Investors Scrutinizing the Regulators

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Securities Regulation In CanadA

Fox Guarding the Hen House




Off the Record

Good luck to you, Mr. Hockin


Tom Hockin, chairman, Ottawa’s Single Securities Regulator Panel.


Dear Tom: Greetings and good luck on your new assignment.


Before you start, here is an example of what’s wrong with the regulatory process. Here’s a potted history:


May, 2007: OBSI, an independent dispute-resolution service that investigates disputes for customers of more than 600 financial services, made a ruling against Financial Architects Investments, a mutual fund dealer.


OBSI, which provides a free service and has been around since 1996, announced FAI “has refused to honour a recommendation for compensation” to a former client. (OBSI recommended a compensation of about $80,000. FAI’s refusal was the first time an OBSI recommendation had been rejected.)


OBSI said the client (aged 76 when she signed on with a RRIF worth $142,000) “was badly served by FAI. She deserves compensation for unsuitable investments and a risky strategy that failed to provide her with needed income in her retirement.”


When FAI’s work with the client was finished, “all the funds in the account were equity-based, and none paid regular distributions. This meant units of potentially high-volatility funds had to be redeemed to meet the client’s income and RRIF requirements regardless of their declining net asset value,” said OBSI.


“Leading a widow in her late 70s living on a limited income into a portfolio containing 60% high-risk DSC mutual funds is simply unacceptable.”


How good was FAI’s strategy? The widow’s RRIF withdrawals fell to less than $5,000 in 2003 versus more than $10,000 in 2000.


Jan. 30, 2008. FAI announced it intends to resign from the MFDA, the national self-regulatory organization for the distribution side of the mutual-fund industry.


FAI is in the process of being acquired by GP Wealth Management Corp., also a MFDA member. Chand Misir, FAI’s president, said, “We are transferring our assets to GP Capital and all our advisors. It’s done, we are just going through the exercise of having the transfer take place.”


Given FAI’s non-compliance with OBSI’s recommendation, why would the MFDA agree to transfer the licence without demanding compensation?


Larry Waite, MFDA president, said, “We have a process to approve mergers and acquisitions. That is taking place now. With respect to OBSI, we don’t enforce [their] settlements.”

Shaun Devlin, MFDA’s vice-president of enforcement, said the MFDA “can take regulatory action if a member fails to meet its obligation to handle client’s complaints fairly and promptly.” Devlin said the MFDA has never, to date, “taken formal disciplinary proceedings in complaint handling matters.”

Tom, one doesn’t have to be a former federal Cabinet minister to realize something is wrong here. To mangle Lincoln’s quote about democracy, there is too much by the industry for the industry and not enough by the industry for the investors. Thanks to the efforts of FAI, the former client is still out a great deal of cash — and nothing is happening. As well, too many regulators are involved, none of which has either the power or the willingness to bring the matter to a conclusion. Inertia shouldn’t be the defining characteristic of securities regulation and action.


Good luck, Barry