Executive SummaryIn a previous report, “Advisor Title Trickery” [ 1 ] we found that securities regulators routinely ignore securities law to allow over one hundred thousand investment salespersons, (dealing representatives) to misrepresent their registration and to deceive the public. This simple deception is estimated to cost Canadians billions of dollars each year.In this report we find that regulators also will ‘exempt’ the law, hundreds of times every year, which can let investment dealers and issuers prey upon the public, without warning, notice, or evidence of protection of the public interest.Imagine being able to obtain a “FREE DO NOT GO TO JAIL" card, whereby the illegal is made into the legal, with client's investment money as the payoff to the investment issuer or dealer. In a related topic, another post will soon show that the TOP Twelve Securities Regulators in Canada, shared in total two year compensation of nearly $16 million dollars.
To be precise, that is $15.? million, documented, in 2015 and 2016 to the top twelve) Report coming soon with the details.
Skeptics feel as if provincial securities commissions are running a business within a business, namely profiting at the expense of doing harm to the public, with the sale of permission slips to violate securities laws, and potentially violate Canadians financially.
Imagine if 10% or more of those ‘exemptions’, allowed investment dealers to sell defective, flawed, or in some way inappropriate investments to the public. Sounds impossible in a developed country such as Canada? It probably would be, if not for $16 million dollars...please keep reading if you wish to preserve or protect your retirement investments.
I recall one exemption which was granted to a bank, late one Friday evening, when the bank’s underwriting department was having difficulty selling a new investment issue. It was not being well received in the marketplace. Yet the bank’s underwriting people would look bad if the bank were stuck with a bunch of junk, or unsold product on the shelf. What did they do?
They applied for an exemption to the law intended to prevent banks from dumping the bad product into bank customer’s mutual funds. Viola! Problem solved with the swipe of a pen, from a friendly regulator. Bank mutual fund investors are not informed and none the wiser for having personally purchased the bank’s mistakes.
There are many exemptions like that, where banks utilize their customer’s mutual funds (managed by the bank) to “bail out” some of the investment mistakes of the bank. Regulators sign these exemptions, again without showing meeting the test required, which is to demonstrate how the granting of executive relief would not be prejudicial to the public interest.
In another case a mutual fund dealer boasted on it’s share selling prospectus that they could earn “nine to sixteen times” more money if they switched their clients out of quality, independent mutual fund investments, into their own “house brand” funds, with higher commissions, higher annual fees, and zero track record.
They applied and received an exemption to do this, and a second exemption, backdated, for the provinces where they did this to clients before asking for permission to skirt the law. Yes, they skirted the law first, took advantage of the clients, then applied for exemptive relief from that law a year or two later.
The exemption was granted by our government regulators, and backdated to make the illegal, legal.
Do Not Go To Jail, Collect $200 Million Dollars
Every year, hundreds of exemptions to rules or to public laws (Securities Acts) are handed out by securities commissions in Canada.
It is the financial equivalent of a “do not go to jail” pass for those with questionable or illegal investment products which they need to sell.
There is no allowance (or process) for public-input, the exemptions are handled between the application, and lawyers and commissioners at the securities commission.
This is how $32 billion of improperly-rated sub prime mortgage paper [ 2 ] was dumped into Canadian’s "full service" investment accounts prior to their collapse in 2008. Gotta love those “full service” ‘advisors’...but that is the topic of SIPA report #2, found here: LINK???
Exemptions are handled in almost perfect secrecy from public knowledge. Even if you as a member of the public put your life savings into an ‘exempted’ investment.
Some evidence suggests that securities regulators public-protection mandate has morphed into a systemic business within a business, helping investment industry players to harvest the public.
Did I already mention the $16 million dollars shared by just twelve ‘government’ regulatory employees?
You will receive more notice if your neighbour planned to build a garage a foot closer to your property than rules allow, than if an investment dealer applies to sell outside-the-law or harmful investment products or advice to you.
Securities commissions earn millions of dollars in fees by providing exemptive relief to ‘jump’ the law.
What could be further from public protection, than allowing investment dealers to dump their dubious or defective investments upon the public,without an open public process?
Just imagine what it would be like if government meat inspectors accepted money to allow e-coli tainted meat to be sold to the public? It could be a criminal breach of the public trust if this were to occur intentionally.
Securities law or rule exemptions are granted up to 500 times in some years. In Canada. In near secrecy.
The thousands of quiet exemptions from the Securities Commission, occasionally contain evidence of securities commissions mis-using their legislated powers of discretion, to give investment dealers an unfair advantage over consumers. Investment consumers are not given informed when these 'do not go to jail' passes are issued.
Just imagine the public danger if someone were able to buy an “exemption from speed limits”, to allow them to do 240 kms per hour on the 401? Would that be in the public interest? Would it be profitable? Which objective should take priority, money to regulators, or the public protective interest?
Certainly public harm is not the case with every exemption, but enough to be one of the biggest socio-economic sinkholes discovered in Canada. Our next report, coming in February, 2017 will look into the actual size of this billion-dollar sinkhole to the Canadian economy. It is already a thousand times larger than the mere $16 million paid to twelve regulators...
If you have ever wondered how financial institutions can show billions of dollars in profits each quarter, you should become aware of exemptions to investment rules and laws.
In a professional system of regulation, these exemptions should be open to public view, or at minimum with written notice to every affected investor. Securities Commissions are, after all, not intended as private ‘service' organizations for industry, but consumer protection agents first.
Hidden exemptions to our laws risk allowing securities commissions to be possible ‘handmaidens' to the investment industry, rather than objective regulators of this industry.
Securities Commissions are burdened with an impossible to meet, ‘dual mandate”, of “fostering fair and efficient investment markets” and protecting investors from fraud and ensuring fair markets. As we know one cannot serve two masters and this report hopes to shine a light into why that wisdom applies to Securities Commissions.
Our Provincial Securities Commissions (and our Provincial Finance Minister’s etc) have for more than a dozen years, demonstrated no protocols, and provided no documented process, to show the public interest benefits (one of the required tests) of exemptions when asked. This begs the question of what they have to hide, as well as who they feel they work for.
There are over 300 employees at the Ontario Securities Commission alone, who earn more than $100,000 according to the Ontario Public sector salary disclosure for 2015. The top FOUR executives shared over $4 million in 2015 and $3.6 million in 2016. This is many times what the premier of Ontario makes and indicates something ‘unique’ is occurring in this ‘government’ regulator. Perhaps a clue to that ‘uniqueness’ is that all of these overly generous salaries are funded 100% by the industry that provincial securities commissions are supposed to police. [ 6 ]
The only disclosure provided on an Securities law exemption is this boilerplate bafflegab, found on most, if not all exemption orders. These exemptions have cheated millions of Canadian investors...in secret.
“Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.”
Twenty six words that add virtually nothing professional to the process, and yet have an ability to pick billions of dollars from Canadian pockets. This much legislated power must be accompanied by an increased level of public responsibility.
With power, discretion, and negligible accountability, an impression could develop that securities commissions sometimes appear to be running 'a side business within a business’. One would think it impossible that they even allowed such gaping holes in procedure, for observers to think such a thing. Of course, observers will also never believe that 12 regulators could share $16 million in compensation.
I have spoken or corresponded with Alberta (and other) Finance Ministers (in Saskatchewan the Securities Commission is overseen by the Attorney General) as far back as Shirley McClellan. Shirley was about
nine or ten Finance Ministers ago, in my province. One loses track after a while. I have gotten virtually the same response from each of them regardless of which government is represented.
Even our current Alberta NDP has failed to protect the public, and chosen instead to keep this from public knowledge, over public protection
A FEW EXAMPLES FROM THE OVER 14,000 EXEMPTIONS ON THE BOOKSValiant Pharmaceuticals? Not having to follow laws on financial statement disclosure in 2012. What could possibly go wrong?
(UPDATE NOVEMBER, 2017)
The CEO of Valeant's secret pharmacy has been charged with 'engaging in a multimillion-dollar fraud and kickback scheme’ Nov 17, 2016
http://www.businessinsider.com/criminal ... on-2016-11Get permission to skirt the law in Canada, and only the US Southern District of New York could find the means to hold them to account. In Canada this is simply considered free money to the financial industry.
http://www.forbes.com/sites/antoinegara/2016/11/17/two-are-charged-in-fraud-and-kickback-scheme-against-valeant-pharmaceuticals/#2599e3f446c8
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-An exemption to Assante (mutual fund and insurance dealer) to offer commission rebates to clients who are “advised” out of their independent third party funds, and sold the Assante house-brand funds.
http://www.osc.gov.on.ca/en/SecuritiesL ... ssante.htm=======
-Another group of exemptions resulted in $32 Billion lost to Canadian investors, as compared to all the crime measured in Canada, which is in the range of $50 Billion per year.
(See the Movie THE BIG SHORT [ 3 ] if you would like to know where Canadians $32 Billion went)
Ontario Securities Commission Vice President Susan Wolberg Jenah stated after seeing the effects of her signature on some exemptions that caused $32 Billion to drain from Canadians, we “had no clue…”
"Back in August, I had no clue," Ms. Wolburgh Jenah says. "I didn't know there were retail investors, or how many retail investors.
Globe and Mail, August 11, 2008 [ 4 ]
http://www.theglobeandmail.com/report-o ... 153/?ord=1===========
“Exemption from the requirement to include the financial statement disclosure”
http://www.osc.gov.on.ca/en/SecuritiesL ... aleant.htm July 3, 2012
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From another exemption verbage:
“Relief for dealer-managed mutual funds to invest in distributions of debt securities for which dealer-manager acts as underwriter during distribution period or 60 day period following distribution”
English translation:
When banks get stuck with a bad share issue or underwriting, and they cannot sell it to the public, they often apply for this exemption, which
allows them to ‘dump the junk’ into customers-owned mutual funds, bypassing the legal protocols to prevent just such a thing from happening
…..these mutual funds are managed and run by the banks…….A bad but usually hidden example of self-dealing by banks, while doing harm to bank mutual fund investors. They need exemption from our laws to do this.
http://www.osc.gov.on.ca/en/SecuritiesL ... 0_cibc.htm===========
Here is another exemption which allows securities salespersons to act as discretionary portfolio managers, without having to be legally registered as an “Adviser”.
Investors may end up being deceived as to who they are dealing with. Portfolio management involves giving full discretionary authority to a professional, usually one with a legal fiduciary duty to the client. If this discretion were granted to individuals who may only be acting as ‘sales agents’ for the investment dealer, customers could be misinformed and poorly served.
“The requirement contained in the Legislation to be registered as an adviser (the "RegistrationRequirement) does not apply to certain portfolio managers (the "Advisers") who provide portfolio management services for the benefit of National Bank's clients (the "clients")participating in wrap account programs created by NationalBank, including its Ambassador Portfolio Service (collectively,the “Programs”);"
http://www.osc.gov.on.ca/en/SecuritiesL ... albank.htmSee footnote [ 1 ] “Advisor Title Trickery” for further on the topic.
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Here is an exemption for Oleary Funds, to obtain relief from restrictions from only being able to lend out 50% of the underlying assets of their investors mutual funds, or something to that effect.
Read it yourself and see if you can spot how regulators, lawyers and financiers bend the rules.
http://www.osc.gov.on.ca/en/SecuritiesL ... y-fund.htm=============
Here is an
exemption to RBC GLOBAL ASSET MANAGEMENT INC from the mutual fund conflict of interest investment restrictions, and management reporting requirements and self-dealing prohibition.
http://www.osc.gov.on.ca/en/SecuritiesL ... global.htm==========
With the magic of exemptions to laws and industry rules, investment dealers can turn the illegal, into the legal. Simply make a payment to the regulators. No one will ever know…
Every Canadian should be demanding a review and revamp of Securities Commissions ‘dual master/dual mandate’.
sole-investor protection agencies should be established to protect Canadians. Securities Commissions now seem to represent the interests of industry more than necessary…or safe, to society.
Here were some conclusions reached by an Ontario Legislature Agency review of the Ontario Securities Commission, [ 5 ] after the 2008 collapse exempted sub-prime mortgage investments. The image below is captured from page 8 of the Ontario Government report.
- Screen%20shot%202011-09-03%20at%209.14.40%20AM.jpg (56.25 KiB) Viewed 12402 times
click to enlarge image, click again to zoom in
The report fails to mention the part played by Securities Commissions by providing the exemptions needed to sell this tainted product to smaller investors.
$32 billion in harm to Canadians, from just one or two dozen exemptions. What could the total financial harm be in 14,000 exemptions?
This unanswered question is the real reason that no government authority will touch this topic.
It takes millions of street criminals to do $50 Billion worth in criminal harm in Canada. (at $5000 per average property crime) A handful of bankers, lawyers and regulators working in concert, can almost accomplish this much financial harm before 10:00 am on a ‘good day’.....sarcasm alert
One of our upcoming investment industry reports will look into the financial cost to society, of systemic self-dealing and regulatory lapses. It will further explore the concept of comparing the cost of ‘crime in the suites’ verses ‘crime in the streets’.
When the agencies who granted the ABCP (sub prime mortgage paper) exemptions did their…um…investigations, they handed out fines...to the very folks who pay their salaries. The fines levied appeared large to the media, but to add some perspective,
the financial penalties amounted to less than one-half of a penny, for each dollar lost to Canadians. [ 7 ]
That is a pretty tempting return for investment dealers, even if it is as harmful to the country as the cost of 70% of the total crime committed in Canada in a year. Imagine seeing what could be the greatest financial drain to an entire economy, and learning that it is done virtually in secret. And without criminal prosecution or even a raised prosecutorial eyebrow.
This secrecy allows the harm to be repeated, year after year, until our Securities Regulators are no longer so well incentivized to serve 'one master' over the other.
Background of the Securities Regulators It is useful to have a general knowledge of our securities system in Canada. Canadian securities are managed through laws and agencies established by Canada's 10 provincial and 3 territorial governments. Each province and territory has a securities commission or equivalent authority and its own piece of provincial or territorial legislation.
Unlike any other major federation, Canada does not have a securities regulatory authority at the federal government level.
The securities regulator, administers the province’s securities act and correspondingly, promulgates its own set of rules and regulations. Each securities regulator also relies on the work of two national self-regulatory organizations, the Investment Industry Regulatory Organization of Canada referred to as IIROC and the Mutual Fund Dealers Association or MFDA, for most aspects of regulation of the organizations' member firms and their employees.
Accountability for securities regulation extends from the securities regulator to the Minister responsible for securities regulation and, ultimately, the legislature, in each province.
The largest of the provincial regulators is the Ontario Securities Commission (OSC). Other significant provincial regulators are the British Columbia Securities Commission (BCSC), the Alberta Securities Commission (ASC) and the Autorite des marches financiers for Quebec.
The provincial and territorial regulators work together to coordinate and harmonize regulation of the capital markets through the Canadian Securities Administrators (CSA). The CSA is primarily responsible for developing a harmonized approach to securities regulation across the country.
Not all investment products though are covered by provincial regulation. Banks and insurance companies are regulated federally.
In Canada we have something referred to as the “passport system”. Under the passport system, a market participant can obtain a decision from its principal regulator, in its own province or territory and, through a simple filing, have the same decision deemed to be issued under the legislation of all other participating jurisdictions. This passport in essence streamlines and gives access to undertake capital market activity across Canada. The passport system covers such things as prospectus filings, registration of securities firms and individuals, and certain types of discretionary exemptions.
If a company feels it is unable to comply with a requirement in securities legislation, it can pay a fee and apply for ‘discretionary relief’ or an ‘exemption’ from rules or laws.
According to the regulators “exemption” means any discretionary exemption to which Part 4 of MI 11-102 applies; “exemptive relief” means any approval, decision, declaration, designation, determination, exemption, extension, order, ruling, permission, recognition, revocation, waiver or other relief sought under securities legislation or securities directions;
https://www.osc.gov.on.ca/documents/en/ ... dation.pdfEach of our securities commission’s has a mandate to safeguard the public interest and protect investors. Rules provide the framework, the standards of operation and protection. Therefore each decision to waive aside the existing rules should require the utmost careful scrutiny. “The principal regulator must be satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.”
https://www.osc.gov.on.ca/documents/en/ ... dation.pdfIt should go without saying, that the burden should be on the company or individual to demonstrate “good cause” that a waiver to any rule or regulation should be granted. One would expect exemptive relief to the rules to be quite rare, and quite prudently documented to demonstrate proper consideration towards the protection of the public interest.
The core of our regulators multifaceted mission is after all to protect investors, maintain fair, orderly, and efficient markets, and to facilitate capital formation. Having said all of that, efficient markets and capital formation should never be at the price of protecting investors. The various provincial commissions assure us that the criteria for granting exemptive relief are specific and rigorously applied in order to ensure that investors are protected and the integrity of the capital markets is maintained.
We have been unable to determine the exact criteria, procedures, protocol or public interest reasons for how these determinations are made.
We took it upon ourselves to look into the assumption that exemptions to the existing rules are rare and visited the websites of the Ontario Securities Commission, British Columbia Securities Commission, and the Alberta Securities Commission. We also looked at the two national self regulatory organizations IIROC and the MFDA. Here are the numbers we discovered.
The NumbersWARNING!! This (following) information is continually being made more complicated to find, more difficult to understand, and more concealed over time. This almost seems to be done intentionally by some of the 13 Securities Commissions in Canada. I do not know whether that is by intent or by accident, but I do know that it takes increased work to find answers in this area of exemptions, for each few years that pass. It may be an indicator that there is, indeed, something to hide. Ask your MLA why it is not possible to get these simple questions answered by the securities commissions:1.
How many exemptions to rules or laws were allowed in any specific year?2.
Where is the documentation that proves that these exemptions met the “in the public interest, or not contrary to the public interst” test as it is worded in each Securities Act/Rules.3.
Why are exemptions concealed from view of the most important persons in Canada, namely the investors who might be buying an exempted investment?4.
Why can an investor not simply search for “every exemption granted to XYZ Bank”, for example, so that they may stand a “chance”, at least to learn what legal or illegal things their money may be used for? I will paste this warning again, at the end of this section, so readers know when they may be digesting partially obscured, info from Securities Commissions. Again,
please ask your MLA why we pay taxes to provide such investor-invasive, government ’services'.Checking the web sites at the Ontario, BC, and Alberta Securities Commissions used to provide a clear and distinct list (and count) of exemption orders, or decisions for exemptive relief. For example, just a few years ago, a simple search of any of these regulator sites for the word “exemption” turned up nearly 5000 results on the Alberta Securities Commission site.
Today, each of these three major Securities Commissions have obfuscated their web sites to make it much more difficult for the public to obtain clear figures on the number of exemptions they grant each year.
Researchers who are familiar with the operation style of securities commissions are not surprised to see this when commissions remove or hide important information like this from the public. If readers would like to confirm for themselves how difficult it is to get simple numbers from these major regulators, I believe it will only confirm that the regulators may be seeking to hide the information which supports their actions that are helming the industry to self deal, over the protective interests of the public.
Suffice it to say that if a person is intent of discovering the numbers, a time intensive search through the site turns up hundreds of exemption decisions each year. We found hundreds of documents on this OSC website for exemptions, and decisions for exemptive relief for 2015 only.
http://www.osc.gov.on.ca/en/SecuritiesL ... _index.htmThe link to the Alberta site is found here, and it should be noted that this site has been adjusted to make obtaining clear searches dedicated to “exemptions” or “Exemptive Relief” are now almost impossible to do as simply and easily as just a few years ago. This topic is just something the regulators do not wish known to the public.
http://www.albertasecurities.com/procee ... rders.aspxThe BC Securities Commission site to search for exemptions is found here
http://www.bcsc.bc.ca/Enforcement/Decisions/The Manitoba Securities Commission was checked to see if every regulator has increased to difficulty level of searching for “decisions”, “Exemptions” or “Exemptive Relief”. I was pleased to find they were slightly behind their counterparts, and their site gave substantial factual details.
http://www.mbsecurities.ca/law-policy/l ... ments.htmlManitoba’s site can be searched and approximately 200 “orders and exemptions” can be found in any given year. Researchers still have to sort through which are “orders” and which are “exemptions” so the difficulty level is high, but not quite as obstructive as other provinces.
There have been 6,500 exemptions granted to issuers since 1999 to the present and 55 exemptions granted to registrants by the ASC from 2008-09-12 to 2016-08-22.
There were 2,824 Exemption granted prior to the year 2002 found on the BCSC website as well as an additional 2,730 Exemption Orders granted since 2001 (as of 2016-11-02 12:00:00 AM) for a total of 5,554 exemption orders granted by the BCSC.
In the past five years alone 2,060 exemptions were granted from IIROC requirements. IIROC is the Investment Industry Regulatory Organization of Canada and is the delegated self-regulatory body for the industry, as opposed to the legislative empowers body of each Provincial Securities Commissions. 7 exemptions having been granted by the MFDA since 2006
Fourteen thousand six hundred and seventy six (14,676) exemptions have been granted by just three of our ten provincial regulators and self regulatory organizations!
Author’s note: The ability to research and monitor Securities Commissions granting of exemptions to securities law is at least an order of magnitude more difficult than it was just a few years ago. The only explanation I can imagine is that Commissions simply do not wish Canadians to know that they earn millions of dollars, by helping investment dealers and issuers harvest Canadians out of billions.
END OF WARNING SECTION!!]In order to gain some historical perspective, the following two websites have monitored and reported on “exemptions” for a dozen years now, and some of the postings over this time period shine a light into the secretive world of regulatory exemptions, or as one US Senator calls them “loopholes in the law”.
At this web site are 42 posts about exemptions granted to avoid our laws
viewtopic.php?f=1&t=143and this site as well
viewtopic.php?f=1&t=177&start=30#p2249Footnotes [ 1 ] page one
“Advisor Title Trickery” report
http://sipa.ca/library/SIPAsubmissions/ ... 202016.pdf[ 2 ] page one
$32 billion of improperly-rated sub prime mortgage paper
http://www.expertpanel.ca/documents/res ... nglish.pdf[ 3 ] page 4
Movie THE BIG SHORT revealing where some of Canadians $32 Billion went
https://youtu.be/pAcs51tG5sI[ 4 ] page 4
I had no clue," Ms. Wolburgh Jenah says. "I didn't know there were retail investors, or how many retail investors. Globe and Mail, August 11, 2008 [ 4 ]
http://www.theglobeandmail.com/report-o ... 153/?ord=1[ 5 ] page 8
Ontario Legislature Agency review of the Ontario Securities Commission
http://www.ontla.on.ca/committee-procee ... nglish.pdf[ 6 ] page 2
Public sector salary disclosure 2015
https://www.ontario.ca/page/public-sect ... -employees[ 7 ] page 9
penalties amounted to less than one-half of a penny, for each dollar lost
http://www.cbc.ca/news/business/banks-t ... e-1.864830Further Info:
"...Regulators can be accused of more than benign neglect in this story: They helped to open the door for ABCP to become a retail product, thanks to a quiet rule change in late 2005. That's when six provinces, including Ontario, removed a long-standing threshold limiting the ABCP market to investors who could afford at least $50,000 of paper - a standard that was intended to keep relatively unsophisticated investors out of the sector. All of a sudden, small investors were able to buy commercial paper created by so-called "third-party companies" like Coventree Inc., which specialized in the ABCP market and ultimately was destroyed by its collapse....."
http://investorvoice.ca/PI/3574.htmAt the web link below are 42 posts about exemptions granted over the last decade and a half.
http://www.investoradvocates.ca/viewtopic.php?f=1&t=143At this related post, “ABCP's of stealing $32 Billion. Case study 2 for inquiry” are 139 posts covering the largest heist in Canadian history, the lifting of $32 Billion from the pockets of Canadians.
http://www.investoradvocates.ca/viewtopic.php?f=1&t=140
