whether there are changes and improvements that we can make.
I think there are a number of ideas coming out of this tonight. I thank you all for coming and sharing those stories with you. We have said that, as Stan has said, we will attempt to answer all of the questions that have not been answered. We will do it electronically, but we'll also post them, so that people who don't have access to the Internet will be able to see them as well. And we'll produce a report of what we've learned tonight, and some of the ideas that we are prepared to take forward.
So thank you all for coming out. I think we've achieved the objectives that we were hoping to achieve. As Mike says, I'm stepping down. I can tell you that there are many of my colleagues here tonight. I think that this is a priority of the OSC. I think there's an institutional momentum at the OSC that will carry this, long after I'm gone. So thank you again for coming out.
MIKE HORNBROOK: It's been a valuable evening. I know I've learned a few things about what investors' problems are, and what the regulatory difficulties are, around them.