FAIR Canada
FAIR Canada Newsletter

June 2011

Sino Forest/Muddy Waters Scandal Raises Systemic Questions

FAIR Canada questions whether investment dealers, the TSX and regulators have properly assessed the risks that emerging market listings pose to the reputation of the Canadian capital markets and to Canadian investors. Has there been adequate due diligence, among other things, with respect to management and directors? Does the number of China listings with accounting irregularities and independent auditor resignations raise questions about the adequacy of accounting and auditing requirements? When something goes wrong, do Canadian regulators have the ability to regulate and investigate these companies when the mind and management, business and books and records are thousands of miles away in a foreign country and with documents written in a foreign language? Canadian investors lost over $250 million in two TSX-listed China IPO scams in the mid-1990s. Santayana famously said: "Those who cannot remember the past are condemned to repeat it." Today, we have a repeat of the 1990s with many China listings blowing up both in Canada and the U.S. The main difference is that the financial losses to investors are more than ten times greater.

 

FAIR Canada's Executive Director, Ermanno Pascutto, appeared on BNN to discuss the retail investor perspective on the regulatory issues raised by the Sino Forest/Muddy Waters fiasco.  Ermanno called for rules to regulate the disclosure and dissemination of price sensitive information by short sellers to ensure a fair and orderly market.  He also called for the establishment of a task force to examine the risks posed to Canadian investors and the reputation of Canadian markets by listings from China and other emerging markets. Click here for the BNN interview.


The U.S. SEC's Office of Investor Education and Advocacy recently issued an Investor Bulletin on Reverse Mergers which focuses on the enforcement actions against Chinese businesses listed on U.S. exchanges or trading on U.S. markets. Meanwhile, in a speech to the Council of Institutional Investors, SEC Commissioner Aguilar questions whether certain foreign companies are abusing the U.S. capital formation process.

 

The Hong Kong Exchange and the Hong Kong Securities and Futures Commission are the experts at regulating China listings and Hong Kong gets the cream of the crop of Chinese IPOs. Hong Kong regulators understand the elevated risks of listing private businesses from Mainland China (particularly as compared to the listing of Chinese state enterprises). The Chief Executive of the Hong Kong Exchange has stated that Hong Kong is better placed to  regulate China listings than North America. See this Reuter's article on Hong Kong's view on the difficulty of regulating China listings. 

 

We hope that investment dealers, the TSX and regulators in Canada will address these issues on a timely basis for the benefit of Canadian retail investors and the reputation of our markets.

 

Statement of Priorities Signals that New OSC Chair is Listening

The Ontario Securities Commission (OSC) has published its 2011-2012 Statement of Priorities (Statement of Priorities) revising the draft Statement of Priorities published for comment earlier this year. The revisions include a number of specific initiatives that have been added in order to address public comments they received.  These initiatives include:
 

  1. Research the pros and cons of imposing a fiduciary duty on financial advisors and identify what problems the OSC thinks that introducing a statutory fiduciary duty would resolve;
  2. Work with the CSA, IIROC and the MFDA to develop harmonized standards for cost disclosure and performance reporting to investors, thereby improving clients' account statements;
  3. Monitor the Point of Sale initiative's (POS) impact on price competition in mutual funds as implementation of POS moves forward and is expanded to other investment fund products;
  4. Work with the Ontario Government to explore a mechanism by which the OSC could award compensation to Ontario investors who suffer losses because of Securities Act violations; and
  5. Conduct town hall meetings and investor round tables to gather views of investors.

FAIR Canada is encouraged to see the addition of these specific initiatives to the Statement of Priorities. While the Statement of Priorities does not fully meet recommendations made by FAIR Canada, the OSC's Investor Advisory Panel, the Small Investor Protection Association and other investor advocates, it does constitute a significant improvement over previous years' statements of priorities. 

 

The Statement of Priorities signals Chair Howard Wetston's vision for the OSC as a more investor-focused regulator...

 

Read more >>>

  

Financial Scandals Report

Ermanno Pascutto recently made a presentation at the Kempenfelt Enforcement Conference hosted by the Ontario Securities Commission on FAIR Canada's recent report on financial fraud. The report made a number of recommendations on fraud prevention, earlier detection, improved enforcement and providing better compensation for victims.  There was an active discussion of FAIR Canada's recommendations following the presentation. 

 

Click here to review the PowerPoint presentation.
 

  

FAIR Canada Makes Recommendations to FSCO to Protect Financial Consumers and Improve Accountability to Consumers

In its submission on the Financial Services Commission of Ontario's (FSCO) Draft Statement of Priorities, FAIR Canada urges FSCO to adopt a number of reforms to benefit financial consumers. FAIR Canada's recommendations include that FSCO consider setting out regulatory requirements for product suitability in a fashion similar to IIROC Dealer Member Rules and MFDA Rules in order to improve outcomes; FSCO issue a consultation paper in 2011 on implementing a "best interest of the client" standard for all market intermediaries; suggested legislative changes include a "best interests of the client" standard and better disclosure to consumers of the compensation and incentives paid to intermediaries.  FAIR Canada would like to see a specific initiative to further the ways in which FSCO communicates with and is accountable to financial consumers.  One means to do this is through strengthening the Consumer Advisory Committee which FSCO created in 2001 so that it can provide more meaningful and publically transparent consumer input.  For all of FAIR Canada's recommendations, please review the submission.

 

 

FAIR Canada Urges that Alpha Exchange Meet International Best Practice

In its submission, FAIR Canada urges the Ontario Securities Commission to require Alpha to have a model for its exchange where there is a proper separation of the commercial and regulatory functions consistent with international standards in order to protect investors. There is an inherent conflict of interest in the "for profit" status of an exchange and that same exchange acting as a regulator of listed companies. FAIR Canada urges that specific measures which are consistent with other developed countries' exchanges be adopted to manage the conflict of interest in listing regulation. Consideration should be given to transferring the listing functions of Canadian exchanges to an independent SRO that can be responsible for the creation and administration of core ongoing listing rules. FAIR Canada also recommends that the OSC defer public comment on the Alpha Exchange application and points out that it is premature for the OSC to make a decision on the Alpha application given other market developments.
 
If responsibility for regulation is not transferred to an independent SRO, FAIR Canada recommends that  Alpha should be required to set up an independent subsidiary with the majority of its board consisting of independent directors which would have final decision-making powers regarding listing policy, rule-making and budgetary matters.  FAIR Canada makes other comments in response to specific questions in the OSC's Request for Comments in order to protect investors.

 

 

www.faircanada.ca
who we are | top news | submissions and reports | join our fair canada facebook and linkedin groups

 

Join Our Mailing List