1) DSC Mutual Funds and Trailing Commissions
We again called on governments and regulators to proceed with regulations to prohibit the sale of Mutual Funds with DSC (Deferred Sales Charges). The Canadian Securities Administrators (CSA), the umbrella organization of Canada's provincial and territorial securities regulators, has proposed a ban but it is yet to be implemented. We also supported the CSA efforts to amend regulations to prohibit Mutual Funds from charging imbedded trailing commissions when the mutual funds are purchased at a discount broker. See the summary in our January Newsletter
As a follow up ~
the CSA announced on December 19
that all jurisdictions except Ontario are moving forward in 2020 with regulatory amendments to ban up front sales commissions, which will apply to DSCs and associated redemption fees. All jurisdictions, including Ontario, will ban trailing commissions paid to dealers that do not provide investment advice, such as discount brokers.
2) Beat the Bank, by Larry Bates
We featured the work of Larry Bates, retired capital markets executive and member of FAIR Canada's Board of Directors in our
. In a financial system traditionally dominated by the six big Canadian banks, these institutions - and by extension the entire Canadian financial industry - occupy a position of paternalistic authority that too many individual investors respect unquestioningly. The industry brilliantly capitalizes on the combination of poor understanding of fees, deep loyalty, and misplaced trust by charging Canadians the highest mutual fund fees in the world. Bay Street fees continue to quietly strip away 50 percent or more of the lifetime investment gains of millions of Canadians. That's right, 50 percent or more! There are three key elements to "Simply Successful Investing", educate yourself, take a long term view, and manage your costs carefully.
3) Why Penalize Millions of Canadian Investors?
Not shying away from controversy when it sees unfairness for shareholders, FAIR Canada wrote on the policy reasons to support the use of deferred prosecution agreements in appropriate cases where a corporation with public shareholders is charged with responsibility for criminal misconduct committed by its executives or employees. Using SNC-Lavalin as an example, we argued that innocent shareholders of a corporation who have no knowledge, control or responsibility for managing the conduct of the corporations executives or employees can end up paying a disproportionate share of the costs when prosecutors refuse to negotiate a deferred prosecution agreement (DPA) with the corporation. A DPA could achieve all the same criminal penalties as can be imposed at trial and with significant savings of resources of the government.
The Canadian shareholders SNC-Lavalin lost $1 billion the day it was announced the prosecutor would not negotiate a deferred prosecution agreement with the company.
And we note the prosecutors have now settled the case by entering into a plea bargain agreement that imposes the same sanctions as would have been imposed under a DPA. The shareholders may well ask, "where do I get my money back?" See our
June press release
4) Watering Down a Weak Enforcement Regime
FAIR Canada opposed the proposals from the securities industry self-regulatory organization, the Investment Industry Regulatory Organization of Canada (IIROC), to introduce "alternative" disciplinary proceedings. To achieve greater efficiency (meaning clear up the backlog of old cases and close enforcement files quickly to save dealer members from paying for more resources for enforcement) IIROC proposed to create a "minor contravention program", to be used in cases of "limited or no harm" to clients or other market participants. There would be no public record of the details of the offence and they would not name the offender. Why? How is this consistent with IIROC's stated vision to be known for its "integrity, transparency and balanced solutions"? IIROC also proposes an Early Resolution Offer policy where it would offer steep discounts on penalties in return for early settlements. Sounds like a fire sale policy and, unlike regulators in the US, there's no requirement that investors harmed by the misconduct be compensated. Again, we ask why? We've called on the CSA to intervene (see our
). So far there's been no response from IIROC other than to say they are considering the comments they received.
5) Fund Facts - Bear Markets Eliminated by Mutual Funds and Regulators
We also called on regulators to address the consequences of flaws in the way mutual fund firms are permitted to calculate and disclose their risk ratings in Fund Facts. Mutual funds are entering Alice in 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. As of 2019, "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. See our
6) Celebrating Stephen Jarislowsky
We celebrated Stephen Jarislowsky on the occasion of his 94th birthday this past
Stephen Jarislowsky is a founding director of FAIR Canada and has been a champion of investors rights in Canada for decades. He also helped to found the Canadian Coalition for Good Governance and Institute for Governance of Private and Public Organizations. He built one of the most successful money management firms in Canada, Jarislowsky Fraser. Stephen has served on the board of many listed companies over the years. He has been one of Canada's leading philanthropists for many years. The Jarislowsky Foundation has endowed 35 Chairs in Canadian universities and other organizations. Mr. Jarislowsky retired from the FAIR Canada Board of Directors at the end of September.
7) Regulatory Burden Reduction and a National Securities Portal
we featured FAIR Canada's comments to the OSC on the Burden Reduction Initiative, which was created in support of the Ontario government's Open for Business Action Plan. FAIR Canada supports the concept of better regulation. As part of our submission and as featured in an opinion editorial from FAIR Canada published in
September by the Globe & Mail,
we proposed an initiative to scrap the conflict-ridden national securities regulator project that has been staggering along for over 10 years, in favour of a more pragmatic and beneficial national securities portal operated by a private technology service provider owned by the CSA members.
The portal would be a stakeholder friendly, holistic and modernized database, filing and information system to replace outdated IT systems and platforms like SEDI, SEDAR and NRD.
an initiative would benefit registrants, companies and investors addressing fragmented, outdated, complicated and inconsistent systems. It would also go a long way towards
ing the decades old conflict over a national regulator that has drained government and regulatory resources away from many other pressing issues.
8) Welcome Client
After over a decade of advocacy by FAIR Canada and other investor protection advocates to reform the law, the CSA has passed sweeping and potentially fundamental regulatory reforms to address the securities industry's inadequate management of conflicts inherent in the current client-investment advisor relationship due to the manner in which investment advisors are compensated for selling investment products. It's a well known fact that in the securities industry the investment advice given to clients has been, in many instances, self-serving. The Client Focused Reforms i
is a collaborative approach to shifting away from a "buyer beware" traditional disclosure regime to one that does more to mitigate risk.The reforms come into force at the end of the year, with a two-year phased transition period. Much work remains to be done and the devil will be in the details. See the
9) Insiders and Automatic Share Disposition Plans
We wrote to the CSA and the AMF earlier in the year (see our
June Press Release
) regarding concerns about insider trading and reporting of trades by insiders at Bombardier Inc. pursuant to what's called an "automatic share disposition plan" (ASDP), which are supposed to be arms length administered programs for insiders to sell their shares. The securities regulators grant exemption orders to permit the insiders to participate in these plans. However, the regulators do not have a consistent approach across Canada and there appears to be inadequate protections to ensure the plans are administered in a fair and equitable manner subject to consistent, objective controls to prevent gaming the system.
The exemptions open the door to insider trading and deprive investors of transparency by not requiring timely reporting of trades.
The CSA has responded by announcing it is conducting a review of the regime currently in place and it will not be granting any additional exemptions in the meanwhile. We eagerly await the results. See our
10) Securities Dealers Use Client Agreements to Avoid Regulatory Obligations to Clients
IIROC issued a Guidance Note this October that was striking in many ways including its sweeping condemnation of securities dealers business practices that abuse individual investors. IIROC found that its members have been using client agreements that seek to limit or avoid any liability by the dealer for providing clients with inadequate and harmful investment advice, and for any harm resulting from outsourced services used by the investment dealer. Dealers are required by law to be responsible for both. IIROC states that the use of these agreements by dealers is a violation its rules and is considered by the CSA members to be a breach of securities law. What is the regulator doing? Its "encouraging" dealers to repaper their clients agreements! That's it. There's no deadline. There's no required communication to clients expressing mea culpa. There are no enforcement proceedings. Apparently, no-one is being held accountable. How many client complaints were denied or limited by dealers relying on these abusive and illegal agreements? Is this IIROC's interpretation of reducing regulatory burden? FAIR Canada has questioned IIROC and is seeking answers. See our
11) The Slow Death of OBSI as a Banking Ombudsman
We are strong supporters of OBSI, the only true ombudsman service in Canada for customer complaints with banks and investment dealers. OBSI investigates consumer complaints independently and recommends appropriate settlements. But it has been abandoned by several of the big banks who instead offer up a captive third party service that they call an ombudsman but is not. The federal government, which regulates banks, has failed to step in. Fortunately, the Canadian Securities Administrators, with leadership from the OSC on the matter, have refused to permit the same thing to happen for clients of investment dealers who are still able to use OBSI services to help resolve their complaints.
FAIR Canada calls on the federal government to either require all banks to use OBSI or legislate a mandatory banking ombudsman for banks.
op-ed published by Investment Executive
12) Investor Protection Clinic at Osgoode Hall Law School
we congratulated all those responsible for the amazing work being done by the law students at the Investor Protection Clinic at Osgoode Hall Law School. The IPC provides free legal services to help investors who cannot afford a lawyer get compensation for losses due to misconduct in the handling of their investments by their investment dealer or advisor. FAIR Canada co-founded the IPC at Osgoode two years ago with seed funding provided by the Law Foundation of Ontario and a cy-prés award from a court-approved settlement of a securities class action lawsuit.