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
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.