Securities regulators focus on investor protection

By Andrew Rickard | December 19 2011 04:16PM

Provincial securities regulators are devoting more resources to enforcement and investor education in an effort to protect the public from fraud, especially in the exempt market. And they are prepared to use the criminal courts to get results.
In a discussion panel at the annual Investment Funds Institute of Canada (IFIC) conference in Toronto on Oct. 14, representatives from the Alberta, British Columbia, Ontario, and Quebec securities regulators all said that they are putting more effort into enforcing laws and protecting consumers.
Paul Bourque, executive director of the British Columbia Securities Commission (BCSC) said that his organization has been, and will continue to be, very focused on compliance and enforcement in the exempt securities market.
“The exempt market is not exempt from regulation, although sometimes it may be viewed in that way,” he commented. He explained that it is called exempt because, under certain conditions, it is possible for firms to offer securities of both public or private companies to investors without a providing a prospectus or disclosure.
Criminal enforcement
Mr. Bourque notes that the BCSC has a team of five people who focus on criminal enforcement in the exempt market, making charges under both the Criminal Code of Canada and the provincial Securities Act. Since 2007, he says the BCSC has charged 17 individuals with 47 criminal code charges and 211 securities act charges. He adds that the BCSC is trying to target the kind of “egregious conduct” it sees in this area. “While that conduct is quite a small part of a large market, it is nevertheless catastrophic to investors who lose money in these investments in small, private, untried start-up ventures.”
The educational arm of the BCSC has also increased its activities, making a special effort to reach investors in the lower mainland’s South Asian and Chinese communities. “We have information targeted directly at them in Mandarin, Cantonese and Punjabi, trying to send these messages about the exempt market and the risks associated with private offerings,” notes Mr. Bourque.
Mario Albert is the president and CEO of the Quebec securities regulator, the Autorité des Marchés Financiers (AMF). His organization has also increased its enforcement capacity, and he notes that the province is thinking about expanding its securities fraud compensation program as well.
“Expectations in Quebec are very high with respect to enforcement,” says Mr. Albert. After the several high profile fraud cases, most notably the Norbourg scandal, the public wants to see more resources devoted to securities oversight. In the last year, Mr. Albert says that the AMF has tripled the staff dedicated to enforcement and created a number of specialty units, including a financial crime unit, and a unit responsible for examining insider trading.
“We want to do more,” says Albert, who believes that there now needs to be an increase in the number of prosecutors available to see through enforcement actions.
While Quebec offers some of the most generous levels of compensation for fraud victims in Canada, Mr. Albert says that there is still pressure to improve after the Norbourg scandal. He says the AMF is currently studying the issue to determine what effect broadening the provincial financial services compensation fund would have on the industry. “Some believe that portfolio manager fraud should be eligible,” comments Mr. Albert, who notes that there is some concern that widening the scope of the fund could drive up costs and reduce product availability in that province.
Ontario has also put investor protection high on the list of its priorities. Mary Condon, vice chair of the Ontario Securities Commission (OSC) says that, amongst other things, the regulator is especially concerned about how complex financial products are marketed to retail investors. “Is there a point at which a product is so complex that perhaps it is not appropriate for retail investors?” she asks.
With respect to enforcement, Ms. Condon notes that Ontario regulators have only recently obtained powers that other provincial securities regulators have enjoyed for some time, namely the prohibition on fraud and market manipulation, as well as the
prohibition against making misleading statements.
Boiler room activity
As a result, she says that the OSC’s enforcement activity at the tribunal level has been focused on these kinds of issues, using their new-found authority to shut down boiler room activity and the illegal distribution of securities. And like Mr. Bourque, Ms. Condon believes there is an increased willingness to use the criminal courts to deal with wrongdoers rather than rely solely on the provincial Securities Act.
The global financial crisis has caused regulators the world over to reconsider the way they think about risk management, comments William Rice, chair and CEO of the Alberta Securities Commission (ASC) . “There is a push to intervene more dramatically in the exempt market,” he says. “There was pressure and it continues to be applied to deny retail investors access to complicated products.”
The Alberta Securities Commission also has a separate team devoted to monitoring the exempt market, and plans to add more people to it this year. Mr Rice was circumspect when describing the regulators approach. “Our policy decisions are a little way off, but I think we are going to have to grapple with the level of regulation that is appropriate in this territory,” he commented.
While the Alberta regulator does see difficulties and risks to investors in the exempt market, Mr. Rice says there is some question as to the degree regulators should intervene in a field that, up until now, has not been subject to significant regulation. “I think we are going to be reluctant to be drawn into a whole new territory that we offer comfort for, particularly if we are only going to go half way,” he commented.
Like others on the podium, enforcement is a significant issue for the ASC. Mr. Rice says that his organization has also felt pressure to take matters of greater significance to its provincial courts, seeking jail terms for scam artists. However, he points out that taking the criminal route can be a risky, since it is a slow process where the burdens of proof are higher and the regulators’ ability to compel evidence is reduced.
“Clearly there is a demand from the public, and the investing public in particular, for harsher sentences and more visible sanctions for fraudulent conduct,” said Mr. Rice. “We are not seeing the kind of support at the criminal prosecution level that we as securities regulators would like too see, and feel that we are going to have to take on some of that responsibility ourselves.”

Clients satisfied with mutual fund advice 

The overwhelming majority of investors are satisfied with the mutual fund advice they receive from their financial advisors.
The Investment Funds Institute of Canada (IFIC) has released the results of its sixth annual survey of mutual fund investors. Between June 10 and June 21, 2011, the market research firm Pollara conducted telephone interviews with 1006 mutual fund investors and found that most people were content with the investment advice they had received.
The survey revealed that 93% of respondents were at least somewhat satisfied (five or higher on a ten-point scale) with the advice they had been given by their financial advisors. One out of every five investors rated their level of satisfaction as a “ten out of ten”, while only 6% of those questioned said they were not satisfied with the advice they received from their advisors.
Charles Sim is the president and CEO of Mackenzie Financial and is currently serving as chair of IFIC’s board of directors. In his opening address to the IFIC annual conference in Toronto on Oct. 14, Mr. Sim pointed to the Pollara survey results as proof of the valuable role that financial advisors play in Canadian society.
“Advisors help Canadians start early and invest consistently,” said Mr. Sim, who quoted statistics from the survey showing that the accumulation of wealth does not necessarily precede seeking out financial advice. “More than one-half of investors first started using an advisor when they had less than $25,000 and three-quarters had less than $50,000,” he commented. “This speaks to the value advisors are providing to a very broad range of Canadians.”
The Pollara survey also showed that mutual fund investors still rely on help from advisors when they are choosing their investments. “Very few make decisions entirely on their own or simply do what their advisor recommends without question,” notes the report. “Instead, 51% discuss options and make a decision with their advisor while another 40% make the final decision themselves based on information from their advisor.” Pollara reports that the proportion of mutual fund investors who express this preference has remained stable over the past few years.
The survey also asked investors about how they would like their advisors to be compensated. Most mutual fund unit holders said that, instead of paying a separate fee, they would rather pay their advisors via embedded mutual fund management and trailer fees. “Assuming that both approaches cost the investor the same amount, 59% of investors would prefer to pay fees that are part of their mutual funds, while 33% would prefer to pay for advice separately,” says the report, which notes that the preference for compensation through the mutual fund has increased by five points since 2010.
Most investors still prefer the personal touch when buying their funds, with four out of five mutual fund investors making their purchase through a financial advisor. However, the survey reveals that there has been some growth in the direct channel, with 17% of those contacted saying that they bought their funds on-line or through a customer service representative. This is a 7% increase compared to previous year. Nevertheless, those investors who do use advisors show a high level of customer loyalty. “The average length of time that Canadians have remained with an advisor is eighteen years,” noted Mr. Sim. “This is an indication of the value Canadians place on advisors.” (AR)

Outlook mixed for US economy 

The danger of an economic slowdown in the US looms large, but investors who own shares in successful global companies may have the best chance of seeing good results.
In a panel discussion at the annual Investment Funds Institute of Canada (IFIC) conference in Toronto on Oct. 14, three portfolio managers shared their views on the state of the global financial markets. Faced with the possibility of a slowdown in the United States and a sovereign debt crisis in Europe, none of the three panelists were terribly optimistic about the short term.
Dan Richards, founder and CEO of Clientinsights, served as discussion moderator. During the session, he asked each of the panel members about the financial health of the United States economy. Would the Americans recover, muddle through, or enter into a second recession in 2012?
Muddling through
“If I had to guess, and my guess is no better than anyone else here, I would say probably recession, and if not, then muddle through,” commented Leslie Lundquist, senior vice president at Bissett Investment Management and co-lead manager of the Bissett Canadian High Dividend Fund. She noted that next year is an election year in the US, which means the Democrats will be working very hard to try to prevent the economy from slipping back into recession under their watch. “But even trying to be a contrarian, it is very hard for me to come up with a strong growth argument for the States in 2012,” she said.
Ken Miner, vice chair of TD Asset Management said that he believes the US will muddle through. “I think they will lurch from one thing to another,” he commented. We would be surprised to actually see a recession in 2012. Because of the volatility that investors are experiencing in the financial markets, people have stopped investing in the market and started spending.”
“We’ve been quite extraordinarily surprised at the level of things like auto sales,” he comments. Mr. Miner notes that when consumers are asked in surveys why they are buying a new car, they respond that with inflation, low interest rates, and poor investment returns, they prefer to buy a new vehicle. “We are thinking that consumption is actually going to remain higher than the average forecast,” he said, but warns that it will not be very high. Although 1% or 2% growth may still feel very sluggish, Mr. Miner explained that technically speaking, it is not a recession.
The third member of the IFIC panel was Fred Sturm, executive vice president and chief global investment strategist at Mackenzie Financial. Mr. Sturm refrained from making a specific prediction about the prospects of the US economy. Instead, he answered the question by choosing all three outcomes.
“There are some people that will continue to suffer real hardship...There are some people who will continue on with a reasonable life. But there will be some people that will continue to get very wealthy in America.”
Mr Sturm pointed out that some companies in the United States are still doing well despite the lukewarm economy. He cited Apple, McDonalds, and Starbucks as examples of resilient firms, and suggested that these kinds of organizations will continue to accumulate wealth for their shareholders over time. “I think the structure of the American system is that there is not a common ground. There is no one answer,” concluded Mr. Sturm. “There really are three different answers.”(AR)