Investors Scrutinizing the Regulators

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Ottawa looks to boost securities regulation


April 10, 2008

TORONTO Politicians are looking at beefing up regulatory oversight of the securities industry in the wake of Canada's $32-billion commercial paper mess.

Finance Minister Jim Flaherty said yesterday that Canada has regulatory power over banks and insurance firms, but is in a rare position globally because it doesn't have regulatory powers with respect to securities.

"Maybe brokers should understand what they're selling," the minister said in an interview with Business News Network. "We can start there. There's some responsibility."

"We regulate banks in Canada from Ottawa, and we have certain standards we expect the banks to meet," he said. "We also have regulatory powers with respect to insurance and so on. We don't with respect to securities, which is an unusual situation when you look at countries around the world."

Mr. Flaherty suggested that provincial securities regulators shoulder some of the blame for the ABCP problem, and said this is another reason why Canada needs a national securities regulator, something he's been advocating for years.

"The primary responsibility in this situation has been that of provincial regulators because most of these entities that were selling the product were subject to provincial regulation," he said.

But legislators are also looking at whether the system needs new rules.

Liberal finance critic John McCallum said one of the things the House of Commons finance committee will look into is whether the brokerage industry needs more oversight.

Canada's securities industry is self-policed by the Investment Dealers Association of Canada. The IDA said this week it had received 88 complaints from investors whose brokers recommended they buy third-party asset-backed commercial paper and it was investigating some cases.

Mr. McCallum also wants to explore "the due diligence on the part of certain provincial regulators, or lack thereof."

"There's a limit to what you can do," he said. "You can't legislate against fear and greed and the possibility of any kind of financial crisis in the future, that would be naive. But I think you can hope to at least change the rules so that this kind of problem doesn't recur."

The finance committee held a special hearing in Ottawa yesterday on ABCP, and a number of retail investors said they felt duped into losing their life savings and asked the government for help.

Investor activists gave harsh accounts about how their financial advisers had stashed their savings in third-party ABCP, telling clients it was as safe as guaranteed investment certificates or treasury bills.

The market for third-party ABCP ground to a halt in August after investors were spooked by its potential exposure to the U.S. subprime mortgage market.

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