With lackluster returns, record high redemptions, and even OSC investigations, the mutual fund industry has received its share of public impeachment. Mutual funds may not be the shining stars they once were during the 90’s, but does an entire industry deserve to be targeted?

CARP - the Canadian Association for the Fifty-Plus - seems to think so. They recently released a report entitled “Giving small investors a fair chance: Reforming the mutual fund industry”, in which the industry is blamed for “deficient regulations, abusive industry sales practices, excessive fees, inadequate governance, and lax regulatory enforcement”.

Is this really fair? Well, Bay Street, you be the judge.

In the left corner: a press release from CARP making such assertions.

And in the right corner: a response from the Investment Dealers Association of Canada (IDA) pointing out inaccuracies of the report and defending the industry’s position. Do you have an opinion? The rest of Bay Street would like to hear from you. Send an e-mail to editor@baystreettimes.com with your comments for the November issue of The Bay Street Times.

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From: CARP - Canada's Association for the Fifty-Plus

September 28, 2004 - Whether retired or approaching retirement, the loss of retirement savings can be a life altering experience and happens all too often.

A major source of savings is investment in mutual funds. In fact, approximately 10 million Canadians hold mutual funds in their Registered Retirement Savings Plans (RRSPs) or in a regular investment account. According to the Investment Funds Institute of Canada, in 2004 the mutual fund industry was worth $451.6 billion.

Although mutual funds are in principle a sound investment vehicle, most Canadians do not have good investment knowledge and tend to rely upon a mutual fund salesperson or broker for advice. Unfortunately, many investors, including seniors, have fallen victim to financial advisers who have provided them with bad advice or have engaged in outright fraudulent activity. Retirees have seen their savings dwindle, with little hope of regaining lifetime savings. And, recourse for restitution can be limited, time-consuming and costly. Punishment for culpable financial advisers is generally not very effective or meaningful.

The mutual fund industry suffers from deficient regulations, abusive industry sales practices, excessive fees, inadequate governance, and lax regulatory enforcement. Fundamental reform of the industry is required.

For this reason, CARP and the Small Investor Protection Association Inc. (SIPA), have reviewed the industry and have produced a Report including practical recommendations on how to enhance protection for small investors, particularly seniors.

The 17 recommendations in the Report include:

• A single, national independent Investor Protection Agency (IPA) to ensure protection and proper and equitable financial redress for investors.

• Establishment and funding of an effective Investor Advisory Panel by Securities regulators to consist of organizations such as SIPA and CARP to ensure protection of investors.

• Federal legislation for the prompt and fair handling of investor complaints, ensuring that mutual fund companies make public complaint processes and procedures.

• Truth-teller (whistleblower) legislation including employment protection to protect informants who expose non-compliant activities.

• Federal legislation for educational financial/investment seminars to outline guidelines, restrictions and disclosure requirements, as well as a clearly stated “cooling-off” period of 15 days to cancel the transaction without penalty.

CARP is Canada’s Association for the Fifty-Plus. With 400,000 members across the country, its mandate is to promote and protect the rights and quality of life of older Canadians. Its mission is to develop practical recommendations for the issues raised. To view the entire Report & Recommendations, please go to www.50plus.com or phone 416 363-8748 ext. 235.

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FROM: The Investment Dealers Association of Canada

September 28, 2004 - The Investment Dealers Association of Canada (IDA) today responded to Giving Small Investors A Fair Chance, Reforming the Mutual Fund Industry, a report issued by the Canadian Association for Retired Persons (CARP).

The Association welcomes the opportunity to address issues and specific recommendations that address areas of its responsibility and jurisdiction. As a national self-regulatory organization, the IDA regulates the activities of 208 investment dealers and their nearly 25,000 registered employees in terms of capital adequacy and business conduct. From 2001 to June 2004 IDA staff conducted 567 on site financial and sales compliance examinations and completed 165 prosecutions, imposing fines on firms and individuals totaling over $12 million and terminating 25 individuals’ and 3 firms’ licenses.

The report includes a number of redundant recommendations where rules or policies are already in place as well as a number of inaccuracies. Specifically, the IDA has the following comments about Report recommendations and findings.



Recommendation 1: Establish a central registry of industry participants.

Fact: The recently created National Registration Database contains comprehensive and current information regarding disciplinary history, proficiency and education qualifications of every securities industry professional required to be registered under provincial securities laws, including all registrants at IDA Member firms.

Recommendation 2: Securities regulators should be required to actively seek—on a regular and established basis - input from investors.

Fact: The Canadian Securities Administrators (CSA) comprised of provincial securities commissions has a long-established public comment and review process in place. Proposed IDA rules must be approved by the CSA and only following a period of public comment and review.

Recommendation 4: Regulations should require firms to maintain and retain records of all complaints received, report how and when they were resolved, and submit this information to regulatory authorities on a monthly basis.

Fact: IDA Policy 8 requires all firms to retain records and to report to the IDA within two to five days all client complaints, all internal firm disciplinary actions, securities related civil actions, arbitrations, criminal convictions or settlement agreements.

Recommendation 8: Undisclosed marketing arrangements that could encourage financial advisors to recommend one fund over another for personal/corporate gain should either be disclosed or prohibited. Promotion of corporate sales and/or profits rather than serving the needs of the client should be subject to penalty.

Fact: For many years, Canadian regulators have had rules in place that prohibit compensation arrangements that create unacceptable conflicts of interest in the sale of mutual funds. IDA By-law 18.12 prohibits non-cash compensation like trips. National Instrument 81.105 prohibits the direct payment of cash or non-monetary benefits and prohibits any dealer from providing to its sales representatives a biased incentive to favour one mutual fund family over another. IDA Regulation 1300.1c (Suitability) requires registrants to make recommendations to clients based on their suitability for the client.

Recommendation 17: Settlement agreements between investors and firms should be made public—and without confidentiality clauses—at the investor’s discretion.

Fact: Policy 8 prohibits firms from concluding settlement agreements with clients that include confidentiality clauses which would prevent regulators from learning about the matter. Moreover, all IDA disciplinary settlement agreements are made public and are posted on the IDA website.

The IDA also believes that the following Report findings require clarification or correction.

The report states that non-statutory SROs have not provided a fair balance between the interests of investors and those of their member firms and quotes former SEC Chairman Arthur Levitt: “…all SROs, when push comes to shove, favour their listed companies or the brokers that bring them the business. That may be all right in the marketing sense. But the conflict is too great to be allowed to stand”.

Fact: Canadian SROs do not have the conflict identified by Mr. Levitt. The IDA and MFDA, unlike the US SROs he is describing, do not regulate stock exchanges which they own. In Canada, the TSX has delegated regulation to an independent regulatory service provider, Market Regulation Services (RS) Inc.

The Report dismisses current Alternative Dispute Resolution (ADR) programs and Ombudsman services as “sponsored by the industry players themselves”.

Fact: Arbitrations are conducted for clients of IDA Member firms by three independent, impartial agencies: ADR Chambers, The Quebec National and International Commercial Arbitration Centre and the British Columbia International Commercial Arbitration Centre.

Since 2001, clients of IDA Member firms have been able to choose the option of arbitration, a cheaper and faster alternative to pursuing compensation through the civil court system. If a client chooses arbitration, the IDA Member firm is required to participate.

The Ombudsman for Banking Services and Investments offers a free, independent and impartial resolution service for clients of any firm that is a member of one of four non-profit organizations: the IDA, the MFDA, IFIC or the Canadian Bankers Association. Disputes can involve claims for a maximum of $350,000. IDA Member firms are required to fully cooperate and participate in any OBSI investigation.

OBSI is a participant in the Financial Services OmbudsNetwork (FSON), an independent information and assistance service for consumers of the Canadian Financial industry. It was created by the IDA, MFDA, CBA, IFIC, the Canadian Life and Health Insurance Association and the Insurance Bureau of Canada.

Recommendation 5 calls for public announcements when a seller of financial products is under investigation citing the reasons for that investigation. The IDA disagrees with this recommendation. A public announcement that an individual or firm is under investigation is unfair and can have potentially serious negative reputational and financial consequences for the respondent. Disclosure should only be made when the investigation has established reasonable grounds to proceed with a public hearing. The IDA makes the complete disciplinary record available to the public by posting on its web site the Notice to Public of the Hearing; the Notice of Hearing and Particulars; the Disciplinary Decision; the Reasons for Decision or Settlement Agreement.

The Investment Dealers Association of Canada is the national self-regulatory organization and representative of the securities industry. The Association’s mission is to protect investors and enhance the efficiency and competitiveness of the Canadian capital markets.