Solutions, Self Defense and Best Practices

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THE INVESTMENT POLICY STATEMENT
2/10/2010 12:13:45 PM
http://www.fundlibrary.com/features/col ... p?id=12893
The Investor Advocate
Ken Kivenko’s column is all about investor protection. Ken fights for investors’ rights and exposes violations and malpractices. He also runs an advisory business, Portfolio Analytics, assisting investors obtain restitution due to sales or broker abuses.


The Investment Policy Statement

By Ken Kivenko | Tuesday, February 09, 2010


“Why an Investment Policy Statement ?..”
The Fund Library

When you open an account with an IIROC or MFDA investment Dealer you fill in an application form that requires you to reveal a number of facts about yourself. These include your age, income and net worth, level of investment knowledge, risk tolerance and other data. Using this and other information, advisors prepare a Know Your Client (KYC) composite so they can recommend suitable investments. The new account application form (the “NAAF”) requests simplistic answers to complex questions regarding risk, time horizon and goals. Moreover, terminology is ill-defined and there is no industry standard NAAF. The NAAF questionnaires are really pretty basic and rarely include specific investor goals. Unfortunately investors think they must answer them. If you ask someone, “How many stars do you think there are in the heavens?”- they have no idea - but they'll probably still answer the question. History has shown that this approach does not provide the necessary level of information and investor protection.

"When somebody says they can take risk in a questionnaire, is it because they can take risk, or is it because they are stupid enough to believe they have superior stock-picking abilities and are therefore overconfident? That can happen in periods of exuberance. Investors think they are geniuses, that there are no risks; what's to be averse to?" – Behavioural Finance guru Meir Statman Source: M. Noble, Building a better risk profile, Advisor.ca, March, 2009 [His first piece of advice to advisors is this: Realize most investors have a much lower risk tolerance than they may let on. Statman's research has determined that investor risk tolerance is, on average, extremely low]

After you develop an overall financial plan, the next step is to create an investment strategy (no matter how simple it might be) and stick to it. Your strategy could involve something sophisticated like trading options or something simple like putting $100 into an ETF or index fund every month. It can be difficult to stick to your original strategy for several reasons:

• Memory - it’s not easy to remember a strategy that you came up with several months or years ago.
• Greed– if you have a conservative strategy and the market is going straight up, then it can be difficult to stay with the original strategy. Chasing returns is a bad disease.
• Fear – bear markets make for tough investing. It’s easy to forget or dismiss your original plan when the going gets rough.

Some research suggests that portfolio returns are driven at least as much by investor behavior (or misbehavior) than market performance.

Create and write down your Investment Policy Statement (IPS)

The Investment Policy Statement provides an effective channel of communication between client and advisor. This will help clarify issues of importance and concerns to both parties. Conflicts- of- interest and general misunderstandings are minimized since the IPS is in writing and both the client and advisor have agreed to adhere to it. If your advisor is unable or unwilling to prepare an IPS you should ask yourself if you are dealing with an advisor or a salesperson.

If you’re a mutual fund buyer you’ll have access to the person who sold you the funds. Advice is embedded in the MER expense. If you’re a Do-it-Yourselfer and don’t know enough about investing to create an investment policy then fill in the sections you do know and keep learning.

An Investment policy statement has several basic purposes: (1) setting realistic objectives, (2) defining the asset allocation policy, (3) establishing management procedures and (4) determining communication procedures. It should establish: risk tolerance; loss capacity; return requirements; cash income needs; liquidity requirements; investing time horizon; tax considerations; legal, estate issues ; and unique needs and circumstances. If you have a number of different accounts with varying objectives and timelines such as an RRSP and a RESP you may want to develop separate IPS’s for each. We caution however that such mental accounting may not lead to overall optimization of your investable assets.

This written investment statement clarifies the overall investment plan, and clearly articulates your investment objectives and restrictions, thus providing a measurable basis of feedback with your advisor. When done properly, unsuitable investments will be avoided. Because objectives and expectations are clarified for all concerned parties, expectations are harmonized and misunderstandings are less likely to arise. When financial markets come unglued, you can pull your statement out of the drawer and read it, instead of acting emotionally and deviating from your plan. An IPS compels the investor and the investor’s advisor to be more disciplined and systematic in their decision making, which in itself should improve the odds of meeting the investment goals and reduce conflicts and misunderstanding.

Keep in mind that it’s OK to change your policy periodically – the one you start out with after graduating university might not be sufficient 5 years later. Or, the economic climate might change, such as the 2008 credit crunch, necessitating an IPS revisit.

How to create an IPS

The IPS should have the following information:

• Background: Account information and summary of investor circumstances.
• Purpose: What is the money intended for? Retirement? New house? Children’s education?
• Input cash: Your statement can include such information as how much you intend to invest every month as well as any constraints.
• Investment time horizon: When will the money be needed?
• Risks: Your willingness and ability to assume investment risk (summarized by your investment risk tolerance category). If there is a conflict between the required return derived from the financial plan and risk tolerance ( the willingness to take risks) this must be resolved or there is no credible IPS .It should be stressed that while risk tolerance is important, you need to be sure your loss capacity is adequate to recover from any losses you may incur. Age is one of the key determinants of loss capacity as is other sources of regular income.
• Asset allocation: A number of studies have shown that asset allocation explains the lion's share of variance in looking at how a balanced portfolio performs relative to its investment policy. Your statement should include what your target asset allocation and range is between stocks, bonds, ETF’s and other investments. Recognize that fund impurity could be an issue if mutual funds are utilized. Buy and hold is fine for bull markets and works well with strategic allocation. In a secular bear market there is some research that suggests that tactical asset allocation is a wiser choice (i.e. buy-and-hold is inappropriate).
• Rebalancing: How often will you rebalance the portfolio?
• Return expectation: This section should be used to define what kind of real (after inflation) portfolio return you are expecting and the likely range of returns. Rate of return objectives are mostly tempered by your risk tolerance, but other important factors also apply. These are constraints such as: time horizons, income/liquidity needs, tax considerations, estate issues, and unique preferences or circumstances. A professional advisor will tell you if your return expectations are realistic. Typically, a Monte Carlo simulation is used. See http://www.flexibleretirementplanner.com
• Investments: This section should outline what type of investments are eligible for your portfolio – i.e. large cap stocks on the S&P/TSX, foreign stocks, 500, index funds, ETF’s
• Measurement ( What gets measured gets done): Regulators do not require personalized rates of return to be provided to clients. Yet , there’s overwhelming evidence to suggest that the long-term returns from carefully monitored portfolios are higher than those with no systematic measures of performance.You should establish a target annual return so you can measure performance versus goals. Additionally, you might choose to measure your portfolio against an appropriate set of stock and bond indexes as a metric for the investment advice you are being supplied. Check out
http://www.weighhouse.com/resources/ret ... hmark.aspx

This latter point is especially important. Personalized performance measurement appears to be a major soft spot for the advisory business .Critics believe the relative lack of personalized return information reflects the advisor’s fear that exposure of actual and benchmark results could lead to embarrassing questions. Advisors argue that providing such information could at times unduly panic investors, will consume a lot of their time to explain the results or even that the software tools are too expensive. Most professional advisors take it as a given that performance monitoring is essential .Here’s the questions to consider:

1. How often will I monitor my portfolio?
2. How will I determine how well my individual investments are doing?
3. How will I determine how well my overall portfolio is doing?
4. How will I determine if my portfolio is meeting my expected return?
5. How will I determine whether losses fall within my accepted range?

Some IPS’s also list prohibited investments . This could include denying DSC mutual funds leveraged ETF’s, hedge funds, private equity and partnerships and specifically exclude any type of leverage i.e. home equity loans, borrowing against RRSPs, margin etc.

When completed, an IPS will typically run 5-10 pages ; more or less depending on complexity.

Investment Philosophy

While a number of sophisticated portfolio design tools exist, a tailored approach is needed because each individual is different. Be realistic when answering these questions:

1. What’s important to me as an investor?
2. What’s my philosophy about risk (or volatility)?
3. What’s my philosophy about core versus non-core investments?
4. What’s my philosophy about diversification?
5. What’s my philosophy about trading? Dollar Cost Averaging?
6. What’s my philosophy about fees and expenses?
7. What’s my philosophy about taxes?

Sample investment policies

Here are a few sample investment policies I found on the net at ABC‘s for Investing:

• Passive investor.
• Active stock trader.

More detailed samples can be found at www.jdaassociates.com/pdf/SampleSEIISP.pdf and http://www.rightpathinvestments.com/pdf ... _RPIFP.pdf

While researching this article, I also came across a very helpful Investment Policy Worksheet (PDF) that asks key questions in order to help you put together your IPS. To learn more about IPS’s and the client-investor relationship two wonderful books are available. The first is by John DeGoey, the Professional Advisor II and the second, the Unbiased Advisor by Warren Mackenzie.

Disputes

It can happen that there is a dispute when a portfolio loses money. Consumer investors should be aware that dealing with a complaint is stressful, time consuming and aggravating. This is where an IPS can be used to either make your case (or not). When a compliance officer, regulator, OBSI or judge reviews the file, the IPS will play an important role in assigning fault. As mentioned earlier, the IPS is best employed to prevent problems.

Conclusion

The absence of written policy reduces decision making to an individual event basis, and often leads to chasing short-term opportunities that may detract from reaching long-term goals. The presence of a policy encourages all parties to maintain their focus on the long-term nature of the investment process, especially during turbulent, or exuberant, times. By insisting on an IPS you will be treated with more respect and your advisor should work more diligently since you’ve raised the performance bar.

Once a client’s Investment Policy Statement has been created, it should be regularly updated as part of the quarterly or annual review process. Clients’ needs, situations, account values and objectives change frequently, requiring periodic updates to financial and investment planning documents.

A written Investment Policy Statement will not alone guarantee success in protecting and growing your optimal portfolio. Rather, it will shelter your portfolio from emotional ad hoc revisions, made by either you or your advisor and help maintain a sound long-term asset allocation policy.

Generic Mutual Fund Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Personal Opinions & Recommendations Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.
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Investment Fraud in the market place


WHEREAS


Securities Commissions in Canada are self regulatory and can use this system to often bypass
 real criminal investigation and prosecution.



WHEREAS


The financial industry pays the salaries of the regulatory force, rather than the taxpayer.
This means that clever financiers get to choose who to hire to regulate financiers. (like hiring your own police)



WHEREAS


The financial industry pays them three to four times more then what they would earn in the same job elsewhere. Over paying makes regulators, "compliant", more willing to say "YES" to the financial industry. 



WHEREAS
All 13 securities commissions, acting in concert will allow any financial institution in the country to violate our laws, simply by filing an application to do so. With no public debate and no public notice.

WHEREAS
Securities commissions in Canada have representation on RCMP Integrated Market Enforcement Team which further allows the investment industry to avoid criminal prosecution in the most sensitive cases.

BE IT RESOLVED
That the public support the part that make it their policy to support and implement major changes to the Securities regulatory system in Canda.
Specifically:
Establish a national investor protection agency with the following attributes:

1. Separate all investment police functions and investigations from the securities commission and the securities industry. A separate, specialized, Securities Crime Police Unit would be formed.
2. Regulators will be appointed by the government, be representative of the public interest and paid with taxpayers money, not industry money.
3. No permission should be given for exceptions to the law, except in extreme cases where full public discourse and disclosure can show no damage to the investing public by such exemption.
4. Securities commissions and industry paid regulators will be separated from the RCMP Integrated Market Enforcement Team or any criminal police agency.

Whereas under todays self regulatory system, fines levied against investment wrongdoers are typically "kept" by the regulators and self regulators, rather than distributed to investment victims.

It is proposed that monies from fines and penalties could make such a National Investor Protection Agency self funded by such "proceeds of crime".  It is also proposed to increase fines and penalties against investment abusers in order to ensure that an effective national investor protection agency is established and to ensure that investor victims can be compensated wherever possible and practical.  This would be a 100% improvement over our current system where investors are left to duke it out with Canada's largest institutions to get their own money back. Penalties should be at least “double the damage” done to victims. This could provide for full restitution to victims as well as funding for the national protective agency to minimize the impact on taxpayers and maximize the impact on financial predators.
Larry Elford Feb 11, 2010

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I just remembered that I have a tiny tad of RRSP funds left sitting idle and ignored.


I finally put them to work today, and the exact investment is not of any import nor significance, but two things struck me as significant enough to warrant comment:

1. I made the investment in an ETF (exchange traded fund) instead of the mutual fund that the sales guy (sales guy who illegally misrepresents himself as an advisor). He wanted me to buy a canadian fund with a 2.5% management fee. I ended up buying an ETF with less than .5% fee. The extra 2% when compounded over 35 years results in half your money going to the investment guys and only half the future total that you should have. that is solution #1

2. solution #2 was that I made sure that my purchase was made on an American exchange, due to the fact that US securities laws are sometimes enforced and sometimes financial criminals actually do jail time. In Canada, the numbers of prosecutions are so low, as to be statistically insignificant. One could say, and some of the smartest investors in Canada are on the public record as saying, that to invest in anything supervised by Canadian financial regulators is to enter into a predatory buyer beware relationship.

It is unfortunate that I had to witness billions and billions and billions stolen from Canadians to date, before I finally figured out how badly rigged the game is in Canada.

safe investing

advocate

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"Active ETFs will do to the mutual fund industry what iTunes did to the CD. It is so much better for the investor because they have a low management fee - in this case, 0.70 per cent." - Ken McCord, president of AlphaPro Management commenting on mutual fund managers joining the active ETF movement .

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“The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between” by William Bernstein
In a nutshell

Must read book for investors; Bernstein calls it the way he sees it. He starts off with the observation that only a very small minority of investors will succeed at managing their own investments (this by the way makes me wonder why am I authoring a website of DIY investors?) because they lack the four essential requirements for success: interest, mathematical inclination, understanding of financial history and emotional discipline to execute strategy. Nevertheless, he then proceeds to fill his short (<200 page) book with valuable advice. It’s an easy read, which could pay you a lifetime of dividends; it might even help save you from eating cat food in retirement.

-“Muggers and worse” is one of the chapters I enjoyed the most; he calls them the way he sees them: “the prudent investor treats almost the entirety of the financial industrial landscape as an urban combat zone”. He argues that a combination of incompetence, motivation to make money and “agency conflict” are at the root of the raw deal that investors get from the industry. A key reason why the public is not as well protected when doing business with the brokerage industry as when we go to a doctor, lawyer or accountant is because brokers are not fiduciaries like other professionals. Bernstein says that you’ll do fine if you “act on the assumption that every broker, insurance salesman, mutual fund sales person and financial advisor is a hardened criminal”.

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http://www.fsa.gov.uk/pages/Library/Com ... /056.shtml

Here are some details about how much further advanced they are in the UK about placing the investment customer interests ahead of the self interests of the industry. Here in Canada with such strong (five major banks) financial players, combined with such weak (regulators bought and paid for by industry) regulation or enforcement, we simply blow smoke up the public skirts and lie to the public about how well we serve them. (advocate)

The Retail Distribution Review (RDR) aims to put the customer in charge by providing them with vital information about the cost and nature of the advice they are receiving. They will be able agree the cost of that advice with their adviser, rather than it being decided by the provider of the product. From the end of 2012, firms will have to be upfront about how much they charge for their services, and no longer hide the cost of their advice behind the cost of a product. Looks like the FDM hit the UK before it hit Canada.

[admin]

Investor Bill of Rights
Larry Elford

I submit that the investment industry in Canada is an unrestrained bully, an 800lb gorilla if you will, and there needs to be steps taken to ensure a fair and level playing field for Canadians, and not just a free arena for financial abuse.
These are the basic rights that an investor in a developed country deserves. One who seeks help, or advice from those purporting to be professional, or advisors, or both.

The right to have the customer interests take priority over that of the advice giver.
(to use one specific commonly abused example, all other things being equal, if there are two or more nearly identical investment products available, the advice giver must direct the client towards the one which is most beneficial to the client and not the one which pays the advice giver the most commissions, fees, bonus or shares)

To be shown a copy of the actual license of the advice giver.

To know if the advice giver is compensated as a salesperson by commissions and/or fees on assets gathered.

To be told in writing, whether the advice giver, and the investment firm owes some duty of care, a fiduciary duty, or “no duty at all” to place the interests of the client first. Is the relationship one of a salesperson to a customer.

To an independent regulatory and investor protective body, outside of the capture, the funding, or the influence of the investment industry itself.

To have their investment plans, objectives, risk and reward tolerances placed in writing by the advice provider, such that a third party could understand what the client and the advice giver are agreed and embarked upon.

To have a simple, understandable written summary, from the advice giver, of each and every possible or potential form of compensation that is earned, could be earned, or earned indirectly as a result of the advice given by the advice giver.

To a written summary of all claims, judgements, awards against, penalties or any other sanctions against the professional standing of the advice giver and his or her organization.

To receive account statements that could be considered decipherable and understandable with regard to the age, the state of mind, the literacy and the competence of the client. (no financial or accounting jargon, plain language meant to inform not confuse)

To full disclosure of investment positives, risks and negatives, with full and accurate information. To a standard of the best of efforts and “best practices” by a prudent professional at the time.

To immediate recompense by industry compensation funds for any misrepresentation, negligence, breach of duty, fraud, forgery or any criminal offense against the client or the public in general.

To fair, timely and adequate treatment and compensation for investment abuses where the client interests have been taken advantage of by the undue strength and expertise of the investment industry.

To damages of a multiple amount higher than the actual damages to the client, if the industry can be shown to practice any attempts at dishonesty, delay, bullying tactics, or anything less than the highest professional standards or care for a client who has a dispute or a complaint.  Investment sellers must not be seen to profit from investment abuses which cost them less in fines than they make in fees. Investment sellers must also not be allowed to abuse, silence, out-wait, or out-lawyer vulnerable clients with the unequal degree of strength, knowledge and power they possess over that of an ordinary individual.

To a clearly defined, prudent, and professional process for raising and resolving a complaint.  Not an industry smoke screen or an internal kangaroo court process which could be judged by friends of the investment industry or persons paid by the investment industry.

To know if the investment firm has a clear and concise written policy of fairness, honesty, and professional due diligence towards whistleblowers or employees who tell the truth about inappropriate corporate behaviors or customer abuses.

To have financial abuse matters handled objectively by “non-industry” paid persons. To recover credibility the industry must provide an approach and complaint process where independent, objective, trained police agencies or financial experts handle matters which involve financial abuse or criminal or potential criminal violations. Not a process where complaints are handled internally, by industry trade and lobby groups, or by regulators or self regulators who are tied or paid for by the industry.

If you invest in any country which does not have (or does not enforce) these kinds of rights and protections for each investor, you will be placing your economic future at risk of loss or theft. You do not even have to be an investor to be financially abused by the investment industry, as recent economic events have shown. This industry has managed to infect public institutions, governments and entire economies with an unchecked, self regulated, unrestrained greed.

To be candid, Canada is failing on nearly all of these rights and basic protections. Canadians are totally under the care and protection of industry paid, industry driven organizations, which means that you are being protected entirely by the foxes of the industry, or worse, by regulators who are paid by those foxes.   The financial system of Canada is designed and built to put as much wealth in the pockets of the industry as possible, at the expense of, and by abusing your future.  Research for http://www.breachoftrust.ca  suggests that the lack of these investor rights is costing Canadians more each year than the cost of each and every other crime in Canada combined.

More tricks of the investment trade found free of charge at http://www.investoradvocates.ca

Larry Elford (former CFP, CIM, FCSI, Associate Portfolio Manager, retired) worked twenty years inside bank owned brokerage firms in the country and retired in 2004, after failing at convincing his industry to clean up its sales tricks. He writes, blogs and has completed a one man doc film project on what he learned as a broker at http://www.breachoftrust.ca

His public education work is completely free of any sale pitch, any product, or any cost. He speaks to community groups free of charge to warn and educate people about investment tricks of the trade. Feel free to publish, duplicate or distribute this article as it is without copyright protection. He can be reached at lelford@shaw.ca

[admin]

Business scandals dog Canadian markets

If Bernie Ebbers had started his ill-fated telcom company in Alberta instead of Mississippi, critics argue he'd still be sporting his trademark boots and blue jeans instead of an orange jumpsuit.

BY THE CALGARY HERALDMAY 28, 2007

The solution for the powerful Ontario Teachers' Pension Plan is to buy stocks that trade in the United States, because it believes investor protection is superior there.

"The laws are lenient in Canada and crooks know it. They're not stupid," says Lamoreaux.



If Bernie Ebbers had started his ill-fated telcom company in Alberta instead of Mississippi, critics argue he'd still be sporting his trademark boots and blue jeans instead of an orange jumpsuit.

The Edmonton-born mogul is serving hard time for his part in the $11-billion US WorldCom fraud.

He joins a litany of disgraced CEOs that includes Enron's Jeffrey Skilling and Tyco's Dennis Kozlowski, both of whom faced swift justice, American style.

In Canada, many believe justice for domestic white-collar crime is too often delayed or denied completely, and that penalties for corporate skulduggery are akin to a slap on the wrist. Maximum sentences are rarely imposed, if the case crawls through the court system at all.

The textbook example is the massive gold-mining hoax of Bre-X Minerals, which a decade after the fact has yet to result in a single conviction.

"Things have definitely gone backward since Bre-X," argues Al Rosen, one of the country's most outspoken forensic accountants.

"The federal people point to the provinces, the provinces point (to) the federals. People point to different police forces and nobody does anything."

A police investigation into the Calgary company crumbled in 1999 without charges being laid.

Meanwhile, a long-running Ontario Securities Commission proceeding against former Bre-X senior vice-president John Felderhof simmers, awaiting a verdict. It's far from the only example.

There's theatre impresario Garth Drabinsky, who along with business partner Myron Gottlieb stands accused of bilking Livent investors and creditors while at the helm of the now-defunct theatre company.

He was indicted in New York in early 1999, but wasn't charged with fraud in Canada until 2002. The trial continues to drag on in Toronto -- almost a decade after Livent imploded.

It hardly sends a message that white-collar crime is taken seriously, say some of the country's largest investors.

"We're weak, we're wimps," says Claude Lamoreaux, chief executive of the Ontario Teachers' Pension Plan, which manages more than $100 billion in assets.

"If Martha Stewart can be in and out of jail when the Bre-X thing isn't over yet . . . it doesn't make sense."

Bre-X, even today, is something of a sore spot for Lamoreaux. The teachers' fund lost $100 million to the fraudulent gold find -- a fact, he says, that might be easier to digest if there were someone to haul away in handcuffs.

"Nothing beats having a few people in orange jumpsuits. If somebody commits a crime, I think they should go to jail," he says.

American media reports echo the suggestion that Canada is a haven for thieves, one that offers a hospitable environment for hustlers, penny swindlers and big-league fraudsters.

"Toronto Exchange Stumbles Badly in Handling of Bre-X Trades," shouted the headline of one Wall Street Journal story, while a critical editorial in the New York Times proclaimed that Canada "at least per capita" produces more stock market fraud than any other nation.

Most recently, an April story in Forbes magazine entitled 'Oh Canada' weighed in on the U.S. Justice Department's prosecution of media baron Conrad Black, branding him "the latest Northerner to get tagged with stock fraud" on American soil.

"Canada is America's largest trading partner. It's our number one foreign supplier of oil, natural gas and electricity. BlackBerry wireless e-mail comes from Canada, and so do auto parts. Now, for a hot new export: scandal."

Critics on both sides of the border say the main difference between the two countries is that America's regulatory environment is much harsher. High-profile cases tend to proceed faster and federal prosecutors and policing agencies have the kind of financial resources needed to chase corporate malfeasance.

"There is a shortfall in enforcement in Canada. That's probably the politest way to say it," says John Coffee, a professor at Columbia University Law School and former legal adviser to both the New York Stock Exchange and Nasdaq.

"Just look at Lord Black. The U.S. is enforcing law against a principally Canadian actor."

Much of the criticism is directed at the nation's market regulators, who say they're working hard with provincial justice ministers, prosecutors and police to push for faster enforcement.

There's always room to improve, admits Alberta Securities Commission chairman Bill Rice.

That includes changing the perception that Canada doesn't aggressively pursue rogue executives.

Rice, a former securities lawyer, feels Canada too often is an easy target. Without a trial to match the visibility of Enron or WorldCom, regulators here come up short by comparison.

The reality, he says, is that aggressive, U.S-style punitive action isn't the Canadian way when it comes to stock market scandals.

"There is an extreme cultural difference in our approach to criminal law enforcement. We certainly don't send people away for 25 years for these kinds of things.

"I happen to think our public would be horrified by it."

White-collar crime, fuelled by post-Enron reforms, is generally afforded greater publicity in the United States.

Newscasts routinely feature clips of a fallen CEO being led away from his office in handcuffs by an army of FBI agents.

The humiliating spectacle occurs so frequently on television that it's been dubbed the perp walk.

In Canada, there isn't an appetite for theatrics, argues Rice. And there is nothing to suggest the American "get-tough" approach has restored market confidence, he adds.

"Look at Enron, Tyco and WorldCom . . . the disappointment seems to come in making comparisons between what happens here versus what is projected through the media to happen in the U.S.," he said. "I'm not satisfied that their results are in fact better than ours. But the perception is there."

Corporate crime is notoriously difficult to detect, let alone prosecute, say those responsible for protecting investors from swindlers. It doesn't help, critics counter, that Canada has a patchwork of 13 provincial and territorial agencies regulating its stock markets. Canada is the only major developed country without a national securities watchdog, despite growing enthusiasm for the idea.

Supporters -- including federal Finance Minister Jim Flaherty -- point to the success of the U.S. Securities and Exchange Commission, arguing a single regulator here would cut red tape and protect Canada's capital markets.

"The SEC in the United States certainly seems more vigorous in its prosecution, and more successful," Flaherty told the Herald. "I think we could do better . . . there's quite a compelling argument that it's the right way to go."

Those in favour of a national commission say it would improve market vigilance. The SEC spends more than 35 per cent of its budget chasing white-collar criminals, while the Ontario Securities Commission, Canada's largest market regulator, spends less than 20 per cent on enforcement.

Provincial authorities in Alberta, B.C. and Quebec reject the idea, fearing regional interests would be usurped by an Ontario-centric behemoth.

Another suggestion -- one of 65 put forth by a 12-member industry panel last year -- is to create a national court to oversee criminal cases on securities violations, and civil liability cases.

In theory, that would result in cases being heard by a judge well versed in corporate crime -- and hopefully a timelier outcome.

Canada's less-than-stellar reputation is a concern to the TSX Group, which has launched a program to solicit new listings outside its borders. Chief executive Richard Nesbitt acknowledges Canada has a problem.

"We haven't seen the kind of enforcement that you've seen south of the border," he told reporters in April.

He cited the case of Bre-X -- wrangling its way through the justice system.

"Enforcement takes a long time in this country, on the judicial side, not the regulatory side," Nesbitt said.

Six years after Bre-X cratered, the RCMP created the Integrated Market Enforcement Team (IMET), a stock market SWAT team to take aim at corporate criminals.

The move came in the wake of colossal U.S. scandals Enron and WorldCom, which rocked markets and saw thousands of jobs evaporate.

"There was an acknowledgement around organized crime and other kinds of white-collar crime, money laundering, that the RCMP needed a specialized unit and resources to go with that unit," says former Liberal MP Anne McLellan, federal justice minister when Bre-X collapsed.

IMET has teams in Vancouver, Calgary, Toronto and Montreal, with headquarters in Ottawa. The squad includes legal advisers, forensic accountants, market experts and intelligence analysts. From 2003 to 2006, more than $40 million was spent on the program.

Since its inauguration, however, IMET has come under fire for putting only two people behind bars, while several other cases slowly work their way through the courts.

"There's been a lot of criticism, both publicly and internally, as to the fact the cases are taking too long . . . for the investigation to take place, to bring people to justice," says RCMP Supt. John Sliter, national director of the IMET program. "I'm in complete agreement with that critique."

Sliter says things have to move faster, but believes the whole system needs to be looked at, from the time a complaint is filed to when "the cell door slams shut."

The analysis should include prison sentences, the speed of prosecution and even the length of time it takes to get the court time needed for trials that could last months.

"I think there's an appreciation that at least we can conduct some very complex investigations," Sliter said.

"Are they afraid and trembling in their boots? Maybe not quite. But, hey, I think there's an appreciation that we exist."

The solution for the powerful Ontario Teachers' Pension Plan is to buy stocks that trade in the United States, because it believes investor protection is superior there.

"The laws are lenient in Canada and crooks know it. They're not stupid," says Lamoreaux.

"If another Bre-X happens, will there be a prosecution? What example do want to make of it? Because to me, justice that takes 10 years isn't much of an example."

tgignac@theherald.canwest.com

tseskus@theherald.canwest.com

[admin]

I debate with myself whether or not the investment industry should be forced to set up an investor compensation fund to compensate members of the public who are abused and victimized by the industry. Most, including myself would say no, but here is partial reason why it might be necessary.

It might be the only way that the industry is motivated to clean up it's own act. Lets look at how brokers and investment salesmen work now. They earn as much money as they can. The industry polices itself. The RCMP is utterly incapable of keeping up to speed on the crimes and schemes that these intelligent, cunning people can invent. This means that the sky is the limit to their earnings, and the only, restriction to the amount of money, or schemes or scams that occur against the public is the personal conscience of each and every member of the industry. We know how that is going.

That is just not working. Nor are we even close to catching up to them and making a system that does work. We may always be ten to twenty years behind the crooks, so perhaps we put a business honesty requirement (a real money cost, not just words) on their right to be in this money business. Right now there is nothing. There is no requirement to keep people from entering the financial industry and using the credibility (what is left) of the industry to steal as much money as they can possibly steal.

Soooooo.........perhaps if they had some skin in the game, so to speak. Perhaps if they had some pretty serious insurance premiums or compensation fund premiums to pay in order to help keep the system honest, perhaps they might care about the crimes of the guy in the next cubicle, the company next door, and the next ponzi scheme. Perhaps.

I worked two decades in the business and there was little incentive to stop other people from ripping clients off. If you spoke out against abuse of clients, it was more likely at a cost to your own career, but that is another story. (see http://www.breachoftrust.ca ) It was a free world where the crimes paid, and if you want an image in your head of what it was like, imagine the LA riots. The residents of downtown LA learned that the Los Angeles police department were parked outside of the area, afraid to enter in for fear of the public. The residents went wild. They ran in the streets, stealing anything they could put their hands on knowing that the rule of law was gone.
Now imagine that this happened in Canada for the last twenty years, in the financial industry. I was there from 1984 to 2004. I saw it. The police does not come to answer any more than 1% or 2% of financial crimes. There is no law, and the only difference in the looting is that the financial con men do it in boardrooms, and they wear suits.

A compensation fund that paid victims back out of every financial service provider pockets just might make a few more of them in opposition to rampant looting. It might make Canada less of a free ride for crooks. I am not sure it is the only solution, but might be part of the solution.

[admin]

Below are some clips and comments from Bill C-52, Justice Minister Rob Nicholson's efforts to stiffen penalties for white collar crime.

Unfortunately, some clever crafters got hold of the bill as introduced and removed all impact of this bill for public markets fraudsters, those who like a "goldman sachs" sell stocks, bonds, sub prime mortgages, mutual funds etc. Read along to see how they did this:
First we show what the criminal code looks like. I will put the interesting part in green so you can follow it along.

Current Text of Criminal Code (R.S., 1985, c. C-46)
Act current to April 9, 2010
Fraud

Fraud

380. (1) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,
(a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding fourteen years, where the subject-matter of the offence is a testamentary instrument or the value of the subject-matter of the offence exceeds five thousand dollars; or
(b) is guilty
(i) of an indictable offence and is liable to imprisonment for a term not exceeding two years, or
(ii) of an offence punishable on summary conviction, where the value of the subject-matter of the offence does not exceed five thousand dollars.
Affecting public market

(2) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, with intent to defraud, affects the public market price of stocks, shares, merchandise or anything that is offered for sale to the public is guilty of an indictable offence and liable to imprisonment for a term not exceeding fourteen years.
R.S., 1985, c. C-46, s. 380; R.S., 1985, c. 27 (1st Supp.), s. 54; 1994, c. 44, s. 25; 1997, c. 18, s. 26; 2004, c. 3, s. 2.

Immediately below is the draft of Bill C-52 as introduced last year (2009). You will note that the section on fraud as it applies to "public markets" fraudsters has been removed: (it is the green section (2) above)

Current text of Bill C-52 as it was proposed 2009

http://www2.parl.gc.ca/Sites/LOP/LEGISI ... 2&List=toc

BILL C-52
An AAct to amend the Criminal Code (sentencing for fraud)
Her Majesty, by and with the advice and consent of the Senate and House of Commons of Canada, enacts as follows:
SHORT TITLE
Short title

1. This Act may be cited as the Retribution on Behalf of Victims of White Collar Crime Act.
R.S., c. C-46

CRIMINAL CODE
2. Section 380 of the Criminal Code is amended by adding the following after subsection (1):
Minimum punishment

(1.1) When a person is prosecuted on indictment and convicted of one or more offences referred to in subsection (1), the court that imposes the sentence shall impose a minimum punishment of imprisonment for a term of two years if the total value of the subject-matter of the offences exceeds one million dollars.

Now the question will be whether or not Justice Minister Nicholson resubmits the NEW C-15 with or without the free gift to public market fraudsters. It will speak volumes if the public markets fraudster "exemption" is still in. I could be wrong and I very often am wrong, but if this bill is not "repaired" when Nicholson submits it May 3, 2010, after being informed in Justice Committee's of it's shortcomings, it will be a clear signal (a second signal) that the public markets boys own the political boys.

Amazing that we even consider applying criminal code sanctions to fraud artists but we allow our sophisticated friends who own large financial corporations a free "do not go to jail pass". Shouldn't that itself be a criminal code violation, Breach of Trust?

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[admin]

Fellow Citizens in the Fight Against White Collar Crime.

The National Securities Regulator is not the panacea for prosecution and deterrence of white collar crime, when its governance structure is opaque and controlled by the investment industry itself. There is a high risk, based on what we know so far about what is proposed for the governance structure and the integration of securities regulatory and criminal enforcement, that the new National Securities Regulator will have less output and less integrity in criminal enforcement than what we have today. There will be almost no prospect for the systemic fraud at the highest levels of the investment banking industry to be stopped, without an independent Securities Crime Unit.

If you watch the video at www.ismymoneysafe.org, one will come to realize that even with a National Securities Regulator, the process of dealing with Earl Jones and other rogue fraudsters would likely be the same as now. In billion dollar plus public market frauds, the National Securities Regulator will be in a better position to cover up the frauds and protect the senior executives and professionals involved, unless you also have the independent SCU in place to keep these people in check.

My understanding is that the Federal Government intends to integrate criminal policing with administrative enforcement within the National Securities Regulator. This will be the fox guarding the hen house. David Wilson, Chairman of the OSC, has over $15 billion billion in losses on Income Trusts, a product which has a deceptive yield and was shut down in the US. Income Trusts were started up in Canada, after it was shut down in the US when the US Department of Justice imposed a deferred criminal prosecution on Prudential Securities, which had to pay $2 billion in restitution to its investor victims and a $40 million fine for selling the same product to seniors and other unsophisticated investors. After this US criminal prosecution, Canada's Income Trusts developed into a $200 billion dollar industry, that acted as predator of senior investors.

The real fraud in ABCP will probably never be dealt with by the RCMP IMET, yet some like Diane are aware of how the fraud was executed and have explained it to the regulators. If you go to the site www.investorvoice.ca and move to the right, you will see our citizens' fight for restitution on ABCP. Scroll down and you read all the stories. Diane and Henry Juroviesky, a Toronto lawyer, got a $188 million settlement for 1800 families and worked at pushing the regulators to force another $140 million settlement. The retail ABCP owners are now trying to get criminal justice and it is one hell of a fight.

The same players involved with the regulators for the National Securities Regulator are working to ensure that the RCMP IMET will remain controlled by integrating them with the regulator. They have it set up now that a criminal investigation can only start if it is referred from a regulator to the RCMP IMET. One cannot go direct to the police as we want for the SCU.

Hugh Urquhart

[admin]

U.S. Committee for the Fiduciary Standard, a group of prominent U.S. investment advisors which have been circulating a petition to advance this issue. Their petition cites five “core principles”:
? Put the client’s best interests first.
? Act with prudence; that is, with the skill, care, diligence and good judgement of a professional.
? Provide conspicuous, full and fair disclosure of all important facts.
? Avoid conflicts of interest.
? Fully disclose and fairly manage in the client’s favour, unavoidable conflicts.



advocate comment.......Canada is not yet ready to move to this standard. It is still too profitable to do business the "old way", and our bankers who control the system (and the government evidently) are satisfied that financial abuse of citizens suits their interests better than best financial practices.

shame on canada

[admin]

below is the type of question and answer that I deal with occasionally, to give you an idea of investment thinking:
Hi Larry

just want to say i had my eyes opened wide!!! after your presentation at the seniors centre last week

i am the one who said i had a burning question for you after the session ended

here it is:

i have some investments with sun financial corp. and some with the bank and have had since my early working years -- some still never having been touched since i first started working and had my own bank account..

-- now the dilemma i face is whether or not i should take all my money out of the bank and put it all into sun financial which my broker there is trying to get me to do which he says will help him distribute my portfolio better. he has sent me forms to fill out and i am very uneasy and reluctant about doing this --- my "inner" something tells me i dont want to do that for reasons i dont even know (other than what i learned from you at the seminar but i had these feelings even before you talked and have been stalling for the same reason!!!) i know a bit about investing but not as much as i should and my broker has done a good job for me as far as making money -- but i also lost a pile in this last recession..

you mentioned real estate as a good option but i am not prepared at this stage in my life to get into that so i guess i am asking

what would you suggest i do and what do i tell my broker re not giving him all my money
to invest. it just doesnt "feel" right to be doing that!!! maybe i am being too cautious or just not wanting to take any more risks! seems the more we save for retirement the faster it gets eaten away -- just like you said!!

waiting to hear from you if you have time --- thanks in advance for your good information seminar and the time you have to take to answer my question

Glen

-----------------------------
Larry reply

I will try to answer your question Glen,

I don't think you should be putting all your eggs in one basket (sun life or anyone) as the salesman would like you to do. That is just not the best planning, and especially not when a consumer in canada has no assurances yet that any salesman has to act in the customers best interests. I am sorry that this is the case, but it is what it is. I am trying to change this shortcoming in securities regulations but I am only one man against a rather large foe in this argument.

I am not sure I am too fired up about about the "returns on my money" that some broker claims to be able to get me, and I know I would much rather settle for a "return OF my money". In other words safety before return for someone in your situation.

If you are able to live within certain means that would be best, but I know not everyone can get by on the meager returns now available.

There is probably no short answer to your question, but I wanted to give you my thoughts that I agree with you that it might not be best to gather up your savings and turn all over to a salesman, no matter how nice a guy he happens to be. He still is a commission salesman, misrepresenting himself as an "advisor" despite any words to the contrary, so the relationship begins on a lie from the getgo.

I would rather see you buy strong, blue chip, dividend paying companies, (only the best of the best) if you absolutely HAD to invest in equities. I think that is the direction your sun life guy would want to steer you in with the argument that the only way you will get higher returns is with those. Problem is, while he might be right about equities getting higher long term returns, he will make no mention of the risk (perhaps) and little to no mention of his commissions (perhaps), plus little to no mention of the Sun Life Mutual fund management fees, which will take 1/3 or more of any potential return you may see. The costs are just too high with these guys and you take all the risk while they earn far too much of a percentage of your returns.

I am talking too much, and I apologize. I keep coming back to my underlying problem and that is that in Canada, we are so enamored and so captured by our large banks and financial institutions that we let them get away with murder, and the result is that they do not have to act in your best interests, and they do not have to follow any rules that say they must act in your interest. They get a free ride on both counts, first they get to say that the rules force them to act in your best interest, second that they police the rules themselves (or people that they pay), so it is a win win for them and a lose lose for customers.

Stay away from the sales guys until this little problem gets corrected. (Write a letter to the ALberta Securities Commission or ALberta Finance Minister Ted Morton asking him to fix this if you want to be part of the solution, and copy me in the letter and any response you get) I am sorry I have no stronger answers for you at this exact moment. I know a guy or two who charge a straight 1% fee for expertise and then go about helping people get the best of the best (and lowest cost investments) but unfortunately they reside in Toronto, and so I know nobody but straight "sales" types here locally.

I will ponder this a bit more for you, and let you know if I come up with a better answer. If you have questions, please feel free to shoot them towards me, and I will try to help if I can.

cheers

larry

[admin]

It’s your financial adviser’s job to study up on you as a new client, so one of the first things you’ll do together is complete something called a Know Your Client form.

But what about your adviser’s background? You should know as much about your adviser as he or she does about you, but posing the right questions is beyond most people because they don’t know what to ask.

Introducing the new online Know Your Adviser form, a tool developed by financial blogger and fund industry executive Preet Banerjee for people to use while interviewing prospective advisers. You simply ask some key questions, score the answers using Mr. Banerjee’s rating system and then use the final tallies to help you pick the right adviser.

Next step: You and your new adviser tackle the Know Your Client (KYC) form on the way to building the financial plan of your dreams. Or not.

KYC forms typically look at the amount of time you intend to keep your investments, the amount of risk you can stand, your objectives as an investor and your level of knowledge about investing. The idea is to build a profile that ensures the client interests are served by the portfolio their adviser designs.

Mr. Banerjee, an ex-broker who works in the mutual fund industry while maintaining the Where Does All My Money Go blog (wheredoesallmymoneygo.com), has a more skeptical view of the KYC form.

“I’m sure it does protect the client to a certain extent,” he said. “But in my experience and my training, it was more to protect the adviser. If the investor complains about a transaction, you can say, no, this was in your risk tolerance.”

The Know Your Adviser form serves only the interests of you, the client. In fact, there’s an opportunity for people like you to have a say in what it’s final version looks like.

A draft version of the KYA form can be viewed on Where Does All My Money Go, which Globe readers have voted their favourite investing blog (read about it here). Care to collaborate on building the final version? Both individual investors and advisers are invited to comment or provide additional questions that may be used to improve the form.

As it stands now, there are 20 questions divided into four categories.

(Advocate comments.......the above is correct, the KYC form is used to both protect the company from client complaints, and also to "mold" the investing direction of the customer in the direction wanted by the salesman. It was designed by and for the company, not client protection.)

[admin]

Know Your Adviser
Here is a summary of some questions that appear on a form designed by financial blogger Preet Banerjee to assist people interviewing prospective financial advisers. You can comment or submit ideas for additional questions on Mr. Banerjee’s blog, at wheredoesallmymoneygo.com.

Sales Person or Financial Adviser?

1. Are you a full-time adviser, or do you have a part-time job not related to financial advice?
Ideal answer: Full-time adviser

2. Does your firm hold sales contests or provide sales incentives?
Ideal answer: No

3. What is your main method of compensation?
Ideal answer: flat or hourly fee, although this is not a deal breaker by any means

4. Do you provide full disclosure of all fees and commissions paid by clients?
Ideal answer: Yes, for each recommendation

5. Do you mainly use products from your own company?
Ideal answer: No

Qualifications and Competence

1. What investment management qualifications do you have?
Ideal answer: CFA is the gold standard, but others show expertise as well

2. Are you licensed to trade options?
Ideal answer: Yes

3. Will you show clients your own personal portfolio so they can see if you practise what you preach?
Ideal answer: Of course.

4. What financial planning designation do you hold?
Ideal answer: The RFP, CLU and CFP are among several that show expertise.

5. Are you licensed to sell insurance products?
Ideal answer: Yes

Client Services Offered

1. Do you provide an investor policy statement (explains how a client’s portfolio was created and what will happen in various situations)?
Ideal answer: Yes

2. What kind of financial plan do you provide clients?
Ideal answer: A comprehensive plan involving investments, estate planning, budgeting and tax.

3. Do you provide a written summary of all meetings to recap recommendations, etc.?
Ideal answer: Yes

4. How many people are on your team?
Ideal answer: A few, to provide several points of contact.

5. What kind of contact will we have?
Ideal answer: Annual face-to-face meetings, plus periodic phone calls and comment in falling markets.

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