Investors need faith in SROs

 

Diane Urquhart
Financial Post

October 15, 2004

The provincial governments are delegating significant investor protection responsibilities to self-regulatory organizations (SROs) in the financial services industry such as the Investment Dealers Association (IDA), the Mutual Fund Dealers Association and Market Regulation Services Inc.

Joseph Oliver, president of the IDA, admitted to the Ontario standing committee on finance and economic affairs on Aug. 18, 2004, that the Canadian SROs don't have the meaningful and effective enforcement powers necessary in today's capital markets. The IDA is asking Ontario and the other provincial governments for new IDA powers to compel clients and financial institutions to testify and produce documents at investigations and disciplinary hearings. Without this power, Mr. Oliver says, "good cases simply have to be abandoned." Also, the IDA wants its penalties against individuals no longer in the business to be given the authority of court orders. He told the Ontario standing committee, "Our disciplinary process loses credibility when it imposes well-publicized and substantial monetary penalties but has no effective means to enforce the penalties."

Stephen Sibold, chairman of both the Canadian Securities Administrators and the Alberta Securities Commission, agrees with the IDA, as recently reported in the National Post. "Our philosophy is kind of simple: We think that with responsibility should go authority.... If they're going to be given the responsibility of policing, in effect, their members, then they should be given the necessary tools to do it."

Let's call a spade a spade. Our legislators must not act to increase IDA powers, such as subpoena powers and court authority to collect fines, unless the IDA is subject to public accountability, standard legal protections for the accused wrongdoers and a process for restitution of investor losses.

Individual investors who complain to the provincial securities commissions about financial advisor misconduct are routinely sent to the IDA. The Ontario Securities Commission's (OSC) Web site, in fact, says "You should direct your complaint to the Enforcement Division of the appropriate SRO." As Michael Watson, director of enforcement for the OSC confirms: "There's more reliance on self-regulatory organizations now to do the smaller things that involve broker misconduct in relation to individual investors and things of that sort."

The IDA is an unincorporated association of securities dealers governed by a constitution, by-laws and rules, which deal with the conduct of its members. The provincial securities commissions require that all registered securities dealers be a member of the IDA. The IDA is not government and not a Crown agency. The IDA does not have a statute defining it to be a self-regulating organization, as do the Toronto Stock Exchange and the Law Society of Upper Canada. The IDA obtains its government or public character through provincial recognition orders. The act of recognition changes the character of the IDA's rules from having a private character -- the rules of the club -- to having a public character -- the responsibility for enforcement of wrongdoers in the public interest.

Investors certainly deserve to ask why the IDA needs an easier process to collect fines, which go into its coffers. Why is it that the IDA would get to keep fines, while investors have to spend years to get restitution for their losses in industry-sponsored arbitration and ombudsman reviews or in the courts? Paul Bourque of the IDA says, "Look, don't make us go through the process of re-proving the case to get a court order. Why not just deem what we do as if it was a court order." The aggrieved investors ask, "Look, why do we have to spend years and tens to hundreds of thousands of dollars in arbitration or in court to get restitution for our losses?"

Our legislators should not be confused when lobbied for incremental IDA authority to carry out its enforcement responsibilities. The IDA's natural inclination is to protect the reputation of the investment dealing industry. We cannot be fooled by the adage of what is good for business is good for investors. In this instance, what is good for investors will be good for business. The Canadian financial industry and the Canadian economy are hurt without the reforms sought by individuals, who will move away from suppliers, products and markets they do not trust. Both business and investors win when individual investors have confidence in the integrity of the IDA's policing and adjudication functions.