Securities law "exemptions". A license to steal?

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Re: break the law and win. Apply for exemptive relief.

Postby admin » Thu Jul 28, 2011 4:11 pm

July 27, 2011

Bill Rice Chair,
Canadian Securities Administrators
Alberta Securities Commission
Suite 600, 250–5th St. SW
Calgary, AB T2P 0R4

Dear Mr. Rice:
Re: Point of Sale Initiative for Mutual Funds: CSA Staff Notices 81-319 and 81-321

We would like to reiterate our position to the CSA that FAIR Canada opposes the granting of exemptive relief to allow the early use of the Fund Facts document (“FF”) to satisfy the current prospectus delivery requirements as set out in CSA Staff Notice 81-321.1 FAIR Canada also opposes the CSA’s proposal in Stage 2 of the point of sale initiative to do away with the delivery of the simplified prospectus and allow delivery of FF, after the point of sale, to satisfy prospectus delivery requirements.

The point of sale initiative was originally aimed at providing investors with more meaningful and effective disclosure and was held out to be a significant investor protection initiative.2 The purpose of the point of sale disclosure framework was to provide a plain language document that would assist investors in their decision-making process prior to purchasing a mutual fund. Unfortunately, FF is still not required to be delivered prior to or at the point of sale. The document was not designed to be provided after the point of sale or to replace prospectus delivery requirements. If CSA members grant exemptive relief as outlined in Staff Notice 81-321, they will permit a use of the FF for which it was not intended or designed. It will also result in reducing the amount of information that investors receive, thereby preventing vital information from being provided to retail investors.

FAIR Canada opposes the process of granting exemptive relief as set out in CSA Staff Notice 81-321 without a formal public consultation process or legislative amendment. To grant such exemptive relief will be to effectively reduce long-standing investor rights. This is contrary to the purpose of securities regulation and the fundamental aim of the point of sale disclosure framework. We urge you to suspend the consideration of applications for exemptive relief until the concerns and interests of retail investors have been solicited and provided due consideration.
FAIR Canada recommends that a mutual fund’s simplified prospectus continue to be provided to investors either at the point of sale or with the trade confirmation. Eliminating the simplified prospectus delivery requirements runs counter to fundamental principles of securities regulation. FAIR Canada therefore opposes proposed Stage 2 of the point of sale initiative.

1 Submission on CSA Proposed Amendments to the Sale of Mutual Funds dated October 19, 2009 and email from Ermanno Pascutto to Howard Wetston, Q.C., OSC Chair dated March 9, 2011.

2. Canadian Securities Administrators, Staff Notice 81-319 (June 18, 2010), online: ... us-pos.pdf.

161 Bay Street, 27th Floor | Toronto, ON | M5J 2S1 | 416-572-2039 |
FAIR Canada agrees with the OSC’s Investor Advisory Panel3 that the many iterations of FF have yet to produce a document that is timely, clear and useful and that the existing FF is flawed and does not go far enough. The disclosure of risk, for example, is inadequate and misleading and must be improved. Until such time as FF is improved, regulators should not contemplate permitting it to replace the simplified prospectus.
We would be pleased to discuss our concerns with the current version of FF with you and look forward to the response of the CSA to this letter. FAIR Canada would welcome the opportunity to meet with you and other interested parties to discuss this important issue. Feel free to contact me at 416-572-2728 or at


Canadian Foundation for Advancement of Investor Rights
cc: Howard Wetston, Q.C., Chair, OSC
cc: Maureen Jensen, Executive Director, OSC
cc: Stephen Paglia, Senior Legal Counsel, Investment Funds, OSC
(on behalf of the CSA POS Working Group)
cc: Ermanno Pascutto, Executive Director, FAIR Canada
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Thu Jun 30, 2011 10:04 pm

No man really becomes a fool until he stops asking questions.
--Charles P. Steinmetz

SEC Routinely Exempts Companies From Rules Without Adequate Follow-up: Inspector General
First Posted: 06/30/11
Companies are routinely exempted from the Securities and Exchange Commission's panoply of rules and regulations, as long as they meet certain conditions -- but the agency rarely follows up to make sure that those firms are living up to their promises, according to a new report by the SEC's inspector general.

And more than half of those companies (60 percent) granted exemptions ended up violating the conditions of the SEC's order allowing them that dispensation.

In one example, in May 2010 the SEC exempted credit rating agencies from rules intended to avoid conflicts of interest. Those agencies "have been widely criticized for contributing to the housing bubble and the financial crisis that followed by assigning top ratings to investments tied to toxic mortgages," notes the Washington Post.

In addition to the exemptions that essentially allow firms to violate securities laws, companies can also request "no-action" letters in which the SEC assures them that they will not be targeted with enforcement actions as long as the companies' description of their situation is factual.

Though compliance with these conditions is supposed to be reviewed by an arm of the SEC, "there is also no formalized process for monitoring or ensuring compliance with the conditions and representations in exemptive orders and no-action letters," according to the report.

The IG notes: "Exemptive relief was not intended to provide unrestricted or unlimited relief from the securities laws and rules, however."

Among the exemptions granted by the SEC:

To permit a registered closed-end investment company to make distributions of capital gains as often as monthly in any one year.
To allow funds to make and change subadvisory agreements without shareholder approval.
SEC Delays Trial of Ex-Goldman Exec (Raj's Alleged Tipster)

The most prominent Wall Street executive caught in the government's insider-trading probe got a bit of a break on Wednesday. The trial of Rajat K. Gupta, the former Goldman Sachs director and former head of McKinsey, on charges that he leaked secrets to convicted hedge fund trader Raj Rajaratnam, has been pushed back six months, reports The New York Times.

The SEC, which is bringing the case, has accused Gupta of telling Rajaratnam the confidential information that Warren Buffett's company, Berkshire Hathaway, was about to invest $5 billion in Goldman back in 2008. Gupta's lawyer calls the case "totally baseless."

It's not clear what accounts for the delay, though the Times's Peter Lattman notes that bickering between the Justice Department and the SEC could be involved.

State Regulators Blasted For Helping 'Gut' Consumer Protection

Consumer watchdogs are outraged at a recent decision by state insurance regulators to endorse legislation that they claim "gut[s] a central consumer protection" of health care reform -- saying it could cost consumers billions in higher health insurance premiums and lost rebates.

The legislation would preserve broker sales commissions and allow insurance companies to exclude broker commissions from their administrative costs when calculating how much they spend on health care, says Consumer Watchdog.

The group sent a sharply-worded letter to the National Association of Insurance Regulators, saying that the bill would severely weaken the only explicit consumer cost protection in the federal health reform law -- the requirement that health insurance companies spend at least 80 percent of consumers' premiums on medical care.

Lobbyists Pressure California To Weaken Bill To Enhance Transparency

After some heavy lobbying by health care providers, the California assembly watered down a bill requiring more transparent electronic health records. Originally, the "track changes" bill (SB 850) required doctors to record all changes made to patient health records, as well as who made the changes, and make that information available to patients, reports California Watch (hat tip:

But after opposition from the California Hospital Association, California Medical Association and California Association of Physician Groups, the bill was weakened and then approved last week.

Offshore Drilling Fines Get Small Bump, But Regulator Wants More

The country's revamped offshore oil drilling regulator yesterday slightly increased fines for companies that violate drilling rules. But the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) wants Congress to let it raise the penalties much higher.

The bureau raised the civil penalties for violating the Outer Continental Shelf Lands Act from $35,000 to $40,000 per day and the cost of violating the Oil Pollution Act from $25,000 to $30,000 per day, reports the Houston Chronicle.

"Our hope is that new legislation will raise this amount significantly, which would enable us to use the threat and reality of civil fines as viable methods to encourage compliance with offshore oil and gas rules and regulations and meaningfully deter violations," said BOEMRE director Michael Bromwich.

WATCH: GOP 2012 Candidate Cain Won't Name Single Bad Regulation

Republican presidential candidate Herman Cain refused to get into specifics when asked by CNN's Eliot Spitzer to name a single government regulation that burdens businesses or stifles innovation.

Though the conversation remained cordial, Spitzer grew frustrated: "Generalities don't solve problems. Saying you want to get rid of excess regulations sounds good but it doesn't mean anything if you can't tell me which one, Herman. So tell me - -which one?"

Cain promised Spitzer, "The next time I come, I will have a specific one for you."

In addition, Cain conceded that he had not read the list of rules highlighted by President Obama's regulatory review this past spring, which required government agencies to submit those regulations which are duplicative or unnecessary -- "I have not seen the report," said the former pizza magnate. ... 88128.html
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Wed Jun 01, 2011 2:55 pm

Screen shot 2011-06-01 at 3.53.43 PM.png

Some interesting reading about sale of exempt securities to investors, results and needed changes.
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Fri Apr 29, 2011 7:37 pm

Screen shot 2011-04-29 at 8.40.43 PM.png

from section 104 Ontario Securities Act ... .htm#BK117

The obvious problem with this, and the one that gets billions and billions from the pockets of vulnerable consumers (who believe in the "protect the public interest" bullshit from OSC etc) and into the pockets of billionaires is this:

Guess who gets to decide what is or is not in the public interest? The very same guys who play this legal trickery on the public, the same who promise honesty, fair dealing, and transparency. The ones who earn six figure salaries from fees and charges to the financial industry.

With 60 plus lawyers at the OSC, ask them for a reason why the law is exempted and this is what you are likely to get, "Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.”

Then ask them why they do this without giving public notice to consumers, and ........well I put the letter from the OSC that answers this in chapter four of
More legal tricks played to hurt consumers. More shame on a crown agency. More evidence of fraud played on the public by these agents.
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Fri Apr 29, 2011 5:20 pm

this from section 104 (1) of the Ontario Securities act found at ... .htm#BK117

(2) On application by an interested person and subject to such terms and conditions as the Commission may impose, if the Commission is satisfied that it would not be prejudicial to the public interest, the Commission may,
(a) decide for the purposes of section 97.1 that an agreement, commitment or understanding with a selling security holder is made for reasons other than to increase the value of the consideration paid to the selling security holder for the securities of the selling security holder and that the agreement, commitment or understanding may be entered into despite that section;
(b) vary any time period set out in this Part or the regulations related to this Part; and
(c) exempt a person or company from any of the requirements of this Part or the regulations related to this Part. 2007, c. 7, Sched. 38, s. 8.
-------------------------------------------------- advocate comments below-------------------
The problem appears to be that the securities commission do not:

1. inform consumers when the law has been exempted with regard to investments or advice they receive
2. allow public input into the decision making process, just accepts input from the party that seeks to skirt the law
3. give reasons, nor follow a process to document the process by which they confirm that they are satisfied that it would not be prejudicial to the public interest
4. answer questions posed by the public on the matter
5. seem to worry about the optic of letting those who pay you, those you regulate, violate the laws in semi secrecy
6. admit that billions and billions of dollars have been lost to consumers, gained by financial advice givers and millions paid to securities commissions to facilitate this "swapping of money" from customers.
7. Give better reasons on most exemptions than "Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.”
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Thu Apr 21, 2011 9:40 am

Screen shot 2011-04-19 at 4.41.25 PM.png
Goldman Sachs turns up hundreds of times in Alberta Securities Commission search, and same in Ontario Securities Commission search.

Dozens and dozens of "decisions" to allow Goldman to offer investment products, advice, or to allow them to operate while skirting the laws of our provinces.

Interesting place to find the securities commission in. Secret deals, no public notice, Goldman doing things of a criminal nature in the US. Us letting them operate here as well as giving them room to skip our laws. Unfortunately it is but one example out of many thousands where the securities regulators in Canada have been found to have sold out the public protective interests in favour of "loyalty" to friends in industry.

I could almost live with this IF the securities commissions would show a professional process followed, and some prudent reasons for each exemption. They do not. Instead one finds this answer to support most decisions ""Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.” Upon further enquiry, they clam up completely and refuse to display public interest reasons for their actions.

People who are professional do not act like this. People who have done nothing wrong, have no need to hide the reasons for their actions. The securities commissions seem to operate on the principle of "hiding" their behaviours. Shame. ... rders.aspx scroll down this page to see some exemption orders, (permission to skip the law) search any given year, looking for “decisions” and you will see hundreds of times the commission allows permission to skip the law, without telling you the investor. There are billions of profits in here for those who look. And billions of hurt to the public interest.

Ethical Securities Commission employees who may wish to let greater truth come into the open, can send information about these areas, anonymously to

Public Interest Leaks
Suite 309,
440-10816 Macleod Trail SE
Willow Park Village
Calgary, Alberta T2J 5N8
The information will be disclosed in the most appropriate manner of benefit to the public interest. You are not required to disclose your identity in any way.
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Thu Apr 21, 2011 9:25 am

Goldman Sachs turns up hundreds of times in Alberta Securities Commission search, and same in Ontario Securities Commission search.

Dozens and dozens of "decisions" to allow Goldman to offer investment products, advice, or to allow them to operate while skirting the laws of our provinces.

Interesting place to find the securities commission in. Secret deals, no public notice, Goldman doing things of a criminal nature in the US. Us letting them operate here as well as giving them room to skip our laws. Unfortunately it is but one example out of many thousands where the securities regulators in Canada have been found to have sold out the public protective interests in favour of "loyalty" to friends in industry. ... rders.aspx scroll down this page to see some exemption orders, (permission to skip the law) search any given year, looking for “decisions” and you will see hundreds of times the commission allows permission to skip the law, without telling you the investor. There are billions of profits in here for those who look. An billions of hurt to the public interest.

In the explanation of “Why?, you will see this statement most often,
"Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.”
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Mon Oct 25, 2010 10:37 pm


Did you ever see this information about exempt securities before?

It makes them look harmless to someone who invests in mutual funds
which normally have the prospectus attached (supposedly) to any sale.

Bruce ... est_en.pdf

Exempt securities

Some securities can be sold without a prospectus. These are called “exempt”
securities. Examples include hedge funds and principal protected notes.

These investments are not for everyone. If you buy an exempt security, you may
not have the same legal rights as you do when you buy under a prospectus.

If you are interested in these types of investments, ask a financial adviser to
explain how they work, including any guarantees, the risks and the fees.

Find out if other investment strategies may be more appropriate for you.
“Financial advisers have an obligation to ensure that they recommend only
investments that are suitable for their clients. “

(like hell they do........this may be in the law somewhere, but it is sure as hell not in the practice, nor in the enforcement of the law.........a joke is how I take the comment in quotations)

(if I had five cents for each investment which was sold while being “knowingly” not in the best interests of the client, and/or knowingly unsuitable, I would be living next to Bill Gates......the words are simply words, nothing more)

This is the first time I have said this in public, but is so blatantly wrong that I will say it now. The securities commissions are LYING to the public with this comment, and further that the securities commissions have a nearly unblemished record of ignoring large financial abuses of the public by those investment industry people who pay their salaries. In a sound system of justice, these people would be answering to crown prosecutors for the things they do to investors. Public Beware.

These investments are not for everyone. If you buy an exempt security, you may
not have the same legal rights as you do when you buy under a prospectus.

If you are interested in these types of investments, ask a financial adviser to
explain how they work, including any guarantees, the risks and the fees.
images.jpeg (2.38 KiB) Viewed 19154 times
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Wed Sep 15, 2010 8:57 pm

These 2 items make the point

- the system is broken

No wonder ETF's /DIY are growing rapidly

Ken K

Latest exemption hurts investors:

Securities regulators have granted dealer members of self-regulatory organizations a full 12-month exemption from new disclosure requirements that are due to take effect later this month under registration reform. The Ontario Securities Commission Bulletin, reports that the Canadian Securities Administrators are giving investment dealers and mutual fund dealers an exemption from new disclosure requirements that are scheduled to take effect on Sept. 28 as part of the controversial registration reform rules. The new requirements are designed to improve firms’ disclosure to clients about their respective roles and duties, and fees, among other things. Similar requirements are to be imposed by the dealers’ respective self-regulatory organizations (the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada) under the “Client relationship model” reforms that the SROs have been tinkering with for many years ( the remains of the Fair Dealing Model ). The MFDA finalized its proposed reforms earlier this year, but is still awaiting ratification by its annual general meeting in December.

IIROC is also still finalizing the latest version of its CRM (“Client relationship model”) proposals, which will then be released for public comment. The Bulletin indicates that, as the SRO requirements will not be in effect by the deadline under the registration reform rule, each regulator has issued an order that exempts dealers that are members of IIROC, the MFDA, and mutual fund dealers in Quebec, from those requirements until the SRO requirements take effect, or until September 28, 2011, whichever comes first.

Is it any wonder that investors and the advocacy community have lost confidemnce in the regulatory system? ... .htm#1_1_6

IIROC review shows big gaps in controlling “ new products” - no lessons learned ... anguage=en

From March to May of 2010, IIROC conducted targeted regulatory examinations at a representative sample of Dealer Members who distribute structured products. Specifically, the review tested for adequate written policies, procedures, and underlying operational controls on “new products” introduced for sale to retail and institutional clients. The objective of this New Product Due Diligence review was to determine whether, and how, Dealer Members have incorporated the IIROC Guidance Note into their business practice. The disappointing results are extremely disturbing.
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Wed Feb 17, 2010 10:49 pm

Feb 8, 2010

To: Ted Morton, Alberta Finance Minister

Dear Mr. Morton,

Why can investment sellers violate the law in Alberta and sell tainted products?
Why does our crown Alberta Securities Commission allow this? Profit from this?

More than a billion dollars of substandard investments have been sold in Alberta, with the permission of the Alberta Securities Commission. (ASC).  In Canada $32 billion has gone missing with bad commercial paper (ABCP).  

The cost of  every other crime in the country is approx $40 bil according to Justice Canada, so we have that one financial crime equalling nearly every other crime in Canada combined.  

Legal exemptions have allowed substandard investments and advice to be sold by the thousands to Canadians, without notice being sent to the investors.  

The questions that went unanswered by Iris Evans after eight requests. Ted Morton third request.

-What public interest is served by allowing financial laws to be violated?  

-Why are laws allowed to be broken without public input and public notice?

-Why is Alberta Finance suppressing this, rather than protecting the public?

Here is the answer received to date from the Alberta Finance:

“In this particular situation (ABCP) it appears the commissions carefully considered the situation and acted properly in granting the exemptions.”

Here is the official reason given by the ASC:

“Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.”

There is a damaging incestuous relationship between the financial services industry and our government securities regulator. Our Minister of Finance should be moving forcefully towards honest accountability. Anything less may constitute a breach of trust.

These matters have caused billions of dollars to be siphoned out of our economy assisted by 13 securities commissions.   Will you Mr. Morton please take steps to answer these questions for the benefit of Albertan’s?

Larry Elford
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Wed Feb 17, 2010 10:46 pm

Feb 15, 2010

A.P. (Anthony) FOZARD, Staff Sergeant
RCMP Integrated Market Enforcement Team  (Vancouver) 
2200-401 West Georgia Street, Vancouver
British Columbia, Canada  V6B 5A1
Telephone: (604) 602-4455
Facsimile: (604) 331-1222

From: Larry Elford, former CFP, CIM, FCSI, Associate Portfolio Manager, retired

Re: Vancouver IMET file 2010-771

Dear Mr. Fozard,

I write to you with supplemental information regarding the complaint made by Canadians into the sale of Non Bank Asset Backed Commercial Paper (ABCP).  I appreciate that the RCMP have confirmed the opening of a criminal investigative file into the sale of ABCP, as have law enforcement agencies in other countries.  

Public documents are available that indicate that our provincial securities regulatory agencies provided essential help to sellers of this ABCP, to the financial benefit of the securities commissions as well as the investment sellers, and to the detriment of the public interest. I feel that the RCMP should also be made aware of these documents and of the propensity of securities commissions to act in a complicit manner with investment firms who are abusing the public. If these allegations are found to have merit, then we are talking about breach of the public trust by our provincial securities commissions.

None of the public securities commissions have been willing to answer public questions on what process was followed and what public interest is served by letting substandard investments (those which did not met our laws) be sold without notice to Canadians. Of the approximately 5000 instances where securities commissions have let investment firms skirt our securities laws, I find no examples of public input or public notice of these deals. This may put them in a category of secrecy which further reflects poorly on the process and of those who allow our laws to be skirted.

It appears indicitive of a captured regulatory system and one with incestuous relationships with the investment industry which appear to preclude proper duties of care being delivered to the public. 

I write with slight reservation, knowing that not only have the securities industry claimed the right to self-police on matters such as this, but that the RCMP IMET has allowed securities regulators and self regualtory members to work on its force and advise from the position of an RCMP “insider”.  This could be construed as a conflict of interest were it neccessary to investigate the industry or regulators who are paid by this industry.
I urge you to take public steps to show that your force is willing and capable of separating from the investigation, regulators or self regulators who are in fact paid and supported by the very industry you are investigating.

I further ask that the regulators themselves be investigated for breaches of the public trust.

Specific example include, but are not limited to:

The granting  (to investment dealers) of permissions to violate Securities laws in order to help facilitate the sale of known defective investment products, and the simultaneous failure to ensure that the public were notified of this “exemptive relief” process before they invested in the products.

Failure to disclose market risks that were known to the regulators (as evidenced by the need for legal relief application) and intentionally veiled from public view by the industry.

Self-Preservation of regulatory agencies positions through moral disengagement and motivated forgetting towards a securities industry that funds the salaries of all investment regulators in Canada. Dishonest deed by agents of the crown. Failure to provide the duty of care promised to the public by a crown agent.

Regulatory and self regulatory board governance failure. Using boards composed of industry members and very little to none who represent the public interest.

Regulators knew or ought to have known that legal exemptions were detrimental to the protections intended by laws, and that by skirting them, the public was and is being placed at risk. 

Granting of legal exemptions to the financial industry without notice or due process with the public is indicitive of an “abuse of discretion” by an agent of the crown. Hiding the process from the public adds fuel to the argument of an abusive act.

Consistant record of favoritism toward the investment industry, with literally thousands of such behaviors (permissions granted to violate securities laws) that favor the industry and damange the public. Never a public notice was given. No public input was allowed.

Criminal allegations may include but not limited to the following against the provincial securities regulators and self regulatory agencies:

-Failure to provide the public with honest services
-Breach of duty to protect the public

-Regulators knew or should have known enough about their stated protective role in matters that affect the public interest to avoid allowing thousands of exemptions to be granted to those who sell investment products and advice.
-Breach of the public trust.
-Negligently and intentionally failing to protect the public interest through a conflicted securities regulatory system.
-Breaching securities laws and practices that were intended to protect the investing public. Professional complicities with the investment industry that constitute a conflict of interest.

These matters have caused billions of dollars to be siphoned out of our economy, into the hands of investment sellers.  Some of the matters may involve civil recourse from the agencies involved, and some may be criminal in nature.  I trust that the RCMP will take these matters as seriously as the damage to our Canadian economy.  I also trust that the RCMP IMET will take professional steps to separate all aspects of this investigation, from the regulators and self regulatory persons who are on IMET committee’s, and whose regulatory agencies may be suspected of criminal code offenses against Canadians.


Larry Elford, former CFP, CIM, FCSI, Associate Portfolio Manager, retired
Founder of
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Re: break the law and win. Apply for exemptive relief.

Postby admin » Wed Feb 17, 2010 10:45 pm

Mutual Fund Education Series
Document MF #144
March, 2005

Exemption Order Relief-good or bad for investors?

Exemption order- what is it?

A Oct. 1997 discussion document by Benham, Campbell, Gagliardi & Soden at ... liance.jsp articulates
the underlying rationale for regulatory exemptions ―.. Since the early 1990's, securities
markets have undergone rapid and substantial changes including the extended "bull
markets", technological advances, increasing globalization, a rapidly growing securities
industry (particularly, an increasing number of registrants) and a greater number of novel
and complex financial instruments. All of these factors cause market participants to
impose increasing demands on securities regulators, including, most significantly, faster
response times. Securities regulators recognize that they must become more efficient to
meet the demands of industry participants‖ We stress the words ― industry participants ”
There is no comparable provision for a fast track mechanism for investors to correct
deficiencies subsequently discovered in rules and regulations. Investors have waited for
over a decade and still no fund governance requirements are in place.

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). Investors can
spend many man-years striving for the adoption of new investor protection laws, while
the OSC Staff, with the signature of two Commissioners, can grant exemptive relief
from any of these laws. Investors may not intervene before or after the exemptive relief
decisions. Commissioners say they do not have any authority to give notice of these
exemptive relief applications or to hold public hearings before such decisions are
made. Investors may not communicate with the Commissioners making these exemptive
relief decisions to determine the reasons for these decisions. The Commissioners are not
obliged to publish any reasons except to the applicants, usually the mutual fund
companies. The final decision is posted on the regulators website but not communicated
to the public at large.

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. It’s up to the securities
commissioners hearing the relief application to consider the possible ―public interest‖
implications of a proposed exemption, and to apply this test on a case-by-case basis.
Although mentioned frequently, the concept of the ―public interest‖ isn’t well defined in
the legislation; it is typically interpreted as a regulatory commission’s general obligation
to balance investor protection with fair and efficient capital markets.
Mutual Fund Education Series

In this document we examine whether the relief offered by regulatory exemptions is in
fact balanced and in the best interests of mutual fund investors. Or is it slanted towards
industry participants managing $0.5 trillion in assets?

A little background

Before a National Instrument becomes part of securities regulation it goes through a long
complex process of public commentary. Typically, the overwhelming majority 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. If they perceive a change is positive for the industry they will naturally try to
pre-emptively embed it into regulatory thinking. Lobbyist organizations like IFIC
naturally propose what they believe is in the best long term interests of the fund industry.
Despite this, some investor protection aspects survive the onslaught. After a series of
compromises, tradeoffs, deliberations and delays, the Regulation or National Instrument
is eventually 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 company 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 [NP12-201 Mutual Reliance Review System for Exemptive Relief
Applications]. 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. Securities commission normally apply
terms and conditions to its exemption decisions, including sunset clauses that grant relief
for a specified time so firms can rely on the relief only until a rule is in place. Practically
speaking, some relief decisions would be difficult and very costly to unwind.

Relief -The easing of a burden; protection given by law; release from
obligation or duty; lightening of something distressing

Mutual Fund Education Series
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
 relative to requests for new investor protection measures exemptions are
expeditiously approved
 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
 time and energy must be expended to discover 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 sometimes allow a cutback on unitholder services without a corresponding
definitive reduction in fees.
 The cost of the additional monitoring, staff, systems and reporting is directly or
indirectly ultimately 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
 Exemptions increase both compliance and enforcement costs and ultimately the
cost to investors
Investor advocates argue that permitting regulatory exemptions ahead of final rule
approval makes a mockery of the whole public comment process.

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 horrible image problem in the nineties. The media,
investor advocates, 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
Mutual Fund Education Series
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.

In May 2001 mutual fund firms, after intense industry lobbying, were exempted from the restriction
regarding the lending of fund portfolio securities. Securities lending is a temporary loan of
securities to a borrower, against collateral, for a negotiated fee. This fee, net of expenses, could in
principle boost fund returns. Borrowers must meet stringent credit criteria as defined in the
prospectus, and typically include large investment dealers and the securities trading arms of
established international banks. Mutual funds generally participate in securities lending through
their custodians, (in the case of bank-owned funds a related- party) who act as agents or principals.
The custodian negotiates and executes loan terms, collects securities lending revenue, develops
strategies, monitors collateral value and performs appropriate administrative chores. The lending
fee is usually split between the fund company and the custodian. The main risks in securities
lending are (1) the borrower will default,(2) the collateral will drop in value or (3) there are
regulatory, political or economic problems in a given country. Another potential problem involves
operational risk, the effectiveness of the tracking systems of a lending agent that monitors the deal.
Investor advocates continue to question if the small added income for retail fund investors is worth
the risk and caution of potential conflicts-of interest. In practice, the industry had made limited use
of the exemption.

James Langton reports in the Mid- February 2003 Investment Executive -

―..Recall a couple of years ago, when Nortel Networks Corp. was overpowering the
indices, and fund firms clamoured for, and received, exemptions allowing them to go
beyond the concentration restrictions funds usually face. At the time, it seemed
reasonable to allow funds to breach concentration restrictions. But, in retrospect, those
long-held restrictions served a good purpose for investors...‖ Source; J. Langton, ―
Disclosure exemptions create uneven playing field: Some fund firms have received
exemptions from current disclosure rules, but is this fair to the others? ‖

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 Fund Education Series
 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

―…In the 1920s, Goldman Sachs, Lehman Brother sand other investment banks
organized mutual funds [in the U.S.] to provide a market for stocks the bankers brought
to market. The abuses that arose from this practice were the subject of years of
investigations in the 1930s. In the course of the investigations, a senior Goldman Sachs
partner testified before the then-fledgling SEC, "I don't think there is any doubt about it,
when you form an investment company and sponsor it, you get income from stock
exchange business and income from relationships created." Some things never
-Source: Mercer Bullard, ― Another Chink in the Wall: SEC Grants Self-Dealing
Exemption to Goldman Funds‖, 3/1/2001 [the story deals with the case permitting GS
funds an exemption from self-dealing prohibitions so that it could trade securities with
the funds it advises. ... 25120.html

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. According to former OSC Commissioner
Glorianne Stromberg 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
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comprehensible ( in plain language) , 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 auditor 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 regulators, banks
and fund factories need to be reminded as to exactly whose money it is.

Yet another exemption in March, 2004 allowed 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 attracting
assets. 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 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
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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. [The precedent was established in July,
2002, when Mackenzie Financial was allowed to acquire shares in Power Corp., Power
Financial and Great-West Life.] 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
.In Canada’s small market where nearly half of the TSX market cap is attributed to its 60-
stocklarge cap universe but only 3% of listed securities the argument may have some
validity. This related- party prohibition was originally deemed necessary for investor
protection but, with the passage of time, mutual fund growth and industry consolidation,
has been watered down. A January 2004 OSC exemptive relief decision for example lets
Winnipeg-based Investors Group invest [and vote the proxy shares] 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 a unelected
Investment Review Committee. Truly a family affair. The consequences? Added costs for
unitholders, questionable oversight, potential conflicted voting of fund shares and
constraints on timely disposition because of the ―special relationship‖ with related

It’s true that most exemption decisions have 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 cynically 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 ultimately paid for by investors in one form or another,
but in the end the judgment of the fund manager is the sole basis for the suitability of the
investment. When Scotia Mutual Funds was 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, the exemption
minimized their distribution since ― they don’t get read anyway‖.

Mutual Fund Education Series
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 Assante is now part of the CI

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 had as a major creditor of Canadian.
The bottom line
Mutual funds are a wonderful and convenient vehicle for small retail investors to invest
for their retirement or other goals. BUT, they need to be managed at all times in the best
interests of unitholders and without undue risk .
The practical effect of exemption relief decisions is to allow some industry participants,
to operate as if new rules were in place, despite the fact that they may still be out for
comment, or, in the case of fund governance, still at the conceptual stage. Risks due to
exemptive relief have definitely increased for investors without the benefit of a protective
fund governance framework or investor input.
Exemption decisions are yet another example of how securities regulation is tilted in
favour of what the financial services industry, especially the big banks and insurers,
wants, or is prepared, to accept. Seemingly little regard is given to the needs of investors,
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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 , U.S. and Canadian fund scandals, prospectuses
that obscure rather than illuminate and wishy-washy annual reports/financial statements
that don’t really discuss the operations of the fund, break out important costs or articulate
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 officially 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 trillion 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 already
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. In that case ,effective fund governance would
have (a) reacted to the defective valuation process for international funds (b) imposed a
early redemption penalty and (c) told the frequent traders to go elsewhere. Fund
governance is a cost-effective measure that will reduce ( but not guarantee) the chances
of inappropriate behaviour and practices. We await the next move from politicians and
regulators but here’s some ideas. Because individual investors ultimately pay for the
consequences of these sorts of decisions, the regulators should be funding a Financial
Consumer Advisory Panel to represent investors’ interests in proposed new rules and
exemptions to those rules. Another idea, establish a true fund governance regime and toss
the IRC concept out the window.

Ken Kivenko P. Eng.
Investor Advocate

Information contained herein is obtained from sources believed to be reliable, but
the accuracy is not guaranteed. The material does not constitute a recommendation
to buy, hold or sell. The purpose of this Document and others in the series is to
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educate investors by bringing together personal finance information from a variety
of sources. It is not intended to provide legal, investment, accounting or tax advice
and should not be relied upon in that regard. If legal or investment advice or other
professional assistance is needed, the services of a competent professional should be
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Location: Canada

Re: break the law and win. Apply for exemptive relief.

Postby admin » Sat Sep 05, 2009 10:35 pm

in an interesting twist I see the "this is not an offering to sell" warning on a recent advertised investment including a new item. In addition to this normal text, it also went on to say "The Units are being offered pursuant to exemptions under applicable securities law".
Very unusual to see the "exemption" warning. I have never seen it before today.

It is on an ad for retirement residence investments from MasterpiecePhase Two Projects Inc. Advertised in the Calgary Herald sat sept 5, 2009. Page D5.

Would this be a new way of letting the securities commission off the hook for never before having given the public any notice when they might be getting sold an exempt investment?

Would it be an attempt by the commission to move toward better practices?

Would it require an admission to all previous investors that they were lulled into a false sense of security by the commission for not putting these warnings on, and for not giving the public any notice?

Would investors who purchased something bad, that did not have that warning on it deserve their money back, or an action against the commission?

The verbage "pursuant to exemptions under applicable securities law" is also not very clear. Do you think investors will understand that to mean that this investment "did not meet" provincial securities laws, and they had to buy a "pass" to "get around" our laws before they could be sold?

I will leave most of these questions to the lawyers, but it appears to me that while the securities commission is perhaps taking a baby step in placing this warning on an investment offering, they are still visibly serving investment firms over and ahead of serving the public investor. Their salaries come from that angle and their interests seem bent on a lack of transparency just yet.
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Location: Canada

Postby admin » Mon Aug 11, 2008 9:22 pm

cheers guys, I just read saturday and mondays globe and mail front page stories in the business section about asset backed commercial paper.

They are now starting to figure out that some of the causes of the tainted paper ending up in average investors hands were "legal exemptions" granted by our very own securities commissions to help these pigs fly.

(In english........when an investment dealer has a pig of an investment, and needs help to make it sell off his shelves, a legal exemption can often grease the way. It makes things which are normally not in the public interest, and normally something to be frowned upon...........suddenly .....pretty........for the firm with the crappy investment to sell off)

Legal exemptions were granted so that this tainted paper did not need a prospectus for exemptions were granted to CIBC to sell exemptions were used to allow salesmen of this product to misrepresent their clients and call themselves "investment advisors".

All of these exemptions were granted by our own "crown corporations", the provincial securities commissions.............none of these commissions will allow public input or public notice of the thousands of exemptions granted each year.................and I now find out that these securities commission, which are crown corporations are indeed paid by the very firms they purport to police!!! (Alberta Auditor general report on the ASC)

I suspect that one day these crown corporations will cost each provincial government billions of dollars in compensation payments if and when the public fnds out what extent these legal free passes have been given out to vendors of investment products and how those exemptions have affected investor's wealth.
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Location: Canada

Postby admin » Mon Aug 11, 2008 7:50 am

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

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."

(advocate comment: it should be noted here that this same Susan Wolburgh Jenah, personally signed many such exemptive orders when she was employed as vice-chair at the OSC previously, effectively being the sole authority which allowed these products permission to be sold to consumers without meeting the laws in her province)

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."



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."
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