When the ombudsman comes calling
You’ve filed a complaint regarding bad advice and unsuitable investments that cost you money. At some point the ombudsman (or customer service or compliance officer) will come calling. You should assume that they are an adversary trying to nullify your complaint or minimize the amount of restitution. Ombudsman use the same biased restitution decision criteria as the firms that employ them or fund their operation. Don't be taken in by comforting words or a friendly smile. Your goal is to get your hard earned money back. If possible, have a friend or relative accompany you on any visits to act as a witness. Frankly, we view prevailing dispute resolution mechanisms and practices as industry- biased and unfair to small investors, seniors, retirees and immigrants. It is not an exaggeration to classify industry malfeasance as financial assault. There’s a reason Ombudsman don’t conduct or publish client satisfaction surveys –less than 1 person in 20 wins and of those, very few get the full amount of the claim.
First off, you don't have to answer every question they ask. You do not need to provide information that will be harmful to your case or is not relevant to your case. For instance, if they discover that you have substantial assets elsewhere they may attempt to argue that you implicitly have a high loss tolerance. They can and will use any data you provide against you if it helps limit restitution
Second, don't let your ego get in the way. If you really don't understand what that e-commerce fund was all about don't fake it. Ombudsman often try to present clients as more investment savvy than they really are. This provides them an argument for disqualifying or reducing claims. If the advisor didn’t prepare a Investment Policy Statement {IPS] for you or he/she breached it, your case is enriched. An IPS is regarded as one of the most basic documents between clients and advisers. The lack of an IPS is a sign of unprofessionalism. Note too that an unsuitable investment could also include one with inappropriate leveraging, a DSC early redemption penalty or one that causes you to be unduly exposed to tax liabilities. An adviser’s failure to effectively disclose investment risks, hidden commissions and high fees are also part of the equation-inform the investigator if this is the case. If you discover the brokerage firm or dealer failed to tell you that it received extra payments or incentives for recommending specific funds, your claim position is enhanced. The Portus hedge fund scandal is a recent example .
Third, they will point out to you that your monthly client statements clearly indicated you were losing money. So, they argue, you should have mitigated the losses and not let them accumulate. If however the statements are hard to interpret, you were told to buy-and-hold or cautioned that a whopping DSC early redemption fee would be applied, you'll have a stronger case. If you or your spouse were in ill health during the period, make this known to the investigator-this highlights the reason that loss mitigation wasn’t your priority at a time of serious family distress. There is an inherent conflict between the advice that mutual fund and stock investors receive to ride out the market downturns and stay the course for the long haul, and their duty to mitigate their losses as asserted by Ombudsman. If the firm's marketing literature portrays them as professional advisers, you should hand a copy to the investigator. Don’t hesitate to cite any firm –specific or industry conduct rules such as those from the MFDA (www.mfda.ca) or IDA (www.ida.ca) that support your position. Advisors have a role in loss mitigation; in fact the industry emphasizes that investors with advisors achieve better performance than those without. The stated purpose of ongoing embedded trailer commissions is to provide investors with continuing advice with respect to their portfolio, so hold them to it since you’ve already paid for it. If they didn’t suggest disposing of unsuitable investments, their case is weakened. Financial advice isn’t only about buying –it’s also includes selling.
Fourth, they may concede that you were sold inappropriate investments but may unfairly attempt to limit your compensation. Specifically actual market losses, sales commissions paid, DSC early redemption penalty fees incurred, impact on taxes especially in RRIF’s [gross-up], account closing fees, account transfer fees and accumulated interest from the agreed date of loss to the time of restitution payment should be included. Some argument can also be made for recovering the costs to file the claim if it involved out of pocket expenses to independent third parties to assist in articulating the complaint.
Fifth, Ombudsman also believe that inaction is evidence of agreement. Thus acquiescence on disputed unauthorized trades, will be used to negate claims. There should be positive two-way communication between a consultant and client. Since the consultant is the one providing advice, the obligation is there for confirming a transaction and ensuring the client understands the rationale for the transaction .If you have any evidence you queried the transaction, bring it forward.
Sixth, they may attempt to encourage you to walk away or settle for a token amount. You will be given a take- it- or- leave- it date for a decision on their proposed restitution. You might counter by demonstrating a strong level of determination. Some cases have settled successfully perhaps because of the threat of complaining to superiors, informing regulators, contacting the media or even involving law enforcement. In a presentation to the Ontario Legislative Committee on Finance and Economic Affairs, August 2004, John Hollander, a litigator, with the Ottawa firm of Doucet, McBride LLP, offered some insightful comments about the IDA and the OBSI. Mr. Hollander stated:
“The IDA and the OBSI routinely provide legal advice with substantial consequences to the investor and without accountability to the investor for the accuracy of the advice given. They tell clients there is no validity to the claim. The IDA and the OBSI provide legal advice, with neither the safeguards nor the accountability that apply to my profession. They tell clients their claims are ill-founded. My settlements and experts prove these opinions were wrong. Simply put, the IDA and OBSI are practicing law without a license”.
Finally, be aware that your NAAF or KYC may be used to support their argument. that you were greedy and willing to take on substantial risk. The problem with NAAF’s is that the terminology is imprecise and too often the salesperson fills in the form and has the client sign them. We are also aware of cases where clients signed blank forms and advisers signing on behalf of clients to provide a paper trail to cover their improper actions. KYC’s are notoriously inaccurate and often outdated -sometimes they are retroactively fabricated or altered to legitimize them. If you can demonstrate that your risk and loss tolerance is less than they portray, your case will be enhanced and the controversial KYC moved off the evidence table.
It seems fundamentally wrong to put the onus on the small investor who has lost a significant amount of their savings to prove his case, and accept the commission motivated adviser's word rather than place the onus on the firm to prove that they had taken every precaution to prepare an appropriate investment strategy that would not place a senior, retiree or trusting investor at risk of unacceptable consequences.
If the financial services industry insists on investors being liable for ascertaining whether the investment products sold to them are in fact suitable for them, and that investors are solely responsible for mitigating their losses when they become aware that something is wrong, then it is indeed a BUYER BEWARE industry.
There is a lot more to cover when dealing with an industry- paid or industry -sponsored ombudsman and we'll discuss these points in future issues. For now, this little article should heighten your awareness of what you’ll face and how to deal with some of the ploys.
Ken Kivenko April, 2005
Tuesday, May 31, 2005
Monday, May 30, 2005
Eliot Spitzer does the job, where others fail to
NY-AG Eliot Spitzer has explained clearly why he takes action in the U.S. securities marketplaces:
1. "if the agencies of the federal government—the SEC, the FDA, the FCC, whatever—abdicate their authority to protect that marketplace, Spitzer says, "I view it as my responsibility to twenty million New Yorkers who are investors, who work in the marketplace," to assume it."
2. "We need competition. . . . . I understand that a market needs to have rules by which it lives. If you have a marketplace unbridled by rules that mandate integrity and transparency, then the market will not work."
1. "if the agencies of the federal government—the SEC, the FDA, the FCC, whatever—abdicate their authority to protect that marketplace, Spitzer says, "I view it as my responsibility to twenty million New Yorkers who are investors, who work in the marketplace," to assume it."
2. "We need competition. . . . . I understand that a market needs to have rules by which it lives. If you have a marketplace unbridled by rules that mandate integrity and transparency, then the market will not work."
"The Naked Investor" Tells It Like It Is
Sunday, May 29, 2005Book reveals top investing pitfalls
By Michael Kane CanWest News ServiceĆ¢€”Vancouver
John Reynolds is the author of The Naked Investor: Why Almost Everybody But You Gets Rich on your RRSP. CanWest News Service
Hans Merkelbach says he works in a business that stinks. Hans a financial adviser in an industry where most practitioners sell products instead of investment advice.
They do it because they can make a lot of money. More than many of their clients will make from the investments theyre cajoled into buying.
Merkelbach, of Bowen Island, B.C., is one of the real-life characters introduced in The Naked Investor, an explosive new book that chronicles the dark side of Canada's self-serving investment industry.
Disturbing experiences
By recounting a disturbing and sometimes moving collection of true investor experiences, author John Lawrence Reynolds dishes the dirt on how advisers can maximize their earnings, while leaving clients exposed to massive losses.
He also shows how regulators are failing to protect the ordinary investor.
Even when a few investors manage to win partial redress for bad advice, theyre prevented from alerting others by confidentiality agreements and gag orders designed to shield both the offending stockbroker or mutual fund salesperson, and his or her company, from claims by other victims.
Damning indictment
The book, sub-titled Why Almost Everybody But You Gets Rich on Your RRSP, presents a damning indictment of a system driven by greed and duplicity.
Its not about the different branches and techniques of the financial services industry, although it does show readers how they and their money are being manipulated.
Its about people and their personal experiences, coupled with practical advice that hopefully will convince many of Canada's six million RRSP investors that they can do a better job of watching over more than $400 billion in their accounts.
Rescues woman
Merkelbach, 71, enters the narrative when he comes to the rescue of a middle-aged woman who had helplessly watched her $400,000 retirement nest egg lose more than half of its value in the hands of a condescending Toronto insurance salesperson that she had considered her friend.
Most of the account was invested in abysmally performing segregated equity mutual funds carrying management expense ratios as high as four per cent or more. That meant the funds had to earn at least four per cent to pay annual fees to the adviser and the fund manager before they could earn anything for their owner.
As with all mutual funds, the adviser and the fund manager still got paid when the client was losing money.
To make matters worse, the funds were sold on a back-end load basis, which meant the adviser was paid about $20,000 up front just for placing the funds with a life-insurance company, while the investor faced exorbitant penalties if she chose to transfer her money to a better home.
The woman eventually paid $13,000 to correct a mistake that somebody else had made because the back-end load (also known as a deferred sales charge) applied to the original value of her investment, which was twice as high as the funds were worth.
Unlike many of the stories in The Naked Investor, this one appears to be on track to a happy ending. After three years with Merkelbach, the $140,000 left from the original $400,000 has grown to $330,000. The client is free to move her money at any time because Merkelbach does not sell deferred-load funds.
He is well compensated by trailer fees payments by fund managers to advisers typically amounting to one per cent per year of the assets under management and he says thats reasonable because he earns more when his clients earn more and less when they earn less. He doesnt scoop five per cent up front by saddling his clients with onerous penalties if they become dissatisfied with the way their money is being managed.
Unfortunately, many advisers do just that, often with the excuse that it helps to dissuade clients from bailing out on long-term investments when the market is in one of its periodic downturns. That kind of self-serving argument gives the industry a bad name, Merkelbach said.
When I see one of my clients, a very intelligent man, give $700,000 to an insurance broker in Vancouver who sells him six deferred-load funds and makes a $35,000 commission for writing up a bunch of papers, I think, boy, this business still stinks.
Industry shortcomings
Reynolds is inclined to agree. In a telephone interview from his home in Burlington, Ont., he said industry problems are probably equally divided between lack of transparency and the commission-based system which makes every adviser a salesperson.
He believes the industry doesnt want Canadians to know how it makes its money, or how basic the process of making investment decisions can be.
Somewhere along the line, we have to ditch the commission system, he said.
If you visited your doctor with the understanding that your physicians entire income is based upon the commissions that pharmaceutical companies pay him or her for the drugs he or she prescribes, how much faith would you have in your physicians advice? I think the parallel fits exactly with the financial investment industry.
Reynolds, the award-winning author of Free Rider: How a Bay Street Whiz Kid Stole and Spent $20 Million, isnt suggesting Canadians hide their money under the mattress. He says people need professional advice, and most financial advisers try to be professional and are as honest as any other group of Canadians.
The point of the book, frankly, is to alert people to the need for educating themselves where financial matters are concerned.
Pointedly, he says the average seven-year-old child in Canada knows more about sex than his or her grandparents know about investing. Thats a dangerous situation when vultures, jackals, ghouls and everyday thieves are after your money.
Vancouver Sun
By Michael Kane CanWest News ServiceĆ¢€”Vancouver
John Reynolds is the author of The Naked Investor: Why Almost Everybody But You Gets Rich on your RRSP. CanWest News Service
Hans Merkelbach says he works in a business that stinks. Hans a financial adviser in an industry where most practitioners sell products instead of investment advice.
They do it because they can make a lot of money. More than many of their clients will make from the investments theyre cajoled into buying.
Merkelbach, of Bowen Island, B.C., is one of the real-life characters introduced in The Naked Investor, an explosive new book that chronicles the dark side of Canada's self-serving investment industry.
Disturbing experiences
By recounting a disturbing and sometimes moving collection of true investor experiences, author John Lawrence Reynolds dishes the dirt on how advisers can maximize their earnings, while leaving clients exposed to massive losses.
He also shows how regulators are failing to protect the ordinary investor.
Even when a few investors manage to win partial redress for bad advice, theyre prevented from alerting others by confidentiality agreements and gag orders designed to shield both the offending stockbroker or mutual fund salesperson, and his or her company, from claims by other victims.
Damning indictment
The book, sub-titled Why Almost Everybody But You Gets Rich on Your RRSP, presents a damning indictment of a system driven by greed and duplicity.
Its not about the different branches and techniques of the financial services industry, although it does show readers how they and their money are being manipulated.
Its about people and their personal experiences, coupled with practical advice that hopefully will convince many of Canada's six million RRSP investors that they can do a better job of watching over more than $400 billion in their accounts.
Rescues woman
Merkelbach, 71, enters the narrative when he comes to the rescue of a middle-aged woman who had helplessly watched her $400,000 retirement nest egg lose more than half of its value in the hands of a condescending Toronto insurance salesperson that she had considered her friend.
Most of the account was invested in abysmally performing segregated equity mutual funds carrying management expense ratios as high as four per cent or more. That meant the funds had to earn at least four per cent to pay annual fees to the adviser and the fund manager before they could earn anything for their owner.
As with all mutual funds, the adviser and the fund manager still got paid when the client was losing money.
To make matters worse, the funds were sold on a back-end load basis, which meant the adviser was paid about $20,000 up front just for placing the funds with a life-insurance company, while the investor faced exorbitant penalties if she chose to transfer her money to a better home.
The woman eventually paid $13,000 to correct a mistake that somebody else had made because the back-end load (also known as a deferred sales charge) applied to the original value of her investment, which was twice as high as the funds were worth.
Unlike many of the stories in The Naked Investor, this one appears to be on track to a happy ending. After three years with Merkelbach, the $140,000 left from the original $400,000 has grown to $330,000. The client is free to move her money at any time because Merkelbach does not sell deferred-load funds.
He is well compensated by trailer fees payments by fund managers to advisers typically amounting to one per cent per year of the assets under management and he says thats reasonable because he earns more when his clients earn more and less when they earn less. He doesnt scoop five per cent up front by saddling his clients with onerous penalties if they become dissatisfied with the way their money is being managed.
Unfortunately, many advisers do just that, often with the excuse that it helps to dissuade clients from bailing out on long-term investments when the market is in one of its periodic downturns. That kind of self-serving argument gives the industry a bad name, Merkelbach said.
When I see one of my clients, a very intelligent man, give $700,000 to an insurance broker in Vancouver who sells him six deferred-load funds and makes a $35,000 commission for writing up a bunch of papers, I think, boy, this business still stinks.
Industry shortcomings
Reynolds is inclined to agree. In a telephone interview from his home in Burlington, Ont., he said industry problems are probably equally divided between lack of transparency and the commission-based system which makes every adviser a salesperson.
He believes the industry doesnt want Canadians to know how it makes its money, or how basic the process of making investment decisions can be.
Somewhere along the line, we have to ditch the commission system, he said.
If you visited your doctor with the understanding that your physicians entire income is based upon the commissions that pharmaceutical companies pay him or her for the drugs he or she prescribes, how much faith would you have in your physicians advice? I think the parallel fits exactly with the financial investment industry.
Reynolds, the award-winning author of Free Rider: How a Bay Street Whiz Kid Stole and Spent $20 Million, isnt suggesting Canadians hide their money under the mattress. He says people need professional advice, and most financial advisers try to be professional and are as honest as any other group of Canadians.
The point of the book, frankly, is to alert people to the need for educating themselves where financial matters are concerned.
Pointedly, he says the average seven-year-old child in Canada knows more about sex than his or her grandparents know about investing. Thats a dangerous situation when vultures, jackals, ghouls and everyday thieves are after your money.
Vancouver Sun
Sunday, May 29, 2005
Comments from Burgandy Asset Management
http://www.burgundy-asset.com/feb-99.asp
Too Many Regulators, Not Enough Regulation
Some free market ideologues would have us believe that regulation of all kinds is evil, and that if markets are allowed to operate freely, in financial services as in everything else, the world would be a better place. Tell it to the Russians. In the case of stock markets and financial systems, intelligent regulation is essential. The financial sector, with its vast amounts of the public’s money sloshing around, attracts crooks like no other area. Stern and consistent regulation is necessary to protect the public and maintain its confidence in the country’s financial system.
Canada’s current regulatory regime is execrable. Ten provinces share the responsibility for regulating securities markets with five stock exchanges and the Investment Dealers Association, in a world where national borders, let alone provincial ones, are increasingly irrelevant. Penalties for violations of securities laws, which are rare as hen’s teeth in any event, are applied on a province-by-province basis, meaning that scoundrels can always find a new playground. The money that is used to support small, inefficient and ineffective provincial securities commissions could be much better spent in ensuring that the public is not defrauded and bilked by any of the legions of flim-flammers who are attracted to any financial market, but especially a badly-regulated one like Canada’s. The only law obeyed in Canada’s capital markets on a national basis is Gresham’s Law, as provincial regulators and stock exchanges indulge in “one-downmanship” and take their standards to the lowest common denominator.
There have been recent reports that the provincial securities regulators have agreed on a “virtual” national securities agency, to be called the Canadian Securities Regulatory System (CSRS). They will pool their scant resources to try to eliminate some of the waste and inefficiency that make the current system so burdensome to the law-abiding and so helpful to the others. More money would be available for such things as compliance and enforcement, and some standardisation would be possible for prospectus filings. It might be progress compared to the current system, but would still be less effective than a full national securities commission. The main reason for the “virtual” structure appears to be that Alberta fears the domination of Ontario in the securities field, and petty interprovincial rivalries are a poor basis for joint action. We doubt if the proposed CSRS will get us out of the bush leagues anytime soon.
Lessons Learned – Regulators
A national securities commission is by far the best way to go. It is also, in the Canadian political context, probably an impossible dream. Quebec has not been in the habit recently of releasing any areas of control to the federal level, and Alberta’s and British Columbia’s fear of Ontarian hegemony in securities regulation (despite the smaller markets’ lack of resources to do the job) has scuppered any recent attempts to centralise Canadian regulation.
We should point out that the problems with the Canadian regulatory system are structural in nature, and our remarks are not aimed at the many hard-working and well-meaning individuals who work for provincial securities regulators. We have had some exceptional people working at securities commissions in Canada, but they are usually people who are not career regulators. Often, they are fast-track lawyers, joining the securities commissions almost on a pro bono basis. What is needed is a seamless, national, full-time, fully-funded, tough and consistent regulator for the securities industry, someone to “kick butt and take names” in the memorable American phrase. If the proposed Canadian Securities Regulatory System is able to do the job, we will be the first to give three cheers and congratulate Canada’s provinces. But we hope we can be forgiven for a degree of scepticism.
Conclusion
If these lessons are applied by Canadian investors, auditors, regulators and stock exchanges, those of us who have suffered from our country’s loss of reputation in 1997-98 may be able to hold our heads up among our international peers, and our country will be able to start realising its full potential.
It’s time for the Canadian capital markets to grow up
Too Many Regulators, Not Enough Regulation
Some free market ideologues would have us believe that regulation of all kinds is evil, and that if markets are allowed to operate freely, in financial services as in everything else, the world would be a better place. Tell it to the Russians. In the case of stock markets and financial systems, intelligent regulation is essential. The financial sector, with its vast amounts of the public’s money sloshing around, attracts crooks like no other area. Stern and consistent regulation is necessary to protect the public and maintain its confidence in the country’s financial system.
Canada’s current regulatory regime is execrable. Ten provinces share the responsibility for regulating securities markets with five stock exchanges and the Investment Dealers Association, in a world where national borders, let alone provincial ones, are increasingly irrelevant. Penalties for violations of securities laws, which are rare as hen’s teeth in any event, are applied on a province-by-province basis, meaning that scoundrels can always find a new playground. The money that is used to support small, inefficient and ineffective provincial securities commissions could be much better spent in ensuring that the public is not defrauded and bilked by any of the legions of flim-flammers who are attracted to any financial market, but especially a badly-regulated one like Canada’s. The only law obeyed in Canada’s capital markets on a national basis is Gresham’s Law, as provincial regulators and stock exchanges indulge in “one-downmanship” and take their standards to the lowest common denominator.
There have been recent reports that the provincial securities regulators have agreed on a “virtual” national securities agency, to be called the Canadian Securities Regulatory System (CSRS). They will pool their scant resources to try to eliminate some of the waste and inefficiency that make the current system so burdensome to the law-abiding and so helpful to the others. More money would be available for such things as compliance and enforcement, and some standardisation would be possible for prospectus filings. It might be progress compared to the current system, but would still be less effective than a full national securities commission. The main reason for the “virtual” structure appears to be that Alberta fears the domination of Ontario in the securities field, and petty interprovincial rivalries are a poor basis for joint action. We doubt if the proposed CSRS will get us out of the bush leagues anytime soon.
Lessons Learned – Regulators
A national securities commission is by far the best way to go. It is also, in the Canadian political context, probably an impossible dream. Quebec has not been in the habit recently of releasing any areas of control to the federal level, and Alberta’s and British Columbia’s fear of Ontarian hegemony in securities regulation (despite the smaller markets’ lack of resources to do the job) has scuppered any recent attempts to centralise Canadian regulation.
We should point out that the problems with the Canadian regulatory system are structural in nature, and our remarks are not aimed at the many hard-working and well-meaning individuals who work for provincial securities regulators. We have had some exceptional people working at securities commissions in Canada, but they are usually people who are not career regulators. Often, they are fast-track lawyers, joining the securities commissions almost on a pro bono basis. What is needed is a seamless, national, full-time, fully-funded, tough and consistent regulator for the securities industry, someone to “kick butt and take names” in the memorable American phrase. If the proposed Canadian Securities Regulatory System is able to do the job, we will be the first to give three cheers and congratulate Canada’s provinces. But we hope we can be forgiven for a degree of scepticism.
Conclusion
If these lessons are applied by Canadian investors, auditors, regulators and stock exchanges, those of us who have suffered from our country’s loss of reputation in 1997-98 may be able to hold our heads up among our international peers, and our country will be able to start realising its full potential.
It’s time for the Canadian capital markets to grow up
Thursday, May 26, 2005
Who is Telling the Truth? IDA, ASC, OSC, NFG?
Having just received another carefully worded letter from the ASC, about how they feel they must delegate all matters concerning an IDA firm to the IDA itself........I am still stuck on the logic.
Why would a government securities regulator hand off securities regulation duties like enforcing the securities law to a bunch of industry trade representatives, a dealership association if you will. It appears a lot like a government consumer protection agency delegating auto dealer complaints (investigation and enforcement) to the local auto dealers association. It is neither practical nor possible to expect it to work, and in fact it is becoming increasingly clear that it is not working in Canada.
Only people who have six figure jobs in provincial securities regulation seem unable to grasp this. Perhaps they are a bit too busy figuring out how to outlive the changeover to a national securities regulator, to do the job of investor protection that they claim to. If so, that is understandable. Just not to me.
I also do not understand how a kind retired, single nurse, could write to the ASC, with evidence that her account had been not just double dipped, but turned into one more "advisor account" without benefit to the client, and thereby triple dipped.............and the ASC does nothing. Simply refer it to the dealership association. When insiders at investment firms write of elder abuse, investment abuse, double dipping etc., withint the industry, what does the ASC do? Investigate and get to the bottom of it? No. Refer it to the dealership association. End of career for anyone willing to tell the truth of investment abuses.
They turn it over to the IDA. Of course the IDA does nothing, since they are the representatives (dealer association) of the Investment Dealers. Set up and funded by same. they are the LAST folks in Canada who are going to blow the whistle on widespread abuses within the investment industry. They tend to only deal in matters of individual advisor wrongdoing, the rest is just not possible for them.
To view the best research anywhere on the IDA, and perhaps on the industry overall, go to the site www.regulators.itgo.com
There you will find enough information to convince you that Canada is a mostly unregulated, buyer beware investment climate. Your only hope is to find an honest investment advisor.
Here from this site by way of example are two different and conflicting stories from IDA executives, depending on whether they were in advance or retreat mode.
For the Record
Joe Oliver,
President, IDA
"The IDA is Canada's only national entity with delegated responsibility for securities regulation and investor protection." - Joe Oliver
Evidence given before the
Senate Standing Committee
on
Banking, Trade and Commerce
02 November 1998
6 YEARS LATER (almost to the day)
Paul Bourque
SVP Regulation, IDA
"First, let's get the facts straight. The only legislative power the provincial governments "delegate" to the IDA is registration of brokers -- and even that is only delegated in B.C., Alberta and Ontario. The provincial governments do not "delegate" securities industry compliance and enforcement." - Paul Bourque
Penalties needed
03 November 2004
Given that the IDA appears to not even be clear on what they are, what they do, and what legislation they are following...........how are we to believe that the law is being followed when the Alberta Securities Commision (or Ontario, or others) reduce their own workload by referring all related complaints to the IDA.
The chickens (clients) are complaining of abuse in the henhouse, and their complaints are all referred to the Fox's Association (IDA). The ASC is in the job of doing..............what again? Protecting the public, or protecting their incomes? Shame.
Why would a government securities regulator hand off securities regulation duties like enforcing the securities law to a bunch of industry trade representatives, a dealership association if you will. It appears a lot like a government consumer protection agency delegating auto dealer complaints (investigation and enforcement) to the local auto dealers association. It is neither practical nor possible to expect it to work, and in fact it is becoming increasingly clear that it is not working in Canada.
Only people who have six figure jobs in provincial securities regulation seem unable to grasp this. Perhaps they are a bit too busy figuring out how to outlive the changeover to a national securities regulator, to do the job of investor protection that they claim to. If so, that is understandable. Just not to me.
I also do not understand how a kind retired, single nurse, could write to the ASC, with evidence that her account had been not just double dipped, but turned into one more "advisor account" without benefit to the client, and thereby triple dipped.............and the ASC does nothing. Simply refer it to the dealership association. When insiders at investment firms write of elder abuse, investment abuse, double dipping etc., withint the industry, what does the ASC do? Investigate and get to the bottom of it? No. Refer it to the dealership association. End of career for anyone willing to tell the truth of investment abuses.
They turn it over to the IDA. Of course the IDA does nothing, since they are the representatives (dealer association) of the Investment Dealers. Set up and funded by same. they are the LAST folks in Canada who are going to blow the whistle on widespread abuses within the investment industry. They tend to only deal in matters of individual advisor wrongdoing, the rest is just not possible for them.
To view the best research anywhere on the IDA, and perhaps on the industry overall, go to the site www.regulators.itgo.com
There you will find enough information to convince you that Canada is a mostly unregulated, buyer beware investment climate. Your only hope is to find an honest investment advisor.
Here from this site by way of example are two different and conflicting stories from IDA executives, depending on whether they were in advance or retreat mode.
For the Record
Joe Oliver,
President, IDA
"The IDA is Canada's only national entity with delegated responsibility for securities regulation and investor protection." - Joe Oliver
Evidence given before the
Senate Standing Committee
on
Banking, Trade and Commerce
02 November 1998
6 YEARS LATER (almost to the day)
Paul Bourque
SVP Regulation, IDA
"First, let's get the facts straight. The only legislative power the provincial governments "delegate" to the IDA is registration of brokers -- and even that is only delegated in B.C., Alberta and Ontario. The provincial governments do not "delegate" securities industry compliance and enforcement." - Paul Bourque
Penalties needed
03 November 2004
Given that the IDA appears to not even be clear on what they are, what they do, and what legislation they are following...........how are we to believe that the law is being followed when the Alberta Securities Commision (or Ontario, or others) reduce their own workload by referring all related complaints to the IDA.
The chickens (clients) are complaining of abuse in the henhouse, and their complaints are all referred to the Fox's Association (IDA). The ASC is in the job of doing..............what again? Protecting the public, or protecting their incomes? Shame.
Wednesday, May 25, 2005
Here is what is wrong with Brown's speech
(see "What is wrong with this speech article previous for OSC chair David Brown's action on Portus)
In it, he dodges responsibility for hedge funds, by saying they do not fall under OSC jurisdiction. Despite the illegality of unsuitable investments under the Securities Act. Despite the number of improprieties it took to get this investment marketed to thousands of Canadian clients, he appears ready, willing and able to do...................nothing.
He told the Toronto CFA Society that advisors should be held accountable for any inappropriate investments made by clients they referred to the firm. Yet while he talks the talk, and collects the highest paycheque in the land as the top securities regulator in Canada, it seems as if the punishment he is metting out to advisors making innapropriate and perhaps self serving advice to clients is to do............................nothing. Perhaps a stern speech. A bit of a talking to.
I found this line funny: "Many advisors have said the focus on referral fees has been unfair, saying that if they were simply "in it for the money" they could have earned more by selling their client a DSC fund. "
Funny in that 80% of all mutual funds sold in Canada (by advisors) are sold to clients under the DSC option. Are they giving investment advice, or are they "in it for the money"?
See warnings about selling the highest compensating class of mutual funds at the NASD (National Association of Securities Dealers in the US) web site for possible clarity on this issue. http://www.nasd.com
Once again I ask the question: Why are investment practices that are immoral and illegal in the United States, considered, "standard industry practice", in Canada?
The problems are so widespread and so systemic, that the poor regulators are unable to even take the first steps in Canada. they just show up, take the $000,000 pay each year, misinform the public that they are protected, and then move on to leave the system no better off for average Canadians. Very misleading.
Pointing out that hedge funds are not regulated by the OSC, Brown urged all investors who are interested in such products to, "be sure they understand what they are getting into". Ouch! What a stern talking to. I am sure that bold action like this will change the world. This sounds to me like telling criminals to "be sure and remember to register your weapons".
This inaction is of no use and little value. Forgive me my bitter tone, but without serious action, we may have just witnessed another multi-billion dollar consumer rip off successfully done in Canadian style, under the view of the country's top securities cops. And off they ride into the sunset..............to do more good work.
In it, he dodges responsibility for hedge funds, by saying they do not fall under OSC jurisdiction. Despite the illegality of unsuitable investments under the Securities Act. Despite the number of improprieties it took to get this investment marketed to thousands of Canadian clients, he appears ready, willing and able to do...................nothing.
He told the Toronto CFA Society that advisors should be held accountable for any inappropriate investments made by clients they referred to the firm. Yet while he talks the talk, and collects the highest paycheque in the land as the top securities regulator in Canada, it seems as if the punishment he is metting out to advisors making innapropriate and perhaps self serving advice to clients is to do............................nothing. Perhaps a stern speech. A bit of a talking to.
I found this line funny: "Many advisors have said the focus on referral fees has been unfair, saying that if they were simply "in it for the money" they could have earned more by selling their client a DSC fund. "
Funny in that 80% of all mutual funds sold in Canada (by advisors) are sold to clients under the DSC option. Are they giving investment advice, or are they "in it for the money"?
See warnings about selling the highest compensating class of mutual funds at the NASD (National Association of Securities Dealers in the US) web site for possible clarity on this issue. http://www.nasd.com
Once again I ask the question: Why are investment practices that are immoral and illegal in the United States, considered, "standard industry practice", in Canada?
The problems are so widespread and so systemic, that the poor regulators are unable to even take the first steps in Canada. they just show up, take the $000,000 pay each year, misinform the public that they are protected, and then move on to leave the system no better off for average Canadians. Very misleading.
Pointing out that hedge funds are not regulated by the OSC, Brown urged all investors who are interested in such products to, "be sure they understand what they are getting into". Ouch! What a stern talking to. I am sure that bold action like this will change the world. This sounds to me like telling criminals to "be sure and remember to register your weapons".
This inaction is of no use and little value. Forgive me my bitter tone, but without serious action, we may have just witnessed another multi-billion dollar consumer rip off successfully done in Canadian style, under the view of the country's top securities cops. And off they ride into the sunset..............to do more good work.
What is wrong with this speech?
Brown: You can't sell what you can't understand
Steven Lamb
(May 10, 2005) In one of his last addresses to the investment community before leaving his position as OSC chair, David Brown told the Toronto CFA Society that advisors should be held accountable for any inappropriate investments made by clients they referred to the firm.
"There may well be some issues to address in relation to the manufacturers of some of these investment products. But the responsibilities of the intermediaries involved are clear," said Brown. "They are professionals with a duty to understand the products involved and the risks entailed."
While refusing to answer any specific questions regarding the investigation into Portus, Brown concedes that the OSC is more focused on the advisors who sell complex products, than on the manufacturers of those products.
Some question whether there are gaps in the current regulations which allowed Portus to be sold to inappropriate clients in the first place. Brown disagrees, saying the "know your client" rule places the onus on advisors to understand the products to which they direct their clients. If they don't understand the product, they cannot possibly consider it to be suitable.
"In fact, the complexity of the foreign intermediaries involved in the international aspects of the transactions — and the lack of regulatory compliance by Portus — has made it difficult for investigators to understand this product after months of forensic accounting," Brown admitted. "You can't apply any particular investment recommendation to the client's needs, unless you have an understanding of the risk attributes of the investment."
Much of the furor over Portus is that as a hedge fund investment, it should only have been available to accredited investors. When asked if the industry has been able to sidestep such rules, Brown said it was too early to tell and he had seen no evidence of this.
"We're working with the two SRO's — the IDA and the MFDA — to make sure that our rules are adequate," he said. "We are quite prepared to look at our own rules and make sure they are explained well enough, but we also want to make sure they are being complied with by those who are out making these investment recommendations.
"What everybody involved in the recommendation of complex financial products needs to do is to reassess their understanding of the product, reassess their commitment to investors, to make sure that products are suitable for them and to make sure they are motivated with the best interests of their investors in mind."
Many advisors have said the focus on referral fees has been unfair, saying that if they were simply "in it for the money" they could have earned more by selling their client a DSC fund.
But Brown says the regulator is really interested in finding out how Portus products found their way into so many portfolios so quickly.
"The fees that were being paid were comparable to fees that are being paid on the sale of mutual funds, but these were fees being paid for referrals and we need to understand whether that indeed was a factor in such a broad penetration of this product in such a short period of time."
While advisors were comfortable collecting a similar payout as they would have with a mutual fund, they are accepting none of the responsibility that would have accompanied the transaction had it been a fund sale.
"When formerly elite investment instruments become more widely available, the industry has to take a good, hard look at them to determine their suitability for the average investor," Brown said. "We also have to make sure that the industry is clear on its responsibilities."
Pointing out that hedge funds are not regulated by the OSC, Brown urged all investors who are interested in such products to be sure they understand what they are getting into and how the product matches their own risk parameters.
"I'm asking all those involved in the distribution chain to ask themselves whether they are comfortable, whether they understand the products they are selling," he said. "It is really a call to the industry — to us as the regulators, to the SROs who are responsible for setting the education standards — to stay current."
Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com
Steven Lamb
(May 10, 2005) In one of his last addresses to the investment community before leaving his position as OSC chair, David Brown told the Toronto CFA Society that advisors should be held accountable for any inappropriate investments made by clients they referred to the firm.
"There may well be some issues to address in relation to the manufacturers of some of these investment products. But the responsibilities of the intermediaries involved are clear," said Brown. "They are professionals with a duty to understand the products involved and the risks entailed."
While refusing to answer any specific questions regarding the investigation into Portus, Brown concedes that the OSC is more focused on the advisors who sell complex products, than on the manufacturers of those products.
Some question whether there are gaps in the current regulations which allowed Portus to be sold to inappropriate clients in the first place. Brown disagrees, saying the "know your client" rule places the onus on advisors to understand the products to which they direct their clients. If they don't understand the product, they cannot possibly consider it to be suitable.
"In fact, the complexity of the foreign intermediaries involved in the international aspects of the transactions — and the lack of regulatory compliance by Portus — has made it difficult for investigators to understand this product after months of forensic accounting," Brown admitted. "You can't apply any particular investment recommendation to the client's needs, unless you have an understanding of the risk attributes of the investment."
Much of the furor over Portus is that as a hedge fund investment, it should only have been available to accredited investors. When asked if the industry has been able to sidestep such rules, Brown said it was too early to tell and he had seen no evidence of this.
"We're working with the two SRO's — the IDA and the MFDA — to make sure that our rules are adequate," he said. "We are quite prepared to look at our own rules and make sure they are explained well enough, but we also want to make sure they are being complied with by those who are out making these investment recommendations.
"What everybody involved in the recommendation of complex financial products needs to do is to reassess their understanding of the product, reassess their commitment to investors, to make sure that products are suitable for them and to make sure they are motivated with the best interests of their investors in mind."
Many advisors have said the focus on referral fees has been unfair, saying that if they were simply "in it for the money" they could have earned more by selling their client a DSC fund.
But Brown says the regulator is really interested in finding out how Portus products found their way into so many portfolios so quickly.
"The fees that were being paid were comparable to fees that are being paid on the sale of mutual funds, but these were fees being paid for referrals and we need to understand whether that indeed was a factor in such a broad penetration of this product in such a short period of time."
While advisors were comfortable collecting a similar payout as they would have with a mutual fund, they are accepting none of the responsibility that would have accompanied the transaction had it been a fund sale.
"When formerly elite investment instruments become more widely available, the industry has to take a good, hard look at them to determine their suitability for the average investor," Brown said. "We also have to make sure that the industry is clear on its responsibilities."
Pointing out that hedge funds are not regulated by the OSC, Brown urged all investors who are interested in such products to be sure they understand what they are getting into and how the product matches their own risk parameters.
"I'm asking all those involved in the distribution chain to ask themselves whether they are comfortable, whether they understand the products they are selling," he said. "It is really a call to the industry — to us as the regulators, to the SROs who are responsible for setting the education standards — to stay current."
Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com
Putting Client First. Marketing spin, or fact?
The Professional Financial Advisor
Toronto-based Financial Advisor John De Goey offers thoughts about fee-based advice, holistic planning and capital markets.
Corporate Mandate
By John De Goey Tuesday, May 24, 2005
A man (even if that man is a corporation) cannot serve two masters. Either he is serving shareholders or he is serving clients. Both are noble. Both are justifiable. But both cannot be served simultaneously.
I just finished reading Joel Bakan’s book “The Corporation”, which I received as a Christmas present. As a UBC corporate law professor, Bakan’s basic thesis is that since corporations are legally considered to be people, what kind of a personality type might reasonably apply to a corporation? The rationale put forward shows pretty convincing evidence that if corporations were in fact human, they would be seen by society as irresponsible psychopaths who lack empathy and are incapable of feeling remorse.
Corporations were brought into existence to make money. That is their overarching purpose. Senior executives, therefore, have a legal obligation to “maximize shareholder value” at the expense of all else. In fact, the law forbids all other actions and motives. When side-effects (something economists call “externalities”) do harm to society, corporations look for ways to avoid the blame. Think of the long history of harm done by corporations through time: Bhopal, Exxon Valdez, Thalidomide, Enron. The list goes on and the market timing scandal that pitted the interests of shareholders against those of unitholders is likely to go down as another fine example in a long line of externalities.
It is with this in mind that I reflected upon the re-assuring tone and content of all the web sites, newsletters and mission statements that so many investment firms (both those who create investment products and those who recommend them) show to their clients. Almost without fail, there will be a reference to the phrase “the client comes first”. Clients, always on the lookout for decent, high-integrity companies to work with, are presumably made to feel all warm and fuzzy when they read this- and to hand over their life’s savings as an expression of their unfailing trust in these reassuring words.
A man (even if that man is a corporation) cannot serve two masters. Either he is serving shareholders or he is serving clients. Both are noble. Both are justifiable. But both cannot be served simultaneously. In the majority of cases, the more money a firm makes, the higher the cost borne by clients. Conversely, the more prices are cut to benefit clients, the more shareholders will feel the pain. Profits derived from price changes, for instance, are a zero sum game. Whenever one party is doing well, it is as sure as the night follows the day that this comes at the expense of the other party.
What I found try astounding in the book is that one of the world’s re-eminent economists, Milton Friedman is of the opinion that corporate profit is a moral imperative. Friedman believes that corporate responsibility is both illegal and immoral if it compromises profits. He believes it is both illegal and immoral to put the client’s interests first.
Quite apart from the severe consequences if Friedman is right (jail time for installing SO2 scrubbers?), this could also lead to somewhat humourous situations. Imagine having a shareholder showing up at a corporate AGM brandishing a mission statement saying “It says here that you’re putting the clients’ interests first- what the hell is that about, Mr. CEO? If you don’t start charging as much as the market will bear and sending me the money in the form of higher dividends by the end of the next quarter, I’ll get you ousted.”
The simple lesson is that things are seldom as they appear. It is obviously disingenuous of corporations to suggest that they are simultaneously pursuing both agendas to the point where both sets of stakeholders’interests first. No one can have it both ways.
Even if CEOs said something like “we aim to balance the legitimate interests of all our stakeholders”, I would buy in, although Friedman likely would not. My view on the obvious disconnect is that the ubiquitous bumpf about putting clients first is really just another cynical attempt to get people to give you their money. Corporations don’t really mean it. Friedman says they would be breaking the law if they did.
Toronto-based Financial Advisor John De Goey offers thoughts about fee-based advice, holistic planning and capital markets.
Corporate Mandate
By John De Goey Tuesday, May 24, 2005
A man (even if that man is a corporation) cannot serve two masters. Either he is serving shareholders or he is serving clients. Both are noble. Both are justifiable. But both cannot be served simultaneously.
I just finished reading Joel Bakan’s book “The Corporation”, which I received as a Christmas present. As a UBC corporate law professor, Bakan’s basic thesis is that since corporations are legally considered to be people, what kind of a personality type might reasonably apply to a corporation? The rationale put forward shows pretty convincing evidence that if corporations were in fact human, they would be seen by society as irresponsible psychopaths who lack empathy and are incapable of feeling remorse.
Corporations were brought into existence to make money. That is their overarching purpose. Senior executives, therefore, have a legal obligation to “maximize shareholder value” at the expense of all else. In fact, the law forbids all other actions and motives. When side-effects (something economists call “externalities”) do harm to society, corporations look for ways to avoid the blame. Think of the long history of harm done by corporations through time: Bhopal, Exxon Valdez, Thalidomide, Enron. The list goes on and the market timing scandal that pitted the interests of shareholders against those of unitholders is likely to go down as another fine example in a long line of externalities.
It is with this in mind that I reflected upon the re-assuring tone and content of all the web sites, newsletters and mission statements that so many investment firms (both those who create investment products and those who recommend them) show to their clients. Almost without fail, there will be a reference to the phrase “the client comes first”. Clients, always on the lookout for decent, high-integrity companies to work with, are presumably made to feel all warm and fuzzy when they read this- and to hand over their life’s savings as an expression of their unfailing trust in these reassuring words.
A man (even if that man is a corporation) cannot serve two masters. Either he is serving shareholders or he is serving clients. Both are noble. Both are justifiable. But both cannot be served simultaneously. In the majority of cases, the more money a firm makes, the higher the cost borne by clients. Conversely, the more prices are cut to benefit clients, the more shareholders will feel the pain. Profits derived from price changes, for instance, are a zero sum game. Whenever one party is doing well, it is as sure as the night follows the day that this comes at the expense of the other party.
What I found try astounding in the book is that one of the world’s re-eminent economists, Milton Friedman is of the opinion that corporate profit is a moral imperative. Friedman believes that corporate responsibility is both illegal and immoral if it compromises profits. He believes it is both illegal and immoral to put the client’s interests first.
Quite apart from the severe consequences if Friedman is right (jail time for installing SO2 scrubbers?), this could also lead to somewhat humourous situations. Imagine having a shareholder showing up at a corporate AGM brandishing a mission statement saying “It says here that you’re putting the clients’ interests first- what the hell is that about, Mr. CEO? If you don’t start charging as much as the market will bear and sending me the money in the form of higher dividends by the end of the next quarter, I’ll get you ousted.”
The simple lesson is that things are seldom as they appear. It is obviously disingenuous of corporations to suggest that they are simultaneously pursuing both agendas to the point where both sets of stakeholders’interests first. No one can have it both ways.
Even if CEOs said something like “we aim to balance the legitimate interests of all our stakeholders”, I would buy in, although Friedman likely would not. My view on the obvious disconnect is that the ubiquitous bumpf about putting clients first is really just another cynical attempt to get people to give you their money. Corporations don’t really mean it. Friedman says they would be breaking the law if they did.
Tuesday, May 24, 2005
What it feels like to be a whistleblower
It feels like you are doing the right thing. When you see or suspect wrongdoing by someone, against the public interest, or against a trusting and vulnerable person or class of people.
Then it feels strange when your immediate supervisors dodge, deflect, or attack you.
Then it feels shocking when you realize that so many people have so much to lose by outing the abuse, that they will actually prefer to silence you than to fix the problem.
Then it feels scary, when they turn the tables and try to silence or eliminate the problem, instead of facing it and admitting the defects.
Then it becomes downright frightening when it becomes clear that no matter who you contact, which boss, regulator, ombudsman, government, they can all find numerous reasons for, "not getting involved", if the opponent is a powerful and dangerous opponent.
Then it becomes anger at so many who maintain they are there to serve and protect, and yet they refuse to serve and are afraid to protect, lest they become caught in the retaliation.
Then it becomes confusing, to realize that everything you were taught, told, and believed was just talk, and nothing else. That wrong is often considered "right", if it makes you rich enough.
That right is often wrong, if it affects people in positions of power and influence.
Then it feels as if your world is off kilter, that either you are upside down, or your world has turned itself upside down. It feels as if you are out of control, and you need to make some corrections.
Then, like a car where someone has reversed the steering controls, so that left turns take you to the right and vice versa, each and every move you make in this upside down world turns out to be wrong. Each move you make actually makes the out of control situation more out of control.
Then you start to do damage to:
Relationships.
Families
Spouses.
Children.
Finances.
Mental health.
Physical health.
Career.
Motivation.
Medication.
Addiction.
White collar crime is a crime of violence. It affects so many in so many ways.
(Kent Shirley took his own life this past x-mas eve, after making allegations about his former employer, a Mr Mallard of Assante Investments. He was subject to "police state" treatment at the hands of the legal staulking horses sent after him....and those who live on.
No help, nor action has so far some from any provincial securities omission, nor the RCMP commercial crime department. No one has shown the will or the willingness to simply investigate and or enforce securities law.
For those needing further reading on the history and retaliatory treatment of whistleblowers, see the following well documented public or corporate cases:
Gomery
Enron
Worldcom
Environmental Protection Agency
Federal Aviation Administration
Food and Drug Administration
Hooker Chemical
Dow Chemical
DDT, Agent Orange
Morton Thiokol (Challenger space shuttle explosion)
Ford Pinto (exloding gas tank)
General Motors (exploding gas tanks)
General Motors (Corvair)
Love Canal
Frank Serpico and the NYPD
Karen Silkwood and the nuclear power industry
Firestone Tire
Tobacco Industry
Cassandra Rowley and the FBI
Haliburton
Then it feels strange when your immediate supervisors dodge, deflect, or attack you.
Then it feels shocking when you realize that so many people have so much to lose by outing the abuse, that they will actually prefer to silence you than to fix the problem.
Then it feels scary, when they turn the tables and try to silence or eliminate the problem, instead of facing it and admitting the defects.
Then it becomes downright frightening when it becomes clear that no matter who you contact, which boss, regulator, ombudsman, government, they can all find numerous reasons for, "not getting involved", if the opponent is a powerful and dangerous opponent.
Then it becomes anger at so many who maintain they are there to serve and protect, and yet they refuse to serve and are afraid to protect, lest they become caught in the retaliation.
Then it becomes confusing, to realize that everything you were taught, told, and believed was just talk, and nothing else. That wrong is often considered "right", if it makes you rich enough.
That right is often wrong, if it affects people in positions of power and influence.
Then it feels as if your world is off kilter, that either you are upside down, or your world has turned itself upside down. It feels as if you are out of control, and you need to make some corrections.
Then, like a car where someone has reversed the steering controls, so that left turns take you to the right and vice versa, each and every move you make in this upside down world turns out to be wrong. Each move you make actually makes the out of control situation more out of control.
Then you start to do damage to:
Relationships.
Families
Spouses.
Children.
Finances.
Mental health.
Physical health.
Career.
Motivation.
Medication.
Addiction.
White collar crime is a crime of violence. It affects so many in so many ways.
(Kent Shirley took his own life this past x-mas eve, after making allegations about his former employer, a Mr Mallard of Assante Investments. He was subject to "police state" treatment at the hands of the legal staulking horses sent after him....and those who live on.
No help, nor action has so far some from any provincial securities omission, nor the RCMP commercial crime department. No one has shown the will or the willingness to simply investigate and or enforce securities law.
For those needing further reading on the history and retaliatory treatment of whistleblowers, see the following well documented public or corporate cases:
Gomery
Enron
Worldcom
Environmental Protection Agency
Federal Aviation Administration
Food and Drug Administration
Hooker Chemical
Dow Chemical
DDT, Agent Orange
Morton Thiokol (Challenger space shuttle explosion)
Ford Pinto (exloding gas tank)
General Motors (exploding gas tanks)
General Motors (Corvair)
Love Canal
Frank Serpico and the NYPD
Karen Silkwood and the nuclear power industry
Firestone Tire
Tobacco Industry
Cassandra Rowley and the FBI
Haliburton
Those with nothing to hide, hide nothing.
Makes you wonder why the Alberta Securities Commission would hire fast talking lawyers to avoid having a peek into how they run their office. After all, it is the government approved and appointed auditor that is legally charged with this responsibility.
Lets let them take a look under the hood and see if any parts are indeed missing. She just ain't running right.
Lets let them take a look under the hood and see if any parts are indeed missing. She just ain't running right.
Assante client speaks to illegalities, while regulators turn a blind eye
Jocelyne Robidoux
9-2210 Walnut St.
Thunder Bay, Ontario
P7C 1L1 (807)623-0160
jocelyne_robidoux@yahoo.com
May 18, 2005
Mr. David Brown
Chairman, OSC
Suite 800, Box 55
20 Queen Street West
Toronto, Ontario M5H 3S8
Dear Mr. Brown:
I wish to express my sincere disgust with your department’s dismissal of serious allegations against Assante. Based on my experience with the Mutual Fund Dealers Association (“MFDA”) and its conflict of interest issues, and the fact that the Saskatchewan Financial Services Commission has limited resources, I’m assuming these regulators will not proceed further. I know that there exists overwhelming evidence against this company for its widespread practice of converting third party funds to its more profitable proprietary product. Did you comb through all those boxes of evidence? Did you question witnesses who also worked at Assante and were familiar with its practices? I didn’t think so. You conducted your investigation much like the Manitoba Securities Commission (“MSC”) handled my case in 2002.
I am a former Assante client who was a victim of the company’s fund conversion, in my situation without my consent which is illegal and yet appears to be ignored by regulators. I represented myself in a civil suit against my advisor and Assante through the Court of Queen’s Bench of Manitoba in 2003 after the MSC closed my file. I believe I was successful in proving my claims while the MSC seemed unable to find sufficient proof to charge Assante. My case also involved unregistered trades, confirmed by the Ontario Securities Commission (“OSC”) and again ignored by the MSC.
The trades in my case occurred at the same time as the trades in cases by the OSC, the Alberta Securities Commission (“ASC”) and the British Columbia Securities Commission against Assante/Summit Aurum, when the company was promoting and selling its in-house funds. The OSC settled with Assante in November 2003 for unregistered trading by over 152 advisors. No penalties were assessed. Were in-house funds involved? Were the trades authorized? What were the resulting client losses? If these issues were not investigated, is it fair to conclude that your department is negligent or incompetent or maybe more likely, that certain companies are immune
to legal action? Regulators appear to have unwritten agreements with their corporate cohorts to ignore complaints possibly to protect each others interests.
- 2 -
Despite a history of allegations from former advisors, journalists, investor advocates and
investors, Assante has never been severely disciplined. The apparent enforcement problems at
the OSC sound eerily similar to those reported by whistle-blowers at the ASC. A brave young man who was very aware of Assante’s tactics died trying to expose the truth. Shame on you for allowing his efforts and his death to be in vain. It’s not surprising that you once said, “We don’t give awards to whistle-blowers.” You treated this “truth-teller” much like you treated a Hollinger whistle-blower a few years ago. The OSC has a tendency to act when forced to do so by its American counterpart. Unfortunately, investors cannot rely on the U.S. Securities Exchange Commission to take action against Assante as it did with Hollinger.
I did not sign a gag order when I settled with Assante. I’m not done speaking out against Assante and our regulatory bodies who continue to allow corruption to grow in the Canadian financial markets. A foreign journalist once commented that, “the Canadian stock markets are the most manipulated and controlled in the civilized world and that the only reason any experienced foreign investor puts money into Canada is to launder it.” You people are doing more damage to our financial system by protecting instead of disciplining the perpetrators just as poor parents would foolishly let their children do as they please and make society pay for their unruly behavior. In his book, The Naked Investor, John Reynolds refers to a “highly respected academic” who described the OSC as “probably the most poorly governed securities regulator among those of the OECD… countries.”
The OSC announced in the Toronto Star on May 13, 2005 that it was encouraging consumers to report wrongdoing in the industry. I find it interesting and timely that the article was released within days of the OSC announcing an end to its Assante investigation. Please explain how you plan to prosecute corporate crooks based on tips from anonymous sources while you disregard cases with heaps of incriminating documents and testimony from credible witnesses who you never bother to contact during your so-called investigations.
The OSC mandate is to “provide protection to investors from unfair, improper and fraudulent practices.” Your department has not only failed to protect investors but has actually promoted “fraudulent practices.” In April 1999, the OSC approved Assante’s request to convert clients’ third party funds to its proprietary funds and then neglected to monitor and enforce compliance. If mass class action suits are ever filed by investors and huge losses are uncovered, who should be liable? What will the OSC’s defense be after shirking its responsibilities and ignoring repeated warnings of corruption at Assante. What if numerous “truth-tellers” finally come forward having been inspired by the ASC whistle-blowers? The OSC claims it “recognizes the importance of setting an example in the areas of transparency and effective governance.”
A fine example you turned out to be!
Very sincerely,
Jocelyne Robidoux
- 3 -
Cc: Mr. James McCarter Joanne Fallone
Office of the Auditor General of Ontario Manager, Case Assessment, OSC
20 Dundas Street West Suite 800, Box 55
Suite 1530, Box 105 20 Queen St. West
Toronto, Ontario M5G 2C2 Toronto, Ontario M5H 3S8
Hon. Gerry Phillips Michael Hornbrook
Chair, Ontario Management Board of Cabinet CBC Fifth Estate
12th Floor, Ferguson Block P.O. Box 500, Station A
77 Wellesley St. West Toronto, Ontario M5W 1E6
Toronto, Ontario M7A 1N3
Hon. Coulter Osborne Linda Leatherdale
Integrity Commissioner, Ontario Business Editor, Toronto Sun
Suite 1803 333 King Street East
415 Yonge Street Toronto, Ontario M5A 3X5
Toronto, Ontario M5B 2E7
Gerald Lafreniere, LL.B. Michael Watson
Clerk, Standing Senate Committee on Banking, Director, OSC
Trade & Commerce, Senate of Canada Suite 800, Box 55
40 Elgin Street, Room 1039 Chambers Building 20 Queen St. West
Ottawa, Ontario K1A 0A4 Toronto, Ontario M5H 3S8
Hon. Michael Bryant Larry Waite
Attorney General of Ontario CEO, MFDA
803 St. Clair Avenue W. 121 King Street West, Suite 1000
Toronto, Ontario M6C 1B9 Toronto, Ontario M5H 3T9
Douglas Brown David Wild
Director, MSC . Chairman, SFSC
1130-405 Broadway Avenue 6th Floor, 1919 Saskatchewan Drive
Winnipeg, Manitoba R3C 3L6 Regina, Saskatchewan S4P 3V7
Amanda Downs Joe Canavan
Investigator, OSC CEO, Assante Corporation
Suite 800, Box 55 320 Bay Street, Suite 1100
20 Queen St. West Toronto, Ontario M5H 4A6
Toronto, Ontario M5H 3S8
9-2210 Walnut St.
Thunder Bay, Ontario
P7C 1L1 (807)623-0160
jocelyne_robidoux@yahoo.com
May 18, 2005
Mr. David Brown
Chairman, OSC
Suite 800, Box 55
20 Queen Street West
Toronto, Ontario M5H 3S8
Dear Mr. Brown:
I wish to express my sincere disgust with your department’s dismissal of serious allegations against Assante. Based on my experience with the Mutual Fund Dealers Association (“MFDA”) and its conflict of interest issues, and the fact that the Saskatchewan Financial Services Commission has limited resources, I’m assuming these regulators will not proceed further. I know that there exists overwhelming evidence against this company for its widespread practice of converting third party funds to its more profitable proprietary product. Did you comb through all those boxes of evidence? Did you question witnesses who also worked at Assante and were familiar with its practices? I didn’t think so. You conducted your investigation much like the Manitoba Securities Commission (“MSC”) handled my case in 2002.
I am a former Assante client who was a victim of the company’s fund conversion, in my situation without my consent which is illegal and yet appears to be ignored by regulators. I represented myself in a civil suit against my advisor and Assante through the Court of Queen’s Bench of Manitoba in 2003 after the MSC closed my file. I believe I was successful in proving my claims while the MSC seemed unable to find sufficient proof to charge Assante. My case also involved unregistered trades, confirmed by the Ontario Securities Commission (“OSC”) and again ignored by the MSC.
The trades in my case occurred at the same time as the trades in cases by the OSC, the Alberta Securities Commission (“ASC”) and the British Columbia Securities Commission against Assante/Summit Aurum, when the company was promoting and selling its in-house funds. The OSC settled with Assante in November 2003 for unregistered trading by over 152 advisors. No penalties were assessed. Were in-house funds involved? Were the trades authorized? What were the resulting client losses? If these issues were not investigated, is it fair to conclude that your department is negligent or incompetent or maybe more likely, that certain companies are immune
to legal action? Regulators appear to have unwritten agreements with their corporate cohorts to ignore complaints possibly to protect each others interests.
- 2 -
Despite a history of allegations from former advisors, journalists, investor advocates and
investors, Assante has never been severely disciplined. The apparent enforcement problems at
the OSC sound eerily similar to those reported by whistle-blowers at the ASC. A brave young man who was very aware of Assante’s tactics died trying to expose the truth. Shame on you for allowing his efforts and his death to be in vain. It’s not surprising that you once said, “We don’t give awards to whistle-blowers.” You treated this “truth-teller” much like you treated a Hollinger whistle-blower a few years ago. The OSC has a tendency to act when forced to do so by its American counterpart. Unfortunately, investors cannot rely on the U.S. Securities Exchange Commission to take action against Assante as it did with Hollinger.
I did not sign a gag order when I settled with Assante. I’m not done speaking out against Assante and our regulatory bodies who continue to allow corruption to grow in the Canadian financial markets. A foreign journalist once commented that, “the Canadian stock markets are the most manipulated and controlled in the civilized world and that the only reason any experienced foreign investor puts money into Canada is to launder it.” You people are doing more damage to our financial system by protecting instead of disciplining the perpetrators just as poor parents would foolishly let their children do as they please and make society pay for their unruly behavior. In his book, The Naked Investor, John Reynolds refers to a “highly respected academic” who described the OSC as “probably the most poorly governed securities regulator among those of the OECD… countries.”
The OSC announced in the Toronto Star on May 13, 2005 that it was encouraging consumers to report wrongdoing in the industry. I find it interesting and timely that the article was released within days of the OSC announcing an end to its Assante investigation. Please explain how you plan to prosecute corporate crooks based on tips from anonymous sources while you disregard cases with heaps of incriminating documents and testimony from credible witnesses who you never bother to contact during your so-called investigations.
The OSC mandate is to “provide protection to investors from unfair, improper and fraudulent practices.” Your department has not only failed to protect investors but has actually promoted “fraudulent practices.” In April 1999, the OSC approved Assante’s request to convert clients’ third party funds to its proprietary funds and then neglected to monitor and enforce compliance. If mass class action suits are ever filed by investors and huge losses are uncovered, who should be liable? What will the OSC’s defense be after shirking its responsibilities and ignoring repeated warnings of corruption at Assante. What if numerous “truth-tellers” finally come forward having been inspired by the ASC whistle-blowers? The OSC claims it “recognizes the importance of setting an example in the areas of transparency and effective governance.”
A fine example you turned out to be!
Very sincerely,
Jocelyne Robidoux
- 3 -
Cc: Mr. James McCarter Joanne Fallone
Office of the Auditor General of Ontario Manager, Case Assessment, OSC
20 Dundas Street West Suite 800, Box 55
Suite 1530, Box 105 20 Queen St. West
Toronto, Ontario M5G 2C2 Toronto, Ontario M5H 3S8
Hon. Gerry Phillips Michael Hornbrook
Chair, Ontario Management Board of Cabinet CBC Fifth Estate
12th Floor, Ferguson Block P.O. Box 500, Station A
77 Wellesley St. West Toronto, Ontario M5W 1E6
Toronto, Ontario M7A 1N3
Hon. Coulter Osborne Linda Leatherdale
Integrity Commissioner, Ontario Business Editor, Toronto Sun
Suite 1803 333 King Street East
415 Yonge Street Toronto, Ontario M5A 3X5
Toronto, Ontario M5B 2E7
Gerald Lafreniere, LL.B. Michael Watson
Clerk, Standing Senate Committee on Banking, Director, OSC
Trade & Commerce, Senate of Canada Suite 800, Box 55
40 Elgin Street, Room 1039 Chambers Building 20 Queen St. West
Ottawa, Ontario K1A 0A4 Toronto, Ontario M5H 3S8
Hon. Michael Bryant Larry Waite
Attorney General of Ontario CEO, MFDA
803 St. Clair Avenue W. 121 King Street West, Suite 1000
Toronto, Ontario M6C 1B9 Toronto, Ontario M5H 3T9
Douglas Brown David Wild
Director, MSC . Chairman, SFSC
1130-405 Broadway Avenue 6th Floor, 1919 Saskatchewan Drive
Winnipeg, Manitoba R3C 3L6 Regina, Saskatchewan S4P 3V7
Amanda Downs Joe Canavan
Investigator, OSC CEO, Assante Corporation
Suite 800, Box 55 320 Bay Street, Suite 1100
20 Queen St. West Toronto, Ontario M5H 4A6
Toronto, Ontario M5H 3S8
Wednesday, May 18, 2005
Securities Omission
When I read of McMaster University awarding an honorary degree to OSC Chairman David Brown for,"his distinguished public service in the field of securities regulation on the provincial, national and international stages", several thoughts come to mind immediately.
One that I will apologize in advance for, is that I expect Michael Jackson to be similarly awarded "father of the year".
As someone who has worked under the "oversight" of the OSC for many, many years I can only conclude that David Brown must have made considerable contributions to McMaster university over the years, because I am unaware of his contributions to benefit securities regulation.
I am aware that his salary during his tenure at the OSC exceeded that of the president of the United States, as well as that of the head of the SEC in the US. Bravo David. Well done on behalf of David. Once again, an apology for the bitter tone of this, but from the position of where I stand, I see only the lives ruined, the occasional suicide, the many forms of "violence resulting from white collar crimes" that have taken place under a regulatory system that ignored, passed the buck, or declined to investigate rampant industry fraud that hurt average Canadians.
I am sorry but I must have missed the memo where the Securities Commission solved something or improved conditions for Canadians.
One that I will apologize in advance for, is that I expect Michael Jackson to be similarly awarded "father of the year".
As someone who has worked under the "oversight" of the OSC for many, many years I can only conclude that David Brown must have made considerable contributions to McMaster university over the years, because I am unaware of his contributions to benefit securities regulation.
I am aware that his salary during his tenure at the OSC exceeded that of the president of the United States, as well as that of the head of the SEC in the US. Bravo David. Well done on behalf of David. Once again, an apology for the bitter tone of this, but from the position of where I stand, I see only the lives ruined, the occasional suicide, the many forms of "violence resulting from white collar crimes" that have taken place under a regulatory system that ignored, passed the buck, or declined to investigate rampant industry fraud that hurt average Canadians.
I am sorry but I must have missed the memo where the Securities Commission solved something or improved conditions for Canadians.
Tuesday, May 17, 2005
Overcharging clients on mutual fund commissions
Check out the NASD site at http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_005975
for info on how selling higher cost DSC shares is considered a breach of fiduciary responsibility by a trusted professional. (National Association of Securities Dealers, United States)
In August 2002, NASD affirmed a hearing panel decision that a broker made unsuitable recommendations to a customer. The broker had sold $2.1 million in Class B shares in two mutual fund families to a customer. The amount invested in one fund family was enough to entitle the customer to obtain Class A shares with no front-end load. The amount invested in the second fund family would have entitled the customer to obtain the largest breakpoint discount on Class A shares. NASD's National Adjudicatory Council held that a broker's suitability obligation includes the requirement to minimize the sales charges paid for mutual fund shares, when consistent with the customer's investment objectives. The broker's recommendation was unsuitable because the customer's purchase of Class B rather than Class A shares resulted in significantly higher commission costs, including the payment of contingent deferred sales charges upon sale of the shares. The broker was fined $40,000, suspended in all capacities for one year, and ordered to pay restitution of $55,567, plus interest, to the customer's estate. See Department of Enforcement v. Wendell D. Belden (PDF 40 KB).
In April 2001, NASD censured and fined a brokerage firm, suspended a broker and his supervisor, and directed that restitution be paid to its customers for, among other things, recommending that each of 15 customers purchase over $250,000 in Class B shares when it would have been more cost-effective for those customers to purchase Class A shares. NASD found the purchases were unsuitable in light of the amount sold, the sales and distribution charges incurred, and because the customers could have purchased the Class A shares with much lower sales charges and brokerage firm commissions. The same firm also recommended to 29 customers that they liquidate another mutual fund and purchase over $500,000 of Class B shares, when Class A shares would have been the more cost-effective purchase at the time because a temporary marketing promotion offered by the fund eliminated the sales load. See NASD Regulation Censures and Fines Stifel, Nicolaus & Company, and Two Individuals for the Unsuitable Sale of Class B Mutual Funds.
This kind of behavior, unfortunately is considered "standard industry practice" for the time being in many offices in Canada.
for info on how selling higher cost DSC shares is considered a breach of fiduciary responsibility by a trusted professional. (National Association of Securities Dealers, United States)
In August 2002, NASD affirmed a hearing panel decision that a broker made unsuitable recommendations to a customer. The broker had sold $2.1 million in Class B shares in two mutual fund families to a customer. The amount invested in one fund family was enough to entitle the customer to obtain Class A shares with no front-end load. The amount invested in the second fund family would have entitled the customer to obtain the largest breakpoint discount on Class A shares. NASD's National Adjudicatory Council held that a broker's suitability obligation includes the requirement to minimize the sales charges paid for mutual fund shares, when consistent with the customer's investment objectives. The broker's recommendation was unsuitable because the customer's purchase of Class B rather than Class A shares resulted in significantly higher commission costs, including the payment of contingent deferred sales charges upon sale of the shares. The broker was fined $40,000, suspended in all capacities for one year, and ordered to pay restitution of $55,567, plus interest, to the customer's estate. See Department of Enforcement v. Wendell D. Belden (PDF 40 KB).
In April 2001, NASD censured and fined a brokerage firm, suspended a broker and his supervisor, and directed that restitution be paid to its customers for, among other things, recommending that each of 15 customers purchase over $250,000 in Class B shares when it would have been more cost-effective for those customers to purchase Class A shares. NASD found the purchases were unsuitable in light of the amount sold, the sales and distribution charges incurred, and because the customers could have purchased the Class A shares with much lower sales charges and brokerage firm commissions. The same firm also recommended to 29 customers that they liquidate another mutual fund and purchase over $500,000 of Class B shares, when Class A shares would have been the more cost-effective purchase at the time because a temporary marketing promotion offered by the fund eliminated the sales load. See NASD Regulation Censures and Fines Stifel, Nicolaus & Company, and Two Individuals for the Unsuitable Sale of Class B Mutual Funds.
This kind of behavior, unfortunately is considered "standard industry practice" for the time being in many offices in Canada.
Why are 80% of funds sold with a DSC option?
Check out the NASD site at http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_005975
for info on how selling higher cost DSC shares is considered a breach of fiduciary responsibility by a trusted professional. (National Association of Securities Dealers, United States)
In August 2002, NASD affirmed a hearing panel decision that a broker made unsuitable recommendations to a customer. The broker had sold $2.1 million in Class B shares in two mutual fund families to a customer. The amount invested in one fund family was enough to entitle the customer to obtain Class A shares with no front-end load. The amount invested in the second fund family would have entitled the customer to obtain the largest breakpoint discount on Class A shares. NASD's National Adjudicatory Council held that a broker's suitability obligation includes the requirement to minimize the sales charges paid for mutual fund shares, when consistent with the customer's investment objectives. The broker's recommendation was unsuitable because the customer's purchase of Class B rather than Class A shares resulted in significantly higher commission costs, including the payment of contingent deferred sales charges upon sale of the shares. The broker was fined $40,000, suspended in all capacities for one year, and ordered to pay restitution of $55,567, plus interest, to the customer's estate. See Department of Enforcement v. Wendell D. Belden (PDF 40 KB).
for info on how selling higher cost DSC shares is considered a breach of fiduciary responsibility by a trusted professional. (National Association of Securities Dealers, United States)
In August 2002, NASD affirmed a hearing panel decision that a broker made unsuitable recommendations to a customer. The broker had sold $2.1 million in Class B shares in two mutual fund families to a customer. The amount invested in one fund family was enough to entitle the customer to obtain Class A shares with no front-end load. The amount invested in the second fund family would have entitled the customer to obtain the largest breakpoint discount on Class A shares. NASD's National Adjudicatory Council held that a broker's suitability obligation includes the requirement to minimize the sales charges paid for mutual fund shares, when consistent with the customer's investment objectives. The broker's recommendation was unsuitable because the customer's purchase of Class B rather than Class A shares resulted in significantly higher commission costs, including the payment of contingent deferred sales charges upon sale of the shares. The broker was fined $40,000, suspended in all capacities for one year, and ordered to pay restitution of $55,567, plus interest, to the customer's estate. See Department of Enforcement v. Wendell D. Belden (PDF 40 KB).
Financial Post Article, Investors Miffed
5/17/2005 5:54:58 PM
HOME : FEATURES : COLUMNS :
Financial Post
The Professional Financial Advisor
Toronto-based Financial Advisor John De Goey offers thoughts about fee-based advice, holistic planning and capital markets.
By John De Goey Tuesday, May 17, 2005
The litany of malfeasance occurrences over the past number of years has caused virtually everyone to become at least a little jaded about how the industry works.
It should come as no surprise that the financial services industry is less than credible in holding itself out as a true profession. The litany of malfeasance occurrences over the past number of years has caused virtually everyone to become at least a little jaded about how the industry works- sort of like politics. Rather than recount the track record of transgressions here, let’s consider the current opportunity to implement positive and meaningful change by making improvements to restore investor confidence.
For starters, the federal government has signaled a strong intent to press forward with a single national securities regulator. Most stakeholders agree. Still, it should be obvious that the larger concern is not the structure of securities regulation in Canada, but the efficacy. If regulators can’t protect consumers from misrepresentation and fraud, the structure hardly seems relevant. No matter what form our regulatory framework ultimately takes, there should be a clear focus on enhanced consumer protection.
Second, since an ounce of prevention is worth a pound of cure, disclosure at the point of sale needs to be overhauled considerably. This is especially true with regard to so called “manufactured” investment products: mutual funds, segregated funds, structured notes, universal life insurance policies and hedge funds. Most people don’t understand the risks they’re taking because the risks are couched in legal language in the middle of an imposing technical document called a prospectus. The cigarette industry dealt with this problem by putting stark wording about risks and limitations on product packaging. Investment products would be well advised to follow suit. That way, no one would be able to say they weren’t aware of the risks involved when buying one of them.
Third, and most important, politicians need to address the industry’s tarnished reputation head on. Concerned stakeholders, including the Small Investor Protection Association, the Consumers’ Council of Canada, Democracy Watch and the Canadian Association of Retired Persons have long been making actionable suggestions. Call them Mainstream Investors For Fair Disclosure (or MIFFD). These groups will be using their considerable resources in the upcoming federal election campaign to ensure that consumer interests are heard. A number of prominent consumer advocates are lending a hand, too.
One of the reasons consumer issues are seldom addressed in the political arena is that consumers are just too disparate and disorganized to work together. Often, the diverse hodgepodge of consumer concerns lacks sufficient focus to be clearly articulated and acted upon.
That’s not the case this time.
Previously, the industry has pointed to the lack of consensus regarding what ails it as a de facto expression of reasonable functionality. The logic is that if stakeholders can’t even agree on what’s wrong, then things must not be that bad. That has been the industry’s position for a decade now. In that time, we’ve had sales trips, inappropriate advice, market timing, Bre-X and Portus, to name only a few more recent debacles.
Nearly a decade ago, Glorianne Stromberg warned that this would happen if meaningful steps weren’t taken. There’s an old saying that “if it ain’t broke, don’t fix it”. The flip side is that if it is broke, you’d better get right to work or there will be hell to pay on Election Day.
John J. De Goey is a Senior Financial Advisor with Assante Capital Management Ltd., member CIPF and author of The Professional Financial Advisor. The views expressed here are the personal views and opinions of the author and not those of Assante and are not endorsed in any way by Assante. jdegoey@assante.com
HOME : FEATURES : COLUMNS :
Financial Post
The Professional Financial Advisor
Toronto-based Financial Advisor John De Goey offers thoughts about fee-based advice, holistic planning and capital markets.
By John De Goey Tuesday, May 17, 2005
The litany of malfeasance occurrences over the past number of years has caused virtually everyone to become at least a little jaded about how the industry works.
It should come as no surprise that the financial services industry is less than credible in holding itself out as a true profession. The litany of malfeasance occurrences over the past number of years has caused virtually everyone to become at least a little jaded about how the industry works- sort of like politics. Rather than recount the track record of transgressions here, let’s consider the current opportunity to implement positive and meaningful change by making improvements to restore investor confidence.
For starters, the federal government has signaled a strong intent to press forward with a single national securities regulator. Most stakeholders agree. Still, it should be obvious that the larger concern is not the structure of securities regulation in Canada, but the efficacy. If regulators can’t protect consumers from misrepresentation and fraud, the structure hardly seems relevant. No matter what form our regulatory framework ultimately takes, there should be a clear focus on enhanced consumer protection.
Second, since an ounce of prevention is worth a pound of cure, disclosure at the point of sale needs to be overhauled considerably. This is especially true with regard to so called “manufactured” investment products: mutual funds, segregated funds, structured notes, universal life insurance policies and hedge funds. Most people don’t understand the risks they’re taking because the risks are couched in legal language in the middle of an imposing technical document called a prospectus. The cigarette industry dealt with this problem by putting stark wording about risks and limitations on product packaging. Investment products would be well advised to follow suit. That way, no one would be able to say they weren’t aware of the risks involved when buying one of them.
Third, and most important, politicians need to address the industry’s tarnished reputation head on. Concerned stakeholders, including the Small Investor Protection Association, the Consumers’ Council of Canada, Democracy Watch and the Canadian Association of Retired Persons have long been making actionable suggestions. Call them Mainstream Investors For Fair Disclosure (or MIFFD). These groups will be using their considerable resources in the upcoming federal election campaign to ensure that consumer interests are heard. A number of prominent consumer advocates are lending a hand, too.
One of the reasons consumer issues are seldom addressed in the political arena is that consumers are just too disparate and disorganized to work together. Often, the diverse hodgepodge of consumer concerns lacks sufficient focus to be clearly articulated and acted upon.
That’s not the case this time.
Previously, the industry has pointed to the lack of consensus regarding what ails it as a de facto expression of reasonable functionality. The logic is that if stakeholders can’t even agree on what’s wrong, then things must not be that bad. That has been the industry’s position for a decade now. In that time, we’ve had sales trips, inappropriate advice, market timing, Bre-X and Portus, to name only a few more recent debacles.
Nearly a decade ago, Glorianne Stromberg warned that this would happen if meaningful steps weren’t taken. There’s an old saying that “if it ain’t broke, don’t fix it”. The flip side is that if it is broke, you’d better get right to work or there will be hell to pay on Election Day.
John J. De Goey is a Senior Financial Advisor with Assante Capital Management Ltd., member CIPF and author of The Professional Financial Advisor. The views expressed here are the personal views and opinions of the author and not those of Assante and are not endorsed in any way by Assante. jdegoey@assante.com
Sunday, May 15, 2005
Excerpts from Financial Post Editorial on Securities Regulators
Here are some highlights from a recent Financial Post editorial.
The role of the OSC in Portus
Terence Corcoran
Financial Post
Friday, May 13, 2005
"A lot of stray dogs probably need to be shot over Portus, a few of which might even be hanging out at the OSC. Where were the regulators when the creators of these products brought them to market? What role did existing regulation play in making Portus's products, based on hedge funds, so alluring to small investors?"
"what could have accounted for [Portus's] tremendous sales record?" asked Mr. Brown. "Perhaps there is only one particular feature to speak of -- high up-front fees and trailer fees for referrals."
"That's it? More than 26,000 investors turned over $750-million to Portus solely because advisors were paid fees? This is convenient for the OSC, which has been riding the fund fee issue for more than a decade, with absolutely no benefit to investors. Rather than take a hard look at the regulated investment environment that created Portus, Mr. Brown has decided to take a quick, cheap shot at a dead hobbyhorse."
"Far more interesting and sophisticated would be an examination of the role of regulation in creating demand for Portus and the other hybrid hedge products."
"Regulations have a high price in the market. A big part of that price is to lull investors into believing that the market is safer and less risky than it actually is. Many small investors, ignorant of risk, should not be in these markets, but the air of confidence created by regulations draws them in. Failures then land on investors as stunning surprises. At that point, the regulators walk away from the victims and turn to imposing new regulations and lay the foundation for more stunning disasters in the future."
The role of the OSC in Portus
Terence Corcoran
Financial Post
Friday, May 13, 2005
"A lot of stray dogs probably need to be shot over Portus, a few of which might even be hanging out at the OSC. Where were the regulators when the creators of these products brought them to market? What role did existing regulation play in making Portus's products, based on hedge funds, so alluring to small investors?"
"what could have accounted for [Portus's] tremendous sales record?" asked Mr. Brown. "Perhaps there is only one particular feature to speak of -- high up-front fees and trailer fees for referrals."
"That's it? More than 26,000 investors turned over $750-million to Portus solely because advisors were paid fees? This is convenient for the OSC, which has been riding the fund fee issue for more than a decade, with absolutely no benefit to investors. Rather than take a hard look at the regulated investment environment that created Portus, Mr. Brown has decided to take a quick, cheap shot at a dead hobbyhorse."
"Far more interesting and sophisticated would be an examination of the role of regulation in creating demand for Portus and the other hybrid hedge products."
"Regulations have a high price in the market. A big part of that price is to lull investors into believing that the market is safer and less risky than it actually is. Many small investors, ignorant of risk, should not be in these markets, but the air of confidence created by regulations draws them in. Failures then land on investors as stunning surprises. At that point, the regulators walk away from the victims and turn to imposing new regulations and lay the foundation for more stunning disasters in the future."
Cover-ups at the Provincial Securities Commissions?
Seeing the headlines surrounding the Alberta Securities Commission, following the hiding of all material facts, denial of any involvement by the OSC around Assante allegations, reading official responses from provincial Securities Commissions lead me to wonder just how much wrongdoing is being hidden and covered over.
It appears the Alberta Securities Commission will spare no expense, and leave no avenue unexplored. In an effort to ferret out abuse of investors? No. In attempts to avoid full, clear and plain disclosure of ASC activities or audit of the ASC by the provincial auditor. After twenty years in the investment business, I was personally convinced that the ASC was nothing but a "paperwork tiger", unable to protect the average investor, yet unwilling to admit to this. Now I see they area actually a fairly strong organization, unafraid to fight........unfortunately not for small investors, but rather for secrecy and coverup of the job that they are doing.
Now as I watch them, run, hide, and hire lawyers to evade an open look into themselves, it makes one wonder just how large is the iceburg beneath the surface. I guess we will find out soon enough.
To see the OSC dodge, squirm, and avoid having anything to do with documents handed to them on obvious investment improprieties is akin to watching my son explain why he cannot do his homework.
To read the responses from both the ASC and the OSC to investors, industry participants etc, who write to them of wrongdoing, as these commission do everything in their power to justify why they are not the proper people to get involved. They point, they refer, they delegate to others, but I have yet to see them actually take on an investigation into investment abuses and I have yet to see a single abused investor receive compensation due to efforts from a provincial securities commission. That after twenty years.
This smells of regulators who have become so close to those that they are supposed to regulate, that they are unable to any longer recognize what it was they were put there for. This looks like total dedication to job protection instead of investor protection.
I wish to thank the forward thinking officials of the Alberta Securities Commission for doing such a forcefull job of evading a public audit. They are doing a better job of insinuating guilt than I could imagine. I thank them for not opening their books and their operations to audit, as it speak volumes about the kind of job they feel they are doing. Typically the people who evade accountability are those with something to hide. For public servants without something to hide, an invitation to audit is nothing but an opportunity to prove the job is being done correctly.
I look forward to the day when the disinfectant of sunlight is allowed to shine on the affairs at these commissions. Until that day I believe that Canadians are not covered by any effective securities regulatory agency whatsoever. It is very much "buyer beware".
It appears the Alberta Securities Commission will spare no expense, and leave no avenue unexplored. In an effort to ferret out abuse of investors? No. In attempts to avoid full, clear and plain disclosure of ASC activities or audit of the ASC by the provincial auditor. After twenty years in the investment business, I was personally convinced that the ASC was nothing but a "paperwork tiger", unable to protect the average investor, yet unwilling to admit to this. Now I see they area actually a fairly strong organization, unafraid to fight........unfortunately not for small investors, but rather for secrecy and coverup of the job that they are doing.
Now as I watch them, run, hide, and hire lawyers to evade an open look into themselves, it makes one wonder just how large is the iceburg beneath the surface. I guess we will find out soon enough.
To see the OSC dodge, squirm, and avoid having anything to do with documents handed to them on obvious investment improprieties is akin to watching my son explain why he cannot do his homework.
To read the responses from both the ASC and the OSC to investors, industry participants etc, who write to them of wrongdoing, as these commission do everything in their power to justify why they are not the proper people to get involved. They point, they refer, they delegate to others, but I have yet to see them actually take on an investigation into investment abuses and I have yet to see a single abused investor receive compensation due to efforts from a provincial securities commission. That after twenty years.
This smells of regulators who have become so close to those that they are supposed to regulate, that they are unable to any longer recognize what it was they were put there for. This looks like total dedication to job protection instead of investor protection.
I wish to thank the forward thinking officials of the Alberta Securities Commission for doing such a forcefull job of evading a public audit. They are doing a better job of insinuating guilt than I could imagine. I thank them for not opening their books and their operations to audit, as it speak volumes about the kind of job they feel they are doing. Typically the people who evade accountability are those with something to hide. For public servants without something to hide, an invitation to audit is nothing but an opportunity to prove the job is being done correctly.
I look forward to the day when the disinfectant of sunlight is allowed to shine on the affairs at these commissions. Until that day I believe that Canadians are not covered by any effective securities regulatory agency whatsoever. It is very much "buyer beware".
Wolves in Salespersons Clothing?
May 15, 2005
Who's Preying on Your Grandparents?
Illustration by The New York Times
By GRETCHEN MORGENSON
BACK in February, Jose and Gloria Aquino received a flier in the mail inviting them to a free seminar on one of their favorite topics: protecting their financial assets. As retirees, they were always on the lookout for safe investment strategies as well as tips on how to make sure they didn't outlive their savings. Besides, the flier promised a free lunch for anyone attending the workshop, so what did they have to lose?
Potentially plenty, they would soon discover.
On March 1, Mr. and Mrs. Aquino stepped into the Coral House restaurant, not far from their home in North Baldwin, N.Y., on Long Island. They found themselves surrounded by about 50 like-minded retirees, most in their 70's and 80's, they said.
Over lunch, the crowd listened to a presentation by two investment executives from Diversified Concepts Inc. of Manhattan. Using charts and graphs, the men gave advice on how to invest wisely during retirement. Then they passed out forms and asked the retirees to list all their assets and financial holdings.
The Aquinos filled out theirs and left. Two days later, they said, one of the executives came to their home and described an investment with the American Equity Investment Life Insurance Company that would provide 7 percent interest on their money - immediately.
"When somebody tells you he will give you a 7 percent upfront bonus on your money and that you'll get that 7 percent even if the market goes down, you get interested," said Mr. Aquino. He said he signed the necessary documents and the executive left, handing a brochure to the couple.
That evening, the Aquinos told their daughter, Caroline, about their investment. "She said, 'Oh, don't invest like that before searching farther,' " Mr. Aquino recalled. "Then she went on the Internet and found these lawsuits going on in California against the company and we realized that we were not making a good decision."
The investment the Aquinos had chosen was an annuity, an insurance product that not only tends to carry high fees but also requires that most of the money stay locked up for years, making it especially inappropriate for many older investors, regulators say. In fact, the one they bought carried a staggering 17.5 percent surrender charge if it was cashed in during the first year, their daughter explained. Exit charges were not scheduled to disappear until 17 years after the purchase.
This meant that Mr. Aquino, who is 65, and Mrs. Aquino, 63, could not cash in the annuity without paying a surrender fee until they were in their 80's. The executive had not told them about the lockup requirement, the Aquinos said, although the brochure he left with them described the fees in small print.
Thanks to their daughter, they were able to phone the company in time to cancel their purchase. Others, however, have wound up stuck in an investment that they cannot liquidate without severe penalties.
Meetings like the one attended by the Aquinos take place thousands of times a year in restaurants, American Legion halls and senior centers across the nation - and are a growing problem, securities regulators say. The seminars are usually described as a way for retirees to receive free advice on estate planning, asset protection and tax reduction. After a short presentation, the attendees are approached by a sales representative, who almost invariably encourages them to liquidate their stocks, bonds and 401(k)'s and to buy an annuity.
"We started getting all these complaints from children of seniors who found out that their stock portfolios or other investments had been transferred into these annuities," said Joseph A. Ragazzo, deputy attorney general of California. "We see this investment abuse as a real problem. These cases are metastasizing all over the country."
David J. Noble, chief executive of American Equity Investment Life Insurance, the company that wrote the Aquinos' policy, said: "I deeply differ with anyone saying we have serious problems. We have over 200,000 annuity policy holders, and the percentage of complaints we have is 0.002. We are extremely market-conduct aware."
Mr. Noble also said that annuities' guaranteed rates of return and protection of principal make them attractive to people worried about how they are going to pay their bills.
The president of Diversified Concepts did not return several phone calls.
WHILE prosecutors in New York and Washington investigate questionable accounting practices in the insurance industry, regulators elsewhere say they are fielding more and more complaints about aggressive sales practices by insurance companies that design annuity products and by the people who sell them. Under the guise of estate planning, regulators say, retirees are being pushed into annuities that carry commissions of up to 12 percent and that require their holders to keep them for as long as 15 years, or to pay big penalties.
It is easy to see why older people find such investments attractive. Annuities produce higher income than other investments and can provide payments for life. They are often sold as a way to allay retirees' fears of outliving their assets.
There are several kinds of annuities. Fixed annuities guarantee that a set amount of money will be paid regularly, regardless of how the underlying investments perform. Variable annuities, by contrast, are based on a portfolio of stocks that rise and fall, so their payments can fluctuate.
With interest rates near historical lows, the first-year rates of 7 percent to 9 percent on some annuities make them alluring to people on fixed incomes. And with the stock market going sideways, people are looking for investment alternatives, giving annuity sales representatives a ready audience.
But because of the fees associated with these products and the restrictions on cashing them in, they are hardly ideal for investors who may need the money quickly, or who die before the investment matures. In many cases, if the holder dies during the annuity period, the beneficiaries cannot redeem the annuity without paying a surrender charge.
Companies that sell annuities say that the higher rates they pay justify the surrender charges. Most investors, they add, are happy with their purchases.
But last February, Bill Lockyer, the attorney general of California, and John Garamendi, the state's insurance commissioner, filed a lawsuit against a group of companies and individuals that state officials said had tricked retirees into using their retirement investments to buy annuities. The suit said that the companies employed up to 300 sales agents and 80 telemarketers and sold annuities worth "hundreds of millions of dollars."
The defendants in the case included American Investors Life Insurance of Kansas, a unit of the AmerUs Group in Des Moines; and Family First Advanced Estate Planning and Family First Insurance Services, both of Woodland Hills, Calif. The complaint seeks $110 million in civil penalties, consumer restitution and damages.
AmerUs said that it does not comment on pending litigation; however, the company said that it was taking the accusations very seriously and that it has strong sales and compliance practices. The Family First companies could not be reached.
Increasingly aggressive marketing has made annuities one of the hottest investments around. Money invested in variable annuities totaled $994 billion at the end of 2003, up from $771 billion in 1998, according to the Insurance Information Institute. Although total annuity sales fell slightly in 2003, they have almost doubled since 1997.
The growing ranks of the nation's retirees are a main focus of annuity sales agents. Next week, the Senior Market Expo opens at the San Diego Convention Center. "Now in its fifth year, Senior Market Expo is the only place you'll find the powerful strategies and ideas you need to boost your sales of life insurance, annuities, long-term care insurance and more," its Web site says. "This sales-centric event focuses on giving you - the senior market adviser - sales and marketing skills to earn more money selling to seniors."
Annuity sales can be highly lucrative. Commissions can reach 12 percent of the money invested, far greater than fees typically generated on stocks and other investments. Mr. Ragazzo, the deputy attorney general of California, said his office had found that some companies selling annuities sponsored trips to Hawaii and Europe for top agents. "Some of these guys are former used-car salesmen bringing in $600,000 a year," he said.
Ads for asset-preservation seminars often use scare tactics. "Your family's assets are in danger!" reads one; "Trust me! You need a living trust!" goes another.
As sales of annuities have grown, so have investor complaints related to them. According to the N.A.S.D., annuities were at issue in about 600 arbitration cases in 2004, more than twice the number from three years earlier. Of the seven types of securities typically involved in arbitrations, annuities were the third most common last year, behind stocks and mutual funds.
Sellers of annuities are also the subjects of civil lawsuits. The American International Group, the insurance company whose accounting practices are under investigation by regulators and federal prosecutors, has been sued recently in California by elderly investors who bought annuities the company issued. The investors are also suing Estate Preservation Inc. of El Segundo, Calif., which sold the annuities.
One plaintiff is Beverly Buhs, 80, of Millbrae, Calif. In 1997, Ms. Buhs, then 73, and her husband Art, then 76, attended a seminar at an American Legion hall. Like the Aquinos, the Buhs filled out a form detailing their assets; it was supplied by the seminar leader, an agent from Estate Preservation.
Mr. Buhs had previously invested in mutual funds, but he and his wife had never bought an annuity. With the agent's help, the Buhs set up a living trust, which they believed would help them avoid probate costs, according to the lawsuit. Shortly after setting up the trust, according to the lawsuit, the agent came to their home and persuaded them to sell their investments and to put them into a fixed annuity issued by SunAmerica, a financial services company bought by A.I.G. in 1999.
In December 2002, Mr. Buhs died of complications from an aneurysm. Only then did Ms. Buhs learn that the living trust did not protect her from probate costs and that she could not cash in the annuity without significant penalties, she said.
Ms. Buhs said she had to hire an estate lawyer to restructure the trust and wound up losing $20,000 of a $90,000 death benefit. Now she is still dealing with tax problems associated with the trust. "I tried to talk to SunAmerica, but I get so stressed out," Ms. Buhs said. "I don't know how to talk the jargon and don't know where to go. It's sad to think the world is like this. How many other seniors are being taken and deceived?"
Ms. Buhs's lawyer, Ingrid M. Evans of Renne Sloan Holtzman & Sakai in San Francisco, said: "The majority of annuity policies are going to seniors because those are people who have the money and are scared of the stock market and most susceptible to fear. But over a certain age it's not acceptable to sell someone a deferred annuity because they are going to pass away before it annuitizes," or matures.
Ms. Evans said Ms. Buhs had sued A.I.G. because SunAmerica "implicitly or explicitly ratifies the sales agents' unlawful and unfair schemes."
Chris Winans, an A.I.G. spokesman, said that the company would not comment on the litigation but said that the claims in the suits were unfounded. Ms. Buhs' annuity provided good returns - almost 20 percent from 1997 to 2002, after surrender charges, he said.
Mr. Winans added that A.I.G. has suitability policies and procedures that it monitors and enforces and that it requires the same of the brokers who sell its products.
Estate Preservation did not return a phone call seeking comment.
A.I.G. is the nation's top seller of fixed annuities through banks and the fifth-largest seller of variable annuities, according to the Insurance Information Institute. The company sold $8.8 billion in fixed annuities in 2004 and sold $8 billion of new variable annuities in 2003, the most recent figures.
In the first nine months of 2004, A.I.G.'s life insurance and retirement services group, which includes its SunAmerica unit, accounted for 45 percent of the company's total revenue. Sales at the group rose 24 percent from the corresponding period a year earlier and its operating income rose 23 percent, the fastest growth registered by any of A.I.G.'s four business segments. Premiums from annuities sold domestically rose 20 percent in the first nine months of 2004.
TYPICALLY, the people pushing annuities are registered only as insurance agents and not with government securities regulators who have large staffs to root out dubious practices. As a result, many fall through the regulatory cracks.
Last July, the California Department of Corporations filed a "desist and refrain order" against the Gentry Group, a Dallas company that sells annuities. The company had induced an elderly woman in Oroville, Calif., to authorize the sale of $98,470 of securities without her knowledge and to buy two American Equity annuities with the money, according to the order. The Gentry Group, the American Equity Life Insurance Company and the saleswoman who sold the annuities were not authorized to conduct business as investment advisers in California, so the desist order was issued.
The Gentry Group did not return a phone call seeking comment. American Equity said that it was resisting the order in court.
Mary L. Schapiro, the vice chairwoman of N.A.S.D., said that her agency had proposed new rules related to the selling of annuities to the elderly; they await approval by the Securities and Exchange Commission.
"Some of the worst advertising we've seen has been in equity-linked annuities," she said, "very promotional, talking about growth without any risk, all the kinds of push-button expressions that really resonate with senior citizens." But, she said, she oversees only a small percentage of the firms and people selling these annuities.
Alas, not every retiree can rely, as the Aquinos did, on a daughter to help them steer clear of an investment they might later regret.
Who's Preying on Your Grandparents?
Illustration by The New York Times
By GRETCHEN MORGENSON
BACK in February, Jose and Gloria Aquino received a flier in the mail inviting them to a free seminar on one of their favorite topics: protecting their financial assets. As retirees, they were always on the lookout for safe investment strategies as well as tips on how to make sure they didn't outlive their savings. Besides, the flier promised a free lunch for anyone attending the workshop, so what did they have to lose?
Potentially plenty, they would soon discover.
On March 1, Mr. and Mrs. Aquino stepped into the Coral House restaurant, not far from their home in North Baldwin, N.Y., on Long Island. They found themselves surrounded by about 50 like-minded retirees, most in their 70's and 80's, they said.
Over lunch, the crowd listened to a presentation by two investment executives from Diversified Concepts Inc. of Manhattan. Using charts and graphs, the men gave advice on how to invest wisely during retirement. Then they passed out forms and asked the retirees to list all their assets and financial holdings.
The Aquinos filled out theirs and left. Two days later, they said, one of the executives came to their home and described an investment with the American Equity Investment Life Insurance Company that would provide 7 percent interest on their money - immediately.
"When somebody tells you he will give you a 7 percent upfront bonus on your money and that you'll get that 7 percent even if the market goes down, you get interested," said Mr. Aquino. He said he signed the necessary documents and the executive left, handing a brochure to the couple.
That evening, the Aquinos told their daughter, Caroline, about their investment. "She said, 'Oh, don't invest like that before searching farther,' " Mr. Aquino recalled. "Then she went on the Internet and found these lawsuits going on in California against the company and we realized that we were not making a good decision."
The investment the Aquinos had chosen was an annuity, an insurance product that not only tends to carry high fees but also requires that most of the money stay locked up for years, making it especially inappropriate for many older investors, regulators say. In fact, the one they bought carried a staggering 17.5 percent surrender charge if it was cashed in during the first year, their daughter explained. Exit charges were not scheduled to disappear until 17 years after the purchase.
This meant that Mr. Aquino, who is 65, and Mrs. Aquino, 63, could not cash in the annuity without paying a surrender fee until they were in their 80's. The executive had not told them about the lockup requirement, the Aquinos said, although the brochure he left with them described the fees in small print.
Thanks to their daughter, they were able to phone the company in time to cancel their purchase. Others, however, have wound up stuck in an investment that they cannot liquidate without severe penalties.
Meetings like the one attended by the Aquinos take place thousands of times a year in restaurants, American Legion halls and senior centers across the nation - and are a growing problem, securities regulators say. The seminars are usually described as a way for retirees to receive free advice on estate planning, asset protection and tax reduction. After a short presentation, the attendees are approached by a sales representative, who almost invariably encourages them to liquidate their stocks, bonds and 401(k)'s and to buy an annuity.
"We started getting all these complaints from children of seniors who found out that their stock portfolios or other investments had been transferred into these annuities," said Joseph A. Ragazzo, deputy attorney general of California. "We see this investment abuse as a real problem. These cases are metastasizing all over the country."
David J. Noble, chief executive of American Equity Investment Life Insurance, the company that wrote the Aquinos' policy, said: "I deeply differ with anyone saying we have serious problems. We have over 200,000 annuity policy holders, and the percentage of complaints we have is 0.002. We are extremely market-conduct aware."
Mr. Noble also said that annuities' guaranteed rates of return and protection of principal make them attractive to people worried about how they are going to pay their bills.
The president of Diversified Concepts did not return several phone calls.
WHILE prosecutors in New York and Washington investigate questionable accounting practices in the insurance industry, regulators elsewhere say they are fielding more and more complaints about aggressive sales practices by insurance companies that design annuity products and by the people who sell them. Under the guise of estate planning, regulators say, retirees are being pushed into annuities that carry commissions of up to 12 percent and that require their holders to keep them for as long as 15 years, or to pay big penalties.
It is easy to see why older people find such investments attractive. Annuities produce higher income than other investments and can provide payments for life. They are often sold as a way to allay retirees' fears of outliving their assets.
There are several kinds of annuities. Fixed annuities guarantee that a set amount of money will be paid regularly, regardless of how the underlying investments perform. Variable annuities, by contrast, are based on a portfolio of stocks that rise and fall, so their payments can fluctuate.
With interest rates near historical lows, the first-year rates of 7 percent to 9 percent on some annuities make them alluring to people on fixed incomes. And with the stock market going sideways, people are looking for investment alternatives, giving annuity sales representatives a ready audience.
But because of the fees associated with these products and the restrictions on cashing them in, they are hardly ideal for investors who may need the money quickly, or who die before the investment matures. In many cases, if the holder dies during the annuity period, the beneficiaries cannot redeem the annuity without paying a surrender charge.
Companies that sell annuities say that the higher rates they pay justify the surrender charges. Most investors, they add, are happy with their purchases.
But last February, Bill Lockyer, the attorney general of California, and John Garamendi, the state's insurance commissioner, filed a lawsuit against a group of companies and individuals that state officials said had tricked retirees into using their retirement investments to buy annuities. The suit said that the companies employed up to 300 sales agents and 80 telemarketers and sold annuities worth "hundreds of millions of dollars."
The defendants in the case included American Investors Life Insurance of Kansas, a unit of the AmerUs Group in Des Moines; and Family First Advanced Estate Planning and Family First Insurance Services, both of Woodland Hills, Calif. The complaint seeks $110 million in civil penalties, consumer restitution and damages.
AmerUs said that it does not comment on pending litigation; however, the company said that it was taking the accusations very seriously and that it has strong sales and compliance practices. The Family First companies could not be reached.
Increasingly aggressive marketing has made annuities one of the hottest investments around. Money invested in variable annuities totaled $994 billion at the end of 2003, up from $771 billion in 1998, according to the Insurance Information Institute. Although total annuity sales fell slightly in 2003, they have almost doubled since 1997.
The growing ranks of the nation's retirees are a main focus of annuity sales agents. Next week, the Senior Market Expo opens at the San Diego Convention Center. "Now in its fifth year, Senior Market Expo is the only place you'll find the powerful strategies and ideas you need to boost your sales of life insurance, annuities, long-term care insurance and more," its Web site says. "This sales-centric event focuses on giving you - the senior market adviser - sales and marketing skills to earn more money selling to seniors."
Annuity sales can be highly lucrative. Commissions can reach 12 percent of the money invested, far greater than fees typically generated on stocks and other investments. Mr. Ragazzo, the deputy attorney general of California, said his office had found that some companies selling annuities sponsored trips to Hawaii and Europe for top agents. "Some of these guys are former used-car salesmen bringing in $600,000 a year," he said.
Ads for asset-preservation seminars often use scare tactics. "Your family's assets are in danger!" reads one; "Trust me! You need a living trust!" goes another.
As sales of annuities have grown, so have investor complaints related to them. According to the N.A.S.D., annuities were at issue in about 600 arbitration cases in 2004, more than twice the number from three years earlier. Of the seven types of securities typically involved in arbitrations, annuities were the third most common last year, behind stocks and mutual funds.
Sellers of annuities are also the subjects of civil lawsuits. The American International Group, the insurance company whose accounting practices are under investigation by regulators and federal prosecutors, has been sued recently in California by elderly investors who bought annuities the company issued. The investors are also suing Estate Preservation Inc. of El Segundo, Calif., which sold the annuities.
One plaintiff is Beverly Buhs, 80, of Millbrae, Calif. In 1997, Ms. Buhs, then 73, and her husband Art, then 76, attended a seminar at an American Legion hall. Like the Aquinos, the Buhs filled out a form detailing their assets; it was supplied by the seminar leader, an agent from Estate Preservation.
Mr. Buhs had previously invested in mutual funds, but he and his wife had never bought an annuity. With the agent's help, the Buhs set up a living trust, which they believed would help them avoid probate costs, according to the lawsuit. Shortly after setting up the trust, according to the lawsuit, the agent came to their home and persuaded them to sell their investments and to put them into a fixed annuity issued by SunAmerica, a financial services company bought by A.I.G. in 1999.
In December 2002, Mr. Buhs died of complications from an aneurysm. Only then did Ms. Buhs learn that the living trust did not protect her from probate costs and that she could not cash in the annuity without significant penalties, she said.
Ms. Buhs said she had to hire an estate lawyer to restructure the trust and wound up losing $20,000 of a $90,000 death benefit. Now she is still dealing with tax problems associated with the trust. "I tried to talk to SunAmerica, but I get so stressed out," Ms. Buhs said. "I don't know how to talk the jargon and don't know where to go. It's sad to think the world is like this. How many other seniors are being taken and deceived?"
Ms. Buhs's lawyer, Ingrid M. Evans of Renne Sloan Holtzman & Sakai in San Francisco, said: "The majority of annuity policies are going to seniors because those are people who have the money and are scared of the stock market and most susceptible to fear. But over a certain age it's not acceptable to sell someone a deferred annuity because they are going to pass away before it annuitizes," or matures.
Ms. Evans said Ms. Buhs had sued A.I.G. because SunAmerica "implicitly or explicitly ratifies the sales agents' unlawful and unfair schemes."
Chris Winans, an A.I.G. spokesman, said that the company would not comment on the litigation but said that the claims in the suits were unfounded. Ms. Buhs' annuity provided good returns - almost 20 percent from 1997 to 2002, after surrender charges, he said.
Mr. Winans added that A.I.G. has suitability policies and procedures that it monitors and enforces and that it requires the same of the brokers who sell its products.
Estate Preservation did not return a phone call seeking comment.
A.I.G. is the nation's top seller of fixed annuities through banks and the fifth-largest seller of variable annuities, according to the Insurance Information Institute. The company sold $8.8 billion in fixed annuities in 2004 and sold $8 billion of new variable annuities in 2003, the most recent figures.
In the first nine months of 2004, A.I.G.'s life insurance and retirement services group, which includes its SunAmerica unit, accounted for 45 percent of the company's total revenue. Sales at the group rose 24 percent from the corresponding period a year earlier and its operating income rose 23 percent, the fastest growth registered by any of A.I.G.'s four business segments. Premiums from annuities sold domestically rose 20 percent in the first nine months of 2004.
TYPICALLY, the people pushing annuities are registered only as insurance agents and not with government securities regulators who have large staffs to root out dubious practices. As a result, many fall through the regulatory cracks.
Last July, the California Department of Corporations filed a "desist and refrain order" against the Gentry Group, a Dallas company that sells annuities. The company had induced an elderly woman in Oroville, Calif., to authorize the sale of $98,470 of securities without her knowledge and to buy two American Equity annuities with the money, according to the order. The Gentry Group, the American Equity Life Insurance Company and the saleswoman who sold the annuities were not authorized to conduct business as investment advisers in California, so the desist order was issued.
The Gentry Group did not return a phone call seeking comment. American Equity said that it was resisting the order in court.
Mary L. Schapiro, the vice chairwoman of N.A.S.D., said that her agency had proposed new rules related to the selling of annuities to the elderly; they await approval by the Securities and Exchange Commission.
"Some of the worst advertising we've seen has been in equity-linked annuities," she said, "very promotional, talking about growth without any risk, all the kinds of push-button expressions that really resonate with senior citizens." But, she said, she oversees only a small percentage of the firms and people selling these annuities.
Alas, not every retiree can rely, as the Aquinos did, on a daughter to help them steer clear of an investment they might later regret.
Wednesday, May 04, 2005
Democracy Watch Speaks of Client Abuse
A Recipe for Cleaning Up the Investment Industry
(The following opinion piece, by Duff Conacher, Coordinator of Democracy Watch, was published in slightly different form in Corporate Knights magazine on April 28, 2005)
Please become a Supporter of democratic reform, government accountability and corporate responsibility in Canada
Democracy Watch homepage
In the past several years, Canadians have had a front row seat in a classic corporate responsibility fight, this one between investors and the investment industry. And, as in all such fights, the key player is the referee, governments and regulatory agencies such as the Ontario Securities Commission (OSC) and the Toronto Stock Exchange.
Nortel, Bre-X, YBM, Hollinger, Royal Bank, CIBC, TD-Canada Trust AIM -- all these companies and many more in Canada's investment industry have been in the news, involved in insider trading, conflicts of interest, stock fraud, financial mismanagement, market timing by mutual fund companies and many other unethical, irresponsible business practices.
As many industries mired in scandal in the past have, the investment industry has countered these scandals by saying either "so there's a few bad apples, overall the industry is ethical" or "don't regulate us government, we'll clean things up ourselves."
And so Canadian governments and regulators find themselves once again faced with a familiar choice -- protect the industry from accountability, or protect individuals from the industry.
If this were a fair fight, the government/regulatory referee would have to:
be independent from both the industry and investors;
have full information about the practices of both;
have full powers to penalize both, and
have to follow clear rules.
However, as with all corporate responsibility battles in the past century, this is not a fair fight. The government is taking large donations from the industry; the industry gouges investors in part to pay for dozens of lobbyists to wine-and-dine politicians and regulators; the industry does not have to disclose key information; the regulator has inadequate resources and powers, and; the rules are full of loopholes.
Things are so bad that the industry actually is the referee for its own behavior in many areas through the Investment Dealers Association and the stock exchanges. On their own (although some have banded together in small, poorly funded groups), investors don't have a chance.
What is surprising is that anyone has found the scandalous behavior by the industry surprising Ė the whole system is clearly designed to encourage repeated abuses.
The government/regulatory referee has so far responded in a typical way -- do as little as possible and hope investors will be fooled into thinking that they are protected.
Yes, there has been report after report (the Crawford Report, the Osborne Report, a Senate Committee Report, the Ontario Finance and Economic Affairs Committee Report) -- lots of words on lots of paper. Words on paper do not protect investors, however.
So what is needed to clean up the investment industry in Canada? The same things that are needed to clean up every industry in Canada:
strong laws (not voluntary guidelines) with no loopholes;
requirements that the details of every industry practice (including all violations) be publicly disclosed on searchable, government-maintained websites;
a fully independent, fully empowered, well-resourced enforcement agency (in other words, an end to self-regulation);
penalties that are high enough to discourage violations;
citizens empowered to hold the industry, the regulatory agencies, and;
governments accountable if they fail to enforce the laws.
True, the federal government has added a new offence of improper insider trading to the Criminal Code, and a rule that those who "blow the whistle" on wrongdoing can't be harmed (unfortunately without making it clear who will protect whistleblowers from harm), and increased the maximum sentences for financial fraud, and created special enforcement teams in the RCMP.
And true, the OSC has banned certain unethical practices, and Ontario Cabinet minister Gerry Phillips has promised to allow investors to sue in a class action for a broader range of violations.
However, all of these actions have been taken without any examination of three key questions: What was the chance of getting caught for investment frauds in the past? What will be the chance of getting caught after all of these changes? And, therefore, how high do penalties have to be in order to ensure that the effective penalty (the actual penalty x the chance of getting caught) will be high enough to discourage future violations?
These questions are consistently ignored by governments responding to corporate responsibility, as they pretend to clean-up problems and claim to protect individuals, communities, environments from abuse by corporations.
And so, beyond making penalties actually effective in the real world, empowering citizens is a key step for governments to take to clean up the investment and all other industries. Because the government/regulatory referee has shown time and again that they have to be watched as closely as the industry, the referee has a duty to help citizens build the capacity to watch closely.
A simple, no-cost method exists for building this capacity, and to their credit the Ontario Finance and Economic Affairs Committee recommended that this method be carefully considered by the Ontario government.
The method has been used successfully in U.S. states to create watchdog groups over utility companies (hydro, gas, water, telephone), and a national survey shows that a large majority of Canadians support using it here.
All the government has to do is require the investment industry (publicly traded companies and mutual fund companies) to enclose a one-page pamphlet in the same envelopes they use to mail their reports to investors. The pamphlet would describe and invite investors to join an investor association for an annual fee of about $40, an association run only by investors and dedicated to serving only investors.
Approximately 10 million investors would receive the pamphlet, and even if only 5% responded, a group with 500,000 members and a $20 million annual budget would be formed. The creation of such a group would make the corporate responsibility fight in the investment industry more equal, balancing the marketplace by giving investors an easy way to band together, combine their resources, and advocate their concerns.
There would be no cost to the investment industry, as they are mailing out the envelopes anyway. And the government would have no costs either.
If Ontario minister Gerry Phillips, OSC Chair David Brown, and federal Finance Minister Ralph Goodale do not act on this no-cost proposal, they will be making it very clear that they do not really care about the rampant abuse of millions of investors, and that they are quite happy to allow the investment industry off the hook, as so many politicians have let so many industries off the hook in the past.
Canadians deserve better.
Please become a Supporter of democratic reform, government accountability and corporate responsibility in Canada
(The following opinion piece, by Duff Conacher, Coordinator of Democracy Watch, was published in slightly different form in Corporate Knights magazine on April 28, 2005)
Please become a Supporter of democratic reform, government accountability and corporate responsibility in Canada
Democracy Watch homepage
In the past several years, Canadians have had a front row seat in a classic corporate responsibility fight, this one between investors and the investment industry. And, as in all such fights, the key player is the referee, governments and regulatory agencies such as the Ontario Securities Commission (OSC) and the Toronto Stock Exchange.
Nortel, Bre-X, YBM, Hollinger, Royal Bank, CIBC, TD-Canada Trust AIM -- all these companies and many more in Canada's investment industry have been in the news, involved in insider trading, conflicts of interest, stock fraud, financial mismanagement, market timing by mutual fund companies and many other unethical, irresponsible business practices.
As many industries mired in scandal in the past have, the investment industry has countered these scandals by saying either "so there's a few bad apples, overall the industry is ethical" or "don't regulate us government, we'll clean things up ourselves."
And so Canadian governments and regulators find themselves once again faced with a familiar choice -- protect the industry from accountability, or protect individuals from the industry.
If this were a fair fight, the government/regulatory referee would have to:
be independent from both the industry and investors;
have full information about the practices of both;
have full powers to penalize both, and
have to follow clear rules.
However, as with all corporate responsibility battles in the past century, this is not a fair fight. The government is taking large donations from the industry; the industry gouges investors in part to pay for dozens of lobbyists to wine-and-dine politicians and regulators; the industry does not have to disclose key information; the regulator has inadequate resources and powers, and; the rules are full of loopholes.
Things are so bad that the industry actually is the referee for its own behavior in many areas through the Investment Dealers Association and the stock exchanges. On their own (although some have banded together in small, poorly funded groups), investors don't have a chance.
What is surprising is that anyone has found the scandalous behavior by the industry surprising Ė the whole system is clearly designed to encourage repeated abuses.
The government/regulatory referee has so far responded in a typical way -- do as little as possible and hope investors will be fooled into thinking that they are protected.
Yes, there has been report after report (the Crawford Report, the Osborne Report, a Senate Committee Report, the Ontario Finance and Economic Affairs Committee Report) -- lots of words on lots of paper. Words on paper do not protect investors, however.
So what is needed to clean up the investment industry in Canada? The same things that are needed to clean up every industry in Canada:
strong laws (not voluntary guidelines) with no loopholes;
requirements that the details of every industry practice (including all violations) be publicly disclosed on searchable, government-maintained websites;
a fully independent, fully empowered, well-resourced enforcement agency (in other words, an end to self-regulation);
penalties that are high enough to discourage violations;
citizens empowered to hold the industry, the regulatory agencies, and;
governments accountable if they fail to enforce the laws.
True, the federal government has added a new offence of improper insider trading to the Criminal Code, and a rule that those who "blow the whistle" on wrongdoing can't be harmed (unfortunately without making it clear who will protect whistleblowers from harm), and increased the maximum sentences for financial fraud, and created special enforcement teams in the RCMP.
And true, the OSC has banned certain unethical practices, and Ontario Cabinet minister Gerry Phillips has promised to allow investors to sue in a class action for a broader range of violations.
However, all of these actions have been taken without any examination of three key questions: What was the chance of getting caught for investment frauds in the past? What will be the chance of getting caught after all of these changes? And, therefore, how high do penalties have to be in order to ensure that the effective penalty (the actual penalty x the chance of getting caught) will be high enough to discourage future violations?
These questions are consistently ignored by governments responding to corporate responsibility, as they pretend to clean-up problems and claim to protect individuals, communities, environments from abuse by corporations.
And so, beyond making penalties actually effective in the real world, empowering citizens is a key step for governments to take to clean up the investment and all other industries. Because the government/regulatory referee has shown time and again that they have to be watched as closely as the industry, the referee has a duty to help citizens build the capacity to watch closely.
A simple, no-cost method exists for building this capacity, and to their credit the Ontario Finance and Economic Affairs Committee recommended that this method be carefully considered by the Ontario government.
The method has been used successfully in U.S. states to create watchdog groups over utility companies (hydro, gas, water, telephone), and a national survey shows that a large majority of Canadians support using it here.
All the government has to do is require the investment industry (publicly traded companies and mutual fund companies) to enclose a one-page pamphlet in the same envelopes they use to mail their reports to investors. The pamphlet would describe and invite investors to join an investor association for an annual fee of about $40, an association run only by investors and dedicated to serving only investors.
Approximately 10 million investors would receive the pamphlet, and even if only 5% responded, a group with 500,000 members and a $20 million annual budget would be formed. The creation of such a group would make the corporate responsibility fight in the investment industry more equal, balancing the marketplace by giving investors an easy way to band together, combine their resources, and advocate their concerns.
There would be no cost to the investment industry, as they are mailing out the envelopes anyway. And the government would have no costs either.
If Ontario minister Gerry Phillips, OSC Chair David Brown, and federal Finance Minister Ralph Goodale do not act on this no-cost proposal, they will be making it very clear that they do not really care about the rampant abuse of millions of investors, and that they are quite happy to allow the investment industry off the hook, as so many politicians have let so many industries off the hook in the past.
Canadians deserve better.
Please become a Supporter of democratic reform, government accountability and corporate responsibility in Canada
Jon Chereau Covers Investment Industry "Cover-ups"
Grievances never see the light of day
Banks, brokerages use confidentiality pacts to great effect
Jonathan Chevreau
Financial Post
June 25, 2004
CREDIT: Yvonne Berg, CanWest News Service
Stan Buell, founded the Small Investor Protection Association after settling a dispute with a big bank several years ago: "The [financial] industry covers up this huge problem of investors losing due to industry wrongdoing."
Quietly, behind the scenes, investors who lost money the last few years are receiving settlements from Canadian financial institutions.
But you won't hear about them in the press because one of the stipulations made is to adhere to the terms of so-called "gag orders."
In return for financial compensation, these investors are put in a position where they would violate legal contracts if they tell the world specifics of their arrangements.
Several large banks or their brokerage arms are involved, including several cases once prominent in the press.
Some got nowhere going to industry ombudspersons, associations or regulators. Legal action and the threat of airing their grievances publicly seems to have been what motivated institutions to settle.
As they pay their hush money, high-priced lawyers add disclaimers that such settlement agreements do not constitute admission of wrongdoing by the firms -- though it's hard to draw any other conclusion.
"After five years, I'm beaten into submission," one such investor told me this week. "I'm not allowed to disparage the bank at all. We're living in fear of the might of the bank closing down on us and suing for everything we've got."
Even with the promise of anonymity, this source would not divulge the terms of the settlement. "We are not being made whole. It's just a cessation of hostilities."
But I was given a sample of the legalese in the gag order. He/she "will not disclose terms and conditions of the settlement offer to any third party except financial advisors or lawyers, except as required by law and excepting any communication with securities regulatory or other enforcement authorities and self regulatory organizations."
In other words, plenty of professional people know about these cases -- just not the press and the general public.
A confidentiality agreement for another case which reached the Ontario Supreme Court reads in part: "is not to be, and will not be disseminated or disclosed to anyone, whether individual, corporation or other entity, public or private ... the Undersigned covenant & agree that they will only state to any third party that they can not speak about the Action."
The only exceptions are for disclosures made to lawyers or accountants for tax purposes.
The agreement makes explicit reference to the payment made to the investor: "In consideration of the within settlement, this Release, and the payment of the said consideration, the Releasors shall not make a claim or take proceedings against any other person or corporation ...."
Investment Dealers Association vice-president of enforcement Alex Popovic says the latter agreement contravenes Member Regulation Notice 076, issued May 22, 2001.
That notice clearly states agreements "shall not contain language which would prevent the client from disclosing to securities regulatory authorities, self-regulatory organizations or other enforcement authorities the facts or terms of the settlement."
Popovic appends his personal view that "anything that chills a client from coming forward is not in keeping with the intent of this notice."
The Mutual Fund Dealers Association also prohibits confidentiality restrictions on settlements between IDA members and clients, says MFDA president Larry Waite. Any settlement above $25,000, and in some cases $15,000, must be reported, he says. However, he adds, these disclosure requirements do not extend to the press.
Investor advocate Joe Killoran (www.investorism.com) suggests settlements are being wrapped up in advance of the election because "the banks are hoping the Liberals get back in and allow amalgamation."
Another investor advocate who fought and won his own case before taking on others is Jim Roache. He says there was a "flurry" of settlements two months ago, when it looked like a re-elected Liberal majority was a slam dunk. Bay Street wanted to clear the decks for a new round of bank mergers and didn't want the dirty laundry of abused investor cases upsetting their cosy relationships with the ruling party.
Seldom do these investors recoup their losses, Roache says. Most are lucky to get 50 cents on the dollar five years after the fact. "Many get nothing. The vast majority decide to write it off to experience."
Settlements save both sides the costs of dragging litigation through the courts. The rule of thumb is it's not worth pursuing unless the amount involved is at least $250,000 and you have another $250,000 to chase it down, Roache says.
The "financial euthanasia" of Canadian retirees is as important an election issue as health care, Killoran says. Gag orders would never be tolerated in the health care system -- the public has a right to know about the spread of SARS or other diseases. Investors should receive similar warnings of financial industry practices that threaten investors' financial well-being, Killoran believes.
Stan Buell created the Small Investor Protection Association after settling a dispute with a big bank several years ago. Since then, a number of SIPA members have quietly settled out of court.
"The industry covers up this huge problem of investors losing due to industry wrongdoing."
Ironically, Buell suggests it may be better that these cases are covered up. "If everyone knew the truth there would be many fewer small investors."
He concludes regulators have failed to protect investors and it's "time for the government to step in." Buell has contacted leaders of all major federal parties and hopes investor protection legislation will be introduced after the election.
© National Post 2004
Banks, brokerages use confidentiality pacts to great effect
Jonathan Chevreau
Financial Post
June 25, 2004
CREDIT: Yvonne Berg, CanWest News Service
Stan Buell, founded the Small Investor Protection Association after settling a dispute with a big bank several years ago: "The [financial] industry covers up this huge problem of investors losing due to industry wrongdoing."
Quietly, behind the scenes, investors who lost money the last few years are receiving settlements from Canadian financial institutions.
But you won't hear about them in the press because one of the stipulations made is to adhere to the terms of so-called "gag orders."
In return for financial compensation, these investors are put in a position where they would violate legal contracts if they tell the world specifics of their arrangements.
Several large banks or their brokerage arms are involved, including several cases once prominent in the press.
Some got nowhere going to industry ombudspersons, associations or regulators. Legal action and the threat of airing their grievances publicly seems to have been what motivated institutions to settle.
As they pay their hush money, high-priced lawyers add disclaimers that such settlement agreements do not constitute admission of wrongdoing by the firms -- though it's hard to draw any other conclusion.
"After five years, I'm beaten into submission," one such investor told me this week. "I'm not allowed to disparage the bank at all. We're living in fear of the might of the bank closing down on us and suing for everything we've got."
Even with the promise of anonymity, this source would not divulge the terms of the settlement. "We are not being made whole. It's just a cessation of hostilities."
But I was given a sample of the legalese in the gag order. He/she "will not disclose terms and conditions of the settlement offer to any third party except financial advisors or lawyers, except as required by law and excepting any communication with securities regulatory or other enforcement authorities and self regulatory organizations."
In other words, plenty of professional people know about these cases -- just not the press and the general public.
A confidentiality agreement for another case which reached the Ontario Supreme Court reads in part: "is not to be, and will not be disseminated or disclosed to anyone, whether individual, corporation or other entity, public or private ... the Undersigned covenant & agree that they will only state to any third party that they can not speak about the Action."
The only exceptions are for disclosures made to lawyers or accountants for tax purposes.
The agreement makes explicit reference to the payment made to the investor: "In consideration of the within settlement, this Release, and the payment of the said consideration, the Releasors shall not make a claim or take proceedings against any other person or corporation ...."
Investment Dealers Association vice-president of enforcement Alex Popovic says the latter agreement contravenes Member Regulation Notice 076, issued May 22, 2001.
That notice clearly states agreements "shall not contain language which would prevent the client from disclosing to securities regulatory authorities, self-regulatory organizations or other enforcement authorities the facts or terms of the settlement."
Popovic appends his personal view that "anything that chills a client from coming forward is not in keeping with the intent of this notice."
The Mutual Fund Dealers Association also prohibits confidentiality restrictions on settlements between IDA members and clients, says MFDA president Larry Waite. Any settlement above $25,000, and in some cases $15,000, must be reported, he says. However, he adds, these disclosure requirements do not extend to the press.
Investor advocate Joe Killoran (www.investorism.com) suggests settlements are being wrapped up in advance of the election because "the banks are hoping the Liberals get back in and allow amalgamation."
Another investor advocate who fought and won his own case before taking on others is Jim Roache. He says there was a "flurry" of settlements two months ago, when it looked like a re-elected Liberal majority was a slam dunk. Bay Street wanted to clear the decks for a new round of bank mergers and didn't want the dirty laundry of abused investor cases upsetting their cosy relationships with the ruling party.
Seldom do these investors recoup their losses, Roache says. Most are lucky to get 50 cents on the dollar five years after the fact. "Many get nothing. The vast majority decide to write it off to experience."
Settlements save both sides the costs of dragging litigation through the courts. The rule of thumb is it's not worth pursuing unless the amount involved is at least $250,000 and you have another $250,000 to chase it down, Roache says.
The "financial euthanasia" of Canadian retirees is as important an election issue as health care, Killoran says. Gag orders would never be tolerated in the health care system -- the public has a right to know about the spread of SARS or other diseases. Investors should receive similar warnings of financial industry practices that threaten investors' financial well-being, Killoran believes.
Stan Buell created the Small Investor Protection Association after settling a dispute with a big bank several years ago. Since then, a number of SIPA members have quietly settled out of court.
"The industry covers up this huge problem of investors losing due to industry wrongdoing."
Ironically, Buell suggests it may be better that these cases are covered up. "If everyone knew the truth there would be many fewer small investors."
He concludes regulators have failed to protect investors and it's "time for the government to step in." Buell has contacted leaders of all major federal parties and hopes investor protection legislation will be introduced after the election.
© National Post 2004
Monday, May 02, 2005
Advisor? Or Salesperson Masquerading as Advisor?
http://www.baltimoresun.com/business/investing/bal-bz.hancock01may01,1,7246099.column?coll=bal-business-headlines
Broker? Adviser? Difference is important
Jay HancockMay 1, 2005
ONLY 213 YEARS after the New York Stock Exchange's founding, the government has added regulation requiring many brokers to say this before they take your money: "Our interests may not always be the same as yours."
No kidding!
Besides enjoying commissions on stock and bond trades whether or not the trades help your portfolio, brokerages often receive what amount to legal kickbacks from sellers of mutual funds, variable annuities and other products.
A broker might be tempted to sell you a mediocre fund with a big referral fee instead of a great fund with no fee. No, his interest is not the same as yours.
The Wall Street scandal aftermath is littered with fine print that will soon be ignored and unappreciated except perhaps by Georgia-Pacific, whose paper sales surely must have soared. But the red flags hung out a couple weeks ago by the Securities and Exchange Commission - with assistance from Baltimore investors, which we'll get to - are worth remembering, especially because they are still inadequate.
They have to do with the difference between brokers and investment advisers.
Do you know which one your financial agent is? This distinction is fuzzy but critical, because investment advisers are held to different duties and disclosure requirements than brokers.
Under law, advisers must put clients' interests first. Fiduciary duty, the attorneys call it. Brokers are prohibited from selling "unsuitable" investments to clients, but that standard is held by consumer advocates to be less strict and offer lower protection to investors. (The National Association of Securities Dealers disagrees, saying the "suitability" rules are just as rigorous.)
Barbara Roper, director of investor protection for the Consumer Federation of America, puts it bluntly. Brokers, she says, are "salespeople" who may be more interested in moving the product than helping the client.
"People are out there who are salespeople who call themselves advisers, and there are people out there who are advisers who call themselves advisers, and you'd better know who you're dealing with," she says.
That has gotten harder and harder.
"Financial planners" are everywhere. Banks and insurance agents sell mutual funds. Brokers, once basically stock and bond order takers and presumed by regulators to give advice only "incidentally," now dispense counsel on how to reach life financial goals.
Some are advisers. Some are brokers. Some are either, depending on what they're selling.
The new regulation, which requires some brokerage accounts to be treated as "investment adviser" business and others to come with the "our interests may not always be the same" caveat, is supposed to toughen standards for some brokers and require better disclosure from the rest.
It followed focus groups in Baltimore and elsewhere that showed investors were clueless about financial-planner categories.
"I don't know the difference," one Baltimore investor told SEC consultants in February (the agency doesn't identify them). "I mean, I've got a guy that gives me advice. I don't know what he is."
From another: "How could you be clear when you've got brokerages calling themselves planners and planners calling themselves investment [advisers]? It's not clear."
Like other organizations seeking to gauge the consumer pulse, the SEC likes Baltimore as a marketing microcosm.
"It's not New York, and it's not Washington," says Susan Wyderko, director of the agency's Office of Investor Education. "We wanted to affirmatively avoid those two cities because we wanted to find out what real people think."
The real people in Charm City gave the SEC an earful. Among other things they successfully urged the agency to use "plain English," not jargon, in the new disclosures. Don't say "fiduciary," they said.
"Hey, we're lawyers. We think those words are clear," Wyderko joked to me.
Even with the changes, the words aren't clear enough. Disclosure standards and required duties are still weaker for brokerage accounts than for investment-adviser accounts, which require timely revelation of specific financial relationships and other conflicts of interest, Roper says.
The SEC is still working on refinements. Meanwhile, ask your financial agent whether your accounts are brokerage or advisory. If brokerage, ask more questions. Are they being paid to sell you a mutual fund or other product? By whom? How much? Is this really what you need?
Copyright © 2005, The Baltimore Sun
Broker? Adviser? Difference is important
Jay HancockMay 1, 2005
ONLY 213 YEARS after the New York Stock Exchange's founding, the government has added regulation requiring many brokers to say this before they take your money: "Our interests may not always be the same as yours."
No kidding!
Besides enjoying commissions on stock and bond trades whether or not the trades help your portfolio, brokerages often receive what amount to legal kickbacks from sellers of mutual funds, variable annuities and other products.
A broker might be tempted to sell you a mediocre fund with a big referral fee instead of a great fund with no fee. No, his interest is not the same as yours.
The Wall Street scandal aftermath is littered with fine print that will soon be ignored and unappreciated except perhaps by Georgia-Pacific, whose paper sales surely must have soared. But the red flags hung out a couple weeks ago by the Securities and Exchange Commission - with assistance from Baltimore investors, which we'll get to - are worth remembering, especially because they are still inadequate.
They have to do with the difference between brokers and investment advisers.
Do you know which one your financial agent is? This distinction is fuzzy but critical, because investment advisers are held to different duties and disclosure requirements than brokers.
Under law, advisers must put clients' interests first. Fiduciary duty, the attorneys call it. Brokers are prohibited from selling "unsuitable" investments to clients, but that standard is held by consumer advocates to be less strict and offer lower protection to investors. (The National Association of Securities Dealers disagrees, saying the "suitability" rules are just as rigorous.)
Barbara Roper, director of investor protection for the Consumer Federation of America, puts it bluntly. Brokers, she says, are "salespeople" who may be more interested in moving the product than helping the client.
"People are out there who are salespeople who call themselves advisers, and there are people out there who are advisers who call themselves advisers, and you'd better know who you're dealing with," she says.
That has gotten harder and harder.
"Financial planners" are everywhere. Banks and insurance agents sell mutual funds. Brokers, once basically stock and bond order takers and presumed by regulators to give advice only "incidentally," now dispense counsel on how to reach life financial goals.
Some are advisers. Some are brokers. Some are either, depending on what they're selling.
The new regulation, which requires some brokerage accounts to be treated as "investment adviser" business and others to come with the "our interests may not always be the same" caveat, is supposed to toughen standards for some brokers and require better disclosure from the rest.
It followed focus groups in Baltimore and elsewhere that showed investors were clueless about financial-planner categories.
"I don't know the difference," one Baltimore investor told SEC consultants in February (the agency doesn't identify them). "I mean, I've got a guy that gives me advice. I don't know what he is."
From another: "How could you be clear when you've got brokerages calling themselves planners and planners calling themselves investment [advisers]? It's not clear."
Like other organizations seeking to gauge the consumer pulse, the SEC likes Baltimore as a marketing microcosm.
"It's not New York, and it's not Washington," says Susan Wyderko, director of the agency's Office of Investor Education. "We wanted to affirmatively avoid those two cities because we wanted to find out what real people think."
The real people in Charm City gave the SEC an earful. Among other things they successfully urged the agency to use "plain English," not jargon, in the new disclosures. Don't say "fiduciary," they said.
"Hey, we're lawyers. We think those words are clear," Wyderko joked to me.
Even with the changes, the words aren't clear enough. Disclosure standards and required duties are still weaker for brokerage accounts than for investment-adviser accounts, which require timely revelation of specific financial relationships and other conflicts of interest, Roper says.
The SEC is still working on refinements. Meanwhile, ask your financial agent whether your accounts are brokerage or advisory. If brokerage, ask more questions. Are they being paid to sell you a mutual fund or other product? By whom? How much? Is this really what you need?
Copyright © 2005, The Baltimore Sun
Sunday, May 01, 2005
RBC sued for $13 mil, Breach of ethics alleged
The Lethbridge HeraldFront, Friday, September 12, 2003, p. a1
Investment adviser sues RBC Dominion for $13 M
Gauthier, Gerald
By GERALD GAUTHIER
Lethbridge Herald
A local financial adviser, recognized for his business ethics, has filed a $13-million lawsuit alleging his former employer ignored its own ethical standards by secretly charging its clients millions in fees.
Larry Elford, an investment adviser in Lethbridge for 19 years, also alleges RBC Dominion Securities tried to muzzle him when he voiced concern to company management about the improper practices.
His refusal to be silenced, the suit claims, led to the company effectively firing him wrongfully last fall.
The information is contained in a statement of claim filed Aug. 26 with Lethbridge Court of Queen's Bench. Elford is seeking $13.1 million in damages, of which $10 million would be donated by the firm to a charity of his choice. Named as defendants in the lawsuit are RBC Dominion Securities Inc. and RBC Dominion Securities Ltd doing business as RBC Investments and RBC Financial.
The allegations have yet to be proven in court. The firm's Calgary lawyer, Jim Rooney, is preparing a statement of defence to be filed with the court later this month.
"This action will be defended, and we don't see merit in the claim," Rooney said. "It is ill-founded."
Lethbridge lawyer Jim Farrington is representing Elford in the suit.
Elford had been employed with the firm since 1986 when it was then known as Dominion Securities Pittfield. He left the firm Nov. 7, 2002 in what the suit refers to as a "constructive dismissal of the plaintiff which was wrongful" because of management's intimidation and harassment of Elford for raising ethical concerns and its refusal to approve his advertising and promotional materials.
In 2001, while with RBC Investments, Elford was one of two Lethbridge finalists named by the Better Business Bureau in its salute to ethics in business.
The lawsuit alleges the company repeatedly ignored the ethical concerns Elford raised about double dipping - the practice of charging clients transaction fees on top of flat fees when only one or the other should be charged. Those practices generated millions of dollars in transaction fees for the company, the suit alleges.
It also alleges the company and other investment advisers accepted inducements from mutual fund companies to place investments with those companies without notifying clients about those incentives - a practice which is illegal in Alberta.
"When (Elford) attempted to disseminate publicly the fact it was possible to purchase mutual funds without a sales fee, the defendant threatened the plaintiff with disciplinary action if he continued to make such disclosures," the suit alleges.
Failure to disclose such information to clients runs contrary to the company's own published ethical standards which state: "We must operate our business so that every transaction or activity that we are involved in will stand the test of complete and open public scrutiny," the suit alleges.
Also alleged is that the RBC's Lethbridge branch manager tried to intimidate Elford with two memos on May 29, 2002 which threatened sanctions as well as fines and revocation of his securities credentials.
Elford is seeking $3 million in general damages and $100,000 in special damages plus legal costs on top of $10 million in punitive damages, the last of which would be paid to a registered Canadian charity.
It's also alleged after he found employment elsewhere, RBC management and employees made false, derogatory remarks about the circumstances of his departure as well as his business practices.
Category: Front Page; NewsUniform subject(s): Financial products and servicesLenght: Medium, 453 words
© 2003 The Lethbridge Herald. All rights reserved.
Doc. : news·20030912·LH·0100903-Investment_1broker_1
Investment adviser sues RBC Dominion for $13 M
Gauthier, Gerald
By GERALD GAUTHIER
Lethbridge Herald
A local financial adviser, recognized for his business ethics, has filed a $13-million lawsuit alleging his former employer ignored its own ethical standards by secretly charging its clients millions in fees.
Larry Elford, an investment adviser in Lethbridge for 19 years, also alleges RBC Dominion Securities tried to muzzle him when he voiced concern to company management about the improper practices.
His refusal to be silenced, the suit claims, led to the company effectively firing him wrongfully last fall.
The information is contained in a statement of claim filed Aug. 26 with Lethbridge Court of Queen's Bench. Elford is seeking $13.1 million in damages, of which $10 million would be donated by the firm to a charity of his choice. Named as defendants in the lawsuit are RBC Dominion Securities Inc. and RBC Dominion Securities Ltd doing business as RBC Investments and RBC Financial.
The allegations have yet to be proven in court. The firm's Calgary lawyer, Jim Rooney, is preparing a statement of defence to be filed with the court later this month.
"This action will be defended, and we don't see merit in the claim," Rooney said. "It is ill-founded."
Lethbridge lawyer Jim Farrington is representing Elford in the suit.
Elford had been employed with the firm since 1986 when it was then known as Dominion Securities Pittfield. He left the firm Nov. 7, 2002 in what the suit refers to as a "constructive dismissal of the plaintiff which was wrongful" because of management's intimidation and harassment of Elford for raising ethical concerns and its refusal to approve his advertising and promotional materials.
In 2001, while with RBC Investments, Elford was one of two Lethbridge finalists named by the Better Business Bureau in its salute to ethics in business.
The lawsuit alleges the company repeatedly ignored the ethical concerns Elford raised about double dipping - the practice of charging clients transaction fees on top of flat fees when only one or the other should be charged. Those practices generated millions of dollars in transaction fees for the company, the suit alleges.
It also alleges the company and other investment advisers accepted inducements from mutual fund companies to place investments with those companies without notifying clients about those incentives - a practice which is illegal in Alberta.
"When (Elford) attempted to disseminate publicly the fact it was possible to purchase mutual funds without a sales fee, the defendant threatened the plaintiff with disciplinary action if he continued to make such disclosures," the suit alleges.
Failure to disclose such information to clients runs contrary to the company's own published ethical standards which state: "We must operate our business so that every transaction or activity that we are involved in will stand the test of complete and open public scrutiny," the suit alleges.
Also alleged is that the RBC's Lethbridge branch manager tried to intimidate Elford with two memos on May 29, 2002 which threatened sanctions as well as fines and revocation of his securities credentials.
Elford is seeking $3 million in general damages and $100,000 in special damages plus legal costs on top of $10 million in punitive damages, the last of which would be paid to a registered Canadian charity.
It's also alleged after he found employment elsewhere, RBC management and employees made false, derogatory remarks about the circumstances of his departure as well as his business practices.
Category: Front Page; NewsUniform subject(s): Financial products and servicesLenght: Medium, 453 words
© 2003 The Lethbridge Herald. All rights reserved.
Doc. : news·20030912·LH·0100903-Investment_1broker_1
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