By James Langton
The ability of the securities industry to police itself is coming under intense fire, with some critics saying the regulatory system has now moved to being truly dysfunctional rather than merely ineffective.
The latest furor stems from a damning compliance review by the Ontario Securities Commission concerning the enforcement work of the Investment Dealers Association of Canada. The report was followed by a series of compliance problems that surfaced at BMO
Nesbitt Burns Inc., including accusations against a few top performers.
Itís the securities industry as a whole that suffers when it fails to monitor itself. Regulators got something of a free ride during the throes of the bull market because investors are a lot more forgiving when everything is going up. But as portfolios fall and retirement
dreams are scotched, investors become edgier and more demanding of both their firms and regulators.
"Recent publicity surrounding discipline problems has certainly seriously hurt the credibility of the industry and the SROs," says investor advocate Stan Buell, founder and president of the Unionville, Ont.-based Small Investor Protection Association. "It
has exposed the IDA and the industry of running an old boysí club."
The IDA insists it is working hard to respond to the OSCís criticisms, and the commission says it is generally satisfied with the association. The IDA hired two principals in early March from Toronto-based risk-management firm AssetRisk Advisory Inc. to "assist
us through the period until a new vice president of enforcement is hired," says Connie Craddock, the IDAís director of public affairs.
Ralph Brockbank, former head of the RCMPís commercial crime branch in Toronto and principal with AssetRisk, is stepping in for former enforcement chief Fred Maefs. AssetRiskís Helen Ehlers is acting as project manager for implementing the IDAís efforts to beef up its
"[IDA president and CEO] Joe Oliver determined that we needed to take this step of providing additional staff resources to ensure that we meet our objectives," says Craddock.
However, despite the reassurances from the IDA and the OSC, the process is straining the credibility of some industry watchers, particularly as the OSC has delegated authority to the IDA. "Whereís the accountability?" asks one veteran industry observer. "For
organizations that are touting the merits of corporate governance, their own governance seems sadly lacking."
Investors are left to wonder whether the current regulators can clean things up simply by beefing up their existing activities. If regulators are falling down on the job, and the insular, self-referential, mutually reinforcing world of securities regulation is thwarting any
meaningful change, then investors are the ones who will suffer.
For some nervous investors, the sacrifice of a couple of executives at the IDA was mere window dressing of a more insidious regulatory problem. And there are signs of further weakness.
For example, the latest version of the regulatorsí proposal for a permanent registration system has abandoned "fitness for registration" as a criterion for registration, on the basis that this is often determined through compliance and enforcement activities. This
despite the fact that the OSC has already found those compliance mechanisms lacking.
Former OSC commissioner Glorianne Stromberg has criticized the basic lack of transparency in the system, and recommended creation of a public database of both discipline action and client complaints as one measure that would help improve investor protection. At this point even
the IDA canít compel its members to report client complaints, although it has proposed a rule requiring it.
"If the IDA wants to redeem itself, a call for brokers to submit all complaints to the IDA will do little to help. However, if the IDA would agree to be more forthcoming and make this information available to the public, it might give it credibility," suggests Buell.
"A public database of complaints would be much more timely and more effective. If prospective clients were aware of a multitude of complaints, they would hardly select a broker whom they knew was disposed to treating clients inappropriately."
Jim Roache, an Ottawa-based securities industry critic, calls self-regulation an "oxymoron," saying that it should be abandoned in favour of a completely independent, transparent regulatory agency. "Anything short of that is just not going to get the job
done," he says. "There must be combined powers of restitution and powers to ensure that penalties match the infractions and are not simply a tiny cost of doing business."
The regulatory system is letting investors down, says Buell, but he suggests it wouldnít take much to fix. Rather than blowing up the existing system, he says, regulators must simply enforce the rules they have and do a better job of dealing with problems when they crop up.
"The rules and regulations need to be enforced, and dispute resolution has to be simplified and shortened."
"It is not acceptable that a senior citizen such as Armand Laflamme can at first lose his savings at about age 60, and then take 10 years pursuing his case through three levels of court to get restitution," says Buell.
The Quebec investor took his case all the way to the Supreme Court of Canada against Prudential-Bache Commodities Canada Ltd., accusing it of losing his retirement nest egg. Last year he was awarded $924,374, plus interest, in restitution for the account he closed in 1990
after it sustained heavy losses.
The power to order restitution immediately is one which Buell would also like to see given to regulators. As it is, the IDA has the power to levy fines, although it refuses to say what percentage of its fines are actually collected; these donít help wronged investors anyway.
The provincial regulators do not even have the power of disgorgement of ill-gotten gains.
Roache says none of the existing dispute resolution mechanisms work: "Civil action is too costly and takes too long. Both parties must agree to binding arbitration [but] the brokerages wonít. The IDA and its arbitration program are a joke hiding under a cloak of
The basic problem is that the industry sees regulatory problems as a cost but, for investors, it can mean human tragedy. "We donít have to reinvent the wheel. We just have to admit the current system does not work and that there is too much hanky-panky," says
Roache. "Then we have to set about and solve what is essentially a public policy problem. Anyone who thinks it is all about money and quality of life is ignoring the suicides, the broken homes, the stress-related illnesses, etc. ó all of which represent a great cost to society at large."
While regulators are the ones responsible for protecting investors, Buell says, it is really the firms that must clean up the business. "Until management changes their philosophy from accepting rule-breaking as a means of generating
increased profits and rewarding those who do so because the fines levied pale in comparison to the gains made by leveraging and churning," he says, "to one of realizing there is right and wrong and clients should be treated fairly, the financial rape of the Canadian public will continue."