by urquhart » Mon Aug 22, 2005 7:49 am
Here is another reputable industry player asking for the IDA to fix its sorry record of conflicts of interests. The IDA cannot be a self-regulator of investor abuses, while it is also an industry lobbyist. Canada's system of investor proection and securities enforcement is being revealed as a sham everytime there is civil litigation success, like the CIBC fiasco, and prosecution of Canadian companies and executives by U.S. authorities, like the Hollinger executives.
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Divide and dither
How can the Investment Dealers Association of Canada do one thing and its opposite?
By DOUG STEINER
Friday, August 19, 2005
The Investment Dealers Association of Canada, one of the multiple regulators that oversee my business, looks like a crazy fire station to me—first trying to prevent fires, then fighting blazes after they start while also running a store out back selling matches and gasoline. All these things are needed, of course. But should one organization do them all?
The IDA is the self-regulating body and trade association for the securities business. The selection of its board of directors and its senior staff is strongly influenced by investment dealers. The IDA has two distinct missions: 1) protecting investors, and 2) enhancing the efficiency and competitiveness of Canadian capital markets. Among many other things, the IDA makes sure that brokers are properly registered, and that dealers have enough capital to do business. IDA staffers mean well, and they would like to do a better job of protecting investors. The trouble is, the association also has to lobby governments for measures that will enhance dealer profits, not impair them.
The conflict seems obvious to everyone except the dealers. The IDA's website refers to its "complementary" missions. The reasoning goes like this: Who else can protect people when only we know what's going on in the industry? Another benefit is that the public doesn't pay for the regulation. That's like saying that you don't pay for a car warranty.
In practice, the IDA avoids some important investor protection issues. Here's a small example. The association has just published a very useful guide to bond investing. But, oops, it doesn't mention that the IDA helped set up the rules for bond trading. And just try to figure out what the rules are for getting individual investors the best price on a trade, or how much commission dealers can charge.
The IDA allows dealers to skirt what I believe should be their duty to get individuals the best price. The guide explains that most bonds don't trade on an exchange—brokers trade them by phone. So an institution placing a big order might get a better price than you, and a dealer might charge a lower percentage commission on a $1-million order than on a $10,000 order. When talking to an adviser, the guide says, "you should discuss commission." Gosh, thanks for the tip.
In fact, trade-by-trade Canadian bond price data stretching back five years are available. A senior official at the IDA told me the issue of best price "is probably something that they should look at." I first heard that line more than two years ago.
Then there's the IDA's wonky approach to investor protection. Last December, the Ontario Securities Commission thumped four mutual fund firms that had allowed speculators to engage in market timing when trading their funds between 1998 and 2003. The OSC ordered the firms to pay back $156.5 million to investors. In March, the OSC ordered another fund firm to pay back $49.1 million. Of course, dealers executed those trades.
In December, the IDA pilloried the dealers involved in the case. Three dealers coughed up $41 million in penalties—then grumbled privately that it was a "shakedown." And the speculator clients? They aren't under the IDA's jurisdiction, and they got to keep their questionable profits. What happened to the $41 million? About $7 million went to mutual fund investors. The rest went to the IDA to cover the cost of hearings and to support "projects in the public interest."
Yes, the IDA is often great after the fact when it penalizes brokers or firms for playing fast and loose with clients' money. On its website, you can search a database of individuals and firms that have been penalized. But it doesn't include all the original complaints. Paul Bourque, the IDA's senior vice-president of member regulation, says that 91% of the 26,000 staff at member firms have had no complaints filed against them by clients or their firms. So, perhaps 2,300 have. Bourque mentioned that 23 individuals have had more than 10 complaints. Wouldn't you like to know if one of them is your broker?
Now the IDA has even bigger plans. In a speech in June, IDA president Joe Oliver said the association would like to consolidate efforts with the Mutual Fund Dealers Association—which oversees mutual fund sellers—and Market Regulation Services Inc., the independent regulator for Canadian stock exchanges. Those folks want none of it. Many of them also say that the IDA should form a task force to examine its own practices.
Some day, I dream of going to an IDA website and viewing a log of all investor complaints, and the responses of the hard-working IDA staff. On another page, the dealers who, in effect, run the joint will be able to defend their practices.
Doug Steiner is a managing partner in Venturion VGI, a Bay Street investment fund.