David Paddon


TORONTO - Most investment dealers who sold third-party Canadian asset-backed commercial paper to retail investors didn't have adequate criteria for reviewing the products they sold and which were suitable for their clients, one of the industry's regulators says.

Those conclusions were included in a 94-page report issued Friday by the Canadian investment industry's self-regulating body after a six-month investigation.

The study by the Investment Industry Regulatory Organization of Canada, is the latest examination of the collapse of the $32-billion market for Canadian third-party asset-backed commercial paper.

Although institutional investors held about 99 per cent of the ABCP that became stranded in August 2007, notes with a combined face value of $371 million were held in 2,542 retail accounts.

The regulator made 13 recommendations to Canada's investment dealers and gave them 60 days to review a draft set of guidelines for practices they should use.

IIROC found, among other things, that a few of the dealer members it oversees have no process for reviewing new products and there are short-comings for most of those that do.

It found most dealer members do not have adequate criteria for determining what products should be reviewed, reassessing approved products or for training registered representatives or their supervisors about the features and risks of new products.

"Dealer members and registered representatives gave little consideration to the attributes or risks of third-party ABCP. The critical factors in the acceptance of third-party ABCP by retail registered representatives (and their clients) were the credit rating and yield," the study says.

IIROC president Susan Wolburgh Jenah said in an interview that the compliance review was launched to figure out what had happened.

"We were really surprised to learn, as we went through this exercise, that notwithstanding the label 'asset-backed commercial paper' there really are very significant differences between third-party (ABCP) and the bank-sponsored ABCP programs which had previously existed," Wolburgh Jenah said.

In essence, third-party and bank-sponsored ABCP were treated as interchangeable, even though they had different characteristics, she said.

Looking at computer screen listing money-market instruments or debt instruments, "you wouldn't know from the name that one was a bank-sponsored instrument and one wasn't," Wolburgh Jenah said.

There was a basic lack of transparency about this type of product, so they weren't well understood by retail clients or the investment professionals selling the products to them, she said.

As a result of the lack of transparency, there was an over-reliance on the ratings provided by DBRS, the only agency to assess Canadian third-party ABCP.

"Obviously one of the lessons that comes out of this, and we've seen the same lessons unfold in the United States and elsewhere, is that one can't rely on credit rating agencies alone," Wolburgh Jenah said

She said the basic framework is already in place: member dealers and their staff should know their clients, know the products being sold, make sure there's a suitable match up between client and product and supervise staff to ensure they comply with the rules.

"We don't think we need more rules," she said. "What we've done in the report is to articulate some additional guidance that we hope will be of assistance to ensure things like this don't happen again."

At the time of the liquidity crisis, 14 IIROC dealer members held third-party ABCP for retail clients. Seven of the dealers have already compensated their clients by taking over $319.7 million in ABCP while three others have compensation plans totalling $177 million that are dependent on a restructuring that's due to be finalized this month.