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August 2019
FAIR Focus

FAIR Canada Calls on CSA To Reign In IIROC Enforcement Regime Proposals
FAIR Canada has called upon the members of the Canadian Securities Administrators (CSA) to intervene to stop the proposals of the Investment Industry Regulatory Organization of Canada (IIROC) to create a "minor contraventions program" that doesn't name names and to establish a policy granting discounted sanctions for "early resolutions" of enforcement matters. The CSA is comprised of the thirteen provincial and territorial government securities regulators. As reported in our July Newsletter, FAIR Canada opposes the IIROC proposals. FAIR Canada has repeatedly recommended to IIROC that these proposals should only be considered where full compensation has been paid to clients for any investment losses or fees/commissions/expenses arising from the misconduct. FAIR Canada opposes the "behind closed doors" manner in which IIROC proposes to "resolve" enforcement matters using these alternative disciplinary procedures. FAIR Canada doesn't agree with IIROC adopting an enforcement procedure where public knowledge of a registered persons misconduct is traded away for the sake of IIROC's "efficiency". Transparency and accountability in how IIROC discharges its responsibilities to regulate are essential for the public to have confidence that the process is being carried out in the public interest.

Click here to read the full submission. 
MFDA Discretionary Trading  in Client "Model Portfolios" Proposal Needs Control & Supervision and Clear Client Consent
Your mutual fund dealer wants to reduce their costs by having the self-regulatory organization change the rules to allow for discretionary trading in your account as part of "Model Portfolio" services. The problem is who is watching the fox once you let him have unsupervised access to the henhouse?

The Mutual Fund Dealers Association of Canada (MFDA) is the self regulator of mutual fund dealers in Canada. Their rules currently prohibit discretionary trading in clients accounts. They want to amend the rules in the "restricted circumstances" where the dealers provide clients with mutual fund "Model Portfolio" services. The problem is the amendments don't define what that means. Until now, mutual fund dealers that provided such services have been required to obtain an exemptive relief order from the securities commission. In order to avoid the costs of obtaining these orders, they now propose to amend the MFDA rules. However, the proposed rule amendments don't define the limited circumstances when discretionary trading would be permitted. This raises concerns about whether the amended rule would permit mutual fund dealers and representatives to engage in discretionary trading in other circumstances.

The rules should define "model portfolio" services and specify that permitted discretionary trading is restricted to the limited circumstances of making required fund substitutions and changes to asset allocations in accordance with the "model portfolio". The rule should also specifically require clear disclosure to clients of the "model portfolio" products offered including how they are designed and by whom, how re-balancing and substitutions occur, the fees associated with "model portfolio" services, how discretionary authority is exercised and legal responsibility and liability to the client of the mutual fund dealer and any other legal entity involved. The rules should also specify the supervision requirements to be imposed on mutual fund dealers engaged in discretionary trading pursuant to their "model portfolio" products and should establish requirements on how fees charged to clients for "model portfolio" services may be imposed.

Click here to read the full submission. 
Curiouser and Curiouser? Mutual Fund Firms and Regulators Eliminate Bear Markets! 
Mutual funds are entering Alice and Wonderland: they are being rated as less risky when real risk (as retail investors understand risk) increases. Risk ratings look at the performance in the last 10 years. "Poof" the Great Financial Crisis has ceased to exist. No real bear market in the last 10 years which of course means that bear markets (which on average happen every 3-5 years) have been eliminated by regulatory fiat. 

The Globe and Mail highlighted this problem in "Why investors need to be concerned about misleading risk ratings". Investor advocates told regulators years ago that their volatility test was flawed. Now investor advocates and industry experts are raising a warning flag as the problem they highlighted has materialized. 

The Canadian investment fund industry is undergoing a mass revision of its risk ratings, making many mutual funds and ETFs appear safer than they actually are, according to some investor advocates.

"This will mislead investors. Advisers themselves are being fooled by the ratings," said Ken Kivenko, a prominent investor-rights advocate. The "flawed" risk-rating framework is drawing Canadian investors, including retirees, into inappropriately risky funds, he said.

"For risk ratings to ... fall for years as market prices keep rising makes no sense," Mr. Hallett said.

"The actual risk of these investments has not gone down. In reality, it's probably gone up, because stocks are trading at historically high valuations, particularly in the United States," said Ermanno Pascutto, executive director at the Canadian Foundation for Advancement of Investor Rights.

What will regulators do? They suggest that retail investors need to learn about volatility and different measures of risk and read the prospectus. Warning: you may need to hire a CFA or lawyer to explain this to you. 

FAIR Canada in the Media 


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