Securities law "exemptions". A license to steal?

[admin]

Today I received an alert about a study of "Performance of Commercial Bank-Affiliated Funds” that was quite interesting.

It looked at Bank-Affiliated mutual fund performance in countries worldwide and found that on average, the performance of Bank-Affiliated funds is 0.92% (92 basis points) less than the average performance of the other funds in the country.

The study can be found here Performance of Commercial Bank-Affiliated Funds https://onlinelibrary.wiley.com/doi/pdf/10.1111/jofi.12702

Supporting info for the study including a list of countries studied is found here:
https://onlinelibrary.wiley.com/action/downloadSupplement?doi=10.1111%2Fjofi.12702&file=jofi12702-sup-0001-InternetAppendix.pdf

I posted it in this forum topic about EXEMPTIONS to securities law because it resonated with me as a second possible reason why bank-affiliated perform worse. First of course is that banks may in fact overcharge their customers and that is a distinct possibility.

Second and worth mention, however is that here in Canada, I have seen many cases where banks who own investment dealers and underwriting divisions for new investment offerings sometimes use their bank-affiliated mutual funds as a “dumping ground” for their underwriting mistakes. For example, if a Canadian bank-owned investment dealer comes up with a priorly timed, unpopular, or poorly selling investment new issue, and they do not of course wish to be themselves stuck with it...they can apply to the provincial securities commission for “exemptive relief” (exemption from the law).

The law they will gain exemption from is the law which prohibits banks from selling its own new investment underwriting into its bank-affiliated mutual funds and it is intended to prevent the bank from misusing or taking advantage of markets by virtue of their relationship with both fund management and underwriting.

The law requires a waiting period (30-90 days, I do not recall specifically) before a bank-affiliated fund could purchase portions of a new investment that was underwritten by the bank.....BUT, and here is the magic, if the issue is “sinking”, they merely apply and pay a small fee to the regulator (the same one who they pay $400,000 to $700,000 salaries to....) and POOF! They receive instant permission to dump as much of the unsold or poorly selling new issue to get the problem off of the bank’s balance sheets, and onto the bank’s mutual fund holder accounts. Problem solved...for the bank.

I believe I have run across most every bank in Canada who have utilized this trick, and it underscores the tremendous value of letting banks fund the securities regulator salaries. Paying a securities regulator sufficient to make them a millionaire in a few years, is the perfect way to adding billions in profitable tricks to the banks bottom lines. (although it is @FinancialMurder of society...)

You may find examples in this forum topic of many such bank exemptions and I hope ti might help protect readers from being a victim of this one of the banks many self-dealing tricks.

[admin]

At risk of this being a repeat posting, it deserves to be doubled-up.

As I write, today (2018) to Alberta Finance Minister Joe Ceci, ninth or tenth in a long line of Alberta Finance Ministers, who have all chosen to “shoot, shut up and shovel”, rather than to protect the public....regardless of political color or flavor....I am reminded that this article by the Globe and Mail well sums up the damage done by “shill” regulators, hired and paid 100% by the financial industry to pretend to protect the public, whilst truly serving another master, namely the industry that picks and pays them. Here is the article about regulators who sell their souls, their signatures and exemptions to the law, so that financial predators can quietly rape and pillage the public by as much money as the cost of each and every other crime (measured crime) in the land. This story relates to just ONE financial crime, which cost Canada $32 Billion, several suicides quietly spoken of, and windfall gains to the financial industry of billions....all with payment of just a few hundreds of millions....to purchase the entire regulatory systems of Canada

Larry Elford, Author of “ABOUT YOUR FINANCIAL MURDER...” (non fiction)

https://unpublishedottawa.com/letter/207939/ndps-ceci-ignoring-law-enriching-rich

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https://www.theglobeandmail.com/report- ... /?page=all
PLAYING THE BLAME GAME
JANET MCFARLAND, BOYD ERMAN, KAREN HOWLETT AND TARA PERKINS
From Monday's Globe and Mail
Published Monday, Aug. 11, 2008 12:00AM EDT

In the two years before the asset-backed commercial paper market collapsed, the investment was undergoing a transformation, morphing not only into a much riskier product but one that would start to look less out of place on the shelf among a broker's range of products on offer to ordinary clients.

Regulators failed to notice the change in structure and seemed completely unaware that the asset class had even found a new market with retail investors.

Susan Wolburgh Jenah, who heads the Investment Industry Regulatory Organization of Canada (IIROC), said she and her staff had no idea last year that any individuals even held ABCP. To their minds, it was still a sophisticated product with large institutional buyers as target customers. It took disaster to strike before they knew what was really happening.

"Back in August, I had no clue," Ms. Wolburgh Jenah says. "I didn't know there were retail investors, or how many retail investors. Nobody here knew, either ...

It took us a long time to start getting answers to those questions."

Yet IIROC, the regulator for the brokerage industry, now joins the Ontario Securities Commission and its other provincial counterparts in trying to find their own conclusions to how it happened. They are soon expected to reveal a proposal to curtail the sale of ABCP to retail investors.

At the same time, a federal Parliamentary committee has launched hearings, talking to federal banking regulators and provincial securities regulators as well as numerous angry investors to understand what went wrong with ABCP and what should be done to prevent it from recurring in the future.

In the process, the saga's history will be written and lessons offered on how it can be avoided in the future.

What's clear from an investigation by The Globe and Mail, however, is that the regulators must share the blame and, in fact, may have inadvertently made matters worse.

"My impression is that all of these different agencies are treating this like a hot potato, trying to pass it to the next agency and saying that they themselves are blameless," says John McCallum, the senior Liberal on the finance committee in Ottawa.

"With hindsight, there are probably many things that could or should have been done to avoid this crisis."

Opening the door

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.

By last August, industry sources say, many of the least-sophisticated buyers caught in the ABCP crisis had holdings below the former $50,000 minimum investment limit.

James Turner, vice-chairman of the OSC, said the change was made because regulators felt the $50,000 threshold was so low that it was not a meaningful restriction for many investors anyway. The OSC felt the new requirement to have a high credit rating would be a better protection and with so many ABCP trusts receiving high ratings by DBRS Ltd., the flood gates were opened.

"That was a much more appropriate exemption than just [requiring]units of $50,000," Mr. Turner said. The rationale for the change was never publicly discussed in 2005. The rule change was part of a move by provincial securities regulators to have uniform rules across the country.

But to do so, Ontario and five other provinces lowered their standard to match the other provinces that never had a minimum investment level.

The threshold was also lifted in Alberta, Manitoba, Quebec, Nova Scotia and Prince Edward Island.

In essence, the regulators decided to treat commercial paper issued by special purpose trusts as if it were similar to more-traditional commercial paper notes issued by blue chip, publicly traded Canadian companies

. Investors were supposed to rely on the rating of an unregulated agency. But what no one appeared to focus on at the time was that DBRS was the only agency that rated these notes. Both Moody's Investors Service Inc. and Standard & Poor's Corp. refused to rate them.

"I know it sounds like all the regulators are ducking responsibility," Mr. Turner said. "But in terms of what would have prevented this from happening, it was a whole bunch of different factors. If the subprime problem in the U.S. had never happened, then we probably wouldn't be here."

Indeed, the ABCP problem was not entirely foreseeable. But there was a pattern that should have merited closer monitoring.

The OSC was aware by 1999, for example, that there was a rampant trend emerging for simple debt instruments to evolve into far more risky derivative-backed products. In a report that year, a high-level task force set up by the commission recommended that investors be given more information about products that were backed by derivatives.

"The types of debt instruments sold by these issuers have evolved over the years and ... certain risk and other disclosure is required for investor protection," the report recommended.

ABCP was exempted from the recommendations because it was not seen as a similar derivative-backed product in that era. But within a few years, it too had evolved from plain vanilla commercial paper sold by creditworthy companies into the same sort of complex derivative instrument the committee was trying to address in its report.

As it turned out, much of the non-bank paper that froze up during the credit crisis last summer was the most complex and derivative-based product that existed.

Ms. Wolburgh Jenah, who was previously a vice-chairwoman at the OSC and worked on the derivatives task force, says in hindsight the task force demonstrated that many exemptions in securities law need to be regularly re-examined as markets and products change from their original conception.

She said when ABCP was created as an "exempt" product, no one was thinking it would be backed by complicated derivatives such as credit default swaps.

Regulators, she says, have to watch how products "morph" along the way.

"Did anybody think about these products when they created that exemption? Are you kidding? These didn't exist back then." Following a flurry of opposition, some of it coming from the Canadian Bankers Association which argued the OSC did not have jurisdiction to regulate bank debt products, the task force's recommendations on debt-like derivatives were not implemented.

Never again

On Bay Street, there is already speculation that new independent ABCP originators similar to Coventree will emerge fairly soon to fill a gaping hole left in the market.

While big banks are still selling their own brands of ABCP, which never froze up like the independent paper, the demand for new versions of Coventree comes because there are many small lenders who need a place to sell assets such as loans. With independent creators like Coventree gone, there is no way to do that.

The more complicated ABCP - the paper backed by derivatives - is less likely to return any time soon. In whatever form ABCP returns, the question now is: What will be different next time? There's no doubt market discipline will play a key role in the future. Investors have been burned and will demand improvements: clearer disclosure, better-quality assets, clearer guarantees from banks pledging to support the paper, and better credit ratings.

But for retail investors in particular, a critical part of the solution will also lie in the work of regulators which are now considering new rules to restrict the retail market.

The Canadian Securities Administrators (CSA), an umbrella group representing all the provincial securities commissions, is weighing new restrictions for retail investors buying ABCP, in essence narrowing the wide-open market that was created with the 2005 rule change.

Mr. Turner says one possible solution would be imposing the so-called "accredited investor" rule for ABCP. That would mean ABCP could only be sold to individual investors if they meet criteria (such as having up to $5-million in total assets) designed to limit a product's sale to those people with a greater level of financial sophistication.

Despite the work under way to tighten up the sale of ABCP, however, the OSC is making no admissions that it was a mistake to have removed the $50,000 threshold in 2005.

When asked whether the decision was wrong in hindsight, OSC vice-chairman Larry Ritchie repeatedly stressed that it was the role of the brokerage firms to determine whether ABCP was suitable for each client.

"The more complicated a product, the more there is an obligation for the people selling and recommending it to fully understand what it is," he said.

The final response to the ABCP crisis, however, may prove the most frustrating for some investors. While IIROC has launched some investigations of how ABCP was sold to retail investors, no individual or firm has so far faced any disciplinary action for improperly selling ABCP to people for whom it was an unsuitable investment.

And it is unclear whether anything will emerge. Ms. Wolburgh Jenah warns it may be difficult to pursue cases once retail investors are repaid their funds.

"One of the practical issues we have is that, historically, when people get their money back, sometimes they lose interest in pursuing the complaint. You want to go to a hearing and have a witness say, 'This is what the broker told me or this is what happened to me.' It's hard when you don't have that."

*****

PROPOSED REFORMS

Canadian Securities Administrators will soon propose new rules requiring more disclosure of details about ABCP products for investors, and is mulling an accredited investor rule that would make their purchase impossible for many investors. As well, the committee is also planning to seek new powers giving securities commissions the ability to regulate credit rating agencies.

IIROC has conducted its own "compliance sweep" to consider whether new rules or standards are needed for ABCP sales. A key issue to be addressed is the product review process that goes on within brokerage firms to assess whether new or evolving investments such as ABCP are being adequately reviewed before being sold to retail clients.Brokerages such as Canaccord say the industry itself will have to be diligent to rely on more than ratings before selling a product to retail investors. "If you can't get the level of disclosure that you may need," says Canaccord CEO Mark Maybank, "you may not be able to sell that product."

Purdy Crawford, chairman of the Pan-Canadian Investors Committee for the Third-Party ABCP, says he would like to see more co-operation between the Office of the Superintendent of Financial Institutions and IIROC, which could combine their expertise in reviewing financial products, and such areas as capital and liquidity requirements. "These meetings probably need to happen at a more senior level."

https://www.theglobeandmail.com/report- ... /?page=all

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[admin]

Pssst…Wanna buy a pass to avoid the law?

Summary in one page

If the rare occasion arises when police are called upon to break the law, they are required to go in front of a judge to explain the circumstances, and obtain temporary permission to do so. It may be granted only if it is deemed necessary to protect the public interest.

Imagine if a citizen like yourself, or your neighbour, could surreptitiously apply to be exempt from our laws. What if you could apply for an exemption from speeding laws on the road you take to work each day, giving you, and only you, permission to drive at speeds in excess of 200 kms per hour?

Now imagine a financial regulatory system where 14,000 times in the past decade or so, investment industry players quietly applied for permission so that the products they sell, the advice they give to your family could be like them driving the freeway at 200 kms per hour. It would be dangerous to you and the public, and beneficial only to them.

Now, imagine that the persons who possess this ‘discretionary’ power to exempt our financial laws, are persons whom are paid 100% by the financial industry.

Finally, imagine that these investment regulatory ‘judges’ if you will permit the comparison, are usually paid hundreds of thousands of dollars in this position, (some over $700,000).

Here is where you think “impossible, I live in a safe country.” Beware of the brain’s tendency to trick you with cognitive dissonance, because this story is based on public documents and those dealings are sometimes being done to your life savings.

click on image to enlarge and zoom in


One of the hidden risks to investing is the risk of buying an investment which does not carry the protection of law. Most investors do not know this, but many investments are sold to consumers under special ‘exemption’ to Canadian rules or laws.

“This does not meet the criteria of protecting Canadian investors.”

For example, investors with O'LEARY FUND MANAGEMENT fund were likely not informed that this company had obtained exemption from the Securities Act requirements on borrowed or lent out securities. http://www.osc.gov.on.ca/en/SecuritiesL ... y-fund.htm


Most investors assume that if they own shares in a fund, and that fund owns shares in various companies, that the fund would actually hold/own what it says it owns. However in this exemption application it is unclear whether O’Leary funds intend to lend out securities they are supposed to own, or whether they intend to supply it’s fund holders with securities they are ‘borrowing’.

Other aspects of the exemption allow to permit “the collateral delivered to each Fund in connection with a securities lending transaction to not be held….” etc.


Most investors are not aware, for example that 14,000 ‘exemptions’ to rules or laws, have been granted to securities industry players since 2000. The authors of this report are not aware of fair and honest notice to the public of these. This may raise questions about whom the Securities Commissions are paid by, and to whom do they feel they owe loyalty to’, investment industry players, or the public?

Prior to 2006, one popular investment scheme was sub-prime (lower quality, higher risk) mortgages, which were bundled and sold as a package of highly rated, or in some cases, bank ‘backed’ investments. The problem was that they did not have high ratings as promised, or even the backing of some banks on some cases. Many of those investments could not legally be sold to Canadians without an ‘exemption’ from a securities commission.

Billions of dollars were lost to thousands of Canadians ($32 Billion) of dollars. Some never to be repaid. My own local government has just recovered some 80% of the millions of tax dollars they lost to this scheme, after a delay of nearly a decade. The cost to investors was far more than in money, but also in lost trust, hope, and in some cases suicide.

There were zero prosecutions for these ‘products’ sold to investors and zero systemic interest in asking Securities Commissions why they grant exemptions to investment laws.

An Ontario Securities Commission Vice President stated after seeing the effects of her signature on some exemptions that drained billions from Canadians, we “had no clue…”

"Back in August, I had no clue," "I didn't know there were retail investors, or how many retail investors.”

http://www.theglobeandmail.com/report-o%20...%20153/?ord=1

These very same regulators (who granted the exemptions) then fined the perpetrators one-half of one penny, for every dollar lost to Canadians. This while not bothering to mention the regulator’s role in allowing these investments to be sold via their exemptions. Curious.

Screen%20shot%202011-09-03%20at%209.14.40%20AM.jpg (56.25 KiB) Viewed 4805 times

click on image to enlarge and zoom in

One must ask how they do this without bothering to inform investors, whose money is being lured by the marketers of these products? Its strikes the authors of this report as not complying with Securities Act requirements of “fair, honest and good faith dealings” with investors.

The process appears to be so far from transparent as to be rendered invisible to the Canadian investing public.

After sub-prime mortgage investment schemes collapsed in 2008, there was an Ontario Legislature standing committee, that looked into the inner workings of the Ontario Securities Commission. However the committee failed specifically to report on the area of greatest importance. The Commission earns fees in the millions by granting (selling) semi-secret exemption to our laws. Could regulators be thought of as running a ‘business within a business’, raising money through passes to skirt financial laws?

It seems disingenuous for the Commission to claim public protection, without also telling investors who buy investments which may be “factory seconds”.

Several exemptions are found on the record which allow banks or investment dealers to skip around the dividing ‘wall’ between bank mutual fund investors, and the bank’s underwriting (sale of new investments) departments.

The risk to clients when this wall is removed can be that the bank gets to keep all the benefits of a top selling share issue, while it could, if it wanted, dump the poor selling issues directly to their own mutual funds.

This allows bank mutual fund customers to be used as the ‘solution’ by unknowingly taking the poor-selling product off the bank’s hands.

There are enough examples of this type of exemption to ask Securities Commissions to provide the protocol for insuring that exemptions do not harm the public interest. Unfortunately, the closest one gets to an answer from any Provincial Securities Commission is this statement:

“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.”

From industry insiders comes the tale of one offering of shares in an Ontario company, where the bank was in such a tight situation with the poorly selling issue, that it applied to the commission, after hours on a Friday evening, and was able to get the ‘go ahead’ to allow the bank to skirt that law. With that kind of rapid-fire service, they were able to place those shares inside the holdings of bank managed mutual funds, solving the bank’s problem (with bank fund investors money) before business opened up on Monday.

Here is one bank exemption “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” http://www.osc.gov.on.ca/en/SecuritiesLaw_ord20100813_2110_cibc.htm

Of course, not every of the 14,000 or more exemptions on Canadian regulators books do harm to investors, but it would be fair to say that there are not many investment Corporations who apply to bypass laws unless there is something in it for them.

Hundreds and hundreds of exemptive relief applications studied, appeared to have a beneficial effect to issuers only, if some involve mere paperwork or reporting matters. Buried within those dull ‘paperwork matters’ are clever exemptive relief applications which cost Canadian investors as much as the cost of running some provinces. Each year.


Valeant Pharmaceuticals was an up and coming, can-do-no-wrong kind of operation in 2012 when they applied to the Ontario commission for “Exemption from the requirement to include the financial statement disclosure”. What could possibly go wrong when you have a can-do-no-wrong company?

Here is a link to the exemption from the legal requirement to include in a business acquisition report, the financial statements....
http://www.osc.gov.on.ca/en/SecuritiesL ... aleant.htm

Fast forward to November 2016 to find this headline:

“The CEO of Valeant's secret pharmacy has been charged with engaging in a multimillion-dollar fraud and kickback scheme”
Nov 17, 2016

This report will be continued with appendixes, sources, links at the post immediately following......please scroll down for more

[admin]

Continued from previous posting on exemptions topic.....

“The CEO of Valeant's secret pharmacy has been charged with engaging in a multimillion-dollar fraud and kickback scheme”
Nov 17, 2016

July 2015
Valeant Pharmaceuticals International Inc., the drugmaker on an acquisition streak, surpassed Royal Bank of Canada as the country’s largest company by market value.
Valeant surged to $326.96 per share for a market value of $111.6-billion ($85.6-billion U.S.) at 12:11 p.m. on the Toronto Stock Exchange. That eclipsed Royal Bank’s $108.2-billion value, according to data compiled by Bloomberg. Toronto- based Royal Bank is Canada’s largest lender by assets.

2017
Under $5 billion currently, a decline of over $100 billion. Valeant shares dropped from $335.00 to $17.00, dissolving about $100 billion in stock market capitalization for investors.

By way of comparison, the cost of financial harm done by each and every crime in the country of Canada is approximately $50 billion each year. Imagine if one well organized white collar trick could drain Canada of as much or more than every other criminal act in the land. The numbers suggest this is entirely.


Another exemption was this one whereby National Bank Financial received permission for it’s sales reps (also known by the registration category of “dealing representatives”) to be exempt from having to hold the higher professional license of “Adviser”, which typically brings with it a much higher (fiduciary) duty of care.
http://www.osc.gov.on.ca/en/SecuritiesL ... albank.htm


Typically, when Securities Commissions grant these exemptions, there is little or no follow process in place to determine if any imposed conditions have been met, or if abusive actions are not fostered as a consequence (intended or unintended) of the exemptions.

Rather than reproduce another 14,000 exemptions allowed by our government-legislated regulators, and by self-regulators, it is hoped that the principles of allowing exemption to our laws, in near-secrecy from the public, might be enough to make the public awareness point of this report. There are serious and legitimate concerns about the financial protections of the public. Our Provincial governments appear to be decades behind the times, in awareness of what is happening within these legislated entities.

Search ‘exemptions’ or ‘exemptive relief’ at any Provincial Securities Commission if you wish to enter a strange, largely hidden world of back-room deals which cost the country incalculable financial harm…while bringing investment dealers untold billions.









FOLLOWING PAGES ARE BACKSTORY, SOURCES, APPENDIX’S which form the backup data for the exemptions report immediately prior to this post:


Exemptions to Investment Industry Rules and Laws.....continued

Canadian regulators are funded 100% by the investment industry, while they are charged with policing that investment industry.

Once regulations are established, if a company finds it advantageous to not comply with a requirement in the securities legislation, it can pay a fee and apply for discretionary relief or an exemption from the rules. This could be compared to a clothing manufacturer needing to sell something called ‘factory seconds’.

Who do they pay this fee to? Yes, to their Securities Commission!

Each 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 any existing rule should require the utmost scrutiny. The burden of proof should be on the company or individual to demonstrate “good cause” that a waiver to any existing rule or regulation should ever be granted. One would expect exemptive relief to the rules to be quite rare.
We have been unable to determine the exact criteria, procedures, protocol or public interest reasons for how these exemption determinations are made.

We took it upon ourselves to look into exemptions to the existing rules and visited the websites of three of our major commissions: the Ontario Securities Commission, British Columbia Securities Commission, and the Alberta Securities Commission.
We also looked at the two national self regulatory organizations the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealer Association (MFDA). Here are the numbers we discovered.

There have been 6,563 exemptions granted since 1999 to the present by the ASC (see Appendix D)
There were 5,554 exemption orders granted by the BCSC. (see Appendix E)
We found 500 documents on OSC website for exemptions. (see Appendix F)
In just the past five years alone 2,060 exemptions were granted from IIROC requirements (See Appendix G) 7 exemptions having been granted by the MFDA since 2006. (Appendix H)
Fourteen thousand six hundred and eighty four (14,684) exemptions have been granted by just three of our ten provincial regulators and our two self regulatory organizations!

The value of this report is thus not to be sought in the level of academic research, but solely upon the level of ability to have non-self-interested discourse, and to ask difficult questions which others may not be able to ask.

It is important for us to mention we are not totally confident on the numbers we have obtained from the various regulators websites. Information about exemptions is continually being made more complicated to research, more difficult to understand, and more concealed over time. We do not know whether that is by intent or by accident, but it takes increased work to find the answers in this area of exemptions, for each few years that pass.

We encourage you to ask your MLA or other government legislator, why it is not possible to get these simple questions answered by the securities commissions, as these are simple consumer protection issues.

How many exemptions to rules or laws were allowed in any specific year?
Where is the documentation that proves that these exemptions met the “in the public interest, or not contrary to the public interest” test, as it is worded in each Securities Act/Rules?
Why are exemptions concealed from view of the most important persons in Canada, namely the investors who might be buying an exempted investment?
Why can an investor not simply search for “every exemption granted to XYZ ”?

At the present time there is no allowance for public-input into the exemption process. Exemptions are handled between the applicant, and lawyers and commissioners at the securities commission.


In an open, transparent system of regulation, these exemptions would be open to public view, or at minimum provide written notice to every investor infected, er, affected. Securities Commissions are, after all, not intended as private ‘service' organizations for industry, but consumer protection agents first.
The only disclosure provided on an Securities law exemption order is this;

“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.”
This legal bafflegab speaks more clearly than almost any concerns we can voice.

Concerns Regarding Exemptions From an Investor Perspective

First off the number of exemptions granted are concerning in and of themselves. This legislated power needs to be accompanied by an increased level of public responsibility, accountability and transparency.

From an investor point of view, exemption orders do raise a number of concerns and issues such as:

• they are not exposed to public critique as are new regulations. In fact, they are part of a system that generally, but not always, erodes the original regulatory intent in an non-transparent manner

• they are rapidly approved while requests for improved investor protections are subjected to a ‘paid by the decade’ securities approval process

• it is difficult for even the most well-informed investors to be aware of exemptions. The regulatory document management system makes it difficult to readily identify all the amendments and exemptions to regulations

• investors almost never expend time and energy to seek out the exemptions, most will never know they exist.

• Exemptive ‘relief’ is only available to industry players; individual investors and consumer protection associations must wait patiently for regulations to change

Conclusions
Our Securities system throughout Canada has two distinct mandates. The interests of the industry can infringe upon needed investor protection. Salaries paid to our Securities Commission come directly from the industry and can be substantial. The industry can buy a waiver to the existing rules for a relatively small fee paid to our regulators and it happens more often than one would think. The exemption process is not transparent to the public and can happen fairly quickly, whereas well needed investor protection reforms can take decades to occur, if at all.

Current reform proposals do not address the core, institutional weakness with the governance of financial regulation: There is no mechanism through which the public, and its elected representatives, can obtain an informed, expert, and independent assessment of financial regulation. Therefore, the public cannot induce regulatory institutions to act on their behalf. It does not get any more basic than this: How can the public and its elected representatives induce regulatory authorities to behave in the best interests of the public when the regulatory authorities have a monopoly on both the information and expertise necessary for assessing their own performance?

How are Security Rules and Laws Managed in Canada?
Unlike any other major federation, Canada does not have a securities regulatory authority at the federal government level, nor any publicly funded sole-investor, consumer protection agent.
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.

There are many issues facing investors in today’s marketplace. In our attempt to raise public awareness, SIPA has produced a number of reports outlining investor protection concerns in Canada, including this recent one on Advisor Title Trickery


• http://sipa.ca/library/SIPAsubmissions/500%20SIPA%20REPORT%20-%20Advisor%20Title%20Trickery%20October%202016.pdf



We believe there may be only two possible solutions: either industry and regulatory culture must change which appears improbable, OR Government must step in and provide an Investor Protection Agency separate from industry, separate from those with dual master, dual mandates, and with real power and intent to protect Canadian Consumer Investors, not Canadian Investment Payers, er, Players.


“The absence of an informed, expertly staffed, and independent institution that evaluates financial regulation from the public’s perspective is a critical defect in the governance of financial regulation…”

https://www.imf.org/external/np/seminars/eng/2011/res2/pdf/rl.pdf

What You Can Do

Every Canadian should request a review and revamp of Securities Commissions ‘dual master/dual mandate’ role.
Sole-investor protection agencies need to be established to protect ordinary Canadians.
Securities Commissions appear to represent the interests of industry far more than necessary or safe, to our society.
Contact your Member of Parliament and Member of the Legislative Assembly and let them know you are concerned about the lack of independent (ie, not-industry funded, not-dual mandated, regulators) consumer protection of Canadian investors.


Appendix A
 Alberta Securities Commission

Below you will find: 56 exemption orders from 9/12/2008 to 11/17/2016
• orders granting exemptions to particular applicants from specified requirements of securities laws; and
• orders granting approval or recognition to various types of exchanges or self-regulatory organizations.
http://www.albertasecurities.com/procee ... rders.aspx

Exemption Orders Relating to Issuers
The ASC may, in appropriate circumstances, grant discretionary exemptions from specific requirements of Alberta securities laws. See MI 11-102, NP 11-203 and ASC Policy 12-601.
The following table includes decisions issued pursuant to MI 11-102 for issuers for whom the ASC is the Principal Regulator only. Exemption Orders issued under MI 11-102 for other issuers can be found on the CanLII website.

112 at the time of this reporters research in 2016
6,507 exemptions granted to issuers since 1999 to the present
http://www.albertasecurities.com/procee ... rders.aspx

Appendix B
British Columbia Securities Commission

There were 2,824 Exemption granted prior to the year 2002.
There have been an additional 2,736 Exemption Orders granted since 2001 as of 2016-11-21 12:00:00 AM
Total = 5,560 exemption orders granted from the BCSC

Source:
The Exemption Orders in this section are from 2002 -present.
https://www.bcsc.bc.ca/Securities_Law/Exemption_Orders/

• The Exemption Orders in this section are prior to the year 2002 https://www.bcsc.bc.ca/Securities_Law/E ... fore_2002/
•
• To obtain more information, please visit
• BCSC eServices Exemptions & Orders



Appendix C
Ontario Securities Commission
Results for: exemptions granted
Found 500 documents
Source:
http://www.osc.gov.on.ca/en/5610.htm?qu ... viewpage=1





Appendix D
Investment Industry Regulatory Organization


“Each year IIROC’s Board of Directors, IIROC staff and IIROC District Councils consider and, in appropriate cases, grant exemptions from specific Dealer Member or Universal Market Integrity Rules (UMIR). 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.”


634 exemptions granted in 2015 from IIROC requirements
616 exemptions granted in 2014
487 exemptions granted in 2013
257 exemptions granted in 2012
66 exemptions granted in 2011

Total=2,060 exemptions granted in the past five years from IIROC requirements


Sources:
http://www.iiroc.ca/Rulebook/Notices/16 ... e-2900.pdf
http://www.iiroc.ca/Rulebook/Notices/15 ... e-2900.pdf
http://www.iiroc.ca/Documents/2014/282c ... ce9_en.pdf
http://www.iiroc.ca/Documents/2013/98f0 ... 274_en.pdf
http://www.iiroc.ca/Documents/2012/055c ... 53c_en.pdf

[admin]

Exemption Order Relief-good or bad for investors?

Exemption order- what is it?

An exemption order is basically a decision of a provincial securities Regulatory Commission that says that a specific part of the Securities Act, regulations or rules relating to the trading of securities in that province does not apply under certain conditions. (or that the part can be amended under specified conditions) Often this relief allows a mutual fund company to avoid compliance with some sections of the official requirements or to modify the original requirements with the blessing of the applicable provincial securities regulator(s). For mutual fund investors the main documents of interest are NI81-101 Mutual fund prospectus requirements, NI81-102 Mutual funds and NI81-105 Mutual Fund sales practices.
Relief -The easing of a burden; protection given by law; release from obligation or duty; lightening of something distressing

In this document we examine whether the relief offered by regulatory exemptions is in fact in the best interests of mutual fund investors. Or is it neutral?

A little background

Before a National Instrument becomes part of securities regulation it goes through a long complex process of public commentary. Typically, Ninety nine percent of the commentary comes from industry participants, law firms and industry lobby groups. . The comments from the industry typically attempt to clarify, narrow, water down, eliminate or delay implementation if they perceive the new regs are not in their best interests. Investor protection is not a word you’ll see often in these submissions although that doesn’t stop industry participants from suggesting that the requested changes will be good for investors. Despite this, some investor protection aspects survive the onslaught. .
After a series of compromises, tradeoffs and deliberations, the Reg is issued. That’s when the real fun begins.

Exemptions may be appropriate to address new products, to clarify points (If what an applicant proposes to do does not EXACTLY conform to the letter of the law -not the intent, the letter- an applicant is often better off applying for exemptive relief) or other aspects not anticipated or present when the regulation was drafted. Some exemptions are private matters but many open the door to exemption requests from all competitors of the fund factory given the original relief. After a period of time the accumulated exemptions can be used in an update of the regulation. Exenption decisions are posted on regulatory web sites.

It costs about $1500 to file an exemption request with the OSC plus legal expenses to craft the document .Any of Canada’s 13 regulators can grant an exemption and in most cases under the Mutual Reliance Relief System (MRRS) the other provincial regulators will recognize it. We don’t have stats to show what percent of requests are turned down, if any, but we’re sure clear about is what those exemptions approved did to the original intent of the Reg. Exemptions can be filed by an individual firm or a group of firms. In any event, once granted to any firm, other firms can request similar treatment which is exactly what happened with the non-delivery of mutual fund Annual reports. Basically, the exemption became an industry-wide practice.

Why are these exemptions important to investors?

From an investor point of view, exemption orders raise the following issues:

they are not exposed to public critique as are new regulations. In fact, they are part of a system that generally, but not always, erodes the original regulatory intent in an non-transparent manner
they are expeditiously approved while requests for improved investor protections are subjected to the glacially slow securities approval process
it is difficult for even informed investors to be aware of the exemption. The regulatory document configuration management system makes it difficult to readily identify all the amendments and exemptions to regulations
investors must expend time and energy to seek out the exemptions, a task not made easy by hard to navigate regulatory websites.
the relief is only available to market participants; individual investors and consumer protection associations must wait patiently for regulations to change
they generally allow a cutback on unitholder services without a corresponding reduction in fees.
The cost of the additional monitoring, staff, systems and reporting is directly or indirectly borne by fund investors as are the applicable legal expenses for exemption applications
unless mutual fund investors continuously monitor the OSC/SEDAR web sites or subscribe to Carswell, investors are left with the mistaken impression that regulations are in place to protect them from conflicts of interest. Should some Canadian banks merge, the conflicts will be larger and more frequent unless accompanied by a requirement for the banks to divest themselves of either their brokerage arms or mutual fund businesses.
If it is discovered that the exemption terms were breached, it is not clear what penalties would be imposed or how investors would be made whole in the event of a loss

Some examples

The good old days of hidden commissions and flying to Hawaii for a “seminar” at a fund company’s (i.e.. unitholders) expense created a public uprising in the 90’s. The media, investors, and regulators just got so sick of the horror stories that the fund industry responded by introducing a Sales Code (now a regulation NI81-105 Mutual Fund Sales Practices), designed to ban the worst of the excesses. Yet, during the spring of 1999 the CSA/OSC allowed Assante Canada, contrary to NI81-105, to rebate client early redemption penalties if they switched to a proprietary Assante fund. Many observers regarded this redemption and conversion [from third party mutual funds] of their clients’ portfolios as self-serving and not in the best interests of investors. What the exemption did do is simplify and legitimize fund churning and enhance the management fees that Assante would collect .Yes, there were some constraints attached but the exemptive relief was regarded as an unprecedented victory for the industry. Today, Assante is being investigated by the OSC for its sales practices in the nineties.

Another important exemption order issued in July 2002 relaxed the terms under which funds can participate in related party IPOs of debt securities. You don’t need to be a genius to figure out the possible angles here. Let's take a look at an example. Say CIBC World Markets is floating a new issue of a bond or preferred share. Under NI 81- 102 section 4.1 (I) CIBC mutual funds would have to wait 60 days before being able to invest; with the waiver in place investors might be hurt in several ways:

the availability of a ready market for an IPO may cause a decision to price the IPO higher than would otherwise the case or to fill a demand gap in an under- subscribed IPO

it encourages further erosion of the mythical “ethical walls” between mutual funds and their brokerage affiliates; these are the same walls that supposedly existed between analysts and investment bankers

Mutual funds may end up buying unsuitable or non-optimum investments merely to placate superiors and/or receive rewards for such actions

The mutual funds can be used to artificially prop up a weak IPO to prevent it from tanking too shortly after distribution

The effectiveness of independent “ monitors” is a real question mark. It’s hard to see how in practice a monitor would be able to effectively question or ban a portfolio managers’ potentially conflicted purchase decision

Sometimes waiting 60 days allows the market to establish a more rational price of the security; buying early may prove to be expensive

“Hot” IPOs can be used to turbo- boost short-term fund returns to increase fund sales; retail investors traditionally chase well-publicized returns.

if it turns out the IPO was based on material misrepresentations it's highly unlikely the affiliated fund would participate in litigation or class actions to recover losses from the related dealer on behalf of unitholders

An Exemption granted in Dec. 2002, just before Christmas, now permits fund companies to only send you Annual reports if you expressly request them. This is regarded as anti –investor as it permits a fund Company not to mandatorily mail you a copy of the most fundamental of disclosure documents. There may or may not be a reduced MER, but if 10-year trends are an indication, most cost savings, one of the cited reasons for the request, will accrue to the fund Company. Financial statement disclosure is an integral part of the material information relating to a mutual fund. Measures that decrease the likelihood of timely delivery of such information to unitholders undermine the core regulatory strategy of requiring mutual funds to make mandatory and timely disclosure of material information on a continuing basis so that investors are kept fully informed at all times. For disclosure to be effective, it is not enough just to prepare the information. It has to be comprehensible , relevant and to be actually delivered to fund investors in a form they can use before it can be considered to be disclosed to them. Investor advocates howled upon belatedly hearing of the exemption but to no avail.

RBC Mutual Funds was able to bypass a unitholder vote regarding a change of auditor.
The change was made without the knowledge or concurrence of investors via a March 25,2004 OSC Exemption to established regulations. An undated letter distributed April 22 from Brenda Vince, President, RBC Asset Management was the first indication investors had that a change had occurred. The 2003 financial statements of the fund are signed by PwC LLP. There is no credible rationale provided as to why investors were shut out .In fact, Deloitte&Touche is the sole auditor of the bank and the mutual funds complex, an unhealthy situation. The bank claims that significant costs were saved by requesting an exemption rather than mailing out a voting circular to all unitholders. Apparently no request for bids were sent out to other possible contenders which might have lowered costs for the fund. The status quo with a separate fund auditor would actually have been preferable and cheaper for unitholders. It seems that both regulators, banks and fund factories need to be reminded as to exactly whose money it is.

Yet another exemption allows conventional mutual funds to sell securities short, a practice banned since the 1929 market crash. Despite critical commentary from investor advocates, SIPA and others, the CSA/OSC now permit the use of shorting by mutual funds. This Regulatory Exemption order is the culprit in bringing the once relatively stable mutual fund into hedge fund territory. So much for investor protection. Regulators have required funds that short-sell stocks to adopt certain protective measures, including a 10-per-cent asset hedging limit, a cash cover equal to 150 per cent of the value of the security sold short and a requirement to purchase the shorted security if it exceeds 108 per cent of the short price.

However, in a well-reasoned piece that appeared in the August, 2004 THE FUNDLETTER Selling mutual fund investors short, author David West, a CFA, argues convincingly against the practice. He argues that the 150% figure basically introduces leveraging into a fund. Shorting, he warns can sometimes result in losses far greater than 8% due to short –squeezing, a takeover bid or the winning of a major contract. West argues that shorting is fundamentally at cross-purposes with the traditional use of mutual funds to provide a diversified portfolio of quality companies to reduce issuer-specific risk. He thus feels that risk is being increased and small retail mutual fund investors may not comprehend the risk implications. West reminds us that short sellers must make up any dividends paid by shorted stocks and that the lender may recall the stock at a time inconvenient to the fund. However, one thing the new approach does is give Dynamic, National Bank and CI Funds a marketing tool to combat hedge funds who are stealing market share/AUM. AIM Funds Management Inc. appears to be the most outspoken short-selling critic - VP Dwayne Dreger notes that the firm's value-driven investment style "is all about buying good businesses and not about shorting bad ones".

We won’t even talk about manager competency in picking losers (ironically, if history is any guide, maybe they will be better at this than picking winners!), regulatory oversight and fund governance to track and monitor all this. We also ignore the fact that mutual funds can’t distribute losses, they can only carry them forward to offset against potential future gains. Additionally, some hedge fund market analysts think this idea may generally lead to conflicts- of -interest when the same manager manages a hedge fund and a mutual fund.

Still another exemption allows mutual funds to purchase shares in their parent company (or hold debt of affiliates) leading to potential conflicts of interest considering the generally ineffective track record of monitors. For instance a bank- owned fund would not have been allowed to buy shares in its parent thus supposedly putting the fund at a competitive disadvantage with independent fund companies who do not have this conflict-of interest. This related party prohibition was originally deemed necessary for investor protection but, with the passage of time and industry consolidation, has been watered down. The January 2004 OSC decision for example lets Winnipeg-based Investors Group invest client mutual fund assets in the stocks and debt instruments of Great-West Life Assurance Co., Power Financial Corp., Power Corp. of Canada, Canada Life Financial Corp., Canada Life Assurance Co. and Canada Life Capital Trust subject to the establishment of an Investment Review Committee. Truly a family affair.

It’s true that most relief decisions have some constraints imposed but investor advocates and investors view them with cynicism .To start with there is little regulatory meaningful follow-up to check that the limitations imposed are actually complied with. To critics, words like “best efforts’ are not measurable or enforceable. Informed investors have come to consider the limitations as just good optics to give the illusion of strong regulation. For instance, the exemption regarding related- party debt securities IPO’s requires written policies, detailed records to be maintained and a host of other costly administrative chores paid for by investors, but in the end the judgment of the fund manager is the sole basis for the suitability of the investment. When Scotia Mutual Funds were granted the right to cease mandatory mailings of Annual financial statements the provisos required that the Manager shall file on Sedar, under the annual financial statements category, information regarding the number and percentage of requests for annual financial statements made by the return of the request forms and to record the number and a summary of complaints received from Direct Securityholders about not receiving the annual financial statements and shall file on Sedar .So what ? argue advocates –the results are predictable- unsophisticated retail fund investors put on a negative option basis will not request the financial statements or their advisers will suggest they do not need them. That’s exactly what happened. So instead of working to make Annual reports more readable and useful, regulators decided to minimize their distribution.
The related -party exemption also attracted significant investor advocate attention. As an example of how this one works, an Independent Review Committee (IRC) at market timer CI Funds, which received permission to invest in securities of Sun Life Financial (SLF) in 2003, reviews at least every three months the decisions made on behalf of each fund to purchase, sell or continue to hold securities of Sun Life. SLF owns 34 % of CI. It also determines whether such decisions were, and continue to be, in the best interests of the fund. This decision also has a significant impact on capital markets in general. The IRC is to advise regulators if it decides any investment does not meet its criteria. SIPA and others have forcefully argued that the criteria to determine the best interests of the fund are virtually impossible to deal with since in the end it pits the IRC against the judgment call of a professional fund manager. In any event, advocates claim that the toothless IRC is merely a figurehead mirage to provide at least some legitimacy to the investor abusing decision. To date not a single case of a conflict-of interest has been reported by any fund company IRC-investor advocates view this statistic as evidence that the process is useless but allows regulators to feel good that they imposed the necessary control tools. [In Oct. 2004, controversial fundco Assante also received regulatory approval to own, trade and vote shares of SLF, as it is now part of the CI organization.]

On June 6, 2006 the Ontario Securities Commission granted exemptive relief to CIBC Asset Management Inc., CIBC Global Asset Management Inc. and RBC Asset Management Inc. to enable them to act as advisor to their funds in respect of units of the controversial Teranet Income Fund, during its initial public offering. This MRRS decision explicitly permits the CIBC and Royal Bank mutual funds to purchase Teranet Income Fund IPO units without requiring any public disclosure of this for 97 days after the end of the IPO distribution.Teranet’s offering was underwritten by a syndicate that included RBC Dominion Securities, CIBC World Markets Inc, both related parties and TD Securities. In effect, conflicts-of interest were blessed by the regulators duty bound to protect investors.
http://www.osc.gov.on.ca/Regulation/Ord ... casset.jsp

To no one’s great surprise, the unloved units [ TSX:TF.un ] opened below the IPO price and unitholders were left holding the bag. An estimated $400 million of the IPO proceeds worked its way to the Ontario Govt. following completion of the IPO. It appears that even the OSC was conflicted on this one. The OSC did not force the public disclosure of the Teranet Management Long Term Incentive Plan and the Ontario Participation and Ownership Restriction Agreement. It also did not intervene to correct the inaccurate and potentially misleading estimated cash distributions and expected yield of 7.5% used for the valuation. A potential lawsuit facing Teranet was deemed to be immaterial. By the way, RBC also provided a revolving credit facility which could be used to fund distributions .

Do conflicts-of interest really materialize among Canada’s elite financial institutions? In September 1999 Royal Bank of Canada came under criticism for the active role two of its mutual funds played in Onex Corp.'s hostile takeover bid for Air Canada, which Onex wanted to merge with Canadian Airlines International Ltd. It emerged in court documents filed that Royal Bank's trust division, acting on behalf of the two mutual funds, joined Onex in filing an application under the Canada Business Corporations Act requesting that Air Canada advance a shareholder vote on Onex's hostile bid to Nov. 8 from the Jan. 7 date the airline had set. Royal Bank has long been a major lender to financially troubled Canadian, while two of its mutual funds together own about 2.5 million shares of Air Canada -- about 2 per cent of the outstanding -- which fought the Onex bid. The perception this raised in some quarters is that the interests of unitholders in the bank's Royal Balanced Fund and Royal Canadian Equity Fund were playing second fiddle to those the parent bank has as a major creditor of Canadian.
The bottom line
Exemption decisions are yet another example of how securities regulation is tilted in favour of what the financial services industry wants, or is prepared, to accept. Seemingly little regard is given to the needs of investors, fairness or transparency — despite the fact that everything is claimed to be done “in the public interest.” All of this against a backdrop of a weak mutual fund governance processes, loose regulatory enforcement of regulations, U.S. and Canadian fund scandals, prospectuses that obscure rather than illuminate and wishy-washy annual reports that don’t really discuss the operations of the fund or how it made (or lost) money during the reporting period.

The biggest fear now for those interested in investor protection is that the latest CSA/OSC missive, NI 81-107 Mutual Fund Governance , will eliminate all the historical protective prohibitions, and replace them with a powerless IRC. This premeditated attack on investors was so egregious that for the first time individual investors, investor advocates, academics, consumer groups, CARP, the media, fund analysts and even a few industry participants combined forces to counterbalance the awesome half billion dollar fund industry lobbying machine. Ironically, if passed in its existing form, there will be a lot fewer exemption requests since virtually nothing will be prohibited and nearly everything will be handled by the so-called powerless IRC’s.

Worse still, one contributor to this piece, who wishes to remain anonymous, observed “ There are so many clandestinely obtained exemptions out there that NI81-107 is the de facto law. An investor relying on regulations for protection is like standing on Jell-O upon a foundation of quicksand ” Another cynic pointed out that none of this matters. She said “Who cares about exemptions when there is lax enforcement of any rule and investor restitution is almost impossible to obtain. Read John Reynolds the Naked Investor for the bitter truth about investor protection in Canada”

If the mutual fund market timing scandals taught us one lesson it’s that enhanced , not reduced , fund governance is mandatory. We await the next move from politicians and regulators.

Ken Kivenko P.Eng.

[admin]

Executive Summary

In 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 BOOKS

Valiant 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-2016-11

Get 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

=============

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.htm

See footnote [ 1 ] “Advisor Title Trickery” for further on the topic.

=================

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 6079 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.pdf

Each 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.pdf

It 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 Numbers

WARNING!! 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.htm

The 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.aspx

The 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.html
Manitoba’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=143

and this site as well viewtopic.php?f=1&t=177&start=30#p2249


Footnotes

[ 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-1.864830

Further 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.htm

At 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=143


At 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

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Securities regulators granted more than 600 requests for exemptions from various rules last year, most of them providing relief to registered reps from passing certain educational requirements.
IIROC reports that its registration staff recommended refusal in 13 cases where proficiency exemptions were sought

"The release of our annual exemption report highlights IIROC's ongoing commitment to transparency to our stakeholders,"

said Paul Riccardi, IIROC's senior vice president, member regulation.

(If only ‪#‎IIROC‬ and the other investment regulatory puppet regimes would be transparent with the public that the "stakeholders" that they represent are the industry that sponsors and pays them…..NOT the public they pretend to protect:)

The vast majority of exemptions concerned proficiency requirements By James Langton | March 16, 2015 12:50
Companies cited in this article
Investment Industry Regulatory Organization of Canada Inc.
Former rep’s appeal dismissed by OSC
IIROC republishes proposed revisions to margin requirements
More
Securities regulators granted more than 600 requests for exemptions from various rules last year, most of them providing relief to registered reps from passing certain educational requirements.
The Investment Industry Regulatory Organization of Canada (IIROC) Monday published its latest report detailing the 616 exemptions that the regulator granted in 2014. Of these, 449 of the exemptions were granted from certain proficiency requirements. This total was up by 18% from the previous year, IIROC reports.
The proficiency exemptions included 322 requests from rewriting a particular requirement; 95 seeking an exemption from completing a proficiency requirement; 21 requests to accept alternative work experience and eight requests for an extension to complete a particular requirement.
IIROC's report says that 241 of the requests involved the Investment Management Techniques (IMT) and the Portfolio Management Techniques (PMT) courses, which largely involved registered reps seeking to add portfolio management services to their IIROC registrations; and, it says that in the vast majority of cases, the reps had already completed these courses outside the prescribed two-year validity period. Most of them also held other relevant designations and exceeded IIROC's minimum experience requirement to conduct discretionary portfolio management activities.
IIROC also received 51 applications for exemptions from writing the Canadian Securities Course (CSC); 34 relating to the Conduct and Practices Handbook Course (CPH); and, 26 involving the Partners, Directors and Senior Officers (PDO) course.
IIROC reports that its registration staff recommended refusal in 13 cases where proficiency exemptions were sought; and, in each case, the relevant District Council agreed with staff's recommendation. "In all of these cases, the individual applicants were not able to demonstrate that their education or experience was equivalent or relevant to the proficiency requirement for which the exemption was requested," it says.
While exemptions from proficiency requirements make up the bulk of exemption requests, the report notes that 120 exemptions were also sought from the trading rules. Of these, most of them, 84, involved requests for permission to act as principal or agent in off-marketplace trades.
Another, 40 exemptions from dealer rules were granted by IIROC's board, including 38 exemptions from the margin requirements for certain borrowing and lending arrangements. And, seven exemptions from dealer rules were granted by IIROC staff, which were not related to proficiency requirements — all of these involved bulk transfers of a large number of client accounts following mergers and acquisitions.
"The release of our annual exemption report highlights IIROC's ongoing commitment to transparency to our stakeholders," said Paul Riccardi, IIROC's senior vice president, member regulation.

http://www.investmentexecutive.com/-/ii ... regulators

[admin]

Regulators increase monitoring of exempt market

Ontario Securities Commission reviewing KYC process for accredited investors By Megan Harman | May 07, 2012 16:40

As regulators contemplate changes to the rules governing the exempt market, registered representatives can expect to face greater regulatory scrutiny when distributing these products, particularly with respect to know your client (KYC) and suitability rules, industry experts said on Monday.
At a conference in Toronto hosted by the Association of Canadian Compliance Professionals, David Di Paolo, partner at Borden Ladner Gervais LLP, said regulators are monitoring exempt market transactions much more closely as the scope of the market grows. He estimates that in 2010, $83.9 billion was raised in the exempt market.

"Issuers are increasingly looking towards the exempt market as an avenue to raise capital," Di Paolo said. "And moreover, these exempt products are increasingly being sold through retail channels."

The growing volume of transactions is leading to more regulatory investigations involving the sale of exempt market products, and more civil claims by investors against their advisors and dealers involving the sale of these products. This has prompted regulators to take a closer look at the rules governing this segment of the securities business.

"The exempt markets, and the rules surrounding the exempt markets, are increasingly being scrutinized by the Canadian Securities Administrators," Di Paolo said.
In particular, the securities commissions are evaluating the two exemptions most commonly relied upon by investors: the accredited investor exemption, which is available to investors who have a certain amount of net income, financial assets or net assets; and the minimum amount exemption, which is available to investors who are purchasing at least $150,000 in the security of a single issuer.
Regulators are currently assessing these exemptions to determine whether stricter criteria may be necessary to ensure appropriate protection of exempt market investors.
"It's quite likely that the prospectus exemptions available will be narrowed," Di Paolo said.

In the meantime, regulators are also evaluating the extent to which dealers and advisors are complying with the existing exemptions.
"Regulatory enforcement of existing qualifications is going to heat up," Di Paolo said. In particular, he said the Ontario Securities Commission is closely monitoring the KYC process for accredited investors. It has found that some dealers aren't collecting adequate KYC information to reasonably determine whether clients are, in fact, accredited.
Even if clients say they qualify for the exemption, advisors and dealers must conduct due diligence to prove that clients do indeed qualify. "You have to be able to demonstrate that you've done adequate due diligence," Di Paolo said.
If regulators continue to find abuse of the exemptions – and the accredited investor exemption in particular – Di Paolo said they'll likely implement a requirement for accredited investors to be certified by a third party before they're eligible to purchase exempt market securities from a dealer. This could mean hefty costs for dealers.
"It strikes me as being an extraordinary amount effort and an extraordinary impediment to selling exempt market products to clients," Di Paolo said.
Regulators are also taking steps to ensure advisors selling exempt market securities completely understand how the products work, so that they can properly determine whether they're suitable for clients. "The regulators are coming down hard on advisors and dealers who don't adequately understand their products," Di Paolo said.
Calgary-based Portfolio Strategies Corp. is one firm that's taken steps to address this area of concern. It's introduced a questionnaire that advisors must fill out when they're seeking approval to distribute an exempt market product, according to Ken Parker, vice president of compliance and finance. The questionnaire asks about the advisor's familiarity with the product and the company and individuals offering the product, among other things; forcing advisors to thoroughly familiarize themselves with product before selling it.
"They have to do a bunch of work up front," Parker said.

http://www.investmentexecutive.com/-/re ... -afternoon

[admin]

click to enlarge

The head of Canada’s self-regulatory agency for the investment industry has been named chair of an international organization whose goal is improved investor education.

Susan Wolburgh Jenah, chief executive of the Investment Industry Regulatory Organization of Canada (IIROC), takes on the added role as chair of the International Forum for Investor Education (IFIE).

The International Forum, which held its annual meeting in Seoul, Korea, on the weekend, is an alliance of 26 organizations of regulators, associations and other industry players from 14 countries.

“With today’s challenging environment for financial markets, there has never been a greater need for increased investor protection and investor education,” Ms. Wolburgh Jenah said in a statement Monday. ”IFIE’s global representation and reach allows us to leverage the best standards and practices available and work toward getting them into the hands of investors.”

In calling this FOLLOW THE MONEY at the Post, it becomes the perfect irony. Lets follow the money back in time to Canada's largest economic crime. The crime of willful blindness, moral blindness.

This article shows the appointment of Susan Wolburgh Jenah from the OSC, where she was earning approx $400,000, to the IIROC (investment dealers self regulatory) where her earnings approached $700,000.

Click on image to enlarge
Her first order of the day with IIROC was to denounce investment dealers who "did not know what they were selling".

click to enlarge

And yet, the irony is that it was her signature, on the legal exemption applications, which allowed many of the toxic ABCP (sub prime mortgage) investments to be sold here in Canada, despite them not meeting the laws of the Securities Act.

Following the career of this person is indeed an insightful example of following the money. She either, as she says in the following article, has no clue what she is doing, or she is very willfully blind as to what she is doing.

=============================

Below is earlier posting from 2008 for some further background to the ABCP scam.


Playing the blame game
In the aftermath of the ABCP fiasco, investigators are looking for answers. What went wrong and who is to blame? So far, the regulatory agencies under fire seem to only be pointing fingers at one another. Janet McFarland, Boyd Erman, Karen Howlett and Tara Perkins report
JANET MCFARLAND , BOYD ERMAN and KAREN HOWLETT AND TARA PERKINS

From Monday's Globe and Mail

August 11, 2008 at 4:00 AM EDT

In the two years before the asset-backed commercial paper market collapsed, the investment was undergoing a transformation, morphing not only into a much riskier product but one that would start to look less out of place on the shelf among a broker's range of products on offer to ordinary clients.

Regulators failed to notice the change in structure and seemed completely unaware that the asset class had even found a new market with retail investors.

Susan Wolburgh Jenah, who heads the Investment Industry Regulatory Organization of Canada (IIROC), said she and her staff had no idea last year that any individuals even held ABCP. To their minds, it was still a sophisticated product with large institutional buyers as target customers. It took disaster to strike before they knew what was really happening.

"Back in August, I had no clue," Ms. Wolburgh Jenah says. "I didn't know there were retail investors, or how many retail investors. Nobody here knew, either ... It took us a long time to start getting answers to those questions."




Yet IIROC, the regulator for the brokerage industry, now joins the Ontario Securities Commission and its other provincial counterparts in trying to find their own conclusions to how it happened. They are soon expected to reveal a proposal to curtail the sale of ABCP to retail investors.

At the same time, a federal Parliamentary committee has launched hearings, talking to federal banking regulators and provincial securities regulators as well as numerous angry investors to understand what went wrong with ABCP and what should be done to prevent it from recurring in the future.

In the process, the saga's history will be written and lessons offered on how it can be avoided in the future. What's clear from an investigation by The Globe and Mail, however, is that the regulators must share the blame and, in fact, may have inadvertently made matters worse.

"My impression is that all of these different agencies are treating this like a hot potato, trying to pass it to the next agency and saying that they themselves are blameless," says John McCallum, the senior Liberal on the finance committee in Ottawa.

"With hindsight, there are probably many things that could or should have been done to avoid this crisis."

Opening the door

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.

By last August, industry sources say, many of the least-sophisticated buyers caught in the ABCP crisis had holdings below the former $50,000 minimum investment limit.

James Turner, vice-chairman of the OSC, said the change was made because regulators felt the $50,000 threshold was so low that it was not a meaningful restriction for many investors anyway. The OSC felt the new requirement to have a high credit rating would be a better protection and with so many ABCP trusts receiving high ratings by DBRS Ltd., the flood gates were opened.

"That was a much more appropriate exemption than just [requiring] units of $50,000," Mr. Turner said. The rationale for the change was never publicly discussed in 2005. The rule change was part of a move by provincial securities regulators to have uniform rules across the country. But to do so, Ontario and five other provinces lowered their standard to match the other provinces that never had a minimum investment level. The threshold was also lifted in Alberta, Manitoba, Quebec, Nova Scotia and Prince Edward Island.

In essence, the regulators decided to treat commercial paper issued by special purpose trusts as if it were similar to more-traditional commercial paper notes issued by blue chip, publicly traded Canadian companies. Investors were supposed to rely on the rating of an unregulated agency. But what no one appeared to focus on at the time was that DBRS was the only agency that rated these notes. Both Moody's Investors Service Inc. and Standard & Poor's Corp. refused to rate them.

"I know it sounds like all the regulators are ducking responsibility," Mr. Turner said. "But in terms of what would have prevented this from happening, it was a whole bunch of different factors. If the subprime problem in the U.S. had never happened, then we probably wouldn't be here."

Indeed, the ABCP problem was not entirely foreseeable. But there was a pattern that should have merited closer monitoring.

The OSC was aware by 1999, for example, that there was a rampant trend emerging for simple debt instruments to evolve into far more risky derivative-backed products. In a report that year, a high-level task force set up by the commission recommended that investors be given more information about products that were backed by derivatives.




"The types of debt instruments sold by these issuers have evolved over the years and ... certain risk and other disclosure is required for investor protection," the report recommended.

ABCP was exempted from the recommendations because it was not seen as a similar derivative-backed product in that era. But within a few years, it too had evolved from plain vanilla commercial paper sold by creditworthy companies into the same sort of complex derivative instrument the committee was trying to address in its report.

As it turned out, much of the non-bank paper that froze up during the credit crisis last summer was the most complex and derivative-based product that existed.

Ms. Wolburgh Jenah, who was previously a vice-chairwoman at the OSC and worked on the derivatives task force, says in hindsight the task force demonstrated that many exemptions in securities law need to be regularly re-examined as markets and products change from their original conception.

She said when ABCP was created as an "exempt" product, no one was thinking it would be backed by complicated derivatives such as credit default swaps. Regulators, she says, have to watch how products "morph" along the way.

"Did anybody think about these products when they created that exemption? Are you kidding? These didn't exist back then." Following a flurry of opposition, some of it coming from the Canadian Bankers Association which argued the OSC did not have jurisdiction to regulate bank debt products, the task force's recommendations on debt-like derivatives were not implemented.

Never again


Purdy Crawford, head of the committee to restructure
the frozen ABCP market, in a presentation to investors
in Vancouver last April.
On Bay Street, there is already speculation that new independent ABCP originators similar to Coventree will emerge fairly soon to fill a gaping hole left in the market.

While big banks are still selling their own brands of ABCP, which never froze up like the independent paper, the demand for new versions of Coventree comes because there are many small lenders who need a place to sell assets such as loans. With independent creators like Coventree gone, there is no way to do that.

The more complicated ABCP - the paper backed by derivatives - is less likely to return any time soon. In whatever form ABCP returns, the question now is: What will be different next time? There's no doubt market discipline will play a key role in the future. Investors have been burned and will demand improvements: clearer disclosure, better-quality assets, clearer guarantees from banks pledging to support the paper, and better credit ratings.

But for retail investors in particular, a critical part of the solution will also lie in the work of regulators which are now considering new rules to restrict the retail market.

The Canadian Securities Administrators (CSA), an umbrella group representing all the provincial securities commissions, is weighing new restrictions for retail investors buying ABCP, in essence narrowing the wide-open market that was created with the 2005 rule change.

Mr. Turner says one possible solution would be imposing the so-called "accredited investor" rule for ABCP. That would mean ABCP could only be sold to individual investors if they meet criteria (such as having up to $5-million in total assets) designed to limit a product's sale to those people with a greater level of financial sophistication.

Despite the work under way to tighten up the sale of ABCP, however, the OSC is making no admissions that it was a mistake to have removed the $50,000 threshold in 2005.

When asked whether the decision was wrong in hindsight, OSC vice-chairman Larry Ritchie repeatedly stressed that it was the role of the brokerage firms to determine whether ABCP was suitable for each client.

"The more complicated a product, the more there is an obligation for the people selling and recommending it to fully understand what it is," he said.




The final response to the ABCP crisis, however, may prove the most frustrating for some investors. While IIROC has launched some investigations of how ABCP was sold to retail investors, no individual or firm has so far faced any disciplinary action for improperly selling ABCP to people for whom it was an unsuitable investment.

And it is unclear whether anything will emerge. Ms. Wolburgh Jenah warns it may be difficult to pursue cases once retail investors are repaid their funds.

"One of the practical issues we have is that, historically, when people get their money back, sometimes they lose interest in pursuing the complaint. You want to go to a hearing and have a witness say, 'This is what the broker told me or this is what happened to me.' It's hard when you don't have that."

*****

PROPOSED REFORMS

Canadian Securities Administrators will soon propose new rules requiring more disclosure of details about ABCP products for investors, and is mulling an accredited investor rule that would make their purchase impossible for many investors. As well, the committee is also planning to seek new powers giving securities commissions the ability to regulate credit rating agencies.

IIROC has conducted its own "compliance sweep" to consider whether new rules or standards are needed for ABCP sales. A key issue to be addressed is the product review process that goes on within brokerage firms to assess whether new or evolving investments such as ABCP are being adequately reviewed before being sold to retail clients.Brokerages such as Canaccord say the industry itself will have to be diligent to rely on more than ratings before selling a product to retail investors. "If you can't get the level of disclosure that you may need," says Canaccord CEO Mark Maybank, "you may not be able to sell that product."

Purdy Crawford, chairman of the Pan-Canadian Investors Committee for the Third-Party ABCP, says he would like to see more co-operation between the Office of the Superintendent of Financial Institutions and IIROC, which could combine their expertise in reviewing financial products, and such areas as capital and liquidity requirements. "These meetings probably need to happen at a more senior level."

[admin]

Unhappy Alberta investors fail to turf former pastor as head of troubled real estate companies

Monitor gets more power to restructure firms

BY MATT MCCLURE, CALGARY HERALD MAY 18, 2012

Disgruntled investors in a group of troubled real estate companies failed in their legal bid to have the man at the centre of the cash-strapped developments turfed.

But a judge did give a court-appointed monitor greater powers to restructure the insolvent firms - Legacy Communities, Airdrie Capital, Airdrie Country Estates, Railside Capital and Foundation Place - and maximize recoveries of the $92.9 million raised by former pastor Ron Aitkens and his firms at the height of Alberta's real estate boom.

The lawyer for a committee of angry investors who packed Court of Queen's Bench Justice Barbara Romaine's courtroom in Calgary last week said that thousands of small players had plunked down an average of $23,000 each in 2005 and 2006 on the promise of attractive returns.

David LeGeyt told the court that in the intervening years little or nothing had been done to develop the property acquired, but that millions of dollars of investors' money had been transferred out or paid in fees to other Aitkens-controlled companies.

"He did a very good job at raising money, a very good job at paying it to himself," said LeGeyt, "but not as good a job at developing the land."

The insolvent companies sought and obtained protection under the Companies' Creditors Arrangement Act in late 2011 and early 2012, when Romaine appointed Ernst and Young to monitor their restructuring.

Monitor Neil Narfason has since uncovered significant variances in what investors were told in the offering memorandums and how their money was actually spent.

In the case of Legacy Communities, 202 hectares near the Glencoe Golf Club west of Calgary were to be acquired with the $35.4 million raised from about 1,400 investors.

But Narfason found only 82 hectares were actually purchased, and the firm no longer has the $9 million needed to exercise the option for the rest of the property.

Instead, about $9.3 million was transferred to a firm controlled by Aitkens and invested in properties in Panama, Ontario and Red Deer, money Narfason has now asked be repaid.

The monitor also found the firm had spent $2.4 million more than expected in the offering, including an overpayment of approximately $550,000 in management fees to Aitkens' firms and about $660,000 in unknown disbursements which may have related to the original land acquisition.

Upset by how their money had been used, Aitkens' perceived conflict of interest and his slowness in supplying Ernst and Young information, the investors' committee wanted him removed as a director and a restructuring officer of their choice to replace the court-appointed monitor.

But Aitkens' lawyer Randal Van de Mosselaer argued there was little evidence his client had been unhelpful during the insolvency and that removing him as director now was inappropriate.

"I appreciate the erosion of trust between the (investors' committee) and Mr. Aitkins," Romaine said in her ruling.

"I'm not satisfied that the insertion of a (chief restructuring officer) would not cause delays and make the process more expensive."

Instead, Romaine gave Narfason the final say in deciding on a restructuring plan for the insolvent firms and whether to legally pursue Aitkens' companies if negotiations over the transferred monies fails to produce a settlement.

During a break in the proceedings, Aitkins said the real estate companies were hurt by the recession and that he was confident a restructuring plan would be completed by the end of June.

"It's no different than any other developer out there," he said.

"It's just a balance sheet restructuring that we want to give bondholders a chance to vote on."

Nicole Shurko, a former sales-woman with Aitkens who said she invested $10,000 of her own money and convinced dozens of clients to invest another $2 million in total, was disappointed with the ruling.

"We wanted Aitkens out and a manager we can trust at the helm," said Shurko, "to give us transparent information about these assets and to maximize what's left."

As of the end of March, the in-solvency had already cost investors about $820,000 and by the end of June the monitor expects to spend another $1.4 million.

Those costs include about $300,000 in management fees that continue to be paid to firms controlled by Aitkens.

He was disciplined twice in 2009 for breaking securities laws.

The Alberta Securities Com-mission fined Aitkens $45,000 and Foundation Capital another $120,000 for misleading remarks made a year earlier while raising money for a planned real estate development near Priddis.

Authorities in Saskatchewan issued a cease trade order because Aitkens and his related firms failed to file their offering with regulators before selling investments to residents of that province.

mmcclure@calgaryherald.com

Read more: http://www.calgaryherald.com/Business/8 ... z1vKgst7kO

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Industry News

Exempt market dealers struggling with compliance obligations

Suitability has been a particularly problematic area
By Megan Harman | March 21, 2012 16:50

As the exempt market continues to come under regulatory scrutiny, dealers are being urged to ensure their suitability, marketing and other compliance practices are up to standard.

At the Strategy Institute's Registrant Regulation Compliance Strategies Summit in Toronto on Wednesday, regulators said they're heavily focused on ensuring exempt market players are familiar with, and complying with, the applicable regulations.
"We're trying to understand our exempt market. We're also trying to bring into registration those who should be registered," said Mark French, manager of regulation and compliance in the capital markets regulation division of the British Columbia Securities Commission. "We're going to be doing a lot of compliance outreach work, visiting these firms, doing what we call inspections – limited scope examinations."

Added French: "where we see risk, we'll take action."
Prema Thiele, partner at Borden Ladner Gervais, LLP, said exempt market dealers which haven't yet been audited will likely be contacted by regulators in the months ahead. "There's a lot of emphasis on the compliance side," she said.

Exempt market dealers have been struggling to keep up with the ongoing regulatory changes that have been taking place since National Instrument 31-103 came into effect in 2009, according to David Gilkes, director of the Exempt Market Dealers Association and president of North Star Compliance & Regulatory Solutions Inc. He said there have been 10 regulatory staff notices, amendments and proposed rules affecting exempt market dealers since 2009.

"It is hard for people to keep in touch," said Gilkes. "I'm hoping that the regulators will appreciate how much is being pushed onto dealers at this time."
It's been particularly challenging for new registrants in the exempt market, which had to register for the first time in 2009 under NI 31-103, said Geoffrey Ritchie, executive director of the EMDA. "They're struggling to understand their compliance obligations," he said.

Regulators have identified plenty of compliance deficiencies at the exempt market dealers they've reviewed. Suitability has been a particularly problematic area, since many exempt market products are illiquid and considered to be risky. The onus is on the dealing rep to prove that the product is suitable for a particular client, given their risk tolerance and time horizon.
"You've got to think about liquidity as part of your suitability requirement," said Gilkes.

Regulators find that many dealing reps fail to appropriately document conversations about suitability.
"A lot of times we don't see the documentation of these discussions anywhere," said Janice Leung, lead securities examiner at the BCSC. "We're looking for stronger and clearer evidence that that's being carried out."

Marketing is another area where regulators commonly identify deficiencies in the exempt market. "It's a top of mind issue," said Ian Pember, chief operating officer and senior vice president of administration and compliance at Hillsdale Investment Management.
Specifically, Pember said regulators often find exempt market players using exaggerated or unsubstantiated claims on their websites, pamphlets and other marketing materials.
"Unless you can point to some third party source to back it up, you just can't use it," he said.
Since many of these compliance requirements represent new territory for many exempt market dealers, much education will be necessary to bring the industry up to speed, Ritchie said. He's encouraged that regulators seem to be focused on helping to educate dealers on their obligations.
"We're really into a big education phase," he said.

http://www.investmentexecutive.com/-/ex ... bligations

[admin]

click to enlarge image.......and they are also part of what looks like a well oiled "money laundering" scheme, where securities commissions conspire with exempt market product "makers" to transfer hundreds of millions in fees, commissions and skim, from vulnerable investors, to the regulators, their lawyer friends and a few con artists. Another reason to hobble our current crop of regulators......they are helping to rob Canadians. Read WILLFUL BLINDNESS

[admin]

click to enlarge
Here is a rather rough, "napkin sketch" of a number of exempt market securities offerings in Alberta that appear to be failing or at great risk of failure. (exempt market securities meaning they do not have to meet the full requirements of our laws)

Estimates are that up to 20,000 Albertans are suffering from this.

You can thank your Alberta Securities Commission and a number of Calgary and Edmonton lawyers who allow this. With $12 billion of exempt market securities going through the ASC last year, I figure the lawyers skimmed $100 million in legal fees while allowing the public to be unprotected. Then, when the products fail, the lawyers auditors and the rest get to skim another hundred million or so between them. It is the greatest "magic money machine" even invented.......allowing garbage investments to be sold, and lapping the fees at both ends.

Again, it is just napkin sketching at this point, don't get excited if you have better info. Join ALBERTAFRAUD.com group at facebook and lets get 20,000 people their money back. Alberta government and regulators DO have the money to do this and as far as I can see, they have the liability. (search "Norbourg" in this forum to see how others got their money back from bad regulation)

[admin]

http://www.washingtonpost.com/business/ ... story.html

WASHINGTON POST
Frequent SEC exemptions let companies skirt rules

By David S. Hilzenrath, Published: April 19, 2012

At a time when the Securities and Exchange Commission is under pressure to enforce existing rules and write new ones, it has been busy giving companies permission to ignore the law.

Companies that bump against legal restrictions — brokerages, stock exchanges, life insurance companies, and mutual fund managers, for example — routinely argue that no harm would come from cutting them slack.

The SEC often agrees.

It has issued scores of orders in the past few years exempting individual businesses from rules including how they can use clients’ money and how much information they must disclose to the public.

The financial crisis spurred the government to tighten regulation of Wall Street on a variety of fronts, but some of the SEC’s exemptions seem to poke holes in those efforts.

Currently, for instance, the agency is preparing new restrictions for money-market mutual funds, still haunted by the meltdown of 2008, when a major fund was overwhelmed by customers demanding their money back and the government put taxpayer dollars on the line to backstop the industry. SEC Chairman Mary L. Schapiro has said she wants to prevent trouble at a single fund from triggering broader problems.

But in December, the agency issued an exemption allowing individual mutual funds administered by John Hancock to lend money to each other, potentially exposing them to each other’s troubles. Hancock argued that the exemption would come in handy if any of its funds have too little cash to meet customer withdrawals.

The conduct of credit-rating companies has also come under scrutiny since the financial crisis. In 2010, Congress expressed concern about conflicts of interest in the credit-rating business. Saying that faulty ratings had contributed to the crisis, Congress directed the SEC to reduce the financial system’s reliance on credit ratings.

But, last year, the SEC told the Kroll Bond Rating Agency it could disregard a rule meant to make credit-raters less beholden to the companies they rate. Kroll wanted to charge companies fees to rate their securities, and the SEC temporarily waived a limit on the amount of revenue Kroll could derive from any one company.

At the height of the financial crisis, short selling — a form of trading that pays off if stocks fall — was widely blamed for destabilizing major Wall Street firms. In response, the SEC adopted a rule limiting short sales that it described as “potentially manipulative or abusive.”

But early last year, the SEC carved out an exemption for the New York Stock Exchange. Citing highly technical considerations, the SEC concluded that its rule could have obstructed “the normal operation of the market.”

In each of these examples, the companies essentially argued that strict adherence to the rules would be counterproductive.

For the SEC, the authority to make exceptions cuts two ways. While it gives the agency the freedom to give away the store, it also gives it the flexibility to embrace new ways of doing business, said William A. Birdthistle, who teaches securities regulation at IIT
Chicago-Kent College of Law. Overall, he said, the system strikes a useful balance.

In a recent report to Congress supporting its budget request, the SEC said it grants relief from laws when “doing so is consistent with the protection of investors.”

“These orders can serve as a testing ground for useful innovation,” the SEC said.

Fielding requests for exceptions is such a significant part of the SEC’s work that it tracks its response time as a measure of its performance. During the last fiscal year, the SEC said in the budget document, its Division of Investment Management issued timely initial comments on such requests 100 percent of the time. The document did not explain the SEC’s definition of timeliness.

Nor did the SEC release statistics on the total number of exemptions sought or granted, and tallying that information independently would be difficult. Though some of the permissions are explicitly posted under the heading “Exemptive Orders,” many are not as neatly categorized.

The Washington Post reviewed what may be the biggest — but certainly not the only — category of exemptions: those involving a law called the Investment Company Act of 1940, which is largely concerned with protecting investors from conflicts of interest. The Post identified 188 orders issued by the SEC from 2009 through 2011 allowing companies to break that law or related rules.

Blanket dispensation

Sometimes, the exception becomes the rule.

As privately traded companies, Twitter, Facebook and Zynga would have been required to disclose extensive information about their business, including their profit or loss, once they gave restricted stock units to 500 or more people. Each received a special dispensation allowing them to cross that threshold without making the disclosures. Eventually, the SEC issued a blanket accommodation for all companies concerned about tripping the same wire.

Over the decades, whole categories of financial products have developed through SEC exemptions — including money-market funds and exchange-traded funds.

In making its case for an exemption, John Hancock, the mutual fund manager, told the SEC that situations could arise in which “certain John Hancock Funds have insufficient cash on hand” to meet customer withdrawals. In those instances, borrowing from other John Hancock funds “would provide a source of immediate, short-term liquidity,” the company said.

The risk of default would be so remote that the funds lending the money would rarely require collateral, John Hancock told the SEC. Collateral provides an added measure of security for lenders.

John P. Freeman, an emeritus professor at the University of South Carolina School of Law who has written about mutual funds, said the arrangement could allow problems at one fund to affect others.

“What this is about is hitting up shareholders and turning shareholders into lenders of last resort when managers get their funds in trouble,” Freeman said.

While Hancock said the arrangement would benefit both the borrowing and lending funds, Freeman questioned whether shareholders in any of the funds could count on getting the best deal possible.

John Hancock spokeswoman Beth McGoldrick said in a recent e-mail that the firm was not yet using the exemption and it was therefore “premature for us to get into any details on our program.”

In an application filed with the SEC, John Hancock promised that it would “ensure equitable treatment of each Hancock fund,” and it said the SEC had already granted similar dispensations to more than a dozen mutual fund groups.

Conflicts of interest

In the case of Kroll, the bond-rating agency argued that its exemption would benefit investors by fostering competition in the credit-rating business — a goal Congress has endorsed.

In the past, Kroll made money by charging users subscription fees for access to its ratings. But when it decided to expand and challenge big rating agencies such as Moody’s and Standard & Poor’s, Kroll looked to adopt their business model, too.

These big credit-rating agencies are generally paid by the companies whose creditworthiness or securities they are rating. The fees can amount to hundreds of thousands of dollars to rate a single security.

To address the resulting conflict of interest, the SEC issued a rule saying that rating agencies cannot provide ratings for companies that account for 10 percent or more of their revenue. Otherwise, the SEC reasoned, the client could hold too much influence over the rating agency.

But the rule threatened to block Kroll’s way as it ramped up. Until it amassed enough clients, some of its clients would provide more than 10 percent of its revenue.

If the SEC forced new entrants to follow the rule, “you would never have a start-up rating agency,” said James Nadler, president of Kroll Bond Rating Agency. In September, the SEC gave Kroll permission to violate the prohibition through the end of 2012.

In the case of the New York Stock Exchange, the exchange argued that the SEC’s effort to rein in abusive short selling was out of step with the mechanics of trading in that market.

The SEC has said its rule was meant to prevent “bear raids” and other manipulative trading tactics from exacerbating price declines and shaking confidence in the markets. The stock exchange argued that for technical reasons, it would be hard pressed to use the price benchmark the SEC had prescribed to determine how restrictions should kick in under some circumstances, such as the opening of the trading day.

In a letter to the NYSE, the agency said it was granting the exemption “on the basis of your representations, but without necessarily concurring in your analysis.”


(advocate comment: In Canada, we have similar problems, which are used by financial firms to routinely violate the public interest. See youtube videos at http://www.youtube.com/user/investoradv ... ature=mhum

One video is titled ALBERTA MONEY LAUNDERING and is about 3 min in length
Second related video is titled SYSTEMIC CRIME PAYS and is 32 minutes with documents and greater explanation.

Legal exemptions are used to rob Canadians of billions, making systemic crime pay very very well for those in the system. Civil and criminal actions against the regulatory agencies should be strong and numerous, to get money back for all clients who have lost money, and to restore accountability.

The major point of gross negligence in Canada (or conscious wrongdoing) by the regulators is in their routinely ignoring the "public interest requirement" that each exemption must serve, and adding to the negligence with an undue amount of secrecy throughout the process. It appears to be a rather dramatic and bold corruption between investment corporations and the regulators who purport to protect the public.

(Damn ironic to see an image of a PINK SLIME story in the Washington Post page above.........quite a similarity between food safety regulators letting garbage go into your mouths, and financial regulators letting similar things happen to your investments) Prosecute those public officials who breach the public trust.

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http://www.examiner.com/crime-in-calgar ... -of-others