FAIR Canada
FAIR Canada Newsletter

October 2011

Leveraging strategies too risky for most retail investors

FAIR Canada has written an open letter to the provincial Canadian securities regulators (CSA), calling for better investor protection from the risks associated with registrants who encourage retail investors to borrow funds to purchase mutual funds and similar products. The letter opens with the following request:

 

"We are writing to you in your capacity as Chair of the CSA to recommend that the CSA enhance protection for investors who are persuaded to borrow money in order to invest in mutual funds and other investments. Leveraged investing is not suitable for most retail investors and current requirements do not provide adequate investor protection from unsuitable advice with respect to borrowing to invest. FAIR Canada believes that this is a systemic problem that regulators must address or investors will continue to be placed into unsuitable investments with resulting financial losses and an increasing number of investor complaints."

 

In the letter, FAIR Canada stresses the importance of ensuring that individuals who recommend such strategies clearly and completely explain the risks of leverage to clients and that the risks are clearly understood by consumers.

 

In early October, FAIR Canada submitted comments to the Mutual Fund Dealers Association of Canada (MFDA) regarding proposed changes to their leverage rules. Both the submission and the letter to the CSA call for a certification requirement, which would oblige registrants to certify, at the time of a leverage recommendation, that they have explained the risks associated with leverage to the client and certify their belief that the client understands the associated risks. The client would be required to acknowledge that the risks have been explained and are understood. We also suggest the imposition of a presumption that leverage is unsuitable for retail investors, thus placing the onus on the salesperson and firm recommending leverage to prove that leverage is suitable for the client and that if a home is to be used as security for leveraged investing, independent legal advice be obtained.

 

Leverage is an Emerging Issue

 

A report by the New Brunswick Securities Commission ("NBSC") on leverage practices found that there was a high correlation between leveraged investing, unsuitable investments and losses to consumers. The NBSC found that 68 percent of cases where the use of leverage was aggressive were in a loss position.

 

MFDA members and Approved Persons also are frequently found to have failed to establish, implement and maintain policies and procedures to supervise leveraging recommendations and ensure the suitability of leveraging recommendations leading to the issuance of an MFDA Compliance Bulletin dealing with, among other things, the Suitability of Leveraging. For the period from July 1, 2010 to July 30, 2011, 33 out of 453 MFDA enforcement cases dealt with problems with the suitability of leverage (7.28 percent of its total enforcement actions). The Ombudsman for Banking Services and Investments ("OBSI") data indicates that in the first ten months of 2011 there has been a 56 percent increase in complaints where the main issue was leverage.

 

Please click here to read the full story.

 

FAIR Canada calls for mandatory majority voting for TSX listed issuers

 

FAIR Canada submitted its support of the proposed amendments by the TSX to its Company Manual for listed issuers to: eliminate slate voting in favour of electing directors individually; prevent staggered boards by holding annual elections for all directors; disclose whether they have adopted a majority voting policy for directors for uncontested meetings; and advise the TSX if a director receives a majority of "withhold" votes.

 

However, FAIR Canada urges the TSX to mandate majority voting rather than making such policies optional...

 

Please click here to read the full story.

 

FAIR Canada supports dark liquidity regulatory framework proposed by CSA and IIROC
 
FAIR Canada has provided comments regarding the regulation of dark liquidity. We support the policy rationale for the regulatory approach being undertaken by the CSA and IIROC in the Joint Notice and request for comments. We agree that the regulatory framework should allow the use of dark liquidity but should manage its impact on price discovery, fairness and overall market quality. FAIR Canada supports designating a minimum order size when the rules on dark liquidity are introduced and as well as  proactive regulation and continued monitoring of the impact of dark pool markets and dark liquidity on overall market quality and market integrity as the market evolves.
 
CTV's W5 Highlights Dysfunctional System in Major Fraud 
 
W5's recent CTV program, Who is Protecting Your Investments, investigates a fraud allegedly perpetrated by Milowe Brost and Gary Sorenson (and others) which has been estimated to have cost 3,000 - 4,000 investors hundreds of millions of dollars. FAIR Canada's Executive Director Ermanno Pascutto is interviewed in the program. FAIR Canada reviewed this case in A Report on A Decade of Financial Scandals released in February 2011.

FAIR Canada Appointed to OSC's Market Structure Advisory Committee

 

One of FAIR Canada's strategic priorities is to advocate for increased prioritization of investor protection and greater representation of the retail investor perspective in securities regulation. We are pleased to announce that the OSC has appointed Ermanno Pascutto, FAIR Canada's Executive Director, to its Market Structure Advisory Committee.

 

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

 

Join Our Mailing List