Dealers to reimburse Portus referral fees

Clients who invested in Portus Alternative Asset Management are going to be reimbursed about $12 million in referral fees by mutual fund and investment dealers who participated in the offering, excluding fees that have already been recovered. The agreement was announced on Friday by the Ontario Securities Commission, with the cooperation of the IDA and MFDA.

According to the plan, clients are to be repaid the fees by May 31. This payment will be in addition to the money investors stand to recover from insolvency proceedings involving the Portus Group. Still, the $12 million is the most that will be returned to investors from fees if all the dealers agree.

Fifty-nine MFDA members and five IDA member firms will be required to repay investors all fees received from Portus in connection with client referrals. The lion’s share of those fees are to come from MFDA members; IDA firms account for only about $1 million of those fees, which impact about 845 investors.

“Today’s initiative is one small step for investors, in terms of getting money back into the pocket of harmed investors” says Wendy Dey, communications director for the OSC, calling the move a “proactive” step by the regulators. “The regulators have decided that this is a very efficient, a very effective, and a very expedient manner in which to get money back into the pockets of investors right away.”

The regulators have already received indications from 28 dealers, representing more than 80% of the fees paid out, who say they are prepared to abide by the terms and conditions spelled out by the OSC. Those terms include participating in regulatory studies relating to the referral fee arrangements and non-mutual fund products.

As an added incentive, the OSC has said compliance with the terms and conditions will be viewed by the regulators “as a cooperative response to regulatory issues which maximized prompt recovery to investors.”

The OSC statement continues, “Acceptance of the terms and conditions by a dealer will resolve the regulatory issues in Ontario regarding dealer due diligence and supervision.”

The OSC’s terms will apply to Portus clients across the country and the regulators say they are communicating with other Canadian securities regulators about Friday’s developments.

However, this won’t let all dealers off the hook. The MFDA plans to continue to investigate other matters relating to the conduct of dealers in referring clients to the now defunct hedge fund. This also won’t affect a client’s rights to pursue further recoveries through the courts.

There are some investigations that are continuing with regard to other issues, says Shaun Devlin, vice-president in charge of enforcement for the MFDA. The mutual fund regulator aims to complete 80% of its investigations within 16-months, including a four-month period of case assessment. Devlin says it’s too early to say whether the MFDA will meet its benchmark.

The IDA has already completed its investigation of the five members who were involved with Portus and found no grounds for proceeding to enforcement action. As for investigations into individual, that’s another matter. “I’m in my corner here where I can’t confirm or deny the existence of investigations,” says Connie Craddock, vice-president of public affairs for the IDA.

Dealers have until January 28 to decide if they intend to comply with the regulators’ request. Those dealers that agree to the plan, but fail to reimburse fees by May 31 could face the suspension of their registration.

AEGON Dealer Services Canada was one of the first out of the gate, announcing late Friday afternoon that it would return referral fees “well in advance” of the proposed deadline and would communicate directly with investors about the refunds after its repayment plan was approved by regulators.

“I’m grateful that Canada’s mutual fund and investment dealers have come together to do the right thing,” said AEGON Dealer Services president Scott Sinclair.

Berkshire Investment Group also put together a hastily formed release saying that it too has determined that it is in the best interests of its clients, its advisors and the firm to support and agree to the OSC Regulatory Solution.

More than 24,500 investors placed approximately $800 million in Portus products.

Some advisors may be wondering why they and their clients were forced to wait a year for this regulatory response. Many will recall that within two months of the OSC’s initial action against Portus, Manulife Financial said it would guarantee its clients’ investments in the defunct hedge fund.

“It’s a very complicated matter,” says Dey, responding to the amount of time that the OSC has taken on this file. “Regulators are working as expeditiously as they can on many facets of the Portus problem.”

The next court appearance for the OSC’s administrative proceeding against Portus, Boaz Manor, Michael Mendelson, Michael Labanowich and John Ogg is set for January 17. Manor is also scheduled to make a separate appearance in provincial court on January 18, although he will likely only be represented by council. Manor hasn’t returned to Canada since he fled to Israel.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(01/13/06)

Mark Brown

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