Small investors group blasts regulators

(April 13, 2004) Canada’s securities regulators are ignoring the principles of investor protection to keep industry participants happy, charges an investor lobby group. In a strongly worded report, the Small Investor Protection Association (SIPA) accuses regulators of watering down a proposal to introduce a new fund governance regime.

The Canadian Securities Administrators’ (CSA) proposed National Instrument 81-107, published for comment earlier this year, would require fund companies to set up independent review committees (IRCs) for each fund, with a mandate to review fund managers and potential conflicts of interest. Originally, the CSA called for independent boards of directors for mutual funds. SIPA says it’s “dismayed and disappointed” with the CSA’s change of heart.

“The new rules are extraordinarily naive and inappropriate in relying on a review committee at a time when we’re seeing that independent directors are inadequate protection against wrongdoing,” says the SIPA submission on the CSA proposals, written by Ken Kivenko.

“NI 81-107 has nothing to do with investor protection. It is a vehicle to allow fund sponsors with broker affiliates to engage in controversial practices,” SIPA argues. “The IRC is an advisory committee at best with no teeth.”

Although there has been limited progress in improving fund governance, the pace of change has been far too slow, SIPA maintains. “Previous studies, including the highly regarded Stromberg report and the Ontario Securities Commission’s five-year review committee has recommended more robust investor protection structures that have been unduly discounted to satisfy industry participants.”

“A weak governance structure is not in the best long-term interests of the mutual fund industry,” the submission states. “Stricter rules will benefit our capital markets in the long run by making them safer and more transparent.”

SIPA praises U.S. regulators for the “fast and effective” steps taken to protect fund investors in the wake of a series of late-trading and market-timing scandals. And it says the abuses uncovered south of the border are “no doubt” also prevalent in Canada in some form.

“We assert that if Canadian regulators ignore the U.S. experience, it is at the risk and peril of ordinary Canadians,” SIPA says, pointing to the Canadian mutual fund industry’s “checkered” history.

“The [U.S.] investigation has exposed unsavoury, abusive and illegal fund practices that the fund industry had for decades claimed did not exist. The situation is undoubtedly worse for the average Canadian investors because of the smaller economy, higher financial service industry concentration, weak regulations, limited enforcement resources and the lack of a national regulator.”

SIPA’s submission includes a lengthy list of suggested reforms, including the creation of a mutual fund investor protection fund, the mandatory inclusion of governance risks in prospectuses, the introduction of investor advisory boards, the passing of “whistle-blower” protection legislation, a ban on short-term fund trading and the public disclosure of fund companies’ proxy voting policies.

“Mutual funds are an invaluable investment vehicle for small investors,” the report concludes. “But [they] are typically not financially literate and thus need and deserve full regulatory protection. Their financial health depends on it.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com