Progress on Thow case is glacial
Why Is The Fund Dealers Association Investigation Taking So Long?

Thursday, August 30, 2007

Mutual fund investors, rest easy: The Mutual Fund Dealers Association -- the national self-regulatory organization for the industry's distribution side, the body set up in June, 1998, at the initiative of the Canadian Securities Administrators --is on the job, 100% of the time.

At least that's the impression the $20-million organization, which "regulates the operations, standards of practice and business conduct of its members and their representatives with a man-date to enhance investor protection and strengthen public confidence in the mutual-fund industry," would like us to believe.

The reality, of course, is something else: Like other regulators, it focuses on the low-hanging fruit. It's a non-player when it comes to the big stuff.

More than two years ago, the MFDA launched an investigation into Berkshire Investment Group, the financial-planning firm that employed Ian Thow, a senior vice-president based in its Victoria office who allegedly bilked clients out of more than $30-million.

(Prior to Berkshire, Thow worked at Investors Group. Thow abruptly resigned in 1998, "for personal reasons.") More than 18 months back, Michael Lee-Chin, the founder of AIC, the parent of Berkshire, said, "We are hopeful we can come to a resolution as quickly as possible."

Berkshire is in the process of being acquired by Manulife. That deal, the price of which was not disclosed when the announcement was made on June 26, is set to close tomorrow. Calls made to both Manulife and Berkshire were not returned.

In July, 2006, the B.C. Securities Commission started a hearing into Thow over allegations including fraud, registrant misconduct, misrepresentation and trading without registration. That hearing -- a hearing that Thow, who moved to the United States more than two years back, chose not attend -- continued this year. The sessions wrapped up last month. BCSC said it will give its deliberations in October.

The MFDA has also been beavering away, and it, too, hasn't reached a conclusion.

But based on conversations with senior enforcement people, including those directly involved with this investigation, one wonders if a conclusion will ever be reached.

"We are still involved in the gathering and analysis of information, but we are drawing close to the end of that process," said an MFDA official.

The irony: A similar comment was made by another enforcement official many months ago. "I can't give you a hard date [as to when the investigation and analysis will end] but we are closer to the end now [than the start]."

What's the delay?

MFDA would like us to believe that outsiders can't appreciate the scope of the work to be done. "It is a very large case, a very complex case, a complex set of facts and a complex set of issues," said the official, who refused to detail the various elements in its investigation. Complex work is a term normally applied to putting people on the moon or dealing with problems with the space shuttle.

But the official insisted the work is complex and that the investigation and analysis "is not taking longer than normal. It is taking the amount of time that it takes to process a case of this size and complexity," said the official, in an attempt to defend how inertia and lack of decisiveness have been elevated to an art form. "You can imagine it's not quite as simple as it seems," he said. (Since November, 2002, the MFDA has concluded only two disciplinary actions in British Columbia, the province with 12,000 mutual-fund salesman. Neither of the disciplinary actions was the product of a contested hearing.) 

The conversation was frustrating for other reasons: For instance:

  • The MFDA's enforcement branch is not involved with providing any input into the regulatory clearances Manulife needs to be able to complete its purchase of Berkshire. It's possible the MFDA could complete its work after Manulife has purchased Berkshire. (Manulife may want some idea of its risk.) The official said he would provide the name of the MFDA person who is required to sign off on the Manulife purchase. By the close of business yesterday, that name hadn't been provided.  Bureaucracy is wonderful.
  • On whether the MFDA is waiting for the BCSC to make its decision before reaching its conclusion, the official pointed out that the BCSC is investigating Thow, while the MFDA is investigating Berkshire.
  • The MFDA is itself a victim. "It's a high-priority matter for us. We are moving it forward. One of the constraints for us is that we can't comment on the process as it is underway," he said. "We are not the only people that control how fast the process unfolds. We are dealing with numerous other parties in terms of the information gathering," including Thow's and Berkshire personnel.
  • On whether the MFDA is getting snowed by Berkshire, the official said it wasn't --all of which raises the question: What is causing the delay and why doesn't the MFDA encourage Berkshire to be more forthcoming, given that it has the power to suspend Berkshire's licence? Certainly Berkshire has a long history of not co-operating. It has refused to supply documents to the Ombudsman for Banking Services and Investments, the independent body that investigates complaints from individuals and small businesses about products and services provided by bank financial groups, and to a court hearing in B.C.

    "Berkshire's failure to comply with the rules of court and various court orders made during the course of this application is not acceptable," noted the judge.

The pace of the MFDA's work has upset many of Thow's former clients. They say the matter is straightforward: Thow got their business as a senior Berkshire executive running the firm's Victoria office; and it is up to Berkshire to supervise all its employees.



Ian Thow takes flight