Saturday, April 30, 2005
White Collar Crime is a Crime of Violence. Diane Francis
“..White-collar crime is a violent act. By my rough account, there have been at least half a dozen suicides by investors who are victimized and lost everything as a result of the Bre-X debacle. That's just the ones that came to my attention during a book research. How many people in other mining outfits lost their savings? How many marriages fail because of this? How many people lost their health because of the fraud? Or their houses and lifestyles? How many children's lives were affected? White-collar crime is violent because it mugs lives, livelihoods and self-esteem. That's why the American judges are correct in imposing tough sentences on these people. And yet no one has been charged or even investigated in Canada for Bre-X because the case would be too expensive for the cash-starved Mounties.... ” Source Diane Francis, “White collar crooks: U.S. hits them hard”, Financial Post, March 22, 2005 pgFP2[the Bre-X scandal cost investors an estimated $ 9 billion]
United States illegalities, sadly accepted in Canada
This article could apply to mutual fund and proprietary fund practices in Canada, also double dipping. Regulators still failing to enforce the simplest rules of fiduciary behavior in Canada. Class action lawyers might have to make it right.
New York Times
April 30, 2005
Mutual Fund Firm Is Fined; Will Repay $11 Million to InvestorsBy JENNY ANDERSON
addell & Reed, one of the country's oldest mutual fund companies, paid $16 million to settle charges brought by regulators saying that it fleeced investors by switching them into financial products that benefited the brokers and the company at the expense of investors.
NASD, the investment industry's regulatory organization, said Waddell & Reed, which settled the case less than a week before it was scheduled to go to trial, would pay a $5 million fine and provide up to $11 million in restitution to clients who responded to a company campaign to move their investments from one variable annuity to another.
The switch earned the brokers more fees and commissions but cost customers more, NASD said. The company, which is based in Overland Park, Kan., and has $38.2 billion in assets under management, will also pay a $2 million fine to state regulators. The company did not admit any wrongdoing.
"What was most troubling about the case is what a concerted and aggressive campaign it was on the part of the company," said Mary L. Schapiro, vice chairman of NASD. "There was little regard given to whether this was good for investors."
In a complaint filed in January 2004, NASD charged Waddell & Reed with violating rules that dictate the steps brokers must take to ensure that investments are suitable for clients. From January 2001 to August 2002, the firm tried to switch customers from variable annuities issued by the United Investors Life Insurance Company to similar annuities from the Nationwide Insurance Company, after Nationwide agreed to a fee-sharing agreement that would benefit the company's brokers and bottom line.
The switches cost investors almost $10 million in surrender charges - fees paid for exiting a variable annuity contract early.
The settlement imposes six-month suspensions and $150,000 fines on Robert Hechler, Waddell's former president, and Robert Williams, the former national sales manager who is now senior vice president for public affairs. Neither man admitted guilt.
"This is a positive step for Waddell & Reed, our financial advisers, our employees and our clients," said Keith A. Tucker, the firm's chief executive. "These matters date back several years and their removal as an issue is an important action."
New York Times
April 30, 2005
Mutual Fund Firm Is Fined; Will Repay $11 Million to InvestorsBy JENNY ANDERSON
addell & Reed, one of the country's oldest mutual fund companies, paid $16 million to settle charges brought by regulators saying that it fleeced investors by switching them into financial products that benefited the brokers and the company at the expense of investors.
NASD, the investment industry's regulatory organization, said Waddell & Reed, which settled the case less than a week before it was scheduled to go to trial, would pay a $5 million fine and provide up to $11 million in restitution to clients who responded to a company campaign to move their investments from one variable annuity to another.
The switch earned the brokers more fees and commissions but cost customers more, NASD said. The company, which is based in Overland Park, Kan., and has $38.2 billion in assets under management, will also pay a $2 million fine to state regulators. The company did not admit any wrongdoing.
"What was most troubling about the case is what a concerted and aggressive campaign it was on the part of the company," said Mary L. Schapiro, vice chairman of NASD. "There was little regard given to whether this was good for investors."
In a complaint filed in January 2004, NASD charged Waddell & Reed with violating rules that dictate the steps brokers must take to ensure that investments are suitable for clients. From January 2001 to August 2002, the firm tried to switch customers from variable annuities issued by the United Investors Life Insurance Company to similar annuities from the Nationwide Insurance Company, after Nationwide agreed to a fee-sharing agreement that would benefit the company's brokers and bottom line.
The switches cost investors almost $10 million in surrender charges - fees paid for exiting a variable annuity contract early.
The settlement imposes six-month suspensions and $150,000 fines on Robert Hechler, Waddell's former president, and Robert Williams, the former national sales manager who is now senior vice president for public affairs. Neither man admitted guilt.
"This is a positive step for Waddell & Reed, our financial advisers, our employees and our clients," said Keith A. Tucker, the firm's chief executive. "These matters date back several years and their removal as an issue is an important action."
Thursday, April 28, 2005
ASC carries out rapid investigation, well done
despite allegations of impropriety and dysfuncion at the Alberta Securities Commission, you have to give them credit for acting quickly to investigate.
The problem is that they acted quickly to launch an investigation into catching the scared employees who actually risked their careers to speak out about management........................when they were supposed to launch the investigation into the improprieties. Oooops! Sorry guys.
Instead of hiring KPMG to do a complete check of who was saying what over the e-mail system, they should have used the time, energy and resources to reassure the public that they were looking into the allegations of impropriety.
Where do they get managers like this? At the school of sociopathic corporate climbing? To immediately initiate an internal witch hunt (sorry, but that is the appearance in the eyes of this observer) to feret out the bastards who dared to tell the truth as they see it, is so typical of bad management with something to hide.
What employees did is called blowing the whistle, and it is well documented in social studies and human behavior studies. Others call it telling the truth in the public interest. The reaction is all to often the same and the ASC does not dissapoint in this regard. They take well rehearsed and well documented steps to threaten, intimidate, scare, and otherwise bully and retaliate against those who dare speak out against them.
How sad.
How typical.
The problem is that they acted quickly to launch an investigation into catching the scared employees who actually risked their careers to speak out about management........................when they were supposed to launch the investigation into the improprieties. Oooops! Sorry guys.
Instead of hiring KPMG to do a complete check of who was saying what over the e-mail system, they should have used the time, energy and resources to reassure the public that they were looking into the allegations of impropriety.
Where do they get managers like this? At the school of sociopathic corporate climbing? To immediately initiate an internal witch hunt (sorry, but that is the appearance in the eyes of this observer) to feret out the bastards who dared to tell the truth as they see it, is so typical of bad management with something to hide.
What employees did is called blowing the whistle, and it is well documented in social studies and human behavior studies. Others call it telling the truth in the public interest. The reaction is all to often the same and the ASC does not dissapoint in this regard. They take well rehearsed and well documented steps to threaten, intimidate, scare, and otherwise bully and retaliate against those who dare speak out against them.
How sad.
How typical.
Holy government cover-up Batman!!
Here is what the role of the provincial auditor is
“The Office of the Auditor General exists to serve the Legislative Assembly and the people of Alberta. Accountable to the members of the Legislative Assembly, we are responsible to the public who want assurances that the government's financial reporting is credible. Consequently, our core opinion work is performed to add credibility to the financial reports of organizations accountable to the Assembly. But our legislators want more, and rightly so. In effect, we are charged with making recommendations to improve the economic and operational health of the Province”.
http://www.oag.ab.ca/
Below is from Alberta Securities Commission part time Commissioners:
ASC sets conditions for co-operation
All information involving enforcement matters to be kept confidential
Thursday, April 28, 2005
By IE Staff
http://www.investmentexecutive.com/client/en/News/DetailNews.asp?Id=28572&IdSection=8&cat=8
“The Alberta Securities Commission has advised the Alberta Auditor General of the extent to which it will co-operate with his examination of the commission”.
?????????
Does this mean what it sounds like it means? An agency of the government is actually dictating to the provincial auditor, the terms of an investigation into themselves.
I will try to remember that line when Revenue Canada next needs to talk to me………………………or when I have something to hide. Do you think it will actually work?
Do they?
“The Office of the Auditor General exists to serve the Legislative Assembly and the people of Alberta. Accountable to the members of the Legislative Assembly, we are responsible to the public who want assurances that the government's financial reporting is credible. Consequently, our core opinion work is performed to add credibility to the financial reports of organizations accountable to the Assembly. But our legislators want more, and rightly so. In effect, we are charged with making recommendations to improve the economic and operational health of the Province”.
http://www.oag.ab.ca/
Below is from Alberta Securities Commission part time Commissioners:
ASC sets conditions for co-operation
All information involving enforcement matters to be kept confidential
Thursday, April 28, 2005
By IE Staff
http://www.investmentexecutive.com/client/en/News/DetailNews.asp?Id=28572&IdSection=8&cat=8
“The Alberta Securities Commission has advised the Alberta Auditor General of the extent to which it will co-operate with his examination of the commission”.
?????????
Does this mean what it sounds like it means? An agency of the government is actually dictating to the provincial auditor, the terms of an investigation into themselves.
I will try to remember that line when Revenue Canada next needs to talk to me………………………or when I have something to hide. Do you think it will actually work?
Do they?
Did Ralph really say that? An elder abuse example.
I was speaking to a reporter the other day, who was valiantly trying to understand just what all the fuss was about with the ASC. He wanted to know just who is hurt if indeed the regulator is lax, lazy, or other. By way of example he said that fedderal finance minister Ralph Goodale stated the other day that he has "not had any complaints" about securities regulators or lack of regulation from Canadian consumers. If this is true, here is my answer. If not true, then no worries.
My answer is that if you are the typical "good" investment client, you might fit this profile:
--older, perhaps in your 60's, 70's or older
--wealthy, as often happens when you have lived long and worked hard
--trusting, and respecting of authority and large corporations
--vulnerable, in that you are not aware of everything, and willing to take professional advice
--you may be alone, you may even be frail or in poor health
--Certainly there are other good investment clients, but if you throw ever good client into a basket, you will tend to come out with more who fit into these kinds of categories.
So if you are able to even half way agree with the above, keep reading. If you are not, please go to www.blogspot.com and build your own story.
So we now move ahead to the scenario, where this typical, older, vulnerable, trusting, perhaps frail client has been taken advantage of by a commission salesperson, posing as a professional investment advisor at a major IDA investment firm. Trust me, it happens. Perhaps even one owned by a big five bank, as they are the largest owners of dealerships in Canada.
What does the client do? First, and most often perhaps nothing. I have seen one 90 year old widow, with a $300,000 account, say about her trusted advisor, "he is such a nice young man". While the advisor was turning over her account (without consulting her) to generate some $30,000 in commissions each year.
What do they do if they are fortunate enough to clue in or have relatives to assist them?
They ask their advisor if everything is as it should be. This is a natural first step, and it is akin to asking Michael Jackson if he is really supposed to be touching you there. The answers will tend to support, or reassure the client that all is well, perhaps explain that markets are down, and there is nothing that can be done. I have even see some ego driven advisors get angry at elderly clients, and yell at them for mistrusting them, or questioning them.
This would constitute verbal abuse piled on top of financial abuse toward the elderly.
If the client has the energy, courage, and emotional strength to put up with more of that, they may be encouraged to write to the office manager, or to the firm in question. I have seen a few responses to letters like this, and they are not encouraging. Supposedly a company compliance officer looks at matters such as this, but I am not convinced they are not more interested in protecting the firm at all cost instead of protecting the client. I could be jaded on this, so ask a few opinions within the industry before you accept this opinion as true. End result in my experience is that the client is "handled", with letters minimizing, explaining away or brushing off the concern. The very last thing they will ever put in writing is that they agree and admit that the client was done wrong. That would be like asking Michael Jackson's lawyers to admit their client did something wrong.
So we now have taken up to a year or more out of an elderly persons life, trying to get straight answers on their life savings, and how it was handled.
If they have some real bench strength (support) in the family, they may get help and write a letter to the Provincial Securities Commission making their concerns or complaints known. Here they will meet with two beaurocratic (how the hell do you spell that?) obstacles rather than find help. Obstacle number one is that the commissions are so understaffed (and allegedly dysfunctional employers, .............but I digress) that they can only investigate cases "of importance". This means a yes to a few cases where they score media points (like a large or popular case for example), and "NO" to mom and pop investor cases. They will not tell you this however (misleading advertising), but will instead refer you to the Investment Dealers Association (IDA) , whom they claim do all the investigations for IDA registered firms. Never mind that the IDA is not powered by any law that allows them to do this, nor are they impartial. They are called the Investment Dealers Association because they represent and are paid by the Investment Dealers.
You can imagine the kind of response the client will now get to her concern or compalint...........if she is not dead or exhausted by the whole affair by this time.
So, a frail, trusting, vulnerable, elderly person, who may have been victum of a financial predator has spoken or written to four to six different people, departments, or organizations at this time, each one of which gave her a promise that they are, "there to protect or serve her interests". Each one has either ignored her, abused her further, or told her to go somewhere else, (without being honest enough to tell her that her status is "not important" enough to warrant the same treatment as other cases).
Just noticed, I took to giving this ficticious client a female gender. I should explain. In addition to living longer than males, females listen and accept advice from professionals better than males do (ever seen a guy ask for directions?) and thus in my story about the "ideal" client,and it is my story, my version of an ideal client is female in addition to the points above.
Where was I? Oh, so now this poor client has gotten the "runnaround" by almost each and every avenue they can think of (barring legal action, and when did you last meet a senior citizen that wanted to start a court case in their declining years?) and this includes government agencies, self regulatory agencies, and the largest and most trustworthy (advertising promise) banks in the country. I would not, do not, could not expect them to continue on. To continue to emotionally drain themselves fighting against what feels like an "entire industry", in denial that there is a problem.
To get to the punch line.............how are these people expected to continue on, and write another letter to ralph goodale, or ralph klien or ralph anyone. (and I am a huge fan of ralph klien, by the way) We already know the type of answer they would get. "thank you for your correspondence, I have passed your concern to the proper department and I can assure you...............blah, blah, blah"
If anything happens at all, their complaint may get handed back to the dysfunctional or incapable government regulator who has already dismissed it once.
I give up. And so do clients. And that Ralph, is why you are not getting flooded with letters from abused investors. Please consider this when (if) you say you dont think there are many abused investors.
Thanks to all the Ralphs out there who need to listen.
My answer is that if you are the typical "good" investment client, you might fit this profile:
--older, perhaps in your 60's, 70's or older
--wealthy, as often happens when you have lived long and worked hard
--trusting, and respecting of authority and large corporations
--vulnerable, in that you are not aware of everything, and willing to take professional advice
--you may be alone, you may even be frail or in poor health
--Certainly there are other good investment clients, but if you throw ever good client into a basket, you will tend to come out with more who fit into these kinds of categories.
So if you are able to even half way agree with the above, keep reading. If you are not, please go to www.blogspot.com and build your own story.
So we now move ahead to the scenario, where this typical, older, vulnerable, trusting, perhaps frail client has been taken advantage of by a commission salesperson, posing as a professional investment advisor at a major IDA investment firm. Trust me, it happens. Perhaps even one owned by a big five bank, as they are the largest owners of dealerships in Canada.
What does the client do? First, and most often perhaps nothing. I have seen one 90 year old widow, with a $300,000 account, say about her trusted advisor, "he is such a nice young man". While the advisor was turning over her account (without consulting her) to generate some $30,000 in commissions each year.
What do they do if they are fortunate enough to clue in or have relatives to assist them?
They ask their advisor if everything is as it should be. This is a natural first step, and it is akin to asking Michael Jackson if he is really supposed to be touching you there. The answers will tend to support, or reassure the client that all is well, perhaps explain that markets are down, and there is nothing that can be done. I have even see some ego driven advisors get angry at elderly clients, and yell at them for mistrusting them, or questioning them.
This would constitute verbal abuse piled on top of financial abuse toward the elderly.
If the client has the energy, courage, and emotional strength to put up with more of that, they may be encouraged to write to the office manager, or to the firm in question. I have seen a few responses to letters like this, and they are not encouraging. Supposedly a company compliance officer looks at matters such as this, but I am not convinced they are not more interested in protecting the firm at all cost instead of protecting the client. I could be jaded on this, so ask a few opinions within the industry before you accept this opinion as true. End result in my experience is that the client is "handled", with letters minimizing, explaining away or brushing off the concern. The very last thing they will ever put in writing is that they agree and admit that the client was done wrong. That would be like asking Michael Jackson's lawyers to admit their client did something wrong.
So we now have taken up to a year or more out of an elderly persons life, trying to get straight answers on their life savings, and how it was handled.
If they have some real bench strength (support) in the family, they may get help and write a letter to the Provincial Securities Commission making their concerns or complaints known. Here they will meet with two beaurocratic (how the hell do you spell that?) obstacles rather than find help. Obstacle number one is that the commissions are so understaffed (and allegedly dysfunctional employers, .............but I digress) that they can only investigate cases "of importance". This means a yes to a few cases where they score media points (like a large or popular case for example), and "NO" to mom and pop investor cases. They will not tell you this however (misleading advertising), but will instead refer you to the Investment Dealers Association (IDA) , whom they claim do all the investigations for IDA registered firms. Never mind that the IDA is not powered by any law that allows them to do this, nor are they impartial. They are called the Investment Dealers Association because they represent and are paid by the Investment Dealers.
You can imagine the kind of response the client will now get to her concern or compalint...........if she is not dead or exhausted by the whole affair by this time.
So, a frail, trusting, vulnerable, elderly person, who may have been victum of a financial predator has spoken or written to four to six different people, departments, or organizations at this time, each one of which gave her a promise that they are, "there to protect or serve her interests". Each one has either ignored her, abused her further, or told her to go somewhere else, (without being honest enough to tell her that her status is "not important" enough to warrant the same treatment as other cases).
Just noticed, I took to giving this ficticious client a female gender. I should explain. In addition to living longer than males, females listen and accept advice from professionals better than males do (ever seen a guy ask for directions?) and thus in my story about the "ideal" client,and it is my story, my version of an ideal client is female in addition to the points above.
Where was I? Oh, so now this poor client has gotten the "runnaround" by almost each and every avenue they can think of (barring legal action, and when did you last meet a senior citizen that wanted to start a court case in their declining years?) and this includes government agencies, self regulatory agencies, and the largest and most trustworthy (advertising promise) banks in the country. I would not, do not, could not expect them to continue on. To continue to emotionally drain themselves fighting against what feels like an "entire industry", in denial that there is a problem.
To get to the punch line.............how are these people expected to continue on, and write another letter to ralph goodale, or ralph klien or ralph anyone. (and I am a huge fan of ralph klien, by the way) We already know the type of answer they would get. "thank you for your correspondence, I have passed your concern to the proper department and I can assure you...............blah, blah, blah"
If anything happens at all, their complaint may get handed back to the dysfunctional or incapable government regulator who has already dismissed it once.
I give up. And so do clients. And that Ralph, is why you are not getting flooded with letters from abused investors. Please consider this when (if) you say you dont think there are many abused investors.
Thanks to all the Ralphs out there who need to listen.
Tuesday, April 26, 2005
Securities Enforcement Accountability Coalition
A group called the “Toronto Police Accountability Coalition” is making progress with the Ontario Government on the creation of an independent civilian body to investigate complaints from the public against the police. The Ontario Attorney General Michael Bryant and retired Superior Court of Justice judge Patrick LeSage are taking leadership on the issue of police not being permitted to investigate police. We will borrow the concept of a ” Canadian Securities Enforcement Accountability Coalition”. The objective of this coalition would be to promote integrity and accountability in the enforcement of securities and accounting fraud and offences. To ensure this integrity and accountability, the “Canadian Securities Enforcement Accountability Coalition” should demand that all Federal and Provincial Governments have bona fide independent audit procedures in place to validate the integrity of white collar crime policing, covering the RCMP, the provincial securities commissions’ enforcement operations, the SRO’s enforcement operations and the CPAB. These independent auditing procedures should be capable of receiving evidence of misconduct from whistleblowing employees and the investing public. The “Canadian Securities Enforcement Accountability Coalition” approach is an idea for packaging the various initiatives we have all been involved in during the past two years. The concept of enforcement accountability will be difficult for legislators to ignore in the face of the federal sponsorship scandal, the ASC scandal, and the growing body of document evidence available from the public on bad faith and favouritism exhibited by provincial securities commissions and the SRO’s. Stan Buell and Jim Roache have both drafted letters seeking an independent audit of the OSC enforcement operations (work in progress). Larry Elford, Stan Buell and I have sent similar letters calling for an independent audit of the ASC. Maybe, we can use these various letters as prototypes for the “Canadian Securities Enforcement Accountability Coalition” letter demanding the same integrity and accountability standards throughout all the white collar crime enforcement agencies and accounting oversight agencies across Canada. Does anyone agree that this narrow approach for a coalition could be timely and an effective first step for reducing corruption in Canada.
Diane Urquhart
Diane Urquhart
Sunday, April 24, 2005
Small Investor Protection Association comments
The Holoday Story certainly illustrates most of the problems investors face today. John Reynold’s book Free Rider is well researched and discloses detail that should alert the public to the attitudes of industry that are the major risk that investors face. It may read like fiction but it is full of facts. I had the opportunity to attend the book opening November 26, 2001, and meet some of the people mentioned in the book including Albert Robinson.
Holoday’s misdeeds were not those of a “rogue” broker. His actions were known to management. When Midland Walwyn’s compliance officer, Albert Robinson, had the temerity to suggest that Holoday be fired for his actions because this would create problems for the firm, he was rewarded by being fired. He was also unable to find further employment in the investment industry. This is the problem those in the industry face if they are brave enough to come forward.
Kent Shirley came forward in February 2004 and reported to the Saskatchewan Securities Commission, the Ontario Securities Commission and others. The regulators failed to act and Assante exacted revenge by precipitating an Anton Pillar order to prevent Kent from speaking out. Joe Killoran (he came forward years ago to tell the truth much the same as Kent Shirley and that resulted in his career as a mutual fund salesman being destroyed) is valiantly carrying the torch passed to him by Kent Shirley and is now fighting a civil action launched by Assante. Have the regulators done anything yet?
Now several staff members have come forward with allegations of wrongdoing in the ASC. The ASC has responded by firing Grahame Newton who seems to be one of the “cowards” who made anonymous allegations. The Alberta Finance Minister is “concerned” and ordered an investigation. This type of industry response illustrates that corruption permeates industry and even the regulators. It illustrates that TruthTellers are intimidated and persecuted to discourage others to come forward.
We need TruthTeller legislation that protects all Canadians … particularly those in the investment industry and the regulatory system.
When will Government and the public recognize that financial services dishonesty and corruption is one of the biggest issues that Canadians face. Countless numbers are losing their life savings at the hands of a callous, dishonest investment industry.
Canadians are deceived by the industry and the regulators into believing they can trust the industry to look after their investment, and the regulators to ensure their investments are protected. The reality is that it is really an Investor Beware situation.
When investors lose their money they are faced with the response that they should have looked after their investments and that they should, have taken action to mitigate the losses.
If the regulators and the government accept that the investor is responsible in this manner then government and regulators have a responsibility to alert the public that it is indeed a Buyer Beware industry.
We are becoming alarmed by recent revelations and developments.
In December 2004 it was revealed that eight of our largest investment institutions were found to engage in mutual fund market timing that took from small investors and lined the pockets of industry. This reveals the investment industry’s widespread wrongdoing and a cavalier attitude towards the small investor.
Earlier this year the Gomery Commission testimony began to reveal that corruption is rife and extends into our Government. The former prime minister tried to stifle Justice Gomery and make a mockery of the inquiry.
Recently the Alberta Minister of Finance, the Hon. Shirley McClellan, has ordered an independent inquiry to investigate allegations of Alberta Securities Commission wrongdoing brought forward by ASC staff. The ASC has fired Grahame Newton, and he is believed to be one of those who dared to come forward.
Last year the Ontario government quietly reduced the Statute of Limitation from six years to two years. We are continuing to seek clarification on this issue.
In 1999 Robert Goldin wrote a book entitled “Investor Beware”. Maybe he is right.
Still there are some who believe it should not be an “Investor Beware” situation. Gerry Phillips said our financial services industry regulatory system should focus on investor protection and that a national regulator can best serve all Canadians. We fully support his opinion. We also believe that investor protection can only be provided by an independent investor protection agency, as recommended in the CARP/SIPA Report of September 2004.
However, we are concerned that investor protection is being eroded by an industry that lacks honesty and integrity and seems to have no sense of what is right and what is wrong.
Regulators confide that industry tries to justify all of their actions by saying “show me a rule that says it is wrong.” The industry maintains that market timing is legal. They do not see that robbing the poor to pay the rich is fundamentally wrong.
We are also concerned that the government is failing to realize that white collar crime is not a victimless crime. The seniors, widows and others, who spent a lifetime accumulating savings that are destroyed in a heartbeat by a callous investment industry, suffer in untold ways without hope of recovery.
On February 14th 2005, we made a submission to the Senate committee. Our submission concludes:
Government must take action to enable Canadians to trust. Canadians need:
· One national Financial Services Regulator
· A national Investor Protection Agency
· A national register of representatives accessible to the public
SIPA asks that the Senate call for an inquiry into this problem of investors losing their life savings due to investment industry widespread practices of wrongdoing.
In light of the market-timing scandal, Adscam, and the ASC scandal, Ontario should lead the way by ordering an independent inquiry into the provincial financial services regulatory system. A simple review of the findings of the regulators themselves would confirm the need for an inquiry.
The ASC scandal illustrates that there must be independent oversight of the activities of the regulators and that government must legislate TruthTeller protection immediately. We have already witnessed the death of Kent Shirley who came forward with allegations of wrongdoing yet the regulators are strangely silent on this issue. Now Grahame Newton has been fired. Government must act to provide protection.
With regard to the limitations period, most victims of financial predators take several years to realize that the reasons for their loss are more related to industry wrongdoing than market risks. Canadians tend to believe they can trust the investment industry and believe the hype they hear, and that they can trust our government to provide a regulatory system that provides investor protection. Indeed the hype suggests that investor protection is central to regulation.
With the fractured and complex regulatory system that exists today it takes small investors time to determine what the procedures are. Industry is slow to respond and most victims spend several years following industry and regulatory advised procedures before realizing that civil litigation is the only recourse. To reduce the limitation period to two years is prejudicial to the investor’s rights and this must be corrected.
We are particularly concerned that investors are not receiving fair treatment and that enforcement is either unwilling or unable to act to provide appropriate protection. SROs should not carry the mandate for investor protection.
We believe the most important issues include:
The lack of non-industry sponsored dispute resolution mechanisms
The lack of quantification of the extent of complaints and investor losses to enable this issue to be placed in proper perspective. Lack of transparency, industry cover-up and gag orders prevent the public from knowing.
The need for a regular audit of the enforcement regime by a government agency. The regulators investigating themselves leads to whitewashing and failure to disclose problems in a timely fashion.
The lack of TruthTeller protection that discourages those who would come forward to expose widespread wrongdoing. Witness: the ASC treatment of Grahame Newton, Assante’s treatment of Kent Shirley, and Joe Killoran’s treatment for coming forward years ago.
The reduction of the Limitation period for abused investors. Two years is ridiculous when most aggrieved small investors take several years to realize that their losses are due to industry wrongdoing and not just market risk, and that the industry and regulators do not provide fair an timely treatment.
We believe there are sufficient studies go back to the mid nineties when Ms. Stromberg, a securities lawyer and former OSC Commissioner produced two reports that not only defined the problems but recommended solutions that are still being discussed ten years later.
The Wise Persons Committee Report on December 2003 reviewed all of the studies to date and said “It’s Time” to establish a national regulator. Now there is talk of harmonization and Uniform Securities Law. In the meantime small investors continue to be robbed of their life savings to the tune of several billion dollars per year.
Reviewing regulations and recommending guidelines and practices is like Nero fiddling while Rome burns.
We need to focus on getting action that will effect change that does indeed provide investor protection that includes not only [preventative investor protection but also timely and fair restitution of investor’s disputes.
Making clients whole again should not be interpreted in giving them 10%, 30% or even 70% of their money back. When investors are robbed of their savings, whether by incompetence or deliberate wrongdoing by the financial services industry, there should be an authority with the power to order restitution.
The judge’s order that Holoday pay restitution of half the amount of the fraud is not good enough. Midland Walwyn and First Marathon should be held accountable for full restitution and required to make defrauded clients whole again. The Regulators should be required to ensure that the firms provide this restitution. If not, the regulators should be compelled to punish these companies and establish a fund to pay victims of industry wrongdoing.
At least that is my opinion.
Stan I. Buell, P.Eng.Small Investor Protection Association (SIPA Inc)P.O.Box 325Markham, ON, L3P 3J8e-mail: stanbuell@sipa.towebsite: www.sipa.to
Holoday’s misdeeds were not those of a “rogue” broker. His actions were known to management. When Midland Walwyn’s compliance officer, Albert Robinson, had the temerity to suggest that Holoday be fired for his actions because this would create problems for the firm, he was rewarded by being fired. He was also unable to find further employment in the investment industry. This is the problem those in the industry face if they are brave enough to come forward.
Kent Shirley came forward in February 2004 and reported to the Saskatchewan Securities Commission, the Ontario Securities Commission and others. The regulators failed to act and Assante exacted revenge by precipitating an Anton Pillar order to prevent Kent from speaking out. Joe Killoran (he came forward years ago to tell the truth much the same as Kent Shirley and that resulted in his career as a mutual fund salesman being destroyed) is valiantly carrying the torch passed to him by Kent Shirley and is now fighting a civil action launched by Assante. Have the regulators done anything yet?
Now several staff members have come forward with allegations of wrongdoing in the ASC. The ASC has responded by firing Grahame Newton who seems to be one of the “cowards” who made anonymous allegations. The Alberta Finance Minister is “concerned” and ordered an investigation. This type of industry response illustrates that corruption permeates industry and even the regulators. It illustrates that TruthTellers are intimidated and persecuted to discourage others to come forward.
We need TruthTeller legislation that protects all Canadians … particularly those in the investment industry and the regulatory system.
When will Government and the public recognize that financial services dishonesty and corruption is one of the biggest issues that Canadians face. Countless numbers are losing their life savings at the hands of a callous, dishonest investment industry.
Canadians are deceived by the industry and the regulators into believing they can trust the industry to look after their investment, and the regulators to ensure their investments are protected. The reality is that it is really an Investor Beware situation.
When investors lose their money they are faced with the response that they should have looked after their investments and that they should, have taken action to mitigate the losses.
If the regulators and the government accept that the investor is responsible in this manner then government and regulators have a responsibility to alert the public that it is indeed a Buyer Beware industry.
We are becoming alarmed by recent revelations and developments.
In December 2004 it was revealed that eight of our largest investment institutions were found to engage in mutual fund market timing that took from small investors and lined the pockets of industry. This reveals the investment industry’s widespread wrongdoing and a cavalier attitude towards the small investor.
Earlier this year the Gomery Commission testimony began to reveal that corruption is rife and extends into our Government. The former prime minister tried to stifle Justice Gomery and make a mockery of the inquiry.
Recently the Alberta Minister of Finance, the Hon. Shirley McClellan, has ordered an independent inquiry to investigate allegations of Alberta Securities Commission wrongdoing brought forward by ASC staff. The ASC has fired Grahame Newton, and he is believed to be one of those who dared to come forward.
Last year the Ontario government quietly reduced the Statute of Limitation from six years to two years. We are continuing to seek clarification on this issue.
In 1999 Robert Goldin wrote a book entitled “Investor Beware”. Maybe he is right.
Still there are some who believe it should not be an “Investor Beware” situation. Gerry Phillips said our financial services industry regulatory system should focus on investor protection and that a national regulator can best serve all Canadians. We fully support his opinion. We also believe that investor protection can only be provided by an independent investor protection agency, as recommended in the CARP/SIPA Report of September 2004.
However, we are concerned that investor protection is being eroded by an industry that lacks honesty and integrity and seems to have no sense of what is right and what is wrong.
Regulators confide that industry tries to justify all of their actions by saying “show me a rule that says it is wrong.” The industry maintains that market timing is legal. They do not see that robbing the poor to pay the rich is fundamentally wrong.
We are also concerned that the government is failing to realize that white collar crime is not a victimless crime. The seniors, widows and others, who spent a lifetime accumulating savings that are destroyed in a heartbeat by a callous investment industry, suffer in untold ways without hope of recovery.
On February 14th 2005, we made a submission to the Senate committee. Our submission concludes:
Government must take action to enable Canadians to trust. Canadians need:
· One national Financial Services Regulator
· A national Investor Protection Agency
· A national register of representatives accessible to the public
SIPA asks that the Senate call for an inquiry into this problem of investors losing their life savings due to investment industry widespread practices of wrongdoing.
In light of the market-timing scandal, Adscam, and the ASC scandal, Ontario should lead the way by ordering an independent inquiry into the provincial financial services regulatory system. A simple review of the findings of the regulators themselves would confirm the need for an inquiry.
The ASC scandal illustrates that there must be independent oversight of the activities of the regulators and that government must legislate TruthTeller protection immediately. We have already witnessed the death of Kent Shirley who came forward with allegations of wrongdoing yet the regulators are strangely silent on this issue. Now Grahame Newton has been fired. Government must act to provide protection.
With regard to the limitations period, most victims of financial predators take several years to realize that the reasons for their loss are more related to industry wrongdoing than market risks. Canadians tend to believe they can trust the investment industry and believe the hype they hear, and that they can trust our government to provide a regulatory system that provides investor protection. Indeed the hype suggests that investor protection is central to regulation.
With the fractured and complex regulatory system that exists today it takes small investors time to determine what the procedures are. Industry is slow to respond and most victims spend several years following industry and regulatory advised procedures before realizing that civil litigation is the only recourse. To reduce the limitation period to two years is prejudicial to the investor’s rights and this must be corrected.
We are particularly concerned that investors are not receiving fair treatment and that enforcement is either unwilling or unable to act to provide appropriate protection. SROs should not carry the mandate for investor protection.
We believe the most important issues include:
The lack of non-industry sponsored dispute resolution mechanisms
The lack of quantification of the extent of complaints and investor losses to enable this issue to be placed in proper perspective. Lack of transparency, industry cover-up and gag orders prevent the public from knowing.
The need for a regular audit of the enforcement regime by a government agency. The regulators investigating themselves leads to whitewashing and failure to disclose problems in a timely fashion.
The lack of TruthTeller protection that discourages those who would come forward to expose widespread wrongdoing. Witness: the ASC treatment of Grahame Newton, Assante’s treatment of Kent Shirley, and Joe Killoran’s treatment for coming forward years ago.
The reduction of the Limitation period for abused investors. Two years is ridiculous when most aggrieved small investors take several years to realize that their losses are due to industry wrongdoing and not just market risk, and that the industry and regulators do not provide fair an timely treatment.
We believe there are sufficient studies go back to the mid nineties when Ms. Stromberg, a securities lawyer and former OSC Commissioner produced two reports that not only defined the problems but recommended solutions that are still being discussed ten years later.
The Wise Persons Committee Report on December 2003 reviewed all of the studies to date and said “It’s Time” to establish a national regulator. Now there is talk of harmonization and Uniform Securities Law. In the meantime small investors continue to be robbed of their life savings to the tune of several billion dollars per year.
Reviewing regulations and recommending guidelines and practices is like Nero fiddling while Rome burns.
We need to focus on getting action that will effect change that does indeed provide investor protection that includes not only [preventative investor protection but also timely and fair restitution of investor’s disputes.
Making clients whole again should not be interpreted in giving them 10%, 30% or even 70% of their money back. When investors are robbed of their savings, whether by incompetence or deliberate wrongdoing by the financial services industry, there should be an authority with the power to order restitution.
The judge’s order that Holoday pay restitution of half the amount of the fraud is not good enough. Midland Walwyn and First Marathon should be held accountable for full restitution and required to make defrauded clients whole again. The Regulators should be required to ensure that the firms provide this restitution. If not, the regulators should be compelled to punish these companies and establish a fund to pay victims of industry wrongdoing.
At least that is my opinion.
Stan I. Buell, P.Eng.Small Investor Protection Association (SIPA Inc)P.O.Box 325Markham, ON, L3P 3J8e-mail: stanbuell@sipa.towebsite: www.sipa.to
Friday, April 22, 2005
Here is what one expert feels about the regulators.......and he is probably right
(The below was sent to me by an industry expert who has worked tirelessly for a decade or more to improve conditions for Canadian investors, and who now lashes out at OSC Chairman Brown saying he is now prepared to "listen")
So all my letters, e-mails, telephone calls, formal complaints, appeals and media statements - plus political lobbying and participation in public hearings (federal and provincial) fell on deaf ears??? But now, on the way out the door, Brown wants to know my "tales of unfair treatment, lost savings and roadblocks to restitution"????!!!!
"Brown said he is responding to complaints brought forward by the Small Investor Protection Association and individual investors who appeared before an Ontario legislative committee last fall."
He didn't hear them (or know about the problems they had experienced) before then??? He didn't respond before then??? He didn't direct the IDA to do it's job better and correct the issues identified in audits and studies - as well as by individuals who appealed their arbitrary and capricious decisions to the OSC????
But hearing it all again in a townhall setting, it will finally register, and he will act in the month left in his tenure as head of the commission????
I, and many others, have referred complaints to OBSI - Lauber - what a joke. He has no power to force a settlement. And he is on the way out the door too!
The IDA is - as everyone should know - a bigger joke - because it makes bigger claims for itself.
My rule of thumb in life is to NEVER believe a word anyone says, but to believe everything they do (or don't do). What Brown, Oliver and Lauber - OSC, IDA and OBSI - have NOT done, speaks volumes.
I despise pseudo-consultation. I despise people who talk the talk, but don't walk the walk. And I am not alone. I have dealt with literally hundreds of abused small investors over the years - from coast to coast - many elderly or disabled - and their stories are the same. SROs are in the business of blowing smoke...not of addressing valid complaints.
The public and even investors at large buy into it because of multi-million dollar ad and "educational" campaigns and their innate trust of Canadian institutions...until it's too late. When they inevitably get gored, they wake up to the fact that there is no effective mechanism of redress - except in the most unusual circumstances.
If Brown doesn't know that by now, he has not been doing his job. To try to white-wash his tawdry performance over a number of years with one last PR "dog and pony" show is pathetic. That the media - thus far - seems to be buying in - uncritically - reflects their gullibility (some might say, culpability).
Yes the market (index) goes up and the market goes down; stock values go up and down. We are all adults here - we understand that. The result is acceptable and understandable - gains and losses to the investor.
It is the other stuff - the monkey business - that has made Canada the laughing stock of the world, the Switzerland of North America. When the Americans had to come up and force our regulators to do something about Hollinger, was I the only Canadian to be mortified????
Yes, a townhall show-and-tell by a "lame duck" OSC head will solve all of the well-known and well-documented problems in the financial services sector???!!! And I have several bridges over the St. Lawrence I'd like to sell you --- from Bre-X to Hollinger, nothing has improved. But this town hall charade will stand Bay Street on it's head - right :-( NOT.
So all my letters, e-mails, telephone calls, formal complaints, appeals and media statements - plus political lobbying and participation in public hearings (federal and provincial) fell on deaf ears??? But now, on the way out the door, Brown wants to know my "tales of unfair treatment, lost savings and roadblocks to restitution"????!!!!
"Brown said he is responding to complaints brought forward by the Small Investor Protection Association and individual investors who appeared before an Ontario legislative committee last fall."
He didn't hear them (or know about the problems they had experienced) before then??? He didn't respond before then??? He didn't direct the IDA to do it's job better and correct the issues identified in audits and studies - as well as by individuals who appealed their arbitrary and capricious decisions to the OSC????
But hearing it all again in a townhall setting, it will finally register, and he will act in the month left in his tenure as head of the commission????
I, and many others, have referred complaints to OBSI - Lauber - what a joke. He has no power to force a settlement. And he is on the way out the door too!
The IDA is - as everyone should know - a bigger joke - because it makes bigger claims for itself.
My rule of thumb in life is to NEVER believe a word anyone says, but to believe everything they do (or don't do). What Brown, Oliver and Lauber - OSC, IDA and OBSI - have NOT done, speaks volumes.
I despise pseudo-consultation. I despise people who talk the talk, but don't walk the walk. And I am not alone. I have dealt with literally hundreds of abused small investors over the years - from coast to coast - many elderly or disabled - and their stories are the same. SROs are in the business of blowing smoke...not of addressing valid complaints.
The public and even investors at large buy into it because of multi-million dollar ad and "educational" campaigns and their innate trust of Canadian institutions...until it's too late. When they inevitably get gored, they wake up to the fact that there is no effective mechanism of redress - except in the most unusual circumstances.
If Brown doesn't know that by now, he has not been doing his job. To try to white-wash his tawdry performance over a number of years with one last PR "dog and pony" show is pathetic. That the media - thus far - seems to be buying in - uncritically - reflects their gullibility (some might say, culpability).
Yes the market (index) goes up and the market goes down; stock values go up and down. We are all adults here - we understand that. The result is acceptable and understandable - gains and losses to the investor.
It is the other stuff - the monkey business - that has made Canada the laughing stock of the world, the Switzerland of North America. When the Americans had to come up and force our regulators to do something about Hollinger, was I the only Canadian to be mortified????
Yes, a townhall show-and-tell by a "lame duck" OSC head will solve all of the well-known and well-documented problems in the financial services sector???!!! And I have several bridges over the St. Lawrence I'd like to sell you --- from Bre-X to Hollinger, nothing has improved. But this town hall charade will stand Bay Street on it's head - right :-( NOT.
Thursday, April 21, 2005
ASC Review, Will it be public?
I would wish for full, true, and plain public disclosure as to what happens at the ASC. This will be the very first step towards a better and more trustworthy investment industry in Canada.
No more hiding the truth behind closed doors. Does anyone remember the Gomery inquiry?
For example, if the truth is that 90% or 100% of complaints about IDA firms get referred to the IDA, I want it disclosed to investors. (The IDA is another story entirely and will be addressed in due time)
If from 10,000 complaints received the ASC has the time, money and resources to investigate only 90 cases, I would hope it is disclosed to the public.
I want the public to be informed, rather than misinformed, misled, and mistreated. They should know full well what they are getting into when they place their lives in the hands of a government agency that says it is there to protect them. This agency should have to be upfront with them just as investment dealers should have to be upfront with thier clients.
If the ASC selectively picks and chooses which cases get looked at, and which get passed over due to internal limitations or biases, I would like it known and stated that they are picking and choosing when to enforce the law, and when not to. I would also like full disclosure as to what constitutes a case valuable enough to them to decide to enforce the law, and how they justify the ruined lives left behind from small investors who do not warrant the "case time". Do they not deserve the same protection under the law?
It might be discovered that the ASC is like a police agency, where the only speeding drivers on deerfoot trail who are given tickets are those with Mazda's and Toyota's, and those driving Nissans, Honda's and Ford's are automatically given a free pass. I think the public deserves to know such information so we can know what the rules of the game are and what to expect out of our enforcement agencies.
They are today telling the public that they do a complete job of protecting the public, and I have in twenty years, yet to see a member of the public, made whole by the ASC, after being wronged by my industry. The law is the law, and some members of the industry are really tired of watching this agency speak of high standards while selectively enforcing (or ignoring) the law.
No more hiding the truth behind closed doors. Does anyone remember the Gomery inquiry?
For example, if the truth is that 90% or 100% of complaints about IDA firms get referred to the IDA, I want it disclosed to investors. (The IDA is another story entirely and will be addressed in due time)
If from 10,000 complaints received the ASC has the time, money and resources to investigate only 90 cases, I would hope it is disclosed to the public.
I want the public to be informed, rather than misinformed, misled, and mistreated. They should know full well what they are getting into when they place their lives in the hands of a government agency that says it is there to protect them. This agency should have to be upfront with them just as investment dealers should have to be upfront with thier clients.
If the ASC selectively picks and chooses which cases get looked at, and which get passed over due to internal limitations or biases, I would like it known and stated that they are picking and choosing when to enforce the law, and when not to. I would also like full disclosure as to what constitutes a case valuable enough to them to decide to enforce the law, and how they justify the ruined lives left behind from small investors who do not warrant the "case time". Do they not deserve the same protection under the law?
It might be discovered that the ASC is like a police agency, where the only speeding drivers on deerfoot trail who are given tickets are those with Mazda's and Toyota's, and those driving Nissans, Honda's and Ford's are automatically given a free pass. I think the public deserves to know such information so we can know what the rules of the game are and what to expect out of our enforcement agencies.
They are today telling the public that they do a complete job of protecting the public, and I have in twenty years, yet to see a member of the public, made whole by the ASC, after being wronged by my industry. The law is the law, and some members of the industry are really tired of watching this agency speak of high standards while selectively enforcing (or ignoring) the law.
Tuesday, April 19, 2005
Union Tribune Nails the Problem
SEC needs to protect investors, not brokers
UNION-TRIBUNE
April 17, 2005
During a time when the Nazis were bombing Paris and Allied forces were frantically fleeing across the English Channel, securities regulators in the United States were preoccupied with more prosaic financial concerns.
Thanks to their efforts, Congress passed the landmark Investment Advisers Act of 1940, which has been protecting investors like you and me ever since. The document is simple in its most basic premise. The legislation requires that investment advisers always act in their client's best interests.
While it might seem sad to think that legislation was necessary to mandate this, we're revisiting this historical act today because of who was not originally covered by its language. The act notably exempted traditional stockbrokers, who simply traded securities for commissions. At the time, the exemption made sense because brokers have historically been sales reps, not financial advisers.
But as anybody who has watched the recent commercials for brokerage houses knows, brokers aren't just pushing stock tips anymore. In fact, many of them would probably rather staple their mouths shut than admit they are stockbrokers. Instead, they are calling themselves financial consultants, financial advisers and wealth managers.
It's probably better for investors that many brokers have evolved beyond simply handling sales transactions in return for commissions, but that evolution has triggered a debate that's centered on this question: If a stockbroker is behaving like an investment adviser, shouldn't he or she be subject to the same higher standards that any financial planner must observe?
While the answer is certainly obvious to me and probably everybody reading this column, regulators have been agonizing over the issue for many years. In 1999, the SEC floated a proposed rule that would have extended the exemption to brokers, who had started charging fees instead of relying strictly on commissions. Brokers began switching to fee-based pricing when the increasing popularity of do-it-yourself discount brokerage firms caused commissions to plummet.
But as stockbrokers started repositioning their business to offer customers advice, they encountered a potential problem. The 1940 act states that any advice brokers provide to their clients has to be be "solely incidental" to their jobs as sales reps. Since 1940, the SEC had never defined what "solely incidental" meant or enforced the provision. Wall Street, however, pretty much defined the term to mean anything goes. In television commercials, magazine spreads, and marketing materials, stockbrokers promise to help investors meet their retirement goals, plan wisely for college and find ingenious ways to afford a second home. Does that sound like "solely incidental" advice to you?
The SEC must have been swamped with other really important things because five years later, the controversial decision to expand the exemption to include brokers charging fees – presumably for advice – still hadn't made it on the commission's agenda for approval.
I can understand how these things happen. Sometimes the laundry piles up at our house for an awfully long time. But plenty of staunch critics of the expanded broker exemption, including the Consumer Federation of America, which represents roughly 300 nonprofit organizations, the AARP and financial planning groups, weren't so understanding. And for good reason. Paradoxically, the SEC's inaction, procrastination, or whatever you want to call it, meant that Wall Street, for all these years, could act as if the proposed rule was in effect.
Clearly peeved, the Financial Planning Association, which represents certified financial planners and other professionals, filed a lawsuit last year to force the SEC to vote on the revised exemption. That got the government's attention. The commission solicited a new round of comments from interested parties on the proposed exemption. Only one major brokerage firm, T.D. Waterhouse, sided with consumer groups, who wanted the expanded exemption hacked to itty bitty pieces.
Which brings me to what happened a few days ago in Washington, D.C. The SEC commissioners unanimously voted to allow brokers to keep their prized exemption, but there were some changes. The SEC now says that a broker must register as an investment adviser if he or she maintains discretionary control over an account or engages in financial planning. That's a good thing, but at the same time the SEC only encouraged the anything-goes interpretation of that pesky "solely incidental" standard. The SEC now says financial advice will be considered solely incidental if it is in "in connection with and reasonably related to brokerages services." That could mean just about anything.
While planting a fat kiss on the brokerage industry's cheek, the SEC did acknowledge that investors are terribly confused about the differences between an investment adviser and a broker. No kidding. Consequently, the SEC announced that it would pay for an outside study to determine whether brokers and investment advisers should abide by the same regulations now that we're in the 21st century. So the SEC hasn't ruled out future changes. Thank goodness.
If you're on the verge of dispelling this controversy as a big stink about inconsequential wording, it's not. The regulatory language is important for many reasons. For instance, if you have a brokerage account with a stockbroker, you need to understand that the interests of the brokerage firm come before yours. This means that a broker, for example, could recommend a mutual fund, not because it's excellent, but because his brokerage firm is getting extra cash from the fund company to promote it. A broker could also urge that his client invest in a variable annuity because he could win a free vacation if he meets a sales quota.
Certainly not all brokers are going to conduct themselves in this way, but the point is, it's perfectly legal. In fact, even if a broker wanted to act as a fiduciary for his or her brokerage clients (and plenty would like to), the firm would forbid it. By the way, you won't necessarily ever find out about the behind-the-curtain investment motivations because the disclosures for brokers' conflicts of interest are weak. In contrast, investment advisers are prevented from behaving this way and their disclosure requirements are much stricter. Investment advisers are fiduciaries, who by law, are required to act strictly in their client's best interests.
When you're shopping for a new refrigerator at Sears and the salesperson is praising the latest Kenmore side-by-side model, you may naturally wonder if this refrigerator is really better than the Whirlpool or General Electric model displayed on the same aisle. Or is the salesperson just being partial to his employer's brand? Maybe he is, maybe he isn't. It's up to you to decide. If you have a brokerage account, you need to maintain that same sort of skepticism when a broker advises you. Too bad it has to be like that.
Lynn O'Shaughnessy is the author of "The Retirement Bible" and "The Investing Bible." She can be reached at LynnOShaughnessy@cox.net
UNION-TRIBUNE
April 17, 2005
During a time when the Nazis were bombing Paris and Allied forces were frantically fleeing across the English Channel, securities regulators in the United States were preoccupied with more prosaic financial concerns.
Thanks to their efforts, Congress passed the landmark Investment Advisers Act of 1940, which has been protecting investors like you and me ever since. The document is simple in its most basic premise. The legislation requires that investment advisers always act in their client's best interests.
While it might seem sad to think that legislation was necessary to mandate this, we're revisiting this historical act today because of who was not originally covered by its language. The act notably exempted traditional stockbrokers, who simply traded securities for commissions. At the time, the exemption made sense because brokers have historically been sales reps, not financial advisers.
But as anybody who has watched the recent commercials for brokerage houses knows, brokers aren't just pushing stock tips anymore. In fact, many of them would probably rather staple their mouths shut than admit they are stockbrokers. Instead, they are calling themselves financial consultants, financial advisers and wealth managers.
It's probably better for investors that many brokers have evolved beyond simply handling sales transactions in return for commissions, but that evolution has triggered a debate that's centered on this question: If a stockbroker is behaving like an investment adviser, shouldn't he or she be subject to the same higher standards that any financial planner must observe?
While the answer is certainly obvious to me and probably everybody reading this column, regulators have been agonizing over the issue for many years. In 1999, the SEC floated a proposed rule that would have extended the exemption to brokers, who had started charging fees instead of relying strictly on commissions. Brokers began switching to fee-based pricing when the increasing popularity of do-it-yourself discount brokerage firms caused commissions to plummet.
But as stockbrokers started repositioning their business to offer customers advice, they encountered a potential problem. The 1940 act states that any advice brokers provide to their clients has to be be "solely incidental" to their jobs as sales reps. Since 1940, the SEC had never defined what "solely incidental" meant or enforced the provision. Wall Street, however, pretty much defined the term to mean anything goes. In television commercials, magazine spreads, and marketing materials, stockbrokers promise to help investors meet their retirement goals, plan wisely for college and find ingenious ways to afford a second home. Does that sound like "solely incidental" advice to you?
The SEC must have been swamped with other really important things because five years later, the controversial decision to expand the exemption to include brokers charging fees – presumably for advice – still hadn't made it on the commission's agenda for approval.
I can understand how these things happen. Sometimes the laundry piles up at our house for an awfully long time. But plenty of staunch critics of the expanded broker exemption, including the Consumer Federation of America, which represents roughly 300 nonprofit organizations, the AARP and financial planning groups, weren't so understanding. And for good reason. Paradoxically, the SEC's inaction, procrastination, or whatever you want to call it, meant that Wall Street, for all these years, could act as if the proposed rule was in effect.
Clearly peeved, the Financial Planning Association, which represents certified financial planners and other professionals, filed a lawsuit last year to force the SEC to vote on the revised exemption. That got the government's attention. The commission solicited a new round of comments from interested parties on the proposed exemption. Only one major brokerage firm, T.D. Waterhouse, sided with consumer groups, who wanted the expanded exemption hacked to itty bitty pieces.
Which brings me to what happened a few days ago in Washington, D.C. The SEC commissioners unanimously voted to allow brokers to keep their prized exemption, but there were some changes. The SEC now says that a broker must register as an investment adviser if he or she maintains discretionary control over an account or engages in financial planning. That's a good thing, but at the same time the SEC only encouraged the anything-goes interpretation of that pesky "solely incidental" standard. The SEC now says financial advice will be considered solely incidental if it is in "in connection with and reasonably related to brokerages services." That could mean just about anything.
While planting a fat kiss on the brokerage industry's cheek, the SEC did acknowledge that investors are terribly confused about the differences between an investment adviser and a broker. No kidding. Consequently, the SEC announced that it would pay for an outside study to determine whether brokers and investment advisers should abide by the same regulations now that we're in the 21st century. So the SEC hasn't ruled out future changes. Thank goodness.
If you're on the verge of dispelling this controversy as a big stink about inconsequential wording, it's not. The regulatory language is important for many reasons. For instance, if you have a brokerage account with a stockbroker, you need to understand that the interests of the brokerage firm come before yours. This means that a broker, for example, could recommend a mutual fund, not because it's excellent, but because his brokerage firm is getting extra cash from the fund company to promote it. A broker could also urge that his client invest in a variable annuity because he could win a free vacation if he meets a sales quota.
Certainly not all brokers are going to conduct themselves in this way, but the point is, it's perfectly legal. In fact, even if a broker wanted to act as a fiduciary for his or her brokerage clients (and plenty would like to), the firm would forbid it. By the way, you won't necessarily ever find out about the behind-the-curtain investment motivations because the disclosures for brokers' conflicts of interest are weak. In contrast, investment advisers are prevented from behaving this way and their disclosure requirements are much stricter. Investment advisers are fiduciaries, who by law, are required to act strictly in their client's best interests.
When you're shopping for a new refrigerator at Sears and the salesperson is praising the latest Kenmore side-by-side model, you may naturally wonder if this refrigerator is really better than the Whirlpool or General Electric model displayed on the same aisle. Or is the salesperson just being partial to his employer's brand? Maybe he is, maybe he isn't. It's up to you to decide. If you have a brokerage account, you need to maintain that same sort of skepticism when a broker advises you. Too bad it has to be like that.
Lynn O'Shaughnessy is the author of "The Retirement Bible" and "The Investing Bible." She can be reached at LynnOShaughnessy@cox.net
Example of Securities Commission Watchdogs Sleeping?
When the family of 92 year old Murdo McDonald of Kelowna BC found out that Murdo's trusted RBC investment advisor was assisting him in selling his home and moving him to a care facility they were at first relieved. When they later found that the advisor turned out to the be the person who purchased his home they were surprised. When they found he had purchased it from the elderly client for about $50,000 below market value, without supporting appraisal, and for no money changing hands they were rather upset.
When his son in law contacted the BC Securities Commission, he was told by them to take his issue to the real estate association. He found this disssapointing treatment and asked a second time, and received the same answer a second time.
When I was informed of this, I called Steve Plumber, senior investigator of the BS Securities Commission. His response was that they had no interest in cases like this and that all matters with IDA firms (like RBC) were automatically referred to the IDA. When I asked him if he found any conflict with an industry trade association policing and enfocing itself, he said no, that is "how the system works".
I then asked him, if the Provincial Securities Act allowed him to pass away matters of law such as this to other self interested parties, and he had no answer for me except to repeat, "that is how the system works". I was not informed if "the system" actually follows the legislation in place or if they (regulators) are following a system of greatest convenience to themselves and the industry. After twenty years of seeing cases like this I am convinced it is the latter.
Does the public deserve regulatory and industry participants who paint themselves as the highest providers of ethical and "client first"service, while in practice they are allowed to forget morals, ethics and client protection if they happen to get in the way of making money and convenience?
So for the 92 year old gentleman, the BC Securities Commission failed miserably. Only after vocal investor advocates from across Canada began to act on this gentleman's behalf did the company in question (RBC) make efforts to cause restitution to the client. Even then, corporate lawyers tried to hold the man to confidentiality agreements saying he would remain silent on this indiscretion. He had no interest in publicity, nor did his family have any interest in signing coverup agreements to protect the investment dealer, so none was signed. In order to receive his home back however, the fellow had to sign an agreement that began with the words, "for value received........".
What this means I am not sure, but what it meant to me when I read it was that the parties that took away this mans home in the worst possible abuse of his trust and vulnerability, were suggesting that in order to get his home back, he had to acknowledge that he was receiving some value or benefit in the contract he was signing. He was in fact receiving only his own home.
Financial elder abuse is all too common in the financial services industry, as are the financial predators who roam freely under the guise of investment professionals. The industry seems lacking in motivation to weed them out, since they are generally the top commission or fee producing agents for the firms. The elderly are often vulnerable, trusting, and without doubt some of the wealthiest members of society, and they are easy prey for financial predators.
From my twenty years of experience in the financial services industry, I can say that I am not aware of one single client who has received compensation and or satisfactory treatment from complaint to a provincial securities commission, and I have seen double dipping and other evidence handed to them in hard copy by clients harmed by financial advisors. Each case I have witnessed has improperly and perhaps illegally referred the client away from the law, and turned them over to the foxes who guard the henhouse in Canada, called the Investment "Dealers Association". This is nothing more or less legal a regulatory agency than your local automobile dealers association, and to allow a self appointed body such as this to act as judge and jury on cases against it's own member is nothing short of criminal. A full public investigation should be undertaken to reveal just how many trusting and vulnerable clients have suffered from failed enforcement of securities law, and then suffered insult on top of injury by being told to "go somewhere else" by the government watchdog charged with this. The inquiry will, in my opinon show that the watchdog died some years ago.
For information and resources on the web, go to:
www.regulators.itgo.com
www.sipa.to
When his son in law contacted the BC Securities Commission, he was told by them to take his issue to the real estate association. He found this disssapointing treatment and asked a second time, and received the same answer a second time.
When I was informed of this, I called Steve Plumber, senior investigator of the BS Securities Commission. His response was that they had no interest in cases like this and that all matters with IDA firms (like RBC) were automatically referred to the IDA. When I asked him if he found any conflict with an industry trade association policing and enfocing itself, he said no, that is "how the system works".
I then asked him, if the Provincial Securities Act allowed him to pass away matters of law such as this to other self interested parties, and he had no answer for me except to repeat, "that is how the system works". I was not informed if "the system" actually follows the legislation in place or if they (regulators) are following a system of greatest convenience to themselves and the industry. After twenty years of seeing cases like this I am convinced it is the latter.
Does the public deserve regulatory and industry participants who paint themselves as the highest providers of ethical and "client first"service, while in practice they are allowed to forget morals, ethics and client protection if they happen to get in the way of making money and convenience?
So for the 92 year old gentleman, the BC Securities Commission failed miserably. Only after vocal investor advocates from across Canada began to act on this gentleman's behalf did the company in question (RBC) make efforts to cause restitution to the client. Even then, corporate lawyers tried to hold the man to confidentiality agreements saying he would remain silent on this indiscretion. He had no interest in publicity, nor did his family have any interest in signing coverup agreements to protect the investment dealer, so none was signed. In order to receive his home back however, the fellow had to sign an agreement that began with the words, "for value received........".
What this means I am not sure, but what it meant to me when I read it was that the parties that took away this mans home in the worst possible abuse of his trust and vulnerability, were suggesting that in order to get his home back, he had to acknowledge that he was receiving some value or benefit in the contract he was signing. He was in fact receiving only his own home.
Financial elder abuse is all too common in the financial services industry, as are the financial predators who roam freely under the guise of investment professionals. The industry seems lacking in motivation to weed them out, since they are generally the top commission or fee producing agents for the firms. The elderly are often vulnerable, trusting, and without doubt some of the wealthiest members of society, and they are easy prey for financial predators.
From my twenty years of experience in the financial services industry, I can say that I am not aware of one single client who has received compensation and or satisfactory treatment from complaint to a provincial securities commission, and I have seen double dipping and other evidence handed to them in hard copy by clients harmed by financial advisors. Each case I have witnessed has improperly and perhaps illegally referred the client away from the law, and turned them over to the foxes who guard the henhouse in Canada, called the Investment "Dealers Association". This is nothing more or less legal a regulatory agency than your local automobile dealers association, and to allow a self appointed body such as this to act as judge and jury on cases against it's own member is nothing short of criminal. A full public investigation should be undertaken to reveal just how many trusting and vulnerable clients have suffered from failed enforcement of securities law, and then suffered insult on top of injury by being told to "go somewhere else" by the government watchdog charged with this. The inquiry will, in my opinon show that the watchdog died some years ago.
For information and resources on the web, go to:
www.regulators.itgo.com
www.sipa.to
Wednesday, April 13, 2005
Are 99% of consumer complaints to ASC delegated to the Industry trade Association??
Enquiring minds want to know!
I certainly think so. It has been my experience with provincial Securities Commissions that they totally abrogate responsibility by delegating it down to a self regulatory agency, who in the case of the largest investment firms in the country, happen to be the IDA. (for a hint as to who they represent, think, "dealers association")
I found a quote about how SRO's, to earn the privilege of being self regulating, have to enforce rules equal to "or stricter" than those granted the provinces by law.
Page 33, of the Canadian Securities Institute Textbook, titled, CONDUCT AND PRACTICES HANDBOOK COURSE.
It is something every registered rep in Canada must study and pass an exam on in order to receive a licence to sell.
The full paragraph reads as follows:
As mentioned above, Self Regulatory Organizations (SRO's) are industry organizations that have the privilege of regulating their own members, whether as officially recognized "SROs" or under the "stock exchange" portions of their provincial Acts. SRO's are responsible for enforcement of their members conformity with securities legislation and have the power to prescribe their own rules of conduct and financial requirements for their members. The majority of participants in the Canadian securities industry are members of an exchange and/or the Investment Dealers Association, which are all SROs.
Self regulation is a privilege, not a right. SROs are delegated regulatory functions by the Administrators, adn SRO by-laws and rules are designed to uphold the principles of securities legislation. The commissions monitor the conduct of the SROs as the SROs carry out this regulatory function, and review the rules of the SROs in the province to ensure that the SRO rules do not conflict with securities legislation and are in the public interest.
SRO rules must set a standard equal to or higher than those imposed by the provinces.
I am of the opinion that this system of trusting the industry to police itself is not working in the public interests. It is, however, working very well in the interests of the industry. I will place a bet that when ASC complaint files are opened to an objective public inquiry, they will show that most (99%) of all complaints about the large IDA investment firms are simply referred to the industry, with little or no follow up to ensure the law is adhered to.
What do investors do, when they have written to the large investment dealer, written to the government agency responsible, and also written to the Industry Trade Association, and each response is to refer the client away from the law, and toward the fox on guard of the henhouse?
I certainly think so. It has been my experience with provincial Securities Commissions that they totally abrogate responsibility by delegating it down to a self regulatory agency, who in the case of the largest investment firms in the country, happen to be the IDA. (for a hint as to who they represent, think, "dealers association")
I found a quote about how SRO's, to earn the privilege of being self regulating, have to enforce rules equal to "or stricter" than those granted the provinces by law.
Page 33, of the Canadian Securities Institute Textbook, titled, CONDUCT AND PRACTICES HANDBOOK COURSE.
It is something every registered rep in Canada must study and pass an exam on in order to receive a licence to sell.
The full paragraph reads as follows:
As mentioned above, Self Regulatory Organizations (SRO's) are industry organizations that have the privilege of regulating their own members, whether as officially recognized "SROs" or under the "stock exchange" portions of their provincial Acts. SRO's are responsible for enforcement of their members conformity with securities legislation and have the power to prescribe their own rules of conduct and financial requirements for their members. The majority of participants in the Canadian securities industry are members of an exchange and/or the Investment Dealers Association, which are all SROs.
Self regulation is a privilege, not a right. SROs are delegated regulatory functions by the Administrators, adn SRO by-laws and rules are designed to uphold the principles of securities legislation. The commissions monitor the conduct of the SROs as the SROs carry out this regulatory function, and review the rules of the SROs in the province to ensure that the SRO rules do not conflict with securities legislation and are in the public interest.
SRO rules must set a standard equal to or higher than those imposed by the provinces.
I am of the opinion that this system of trusting the industry to police itself is not working in the public interests. It is, however, working very well in the interests of the industry. I will place a bet that when ASC complaint files are opened to an objective public inquiry, they will show that most (99%) of all complaints about the large IDA investment firms are simply referred to the industry, with little or no follow up to ensure the law is adhered to.
What do investors do, when they have written to the large investment dealer, written to the government agency responsible, and also written to the Industry Trade Association, and each response is to refer the client away from the law, and toward the fox on guard of the henhouse?
Monday, April 11, 2005
Alberta Securities Commission questioned about practices
April 9, 2005
To: Mark Stott, CA
Forensic Accountant
Alberta Securities Commission
4th Floor, 300 – 5th Ave SW
Calgary, Alberta T2P 3C4
Sent by fax to 403-297-6156
Sent by e-mail to mark.stott@seccom.ab.ca
From: Larry Elford
Re: your file #I02028
My apologies for the delay in getting back to you. I have only now begun to understand, after some twenty years in the business, how the regulatory system operates in Canada. I am told there are some 43 regulators of the financial industry in Canada so perhaps you will forgive me for not getting it sooner.
I write in response to your reply to my complaint in file #I02028. In it you state that the complaint concerned “business issues”, and not violations of the securities act, and you referred me to the IDA with my complaint. I want to point out some oversights on the part of your commission that I hope you will take the time to now address.
In my complaint letter, which was also sent internally to RBC directors, was a complaint about an advisor who practices double dipping, or charging a fee based compensation model on top of mutual funds where a commission has already been earned. I see this as a direct violation of securities law or the securities act. There were other issues mentioned in the complaint as well.
The Securities Act states:
1. that investment recommendations must be suitable for each client
representatives have a primary obligation to act in the best interest of clients
2. that representatives have a fiduciary duty
3. that dealers must supervise representatives to ensure compliance with the above
4. that representatives have an obligation to act honestly, in good faith, and in the best interests of the security holder.
If I have any of the above wrong, please feel free to set me straight.
Causing a client to pay a fee based charge on top of already earning a commission on the same investment is to the advantage of the advisor only, (not the client) and it is a practice I now know for a fact was occurring at RBC as my original complaint suggested. I also now know that RBC misled the IDA when they told the IDA that an investigation into these allegations was undertaken at the time.
Similar behavior (unsuitable, not in client best interest, not meeting fiduciary duty transactions, even denying a fiduciary duty to clients) have been discovered through my research and through public court cases in Canada during the ensuing few years. This type of behavior has been found in several public securities cases in the States to be “unsuitable”, and “not in the best interest of clients”. In the reply to myself from Mr. Brian Peters of RBC, he says that double dipping is an unethical practice. RBC has since compounded the confusion by also stating that it is OK to charge a client an additional fee, “if they are given a deal”, on the additional fee. and finally by pointing to the fine print in their account opening documents that suggests they have every right to charge additional fees such as this on top of already paid commissions. I now do not know whether RBC is for, against, defending, or supporting the practice of charging clients fees on top of commissions paid. (Commonly referred to as the practice of double dipping) I would ask you to again consider whether your first reply to me was perhaps in error as to your obligation and the obligation to protect the public interest of Canadians by acting on the statutes, rules and policies of the Provincial Securities Act.
I also have a question of why my complaints were referred away from the Alberta Securities Commission (which appears to be charged with this responsibility) and referred to the Investment Dealers Association, when the IDA is not a government regulatory agency, but rather a self established industry trade association. I feel that by doing this you may have overlooked the mandate of your organization’s responsibilities and passed this to a group of people that not only have no legal mandate to deal with this in the proper manner, but that may actually wish to “not” deal with this in the proper manner. I would appreciate your thoughts on this or perhaps some correction if I am under the wrong impression. Otherwise I would need to take this matter up at another level.
The results of your failure to deal with this complaint have been rather predictable, now that we have the benefit of hindsight. The industry trade association (IDA) has stated (in writing) that no investigation was undertaken, contrary to what was reported by the firm in question in the press, as well as to courts in a civil action. I also find now that through my industry research on this matter, that this is typically the case. That complaints against the industry often get “brushed aside”, when given to the industry trade association (IDA). It seems obvious why this happens when you consider that you are asking the industry to investigate and police the industry. I will say it again for emphasis. You are asking the industry to investigate and police the industry. You must today answer the question of what specific legislation allows you to do this.
Are you the right people to be handling this? I am afraid it may have to be corrected through the court of public opinion, the political process, or a form of legal process that might hold government agencies such as your Commission to accountability. I am willing to ask the question once more, since it appears to indeed be an issue of securities act violations in contrast to your first letter. I am sorry it took me this long to find and understand the securities act. I was dealing with something I knew only to be unethical and immoral treatment of clients at the time, and I thought I was reporting it to the proper organization that knew the act and it’s responsibilities for the Securities Act.
I write this in the spirit of improving the industry that we work in, and maintaining the trust and the integrity of it by carefully questioning when indiscretions are suspected. I will not rest until this matter is properly, objectively and openly investigated to my satisfaction. It is in the public interest to do so.
I look forward to your reply.
Larry Elford
521 Fairmont Blvd S
Lethbridge, Alberta T1K 7G3
Cc: Alberta Finance Minister Shirley McLellan
Ralph Klein, Alberta Premier
To: Mark Stott, CA
Forensic Accountant
Alberta Securities Commission
4th Floor, 300 – 5th Ave SW
Calgary, Alberta T2P 3C4
Sent by fax to 403-297-6156
Sent by e-mail to mark.stott@seccom.ab.ca
From: Larry Elford
Re: your file #I02028
My apologies for the delay in getting back to you. I have only now begun to understand, after some twenty years in the business, how the regulatory system operates in Canada. I am told there are some 43 regulators of the financial industry in Canada so perhaps you will forgive me for not getting it sooner.
I write in response to your reply to my complaint in file #I02028. In it you state that the complaint concerned “business issues”, and not violations of the securities act, and you referred me to the IDA with my complaint. I want to point out some oversights on the part of your commission that I hope you will take the time to now address.
In my complaint letter, which was also sent internally to RBC directors, was a complaint about an advisor who practices double dipping, or charging a fee based compensation model on top of mutual funds where a commission has already been earned. I see this as a direct violation of securities law or the securities act. There were other issues mentioned in the complaint as well.
The Securities Act states:
1. that investment recommendations must be suitable for each client
representatives have a primary obligation to act in the best interest of clients
2. that representatives have a fiduciary duty
3. that dealers must supervise representatives to ensure compliance with the above
4. that representatives have an obligation to act honestly, in good faith, and in the best interests of the security holder.
If I have any of the above wrong, please feel free to set me straight.
Causing a client to pay a fee based charge on top of already earning a commission on the same investment is to the advantage of the advisor only, (not the client) and it is a practice I now know for a fact was occurring at RBC as my original complaint suggested. I also now know that RBC misled the IDA when they told the IDA that an investigation into these allegations was undertaken at the time.
Similar behavior (unsuitable, not in client best interest, not meeting fiduciary duty transactions, even denying a fiduciary duty to clients) have been discovered through my research and through public court cases in Canada during the ensuing few years. This type of behavior has been found in several public securities cases in the States to be “unsuitable”, and “not in the best interest of clients”. In the reply to myself from Mr. Brian Peters of RBC, he says that double dipping is an unethical practice. RBC has since compounded the confusion by also stating that it is OK to charge a client an additional fee, “if they are given a deal”, on the additional fee. and finally by pointing to the fine print in their account opening documents that suggests they have every right to charge additional fees such as this on top of already paid commissions. I now do not know whether RBC is for, against, defending, or supporting the practice of charging clients fees on top of commissions paid. (Commonly referred to as the practice of double dipping) I would ask you to again consider whether your first reply to me was perhaps in error as to your obligation and the obligation to protect the public interest of Canadians by acting on the statutes, rules and policies of the Provincial Securities Act.
I also have a question of why my complaints were referred away from the Alberta Securities Commission (which appears to be charged with this responsibility) and referred to the Investment Dealers Association, when the IDA is not a government regulatory agency, but rather a self established industry trade association. I feel that by doing this you may have overlooked the mandate of your organization’s responsibilities and passed this to a group of people that not only have no legal mandate to deal with this in the proper manner, but that may actually wish to “not” deal with this in the proper manner. I would appreciate your thoughts on this or perhaps some correction if I am under the wrong impression. Otherwise I would need to take this matter up at another level.
The results of your failure to deal with this complaint have been rather predictable, now that we have the benefit of hindsight. The industry trade association (IDA) has stated (in writing) that no investigation was undertaken, contrary to what was reported by the firm in question in the press, as well as to courts in a civil action. I also find now that through my industry research on this matter, that this is typically the case. That complaints against the industry often get “brushed aside”, when given to the industry trade association (IDA). It seems obvious why this happens when you consider that you are asking the industry to investigate and police the industry. I will say it again for emphasis. You are asking the industry to investigate and police the industry. You must today answer the question of what specific legislation allows you to do this.
Are you the right people to be handling this? I am afraid it may have to be corrected through the court of public opinion, the political process, or a form of legal process that might hold government agencies such as your Commission to accountability. I am willing to ask the question once more, since it appears to indeed be an issue of securities act violations in contrast to your first letter. I am sorry it took me this long to find and understand the securities act. I was dealing with something I knew only to be unethical and immoral treatment of clients at the time, and I thought I was reporting it to the proper organization that knew the act and it’s responsibilities for the Securities Act.
I write this in the spirit of improving the industry that we work in, and maintaining the trust and the integrity of it by carefully questioning when indiscretions are suspected. I will not rest until this matter is properly, objectively and openly investigated to my satisfaction. It is in the public interest to do so.
I look forward to your reply.
Larry Elford
521 Fairmont Blvd S
Lethbridge, Alberta T1K 7G3
Cc: Alberta Finance Minister Shirley McLellan
Ralph Klein, Alberta Premier
Thursday, April 07, 2005
Criminal Provisions of Competition Act and Misleading Advertising May Apply
Guidelines
1. In order to proceed on a criminal track both of the following criteria must be satisfied:
(a) there must be clear and compelling evidence suggesting that the accused knowingly or recklessly made a false or misleading representation to the public. An example of such evidence is the continuation of a practice by the accused after complaints have been made by consumers directly to the accused; and
(b) if there is clear and compelling evidence that the accused knowingly or recklessly made a false or misleading representation to the public, and this evidence is available, the Bureau must also be satisfied that criminal prosecution would be in the public interest.
2. The factors to be taken into account in making this public interest determination will vary from case to case, and may include the seriousness of the alleged offence and mitigating factors.
3. The seriousness of the alleged offence will include a consideration of:
(a) whether there was substantial harm to consumers or competitors which could not be adequately dealt with by available civil remedies;
(b) whether the deceptive practices targeted or took unfair advantage of vulnerable groups (e.g., children and seniors);
(c) whether the persons involved failed to make timely and effective attempts to remedy the adverse effects of the conduct, or whether the conduct continued after corporate officials became aware of it;
(d) whether the conduct involved a failure to comply with a previous undertaking, a promised voluntary corrective action, or a prohibition order; and
(e) whether the persons had engaged in similar conduct in the past.
4. Mitigating factors will include a consideration of:
(a) whether the consequences of a prosecution or conviction would be disproportionately harsh or oppressive; and
(b) whether the company or entity has in place an effective compliance program.
5. If, on balance, the Bureau is satisfied that the circumstances of the case warrant criminal prosecution, a recommendation may be made to the Attorney General of Canada who will make the ultimate determination of whether to proceed.
One issue I can think of that the investment industry should start to worry about is the issue of claiming no duty of care, nor fiduciary duty to clients when the relevant Securities Acts of Canada expressly state that a fiduciary duty is owed to clients of investment firms.
Another misrepresentation is that of calling those persons legally registered under the Securities Act by a name that the securities act does not permit without further extensive qualifications. By way of example, although salespersons are only allowed to call themselves “salespersons” or, “registered representative”, they have since the market crash of 1987 begun changing the title of their business role in both advertising and business promotion materials to that of “investment advisor”. This forced the general public to fall into the misunderstanding that the large bank owned investment firms were in fact acting in the client best interest, when in fact, numerous industry statistics would indicate otherwise.
A third misrepresentation is to refuse to allow competitive pricing to be discussed publicly at the major firms. By way of example, although mutual fund commissions were deregulated and fully negotiable in about 1987, none of the advertising from any bank owned investment firm is found to have discussed or disclosed this fact. Further that there was in fact policy decisions made at firms to restrict or to disallow public advertising by any of it’s staff on the topic of deregulated mutual fund choices and methods of lowering investment costs to the public. This despite an industry promise to place the interests of the client “first”.
A fourth misrepresentation would be the act of placing the vast majority of mutual fund client investments into the highest compensating commission paying choice of funds according to industry statistics. With fully 80% of all mutual fund sales having been placed into the fund class that compensated investment advisors at the highest possible amount, it would appear again that the industry promise to place, “you first”, is not being met.
I would suggest that the criminal provisions of the competition act be looked into closely to determine where they apply to these practices. They can be found at http://cb-bc.gc.ca/epic/internet/incb-bc.nsf/en/ct02868e.html#partVII.1
There seems to be a move afoot to uncover these issues and to force full true and plain disclosure into all things. I look forward to the increased benefit to the public interest when public inquiry is truly public, and large powerful vested interests are no longer able to silence thier stories of greed and corruption.
Alberta Securities Commission inquiry recently gagged is another example perhaps of the public interest being denied in the interest of whom? Stay tuned.
1. In order to proceed on a criminal track both of the following criteria must be satisfied:
(a) there must be clear and compelling evidence suggesting that the accused knowingly or recklessly made a false or misleading representation to the public. An example of such evidence is the continuation of a practice by the accused after complaints have been made by consumers directly to the accused; and
(b) if there is clear and compelling evidence that the accused knowingly or recklessly made a false or misleading representation to the public, and this evidence is available, the Bureau must also be satisfied that criminal prosecution would be in the public interest.
2. The factors to be taken into account in making this public interest determination will vary from case to case, and may include the seriousness of the alleged offence and mitigating factors.
3. The seriousness of the alleged offence will include a consideration of:
(a) whether there was substantial harm to consumers or competitors which could not be adequately dealt with by available civil remedies;
(b) whether the deceptive practices targeted or took unfair advantage of vulnerable groups (e.g., children and seniors);
(c) whether the persons involved failed to make timely and effective attempts to remedy the adverse effects of the conduct, or whether the conduct continued after corporate officials became aware of it;
(d) whether the conduct involved a failure to comply with a previous undertaking, a promised voluntary corrective action, or a prohibition order; and
(e) whether the persons had engaged in similar conduct in the past.
4. Mitigating factors will include a consideration of:
(a) whether the consequences of a prosecution or conviction would be disproportionately harsh or oppressive; and
(b) whether the company or entity has in place an effective compliance program.
5. If, on balance, the Bureau is satisfied that the circumstances of the case warrant criminal prosecution, a recommendation may be made to the Attorney General of Canada who will make the ultimate determination of whether to proceed.
One issue I can think of that the investment industry should start to worry about is the issue of claiming no duty of care, nor fiduciary duty to clients when the relevant Securities Acts of Canada expressly state that a fiduciary duty is owed to clients of investment firms.
Another misrepresentation is that of calling those persons legally registered under the Securities Act by a name that the securities act does not permit without further extensive qualifications. By way of example, although salespersons are only allowed to call themselves “salespersons” or, “registered representative”, they have since the market crash of 1987 begun changing the title of their business role in both advertising and business promotion materials to that of “investment advisor”. This forced the general public to fall into the misunderstanding that the large bank owned investment firms were in fact acting in the client best interest, when in fact, numerous industry statistics would indicate otherwise.
A third misrepresentation is to refuse to allow competitive pricing to be discussed publicly at the major firms. By way of example, although mutual fund commissions were deregulated and fully negotiable in about 1987, none of the advertising from any bank owned investment firm is found to have discussed or disclosed this fact. Further that there was in fact policy decisions made at firms to restrict or to disallow public advertising by any of it’s staff on the topic of deregulated mutual fund choices and methods of lowering investment costs to the public. This despite an industry promise to place the interests of the client “first”.
A fourth misrepresentation would be the act of placing the vast majority of mutual fund client investments into the highest compensating commission paying choice of funds according to industry statistics. With fully 80% of all mutual fund sales having been placed into the fund class that compensated investment advisors at the highest possible amount, it would appear again that the industry promise to place, “you first”, is not being met.
I would suggest that the criminal provisions of the competition act be looked into closely to determine where they apply to these practices. They can be found at http://cb-bc.gc.ca/epic/internet/incb-bc.nsf/en/ct02868e.html#partVII.1
There seems to be a move afoot to uncover these issues and to force full true and plain disclosure into all things. I look forward to the increased benefit to the public interest when public inquiry is truly public, and large powerful vested interests are no longer able to silence thier stories of greed and corruption.
Alberta Securities Commission inquiry recently gagged is another example perhaps of the public interest being denied in the interest of whom? Stay tuned.
Saturday, April 02, 2005
What the Investment Industry News is saying
Fascinating issue of IE news for March, 2005 issue.
Here are the interesting highlights I found, with my two cents worth of commentary added in italics behind each:
Page 6, article by James Langton, who is probably the best informed writer in the country on the investment business. Titled, "Executives to be less immune to regulatory actions".
It describes how upper executives at major firms rarely if ever get punished for regulatory abuses. They are able to hid behind underlings to remain untouched. This allows them to sometimes , "look the other way", at some of the practices of big producing brokers.
I have to agree with the premise of this article. The upper executives are also compensated by the revenues brought in by the big producing brokers, so not only can they rarely be held responsible for client abuses, they are motivated by money to allow client abuses. It is a flawed system that will be addressed when Canada's regulators are separated completely from industry. It is time a few Investor Advocates took over in regulatory roles, instead of the revolving door of industry participants who help the status quo to remain.
Page 12, "advisors swing into Portus damage-control mode"
It is too bad that salespersons are allowed to represent themselves as advisors to the public. In my opinion, it was the commission merits and not the investment merits of the Portus product that allowed 26,000 Canadians to become investors in this scheme. There is still effectively zero investor protection or regulator action at the individual investor level in Canada in my experience.
Page 31, "Advisors turn to fund wraps, boosting growth". This article quotes members of industry speaking of how fast they are growing their proprietary and non proprietary wrap products. RBC Capital Markets spokesperson is quoted as saying that these kinds of products are growing three times faster than stand alone mutual funds in the nest few years. The unspoken but major underlying reason for the industry growth can be found in the OSC Fair Dealing Model, appendix F, page 10, that points out that by converting assets under administration into assets under management by the firm in a proprietary product, they can increase the percentage of revenues that flow to the firm by between TWELVE AND TWENTY SIX TIMES GREATER. (fourth paragraph on the page)
Some of the most abusive advisors I watched while in the industry even charged the client a commission, to move them into the higher paying proprietary products. Double and triple dipping made them some of the firms top producers and earned them a "vice presidential" title.
US regulators and courts are now starting to hold firms accountable for this, "self serving" investment advice. see:
Citigroup, Others Pay Fines Over Mutual Funds
By Brooke A. MastersWashington Post Staff WriterWednesday, March 23, 2005; 5:29 PM
In their continuing effort to clean up mutual fund sales, federal and industry regulators yesterday fined three large brokerage firms and a fund company a total of $81 million for improper sales practices and required them to make restitution to tens of thousands of investors.
The regulatory actions covered alleged abuses in two areas but shared a common theme: investors were steered into fund purchases that benefited their brokers, often at the investors' expense. The Securities and Exchange Commission and the industry regulator NASD have been investigating both issues for more than 18 months as part of a wide-ranging probe of the $7 trillion mutual fund industry.
Citigroup, JPMorgan Chase and American Express Financial Advisers paid a total of $21.25 million to the NASD, formerly known as the National Association of Securities Dealers, to settle allegations that they collected excess commissions from more than 50,000 households by selling high-fee "class B" mutual fund shares when the investors could have bought another class of the same funds for less. In addition to the fines, all three firms will convert the shares into the class that pays lower ongoing fees, and reimburse customers who have already sold the shares for the extra fees they paid.
In Canada this kind of thing is "standard industry practice" as the investment firms call it, despite being blatantly self serving to the revenues of the firm, and punishing to the public they serve.
Page 36, article by Glorianne Stromberg, the godfather of mutual fund common sense commentary in Canada. Whatever you read from her will eventually be proven to be true.
Here are the interesting highlights I found, with my two cents worth of commentary added in italics behind each:
Page 6, article by James Langton, who is probably the best informed writer in the country on the investment business. Titled, "Executives to be less immune to regulatory actions".
It describes how upper executives at major firms rarely if ever get punished for regulatory abuses. They are able to hid behind underlings to remain untouched. This allows them to sometimes , "look the other way", at some of the practices of big producing brokers.
I have to agree with the premise of this article. The upper executives are also compensated by the revenues brought in by the big producing brokers, so not only can they rarely be held responsible for client abuses, they are motivated by money to allow client abuses. It is a flawed system that will be addressed when Canada's regulators are separated completely from industry. It is time a few Investor Advocates took over in regulatory roles, instead of the revolving door of industry participants who help the status quo to remain.
Page 12, "advisors swing into Portus damage-control mode"
It is too bad that salespersons are allowed to represent themselves as advisors to the public. In my opinion, it was the commission merits and not the investment merits of the Portus product that allowed 26,000 Canadians to become investors in this scheme. There is still effectively zero investor protection or regulator action at the individual investor level in Canada in my experience.
Page 31, "Advisors turn to fund wraps, boosting growth". This article quotes members of industry speaking of how fast they are growing their proprietary and non proprietary wrap products. RBC Capital Markets spokesperson is quoted as saying that these kinds of products are growing three times faster than stand alone mutual funds in the nest few years. The unspoken but major underlying reason for the industry growth can be found in the OSC Fair Dealing Model, appendix F, page 10, that points out that by converting assets under administration into assets under management by the firm in a proprietary product, they can increase the percentage of revenues that flow to the firm by between TWELVE AND TWENTY SIX TIMES GREATER. (fourth paragraph on the page)
Some of the most abusive advisors I watched while in the industry even charged the client a commission, to move them into the higher paying proprietary products. Double and triple dipping made them some of the firms top producers and earned them a "vice presidential" title.
US regulators and courts are now starting to hold firms accountable for this, "self serving" investment advice. see:
Citigroup, Others Pay Fines Over Mutual Funds
By Brooke A. MastersWashington Post Staff WriterWednesday, March 23, 2005; 5:29 PM
In their continuing effort to clean up mutual fund sales, federal and industry regulators yesterday fined three large brokerage firms and a fund company a total of $81 million for improper sales practices and required them to make restitution to tens of thousands of investors.
The regulatory actions covered alleged abuses in two areas but shared a common theme: investors were steered into fund purchases that benefited their brokers, often at the investors' expense. The Securities and Exchange Commission and the industry regulator NASD have been investigating both issues for more than 18 months as part of a wide-ranging probe of the $7 trillion mutual fund industry.
Citigroup, JPMorgan Chase and American Express Financial Advisers paid a total of $21.25 million to the NASD, formerly known as the National Association of Securities Dealers, to settle allegations that they collected excess commissions from more than 50,000 households by selling high-fee "class B" mutual fund shares when the investors could have bought another class of the same funds for less. In addition to the fines, all three firms will convert the shares into the class that pays lower ongoing fees, and reimburse customers who have already sold the shares for the extra fees they paid.
In Canada this kind of thing is "standard industry practice" as the investment firms call it, despite being blatantly self serving to the revenues of the firm, and punishing to the public they serve.
Page 36, article by Glorianne Stromberg, the godfather of mutual fund common sense commentary in Canada. Whatever you read from her will eventually be proven to be true.
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