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From the Bottom Up. Presentation of Evidence on THE FIVE YEAR REVIEW COMMITTEE FINAL REPORT: REVIEWING THE SECURITIES ACT (ONTARIO) to the Ontario Standing Committee on Finance and Economic Affairs August 2004 Robert Kyle Investor Advocate Toronto, ON.

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from the bottom up

From the Bottom Up

Presentation of Evidence

on

THE FIVE YEAR REVIEW COMMITTEE FINAL REPORT:

REVIEWING THE SECURITIES ACT (ONTARIO)

to the

Ontario Standing Committee

on

Finance and Economic Affairs

August 2004

Robert Kyle

Investor Advocate

Toronto, ON

self regulation in the securities industry has been a major failure
Self–regulation, in the securities industry, has been a MAJOR FAILURE

“The major failure has been at the SRO

(self-regulatory organization) level.

Whether you are talking about research or mutual funds or specialists, there has been a failure to properly question behavior that they know about before anyone else.

Every one of those issues was understood by the industry and not responded to.”

On the Warpath, Eliot Spitzer, New York State Attorney General, New York Post, 25 January 2004

self regulation has done nothing to protect investors
Self Regulation has done nothing to Protect Investors

“Self-regulation has been an abysmal failure — an absolute, abject, complete zero.

It has not done anything to protect investors.”

Self-regulating groups under pressure to change, Eliot Spitzer, New York State Attorney General, Investment Executive, June 2003

“Self Regulatory Organisations (SROs) have scant incentives to monitor quality and expose fraud because fraud exposure is often interpreted by consumers as a bad signal of SRO quality.”

Can Self-Regulation work?: A game-theoretic approach

May 18, 2001, referred to in Investment Executive, June 2003

ida breach of recognition order and osc corroboration
IDA Breach of Recognition Orderand OSC Corroboration

Condition of Recognition Order

“The Guidelines for Investigations of Supervisory Practices are to be followed and updated….”

October 1995, 18 OSCB 5293

“…the document (Guidelines) is not current, nor has it been applied to our knowledge by staff of the Division (IDA Enforcement) in any investigation…”

IDA Legal Counsel, Letter of 01 December 1998

OSC and IDA Representations to the

Ontario Information Privacy Commission (June 2001)

(in a bid to keep the Guidelines secret from the public)

…the Guidelines advise as to when and how the IDA will conduct investigations of member firm supervisory functions.

osc oversight of ida is a failure
OSC Oversight of IDA is a Failure

“Nor is there effective oversight from other quarters. Politicians know little about securities regulation and care less. The Ministry of Finance struggles valiantly, but has neither the personnel nor the expertise to function as an effective cop. And the courts have given the regulators near carte blanche to make decisions that are perceived to be within their area of expertise.”

The Air Canada 'fine' is 'manifestly illicit', Jeff MacIntosh, Law Professor, Director of Capital Markets Institute, University of Toronto

National Post, 31 July 2001

investor request for osc analysis and review of the ida

NOACCOUNTABILITY TO PUBLIC

Investor Request for OSC Analysis and Review of the IDA

OSC Representations to Information Privacy Commission

“The IDA has previously indicated to (the) OSC”…. “that the IDA would be unlikely to provide useful critical commentary on its own performance should that commentary be publicly available.”

Order PO-2206, [2003] O.I.P.C. No. 34 (QL)

The OIPC ordered the document be released:

“In essence, the position of the OSC and the IDA is that if the record is disclosed, the IDA will be reluctant to cooperate with the OSC in its reviews.

This submission lacks credibility.

I order the OSC to disclose the record to the appellant …”

Order PO-2206, [2003] O.I.P.C. No. 34 (QL)

conflicts of commitment and conflicts of interest at ida
Conflicts of Commitment and Conflicts of Interest at IDA.

The Ontario Court of Appeal ruled on June 25, 2003 in Morgis v. Thomson Kernaghan & Co [2002] O.J. No. 4057, that the IDA has no duty of care to the individual investor.

Guidance for Investors posted on OSC web site

Where the registered firm is a member of a self-regulatory organization (“SRO”), either the IDA or the MFDA, you should direct your complaint to the Enforcement Division of the appropriate SRO.

It’s almost like having one lawyer represent both the bandit and the victim, while promising to act in the best interests of both at the same time.New Complaint System on the Way, The London Free Press, 23 July 2001

ida industry regulator registered lobbyist and industry representative
IDA – Industry Regulator, Registered Lobbyist and Industry Representative

… there is a well-documented propensity for specialized bodiessuch as agencies or regulatory commissions to develop very close relations with regulated entities. Specific mechanisms to assist public interest and community based interveners in policy-making and regulatory processes are needed to counteract this tendency.

Drinking Water Protection in Ontario: A Comparison of Direct and Alternative Delivery Models, Issue Paper Prepared for Part II of the Walkerton Inquiry

On December 1, 2001, in the United Kingdom, the FSA became the single regulator of financial services, banking and insurance. It assumed responsibility for supervising firms formerly regulated by SROs. There is no reliance upon SROs under the new U.K. Act.

… one of the reasons for abandoning self-regulation is that SROs were viewed as associations that represented their members’ interests over those of the investing public.

5 Year Review of the Ontario Securities Act Draft Report

sitting on the fence
Sitting on the Fence

The IDA is Canada's only national entity with delegated responsibility for securities regulation and investor protection.

- Joe Oliver, President of IDA

Senate Standing Committee on Banking, Trade and Commerce, Evidence

02 November 1998

The IDA is merely an unincorporated voluntary Association of Securities Dealers governed by a constitution, bylaws and regulations which deal with the conduct, management and control of the Association’s affairs.

Although the IDA is not a statutory body, it does operate within a statutory regime.

IDA Factum filed with the Ontario Superior Court of Justice, Morgis v. Thomson Kernaghan & Co[2002] O.J. No. 4057

ida 2004 conference pamphlet
IDA 2004 Conference Pamphlet

“Cunning and clever, successful in outsmarting adversaries to achieve goals.”

a consumer s nightmare
A Consumer’s Nightmare

“The regulation of financial services in Canada, according to Dr. Yudelman, “remains a consumer’s nightmare, a tangled, confused structure divided by type of government, type of financial service, government regulation versus self-regulation, and by prudential and market regulation.””

The Scorpion and the Frog, A Consumer View of Canadian Financial Services and Ways to Transform Them; Consumers Council of Canada, June 2001

The consequences of inaction may well force a greater dependency on the social safety nets provided by government.

no transparency
NO Transparency

Somebody said to me – ‘Boy if we have a scandal in Canada, we are going to have to be as transparent as the United States.’ And I said ‘Well, if we are, we could just destroy our markets.’ – David Brown, O.S.C. Chairman

Scandal would kill market, OSC head says, Globe and Mail, 20 September 2002

prioritize
Prioritize

Not all Ontarians or Canadians travel the 407, but they must invest through an IDA/MFDA member for the majority of their investments –

Who will protect investors that need help?

"We're not going to shrink from our responsibility to stand up for the public interest," he said. "We're going to protect the Ontario public.”

Ontario Premier Dalton McGuinty

Ontario won't give in on 407, Canadian Press, 12 August 2004

Re: License plate denial on the basis of  non-payment of tolls for use of Highway 407.

"This matter highlights the need in privatization initiatives for accountability mechanisms which will enable the government to ensure that the private sector partner acts fairly with the public.”

Clare Lewis Q.C., Ombudsman Ontario, Ombudsman Ontario Newsletter, June 2000

judicial review
Judicial Review

STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS

HANSARD,01 December 1994, Securities Amendment Act, 1994

I think I'm persuaded by the argument of not pursuing judicial review, just because of my own view that if there are too many avenues available for constant second-guessing the commission, we run the risk of bogging ourselves down, and if the commission is not performing its role, I think we fix the commission.

Gerry Phillips, Finance Critic, Member - Standing Committee on Finance and Economic Affairs

Bill 179, Time Allocation, Hansard, 28 October 2002

Government best serves the people when it listens. Government best serves the people when it accommodates. We need to do more in this Legislature to protect the public good, to listen to what the public wants, to hear their criticisms and to make amendments where those criticisms are justified.

Michael Prue, Member Standing Committee on General Government

the wealth of nations
The Wealth of Nations

"The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public.

The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.

It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have upon many occasions, both deceived and oppressed it."

Adam Smith, The Wealth of Nations (1776), Book One, Ch. XI, at p. 358, para. 262

osc s measure of success
OSC’s Measure of Success

Rebecca Cowdery, the former head of the investment funds team at the OSC, dismisses suggestions that the new rules favour funds.

"If the industry won, so did investors," said Ms. Cowdery

Who's standing up for the investor?, Globe and Mail, 22 June 2004

I leave it to you to decide whether Adam Smith or Rebecca Cowdery has a better grasp on the criteria you as a committee should use to gauge the success of the current regulatory regime vis-à-vis ensuring the public interest.

investors deserve better
INVESTORS DESERVE BETTER

We need an independent tribunal charged with a clear mandate of investor protection, empowered by legislation to decide issues of law, and to order financial redress for abused investors whenever appropriate.

FIX The SYSTEM!!!