Town Hall Meeting for Investors

The Ontario Securities Commission is planning a Town Hall Meeting in Toronto at the CBC Atrium for May 31st, 2005. It will be held in the evening at a time to be established.

This will be an opportunity for investors to ask questions to a panel of the top regulators in Ontario including the Ontario Securities commission (OSC), Investment Dealers Association (IDA) and the Ombudsman for Banking Services and Investments (OBSI).

Investors who have a beef with the way the regulatory system functions, or with the way they have been treated by the industry or regulators should speak up.

It will be a four person panel with a moderator yet to be named. The panel mambers will be:

• David A. Brown, Q.C., ChairOSC
• Joseph J. Oliver, President & CEO IDA
• Michael Lauber, FCA, Ombudsman & CEO OBSI
• Stan I. Buell, P.Eng., President SIPA

Investors who are unable to attend the meeting may submit their questions to the Small Investor Protection Association by e-mail to sipa@sipa.to. Please indicate Town Hall Meeting as the subject.

Will Canada provide justice for Bre-X's Felderhof?

Well, it looks like Felderhof was convinced by two events to return to Canada "to clear his family name".

In the U.S. Ebbers was found guilty on all counts within weeks, and faces up to 85 years in prison. Not the kind of justice white collar criminals like to see. It just could have some impact on corporate governance and industry culture ... in the U.S. The financial predators who have a choice will certainly opt for Canadian justice.

Here in Canada we see the Air Canada 20 year investigation and trial resulting in the accused being declared innocent. This has raised an outcry from ordinary citizens. The TV media coverage causes one to suspect our justice system.

Our white collar criminals who simply rob people of their savings are seldom imprisoned, unless they are small fry, and then rarely for more than a year. They may be sentenced to longer terms and be required to spend some time in minimum security facilities like the Gravenhurst Country Club for white collar criminals, but they are soon released because they are considered non-violent and no longer a risk to society.

It is not unusual for the perpetrators to resume their old practices when they realize that the worst that can happen is they have a years holiday with all expense paid. They can catch up on their reading, improve their strategies for defrauding Canadians and at the same time polish up their tennis game.

Does anyone know how many seniors and widows have lost their savings when they trusted their advisors who put them into Bre-X?

Does anyone remember that our Toronto media failed to carry any coverage when two small investors took Nesbitt to court over Bre-X?

Does anyone remember that the two Ottawa evening papers provided coverage the first day of the trial and then fell strangely silent?

Does the media really think that Canadians were not interested in the "scam of the century" that effected almost every investor? When Diane Francis wrote her column six months before the trial it seemed that there would be interest across Canada.

Is the investment industry so strong and powerful that they are able to muzzle Canada's media?

Yet, we allow extremists freedom of speech that threatens many in our society.

Maybe Canada will summon some courage to cover the Bre-X situation with some detail now that Felderhof has returned to "clear his name", and we are once again embarrassed by U.S. Justice showing how white collar criminals should be treated.

In the U.S. even Martha Stewart was sentenced to six months and her offence was nothing like what we see in Canada on a regular basis, without any incarceration. Why do we accept that the perpetrators are let off by agreeing to pay insignificant fines with other peoples money?

Are we really still the wild west as some Europeans think?

How many investors have lost their savings?

Just today (March 15, 2005), we received a letter from a member saying:

I have a friend who I have known for several years.
I was discussing SIPA with her and she said they are just now "recovering" from bad advice. He still works (70 years old).
I never knew this! How many more are there out there that don't discuss their losses?

We have heard from hundreds of investors who have lost significant portions of their life savings, and sometimes more than all. They trusted their advisors completely. Busy with their own professions and family responsibilities they relied upon their advisor for the management of their investments. They followed the advice provided.

There are widespread practices in the industry that often result in the depletion of investors' savings. Many have lost their savings investing in mutual funds. These investors believed mutual funds offered diversification and safety for their savings.

Some mutual fund dealers offer leveraged investment with a 2 for 1 plan or other leveraging scheme. The plan is fine for the dealer - it results in double the amount of assets under management, and for the registered representative - he earns double the commissions. The friendly bank who provides the loan is happy - more loans at high rates and guaranteed by the investor's assets with the dealer authorized to sell out the investor before there is any risk to the bank.

For investors it is a different story. It's fine if the market goes up strongly and generates a return greater than the cost of borrowing. If the market goes down, it's a different story.

To illustrate the point, one of our members, a widow in her sixties, living modestly and still working with a modest income, inherited $100,000. Her only investments had been bonds and GICs, and her savings were modest enough not to attract financial predators. She was encouraged to invest her newfound wealth. She invested in mutual funds with an advisor. At first she accepted to invest only in money market funds. Over a period of six months her advisor gained her confidence and he persuaded her to invbest in equity funds, and also arranged a loan from the friendly bank as approved in the account opening form. The widow says she was not awareof this clause when she signed.

Now she has $200,000 invested and a loan of $100,000. Over the next few months the account grows (negatively) to $170,000. She realizes she still must repay the bank - they are taking monthly payments - and she is down $30,000. This is more than her annual salary and more than she could save the rest of her life. She does not want to risk losing more of her nestegg and asks her advisor to get her out of these mutual funds.

Her advisor, who receives trailer fees for holding clients in, then tells her if she wants out there is a 7% redemption fee that applies not only to her initial $100,000 or the current amount of $170,000 but to the total of $200,000. This means a redemption fee of $14,000.

The widow is then faced with escaping from her mutual fund experience with $56,000. In less than two years her loss is 44% when she has placed her trust in her advisor and the mutual fund industry.

Is this fair?

How many more widows and seniors have received the same treatment?

Will Government create a federal regulator?

SIPA Inc Five Year Review ~ the Small Investors' Perspective of Investor Protection in Canada

Executive Summary

Until recently the public perception was that the investment industry is well regulated and the regulators provide investor protection that will protect the small investor from wrongdoing. More recently the public is becoming aware of widespread industry practices of wrongdoing that are creating a negative impact on all investors.

The small investor voices included in this report are excerpts from the many communications received since SIPA was founded in mid 1998. These voices are representative of the hundreds of voices that have been heard and come from all walks of life including doctors, lawyers, health care workers, teachers, widows, and seniors. From all these voices a composite small investor perception of the investment industry has evolved.

Regulators are challenged to balance the needs of investor protection with the need to promote market efficiency, but the Canadian public does not understand how the regulatory system works. There is great disparity across the country and amongst the dealers, mutual fund companies, insurance companies and banks. There is pervasive non-compliance with the rules. Regulators appear largely ineffective in dealing with those engaged in wrongdoing. Investors do not know where to turn. The Wise Persons Committee Report issued in December 2003 calls for a Canadian Securities Commission to provide consistent regulation for all Canadians and a united Canadian voice in the global marketplace.

The lack of investor awareness is acknowledged. Attempts at investor education will not resolve the underlying problem, of investor losses due to industry wrongdoing, faced by small investors. The small investor needs to become more aware of how the industry operates and is regulated. However, Canadians are busy with earning a living and participating in family life. The investor trusts his advisor and trusts our Government to provide industry regulation and control. Government has a responsibility to protect small investors as consumers and that responsibility can no longer be deferred.

The investment industry tends to follow widespread practices that are contrary to the rules and regulations and not in the best interests of small investors. Some of these practices are being exposed in the United States. Canadian investors are becoming aware that these same issues are prevalent in Canada. There is an appalling abuse of small investors who are financially uneducated. The leaders of the industry should have at least some knowledge of the cavalier attitude towards small investor life savings. It is irresponsible to ignore this situation or worse to condone it. Our Canadian society is based on trust and that trust is being betrayed by the investment industry.

The primary complaint of the small investor is that he is encouraged to place his trust in his advisor but his advisor often seems more motivated by commission generation than providing a capable professional service to the clients depending on him. Fiduciary duty is breached on an alarmingly regular basis and sometimes fraud is an issue. This results in the serious degradation of small investor savings with the resultant negative impact on lifestyle. The regulators receive large numbers of complaints but are reluctant to reveal information. The public has a right to know when this information could help them to ward off destruction of their life savings.

Investors have found it takes time to determine how complaints are dealt with, and it is difficult to get an appropriate response from industry participants. Industry sponsored dispute resolution mechanisms do not provide appropriate means for small investors to have their disputes resolved. Investors who make a complaint are stalled and encounter delaying tactics. Ultimately, they find that civil litigation is the only viable alternative and often this is not an option possible for the small investor who has lost everything. Most seniors do not have the requisite resources of money, physical and mental stamina, and time to pursue lengthy legal battles.

Investor losses are estimated to amount to billions of dollars. The BCSC alone estimates $100 million annually in ‘reported losses’ in British Columbia. Many small investors are not even aware when they have had a negative experience as a direct result of industry wrongdoing. Industry has failed to provide all investors with meaningful statements on a timely basis. Many that are aware of a problem are reluctant to proceed with a complaint. Often, they are misled when industry participants provide false or misleading information.

The impact on victims of investor losses due to wrongdoing can be devastating. It is not only the financial loss; it is the sense of betrayal the victim feels when his trusted advisor has caused the loss of life savings. The victims lose their money, their hope, and their future. Many suffer from Post Traumatic Stress Disorder. They experience depression, difficulty sleeping, stress on relationships, loss of trust in others, loss of hope, and too often thoughts of suicide.
Small investors need regulators to provide investor protection that is fair and available to all Canadians. History shows that self-regulation has failed to provide adequate investor protection. Industry sponsored agencies or agencies that employ mainly industry staff will not provide fair and objective investor protection. The Government must now act to afford consumer protection for the small investor. Government should heed the call for a Canadian Securities Commission and a Canada Securities Act; and enact legislation for a national authority to provide investor protection for all Canadians. As the Wise Persons Committee Report states and is so aptly named “It’s Time”.

GOVERNMENT MUST ACT!

On January 26, 2004, the following e-mail was sent to Prime Minister Martin:

Dear Prime Minister

The investment industry, the regulators, and the government have failed the small investor.
Small investors have placed their trust in the industry and that trust has been betrayed. Many small investors have lost all of their life savings. They have also lost their hope for the future and their trust in our society.

Is Canada no longer a just society?

There are fundamental issues that have not been acted upon. There have been numerous studies, task forces and reports. Yet investor protection is lacking.

The Industry Canada sponsored 1998 Stromberg Report “Investment Funds in Canada and Consumer Protection” identified issues and proposed solutions. Industry and regulators failed to act.

The Wise Persons Committee Report of December 2003 “It’s Time” reviews securities regulation and strongly recommends action. IT IS TIME for government to act because industry and regulators have failed to respond. Canadians need investor protection. The present regulatory system fails to protect the small investor.

An article in the New York Post January 25th, 2004 has captured the situation in the United States and this applies equally to Canada:
Spitzer's great concern, he said, is the fundamental effectiveness of how Wall Street polices itself for the benefit of investors.
"The major failure has been at the SRO (self-regulatory organization) level," Spitzer told The Post.
"Whether you are talking about research or mutual funds or specialists, there has been a failure to properly question behavior that they know about before anyone else. Everyone of those issues was understood by the industry and not responded to."
Spitzer, 43, a graduate of Princeton University and Harvard Law School, where he was editor of the Law review, sees the solution in leadership.
"I don't pretend to have any answers beyond the platitudinous observation that those who are in charge of the SROs have to be willing to rock the boat and have to be willing to play the role of prosecutor or the system will fail," he said.

This is a message our leaders in Canada need to hear.

Will regulators follow Quebec's lead?

On February 1, 2004, Quebec unveiled a new Authority that reports to the Minister of Finance and is responsible for investment regulation in Quebec. The CVMQ (Quebec Securities Commission) is integrated into this new authority. The authority has a Claims Section to which investors can submit claims. They also have a Fund, Fonds d’indemnisation des services financiers (FISF), that enables restitution to be paid to small investors with certain limitations.

These two initiatives are of primary importance for small investors and these changes are consistent with what SIPA has been requesting from our regulatory system. Investor protection by the SROs does not work and the initiative by the Quebec government in establishing this new authority should propel the rest of Canada to take similar action.

What is covered by the Fonds d’indemnisation des services financiers (FISF)?

The FISF covers three specific acts in eight specific sectors. It is important to carefully distinguish acts that qualify for indemnification by the FISF from those that are not.

The role of the Fonds d’indemnisation des services financiers is to provide financial compensation to any person who is the victim of fraudulent acts, deceptive practices, or embezzlement. FISF compensation is designed to cover these three categories of acts within the scope of the eight sectors regulated by the Act respecting the distribution of financial products and services:
1. Insurance of persons (life, health, disability, etc.)
2. Group insurance of persons (insurance offered in the workplace)
3. Damage insurance (liability, auto, home insurance, etc.)
4. Claims adjustment
5. Financial planning
6. Group savings plan brokerage (mutual funds)
7. Investment contract brokerage
8. Scholarship plan brokerage.

In order for claims to be eligible, the person to whom sums of money are remitted and who committed the fraud must also hold a valid right of practice at the time of this action.

For additional information, contact the Information and Referral Centre:
Tel: 1 866 338-FOND (3663) e-mail: info@fisf.qc.ca

Does the financial services industry need fixing?

Jonathan Chevreau wrote in the Financial Post on October 1, 2003, about a book entitled “The Professional Financial Advisor” that suggests you ask about funds that pay no trailer fees. He quotes the author Advisor John De Goey as saying “The financial services industry is largely broken and desperately needs a fix. Regulatory reform is clearly required.”

Jonathan writes that the book is the biggest exposé of Canada’s mutual fund industry since Daniel Stoffman’s The Money Machine. It’s the book Glorianne Stromberg might have written if she’d been an advisor instead of a lawyer and regulator.

Jonathan comments that De Goey suggests you can make your supposedly independent advisor “squirm” by asking them about ETFs or fund families such as Chou Funds or Phillips Hager & North. Advisors will do “everything they can to dissuade clients from buying these types of funds because they offer no embedded compensation.”

He says other products your friendly fund salesperson may avoid include individual stocks, income trusts and Canada Savings Bonds.

Whistleblowers - Truthsayers - TruthTellers

The press reported that Coca-Cola settled a suit with a whistleblower. A former finance director claimed he was fired because he blew the whistle on accounting fraud at the company. His accusations led to the U.S. attorney’s office and the Securities and Exchange Commission launching investigations. It is reported that Coca-Cola is paying a half million to their former finance director to settle.

It is unfortunate that corporate leaders are intent on covering up wrongdoing and fire those who stand up for what is right.

The regulatory system is simply unable to police the securities industry if it is intent on breaching the rules and doing wrong. If our society has a sense of right and wrong then individuals have a responsibility of reporting the wrongs to management. If management acts responsibly they should take immediate corrective action. Unfortunately top management often condones the activities when these same activities lead to increased perks.

John Reynold’s book Free Rider exposed another case where the “Whistleblower” was fired. He writes about the compliance officer who reported to management about the broker’s activities and suggested that management take appropriate action. Unfortunately management decided to fire the compliance officer because the broker was generating huge amounts of commission. Eventually the broker was jailed for fraud.

A current case in Canada involves a lady who was a director of a publicly owned company. She believed it was her responsibility as a director to bring to management’s attention activities which she believes are wrong. She was promptly excluded from board meetings and management took no appropriate action. She believed the allegations were sufficiently serious that she should report to the regulators to fulfill her responsibility as director. The regulators declined to investigate and suggested she take civil action.

There appears to be a distinct lack of support for those who will go out on a limb to report wrongdoing. We continue to see reports of corporate culture that supports activities that are contrary to law, and which cause irreparable harm to small investors.

Joe Killoran talks about “Truthsayers” as opposed to “Whistleblowers” which often is used with negative connotations. Joe was a mutual fund salesman who felt compelled to “blow the whistle” and ended up being without a job in the industry.

It is time that our society recognizes those people who have the courage to say something is wrong. We need to demand that corrective action be taken, and that those who expose the wrongs be protected from punitive action.

Should brokerage firms be required to warn clients about rogue brokers?

Tell Clients About Rogue Brokers, Ontario Judge Rules

In April 2003 Stuart Weinberg of DOW JONES NEWSWIRES wrote " A recent Ontario court decision found that brokerage firms should warn clients about brokers who engage in improper conduct." He reports that "Ontario Superior Court justice Donald Gordon ruled that Midland Walwyn Capital Inc. and Levesque Securities Inc. were obligated to warn clients about the misconduct of George Georgiou, a former stockbroker who worked at Midland and Levesque between 1988-1995."
He also reported that Justice Gordon wrote in his decision "Despite...knowledge of improper conduct which placed clients at risk, Midland and Levesque made a deliberate decision not to inform their clients and the regulatory bodies".

This is an important decision for investors. Many have suffered losses when the industry has covered up improper conduct and exposed investors to the risk of dealing with bad brokers. Now there is legal precedent.

Is Fund Market-timing a Serious Issue?

In December 2004 the press reported on regulatory action on market-timing.

Toronto, Dec 16, 2004 - A panel of Commissioners of the Ontario Securities Commission (OSC) approved four settlement agreements today that will result in $156.5 million being distributed to mutual fund unit holders who suffered harm from market timing activities in those funds. The settlement agreements, approved in the public interest, were reached earlier this week by OSC Staff with CI Mutual Funds Inc., AGF Funds Inc., I.G. Investment Management, Ltd. and AIC Limited. The text of the agreements is available on the OSC website.

Toronto, Dec 16, 2004 – The Mutual Fund Dealers Association announced a settlement agreement with Investors Group Financial Services regarding market timing. IG has agreed to compensate investors effected by their conduct by making a payment of $2.65 million, and will also pay a fine of $2.65 million to the MFDA as well as costs of the MFDA investigation of $50,000. The text of the settlement agreement is available on the MFDA website.

Toronto, Dec 16, 2004 – The Investment Dealers Association penalizes TD Waterhouse $20,698,713.38, RBC Dominion Securities $16,975,302.08 and BMO Nesbitt Burns $3,693,139.20 regarding market timing. The text of the settlement agreements is available on the IDA website.

The well coordinated news releases by the regulators exposed the involvement in market-timing of eight of Canada's largest investment firms, but did not expose other firms that were also involved. While the regulators justify closing their investigation saying the regulatory action should put a stop to the practice, they are covering up information that should be made available to the public.

How can investors do their due diligence when the regulators fail to disclose information regarding malfeasance?

The regulatory approach to providing investor protection that is preventative in nature is failing investors ... and that means most Canadians. The investment industry is continuing to develop new products and new initiatives that result in investors losing their savings when they place their trust in the industry. Unfortunately the regulators do not prevent wrongdoing from happening. They are aware of the dangers of new industry initiatives involving foreign exchange and futures products but can't prevent it from happening. They may hope to prevent it from continuing but meanwhile thousands of small investors are at risk of losing their savings.

Why don't the regulators focus on remedial regulation and make clients whole when they suffer loss due to wrongdoing? Why doesn't industry take iniatives to do what is right? Why does industry defend vigorously actions that from a moral and ethical point of view appear indefensible? How can they justify their actions when the result is major loss for widows and seniors? How can a government that represents the people stand idly by and allow this financial predation to continue?

The fund market-timing scandal exposed in December 2004 clearly illustrates

• the investment industry's cavalier attitude towards small investors
• wrongdoing permeates the investment industry and is indeed widespread

It's time that our government acts to provide investor protection by establishing an authority with responsibility for investor protection that is remedial. The regulatory approach that is preventative has failed investors.

Do TruthTellers enable Regulators?

SIPA says that whistleblowers or TruthTellers might be more effective than the regulators. The Telegraph in the U.K. published an article that relates how a TruthTeller alerted Eliot Spitzer to the widespread wrongdoing in the mutual fund industry. Some excerpts from that article follow:

Wall Street's whistle-blower Noreen Harrington exposed widespread corruption in America's mutual funds. In her first UK interview, she tells Abigail Hofman why she made her fateful call to the New York state attorney-general. Noreen Harrington is the woman you were never meant to know about. Eliot Spitzer, the New York state attorney general, said he would take her name to his grave.
It was Harrington's anonymous call to the attorney general's office last May, which led to the unveiling of widespread corruption at the heart of the US mutual fund industry. In an exclusive interview with The Telegraph, Harrington explains how she discovered the wrongdoing and why she made that call. Spitzer has praised the 47-year-old Harrington on prime time American television as "a spectacular individual who did an amazing job for all investors in this nation". Spitzer and his colleagues took Harrington's tip-off seriously because of her background: she had 20 years' experience in the financial industry, including an 11-year stint at the leading investment bank Goldman Sachs (where she achieved managing director status) and had worked both on Wall Street and in London (initially for Goldman and then for Barclays Capital). She started asking questions because she believes "that's your responsibility as a senior person in the business".
Harrington talks about "one crowning moment" that pushed her over the edge - when she was asked to review her elder sister's evaporating 401(k) pension pot. Most pension monies are invested in mutual funds.
"My sister is one of the hardest workers I know," Harrington says. "Suddenly I saw her as a victim of this crime. Up until then, I hadn't really thought about the human toll: all those Americans whose only liquid asset is their 401(k). And after I looked at it from the bottom up, then I couldn't sleep at night. I knew I had to call somebody." And that's what she did.
In May 2003, Harrington contacted Spitzer's office. Initially, she just left an anonymous voice-mail. Then, realizing that her original message had been too vague, she called again and spoke to an executive who persuaded her to go into the office for several meetings. "The basis for that was they would investigate and no-one would ever know who I was," she says. She told none of her friends or family about her dealings with the attorney general's office. "I truly hoped my name would never come out. And so the right number of people to tell in those circumstances is zero."

SIPA recognizes Noreen Harrington for her courage as a TruthTeller.

Will the WPC Report have an impact?

The Wise Persons Committee Report "It's Time" was issued December 13th, 2004. It was prepared in response to the MacKay Report calling for a review of the securities industry. There was intense industry input but very little input to present the small investor’s view. SIPA made a submission as did a couple of SIPA members and a couple of investor advocates.
The WPC Report recommends a single Canadian Securities Regulator. This is a position that SIPA supports; however there is sufficient opposition that it is unlikely this would happen in the near future. The Summary of the WPC Report follows:

7. It’s Time

It’s time for Canada to have a single securities regulator. Capital markets around the world are continuing to integrate and become more competitive and important to economic growth and prosperity. Canada is now at a crossroads. Others have moved faster in adapting their regulatory structures in response to these trends. Either we can continue with a fragmented regulatory structure that has served Canada adequately in the past but that is ill suited to current realities, or we can choose to create a regulatory structure that helps Canadian capital markets become a source of comparative advantage in the increasingly competitive global marketplace.

”Canadians should not settle for anything but the best they can achieve.”
Canadian Bankers Association

We believe the choice is clear. Canada cannot afford to stand still. We therefore call on the federal and provincial governments to participate in the creation of the Canadian Securities Commission. Canadians are seeking increased federal-provincial cooperation in addressing important public policy priorities. Both levels of government now have an opportunity to come together and act in the national interest.

Other countries have already done this. In Australia, a federal state with regional diversity and shared constitutional authority over securities regulation, the federal and state governments worked together to create the ASIC, a single securities and market conduct regulator, in recognition of the fact that a single regulator was in Australia’s national interest. We believe the same spirit of collaboration can, and should, animate the creation of the Canadian Securities Commission.

We believe the federal and provincial governments should implement our recommendation without delay.

There is a remarkable momentum for change, shared by capital market participants, governments and regulators. There is an unprecedented opportunity to improve Canada’s securities regulatory structure.

It’s time to act.

... That was December 13th, 2004.

What happened Fair Dealing?

In 2004 the OSC issued a Press release on the Fair Dealing Model. Initial reports suggest the proposal is watered down due to industry input. Although the iniative appears well intended, it is impossible to pass judgment until details are released. The Press release follows:

OSC Chair David Brown unveils "Fair Dealing Model" to regulate relationship between the financial services industry and investors
TORONTO - The Ontario Securities Commission is considering significant changes to the way it regulates the relationship between the financial services industry and individual investors. OSC staff, in consultation with a group of investment industry leaders, has developed an outline of a new "fair dealing model".
The new framework would, among other things, seek to better define the rights and responsibilities of each party, reduce conflicts of interest in the provision of advice, and ensure greater transparency of adviser services, qualifications, compensation and other fees.
"A fair dealing model can result in a stronger financial services industry, enhanced competition around quality of advice, and clarity in provider-client relationships," OSC Chair David Brown said in a speech to kick-off Investor Education Month. "And it would cut unnecessary compliance costs, ensuring that providers and investors receive maximum regulatory value for every dollar spent."The OSC and its advisory group have studied business models in the financial services industry and recognized that the current regulatory model has become outdated. For example, securities regulations assume that advisers are compensated based on trading activity, yet most firms now take a wealth management approach where trading and advising are no longer viewed as separate activities. The proposed regulatory model is more flexible and would better reflect market realities.Changes being considered include the following:
requiring more complete information on how service providers are compensated, including clear disclosure of whether they receive payments or incentives from product issuers;
replacing existing account opening documentation with a new form that clarifies the nature of the provider-client relationship and seeks to improve clients' understanding and acceptance of investment risk;
placing clearer responsibility on firms, including liability for losses, for any improper activities of their officers, employees and agents;
replacing current registration categories with a single service provider license which makes no distinction between trading and advising; and
reducing certain regulatory requirements to improve small investors' access to a variety of investment opportunities and increase market access for new types of service providers.
Staff plan to expose the new "fair dealing model" to a wider group of stakeholders later this spring, and publish detailed proposals by the summer.

Have you heard a Margaret’s Story?

“The main reason I considered investing in 1989 was because retirement was just seven years down the road. I had raised my children as a single parent and was reminded that I needed to have enough money to provide a reasonable lifestyle for my 'golden years'. I had worked for 40 years at that time.

I approached a large brokerage firm. Mutual funds were being promoted and at that time the banks were not involved in the investment industry.

My first investment was $10,000.00.

Over the next seven years I invested further monies as funds became available. I saw my investments as an extension of my 'bank - savings account'; and that monies were safe and secure, and of course would grow. On the advice of my broker, I also transferred my RRIF account from my local bank to the brokerage firm.

During this time period I saw my investment advisor only three times. He would call me on the phone three of four times a year. I felt my money was in good hands and certainly under the roof of a reputable organization. I certainly had nothing to fear.

In 1995, I contacted the broker with the purpose of discussing the purchase of a condominium. I was renting accommodation and felt it would be advantageous to buy a property that would at least carry for what I was paying in rent. My rent had increased that year 7.6%. I told the broker that I had $100,000.00 as a down payment. He dissuaded me from buying, and added that I had insufficient funds to carry the mortgage.

I took his advice, that 'I would do better by giving the money to him to invest and that it would grow and "we would make money”'! Today, I would hear this response very differently. I decided to start saving earnestly. I was now working part-time, so I had to sacrifice certain projects, like traveling to England to see family, who sadly have since died.

In 1996, the year I retired, on the advice of an elderly friend, I approached a mutual fund advisor of another investment company. I was eligible to investment money in my RRIF account and decided that maybe it was time to create 'another basket' so to speak. The advisor asked me to bring in my current monthly statement so that she could see how to best invest my money. Whilst reviewing the document she asked permission to make a copy so she could review the contents with her manager. We made arrangements to meet later on that week.

The outcome of our meeting was shocking. The month and year I retired was the month and year that my account was at -104% leverage!!! In other words my account had been 'wiped out'! After a visit to my home and a brief audit by this new advisor, it was discovered that my investment had been set up as a 'leverage account'; and that during 1995-1999, 1.4 million dollars of investments had been turned over in my investment and RRIF accounts.

I had signed nothing. Even after I discovered what had happened and sent a letter to the broker stating that nothing was to be done in my accounts without my knowledge or signature, monies were still turned over to the tune of $85,000.00! The broker had made at least $60,000.00 in commission!

Who had supervised these transactions; but further more, who had provided the transitionary signature for these investments and other leveraged investments - some 150 in total!

The branch manager was contacted and confessed that something was wrong with my account and said that 'things could be changed'!

I wrote to the Ontario Securities commission who forwarded my complaint and evidence on to the compliance department of the brokerage firm. That was 1999.

It is now 2004, and five years have passed. With legal fees and loss of interest, apart from what the monies invested would be worth today had they been suitably invested, my total losses amount to $325,000.00. The compliance department has made an offer of 20% of the losses. It appears that they are unwilling to investigate the behaviour of the broker or supervisor.

In the meantime the broker has been disciplined - for the second time; and the IDA is investigating at least two other brokers, in the same branch. It appears that I am not 'being heard'.

On a personal level - tempus fugit - time is passing. My apartment is on the second floor of a small building and there is no elevator, my reason for purchasing alternate accommodation was legitimate, I drive a car that is 17 years old. Although it has served me well, it too is aging!

I am totally disgusted with the way I have been treated by the brokerage firm in question; and am sorry to say that as I have shared my story with others, I have been further shocked to find that I am not alone.

I am now with my 'fourth lawyer'. The first one created a conflict of interest, the second one placed me on the 'backburner' for five months, and the third one failed to read my mail and did nothing for two and a half years!

So not only do I have to deal with the investment arena, but my experiences have caused me to question the behaviour of 'the legal beagles’!

My message to those 'out there'. I am not going away. I will see this 'project' through to the end and it will be resolved to my satisfaction. There are those in the industry that need to be exposed and made to put right what was done wrong. The alternative is that we will all pay a heavy price.

We are very much aware of what has happened to Enron and other large corporations. It just doesn't pay to lie and cheat. Didn't these guys learn anything in 'Sunday school'! Or maybe their parents did not insist that they return 'that candy bar' that they stole, as they were leaving the drug store. A philosophy eventually develops that if you don't get caught, it's O.K. or 'that is the way it is done'.

Sad to say, even as I am writing this, the broker in question is being allowed to do what he has been doing the last 18 years; and that is, abuse investors and use their money to make money for himself!”

Margaret – Jan 2004

NOTE: Margaret is a pseudonym to protect the individual's identity

What are the issues for Small Investors?

“Giving Small Investors a Fair Chance: Reforming the Mutual Fund Industry” is a report prepared by a team of CARP and SIPA representatives. The report started as a mutual fund report drawing upon the expertise of Ken Kivenko, Chair of SIPA’s Advisory Committee. At an early meeting of the project team of Judy Cutler, Bill Gleberzon, Ken Kivenko, Robert Kyle and Stan Buell, it was decided to incorporate a concept proposal for an Investor Protection Agency.

Glorianne Stromberg had examined the mutual fund industry and wrote a report for Industry Canada entitled “Investment Funds in Canada and Consumer Protection” and released in 1998. This report outlined the weaknesses in the regulatory system and made detailed recommendations for improvement. The report did not sit well with industry, as they preferred the status quo.

There were subsequent reviews and studies culminating in a Wise Persons Committee that produced another report “It’s Time” in December 2003. These wise people reviewed most all of the previous studies and reports and reached the conclusion that it was time for Canada to have a single national regulator. This was the recommendation of Ms. Stromberg in 1998.

Elliot Spitzer, the New York State Attorney General set the U.S. investment industry on its ear with his Bureau of Investment Protection headed by David Brown (not the OSC Chair), former assistant attorney general. The Bureau was enabled to act on the basis of the New York State Securities Law, commonly known as the Martin Act, and the Sarbanes/Oxley law, formally titled The Public Company Accounting Reform and Investor Protection Act.

Spitzer pursued a strategy based on investment protection rather than regulation. The Bureau was alerted to wrongdoing by whistleblowers because they are protected in the U.S. by legislation. Spitzer’s office accomplished what the mighty Securities and Exchange Commission could not. Wall Street brokerage firms and mutual fund companies lined up to pay fines and avoid extended litigation that would have destroyed their firms. Some of the firms suffered considerable damage just from the publicity. Here in Canada the OSC is still investigating market timing, which is really a non-issue as far as extreme investor loss is concerned.

The CARP Report outlines many of the problems with the mutual fund industry and concludes that if investors are to be adequately protected there must be an independent agency with the authority to provide investor protection.

At present the provincial regulators have delegated investor protection to the SROs that represent the industry. This conflict of interest situation does not provide fair treatment for investors. The IDA was quick to criticize the CARP/SIPA report. Although they say they are responsible for investor protection, their attack on investor advocates indicates their interests lie solely with the industry.

The industry will employ tactics to discredit investor advocates and attempt to justify the way the industry operates … they have a lack of transparency, a laissez faire policy and a flagrant disregard of rules and regulations.

Eliot Spitzer has now exposed how the investment industry operates in the United States. First the brokerage houses on Wall Street, then the mutual fund companies coughed up hundreds of millions of dollars in fines to try to keep a lid on a deteriorating situation for the investment industry.

Canadians would be naïve to think our investment industry is any different. SIPA has documentation on file that corroborates the statements that have been made and illustrate industry’s attempts to defend situations that are morally and ethically indefensible.

How many times have I heard or read that a mutual fund company or an investment dealer attempts to justify that all of their actions were appropriate when seniors have lost 50% and more of their life savings?

The issues for small investors are not so much the refinement of rules, a new set of recommended best practices, mutual fund market timing or late trading.

The most important issue for small investors is the extreme loss being suffered by those who have been victimized by widespread industry practices of wrongdoing. Many of the victims have no opportunity to replace the loss and their futures are compromised.

An Investor Protection Agency, coupled with TruthTeller protection, and a means of dispute resolution that is affordable and timely is what is needed to save our seniors from financial hardship caused by industry wrongdoing.

Are leaders' responses acceptable?

In February 2004 SIPA issued a report entitled "The Small Investors Perspective of Investor Protection in Canada". It was based largely upon anecdotal evidence gathered since SIPA was founded in 1998.
We have had the opportunity of speaking with hundreds of small investors and also with individuals working in the investment industry. This has enabled SIPA to outline how the industry operates and the challenges faced by investors in dealing with this industry.
The report was delivered to 25 leaders across Canada including the Prime Minister, the provincial premiers and several other key ministers and leaders.
Some of the responses are shown in part to illustrate the range of response received.
SIPA continues to contact both our provincial and federal politicians.
Lorne Calvert, Premier of Saskatchewan, Feb 20;
“Thank you for outlining your Association’s concerns regarding the impact of unethical investment advisors. I have taken the liberty of forwarding your letter to Honourable Frank Quennell, Q.C., Minister of Justice and Attorney General, for his information.”
Ralph Klein, Premier of Alberta, Feb 25;
“I have taken the liberty of forwarding your comments to the Honourable Greg Melchin, Alberta’s Minister of Revenue, for his review and further response on behalf of the Government of Alberta.”
Prime Minister’s Office, Feb 25;
“You may be assured that the points you raised, on behalf of the Small Investor Protection Association, along with your support for the Government’s measures to address the Auditor General’s concerns, have been carefully reviewed. … I have taken the liberty of forwarding a copy of your letter to the Honourable Lucienne Robillard, Minister of Industry…”
Jean Charest, Premier of Quebec, Mar 2;
“Thank you for your letter in which you ask the government to provide investor protection. Your query falls under the mandate of Mr. Yves Seguin, ministere des Finances and will be passed on to him to provide you with an appropriate response.”
Bernard Lord, New Brunswick Premier, Mar 3;
“Small investors are the backbone of Canada’s capital markets and your organization is an important voice for them. The introduction of a new Securities Act and the establishment of the New Brunswick Securities Commission will be significant milestones in New Brunswick’s economic history and of great benefit to your members.”
Greg Melchin, Alberta Minister of Revenue, Mar 15;
“I have been working with other provincial ministers responsible for securities regulation on an initiative to reform the way securities are regulated in Canada. Providing provincial securities commissions with the authority to order restitution to investors is an option that will be carefully considered as we move forward.”
Office of P.E.I. Premier, Mar 26;
“Please be assured that Premier Binns is aware that you have written and is appreciative of your efforts on behalf of our citizens.”
Greg Selinger, Manitoba Minister of Finance, May 03;
The Government of Manitoba shares the views of the Small Investor Protection Association (SIPA). That is why we amended the Manitoba Securities Act in 2003 to allow the Manitoba Securities Commission to order financial compensation (restitution) to an aggrieved investor after an administrative hearing.”
Cabinet du premier ministre, Quebec, May 4;
“Rest assured we have taken your document and its content into consideration.”
Yves Seguin, Quebec Minister of Finance, May 5:
“An indemnity fund exists in Quebec for the victims of fraud in insurance and in mutual funds. We are studying with interest the possibility of expanding this indemnity to the victims of fraud in securities sector as well.”
Ralph Goodale, Minister of Finance, May 31;
“I share your view about the importance of investor protection. Indeed, one of the fundamental objectives of securities regulation is to protect investors from unfair practices. It is imperative that any reforms to our current system of securities regulation measure up to this objective.”

Will Government Give Small Investors a Fair Chance?

"Giving Small Investors a Fair Chance – Reforming the Mutual Fund Industry" is the title of CARP’s Report and Recommendations in partnership with the Small Investor Protection Association - September 2004.
The report examines the mutual fund industry and makes a number of recommendations for reform. The Number 1 recommendation is that a federal Investor Protection Act should be passed which includes the establishment of a single, national, independent Investor Protection Agency (IPA) accountable to Industry Canada or the Attorney General of Canada.
This is an important recommendation that will be followed up with the federal government by CARP and SIPA. SIPA’s members have already communicated with every M.P. across Canada to ensure they have a copy of the report.
The report was presented to the Honourable Tony Ianno at a media conference on September 28th. In a preliminary meeting the Minister discussed the report with CARP and SIPA representatives. The minister stated he would discuss the report with the Minister of Industry, Hon. Lucienne Robillard, and the Minister of Finance, Hon. Ralph Goodale.
CARP and SIPA agreed to work with the Minister to develop strategies to move this initiative forward.
There was a good turnout for the media conference with several journalists, a couple of TV cameras, investor advocates and SIPA members, and industry representatives including OBSI’s Mike Lauber. Glorianne Stromberg was also present.
The IDA was quick to respond to the CARP Report. Their comments in an advertisement in the Investment Executive are;
The Investment Dealers Association of Canada today responded to “Giving Small Investors A Fair Chance, Reforming the Mutual Fund Industry”, a report issued by the Canadian Association for Retired Persons (CARP).
In a statement, the IDA said the CARP report includes a number of redundant recommendations where rules or policies are already in place as well as a number of inaccuracies.
The media also wrote about the report:
Rob Carrick, Globe and Mail, said:
The only way to improve protections for small investors in Canada is to get politicians interested, and the only way to do that is to have investor advocacy with clout.
Ellen Roseman, Toronto Star, said;
Buell gets lots of publicity, but he hasn't been able to move his agenda forward. That could change now he's allied himself with an advocacy organization 100 times his size. … Reform is a tough nut to crack. But with CARP beavering away, I feel better already.
Linda Leatherdale, Toronto Sun, said:
In a joint press release, CARP and SIPA warn, "The mutual fund industry suffers from deficient regulations, abusive industry sales practices, excessive fees, inadequate governance and lax regulatory enforcement."
John DeGoey, Globe and Mail, said:
The most important recommendation is that the federal government should pass an investor-protection act, creating an independent investor-protection agency, which is accountable to the federal government.
NOTE: Every SIPA member should write their Member of Parliament for Canada and also their Member of Provincial Parliament, and ask them to support this important initiative for a national Investor Protection Agency.

S-O-S Who will Save Our Seniors?

The evidence collected by SIPA suggests that many seniors are losing their savings due to fraud and investment industry wrongdoing. The media is full of stories regarding leaders in government and industry acting for their own benefit at the expense of ordinary Canadians. Many of the issues that receive media coverage affect all investors but are rarely the cause of extreme loss.
Extreme loss is when the small investor loses a significant portion of his savings. This usually is the result of fraud in many forms or widespread investment industry wrongdoing.
Individuals with no affiliation with the legitimate investment industry can perpetrate fraud. It may be the sale of non-existent investment products such as Guaranteed Bank Certificates, Limited Partnerships for non-existent properties or properties that do exist but do not have the value stated, or simply a cash scam (known as a Ponzi scheme & supposedly named after the initiator of these schemes.)
The more serious issue is that of widespread industry wrongdoing. Many seniors have accumulated substantial savings over their working careers, have no investing experience and relied upon income interest generated by GIC’s, bank savings, Canada or government bonds, and Treasury Bills. Their capital was protected and they were able to manage on the modest interest earned.
With interest being reduced to historic lows, rates on savings accounts down to less than 1% and government bond returns reduced to unforeseeable levels, many seniors felt forced to move to other forms of investment offering higher rates of return.
Few seniors are prepared to risk the loss of their savings and they are assured there is little risk in following their advisors advice.
Often the advisors suggest or implement a strategy of leverage without explaining the increased risk of significant loss. Many firms have a corporate policy to leverage clients. They encourage mortgages, bank loans, and margin loans (loans form the investment firm guaranteed by the assets in your account). Sometimes these strategies result in highly leveraged accounts.
Leveraging can work in certain circumstances when the investor understands the underlying factors that can affect risk, but there is always risk of change in the investment market.
When advisors combine the selection of inappropriate investment products, and excessive trading to generate commissions, it is a recipe for disaster.
When mutual funds are churned deferred sales charge can be incurred on top of MERs and Trailer Fees.
Sometimes it is not easy for seniors to monitor their accounts because the statements provided are not easy to decipher.
While many statements will provide a value for this month and last month, few provide an annualized rate of return. Managed accounts will normally provide this information but registered and non-registered accounts often do not unless it is specifically requested.
So how can we Save Our Seniors?
· Speak with older friends and relatives about the need to be watchful over savings and investments.
· Help educate others about the danger of following an investment strategy that we do not understand. Seniors in particular should avoid leverage.
· Talk about the need for a statement that clearly shows where you stand and shows the annualized rate of return for your investments.
· Write to the Hon. Tony Ianno, Minister for Families and Caregivers, in Ottawa and express your concern about the lack of investment protection for senior investors.
· Also express your concerns to your M.P. and your M.P.P.
· Become more informed and support the journalists who are writing to help small investors. Send them letters of support.
· Make sure that you protect yourself so you will be in a position to help others.
· Support CARP/SIPA in their call for an Investor Protection Agency, TruthTeller Protection legislation and a firmer stand on white-collar crime.
At a SIPA meeting Glorianne Stromberg said the situation would not change unless small investors speak out. SIPA is one voice for small investors. We need many voices speaking out.
We estimate that Canadian investors are losing billions of dollars each year due to fraud and industry wrongdoing. We believe that industry wrongdoing is the cause for the major portion of this loss.
Seniors are suffering from the loss of their life savings. Their lifestyles are compromised in their Golden Years. Often their health, hope and happiness are destroyed.
Help to Save Our Seniors. Become active in supporting the need for better investor protection. Write your M.P.P. and your M.P. Become involved. Support SIPA.

Will leaders heed the SIPA Report?

The SIPA Report was prepared during 2003 and 2004 based upon anecdotal evidence recieved by SIPA since its founding in 1998. The report is entitled "The Small Investors' Perspective of Investor Protection in Canada". It was delivered on February 27, 2004 to 25 of Canada's leaders across Canada including the Prime Minister, the Premiers of our provinces and certain other leaders. It was featured in a Globe and Mail article by Rob Carrick at the time, and has received further distribution since then. It is available on the SIPA website at www.sipa.to.
The Report outlines the problems small investors encounter when dealing with the investment industry, and includes the voices of over 60 small investors as well as several industry representatives. The purpose of the report is to make readers aware of how the widespread industry practices of wrongdoing are victimizing small investors, and how the current regulatory system is incapable of dealing fairly with small investors. Self regulation and industry sponsored dispute resolution result in many seniors and unsophisticated investors losing their savings without hope of recovery.
The public is generally not aware of the magnitude of this problem until it happens to them.

Will an IPA be the answer?

Many Canadians are losing significant portions of their life savings due to widespread wrongdoing in the investment industry.

The fund market timing scandal was revealed in Canada in December 2004 when Canada'a regulators (Ontario Securities Commission, Investment Dealers Association and Mutual Fund Dealers Association) reached settlement agreements with eight major firms who jointly agreed to pay about $200 million dollars for their part in the market timing.

The investigation stopped short of exposing all the firms involved in market timing, but the results illustrate how widespread industry practices of wrongdoing are.

In 2004 SIPA associated with CARP to produce a report "Giving Small Investors a Fair Chance". This report reviewed mutual funds and made recommendations. The report recommends establishing a national Investor Protection Agency with a mandate to provide meaningful protection for investors that would include the power to investigate and to order restitution when wrongdoing is found.

The complete report is available on the SIPA website at www.sipa.to.