Investors Scrutinizing the Regulators

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IDA investigating members on ABCP

Conducting compliance and enforcement sweep of members, sources say


Theresa Tedesco

Tuesday, May 13, 2008

 

 

The brokerage industry's self-regulatory body is conducting a compliance and enforcement sweep of its member firms in the wake of the $32-billion asset-backed commercial-paper debacle and has served notice that dealers that signed the Purdy Crawford restructuring will not be immune to regulatory action.

 

Industry sources say the Investment Dealers Association of Canada, which oversees the business activities of 214 brokerages across the country, has delivered about two dozen letters in recent weeks to dealers, including those owned by the banks, that participated in the manufacturing and distribution of the controversial investments.

 

Ward Perrin / Vancouver Sun

Purdy Crawford, architect of the rescue plan for ABCP investors. Sources say the Investment Dealers Association has served notice that his rescue plan won't protect advisors who may have improperly recommended ...

The IDA is said to have demanded answers to detailed questions about internal controls and the due diligence used to review the asset-backed commercial-paper products before they were sold to retail and institutional clients.

For example, the self-regulator is reviewing the literature the dealers produced about ABCP products and distributed to their clients; any reviews done of the trusts that may have been conducted by the brokers; and client lists of those who were sold the products.

Some brokerage executives have been interviewed by IDA compliance officials and similar meetings are expected in the weeks ahead.


The letters are also part of the IDA's investigation into about 100 complaints from retail investors in the wake of the ABCP debacle, which began to unravel in August, 2007.

"We're conducting investigations on every complaint we receive and we're going to follow up on every single one of them," said Paul Bourque, senior vice-president, member regulation, at the IDA.

Mr. Bourque would not comment on any specific investigations, citing the IDA's policy, except to say "enforcement is involved."

Unlike other Canadian regulators that have sidestepped the ABCP crisis -- namely the Office of the Superintendent of Financial Institutions, which oversees banks -- the IDA is targeting its member firms to determine whether they complied with industry regulations.

In this case, the self-regulatory agency is reviewing whether the brokerages provided their clients with appropriate information about the risks of the ABCP investments, and whether they were suitable investments according to the industry's Know Your Client rules.

Based on the compliance information gathered as part of the probe, the IDA will determine whether or not to take disciplinary action against the brokerage firms.

According to sources, senior officials at the IDA have told Purdy Crawford, who is leading a committee of investors who is overseeing a plan to restructure the $32-billion frozen ABCP market, that there will be no immunity from regulatory action in the future.

The plan, which is currently seeking court approval, has been endorsed by 96% of the noteholders.

The IDA's probe of its members is similar to its probe during the market timing scandal that rocked the mutual funds industry in 2004.

At that time, the self-regulator collected a total of $7.2-million in fines from brokerages and investors were reimbursed in the form of refunds.
 

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