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.