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Re: GET YOUR MONEY BACK!

Postby admin » Tue Dec 17, 2013 11:14 am

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a release today from CSA about "best interest" treatment for investment customers

Executive summary in red:

One the one hand…….
Those stakeholders that support the introduction of a statutory best interest standard felt that the current regulatory framework for advisors does not adequately protect investors. Many also felt that targeted regulatory responses are also required in several specific areas, including titles, proficiency, suitability and conflicted compensation practices. Several took the view that recent international regulatory developments have left Canadian standards at a lower level than those in leading jurisdictions.

One the other hand……
Those stakeholders that do not support the introduction of a best interest standard explained how the current regulatory framework, coupled with recent Canadian regulatory reforms, provided a robust, flexible and principled regulatory foundation that affords strong investor protection and that addresses the investor protection concerns identified in the Consultation Paper. Most of these commenters also suggested that although there was no evidence of actual harm to investors under the current framework, if there were such evidence, the appropriate regulatory response would be targeted.

and this…….

Many commenters strongly believe that the potential for negative impact on investors and capital markets from unintended consequences of a statutory best interest standard is significant. (negative impact on investors if we are forced to consider their best interests………:) (Larry's comment)


And finally this conclusion……..

4. More work is needed…..



(decades have been spent by regulators, in protecting the industry that pays them, from accountability to the public and duty to public protection. What we see is a simple "facade" of public protection……)


study found here

http://www.osc.gov.on.ca/documents/en/S ... 33-403.pdf


cheers and best

Larry Elford

December 17, 2013

Introduction
The purpose of this Notice is to:
 summarize the consultation work conducted to date in respect of the best interest consultation
initiative, and
 identify the key themes that emerged from the best interest consultation process.
In October 2012, the Canadian Securities Administrators (CSA or we) published CSA Consultation Paper 33-403: The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients (the Consultation Paper). We received numerous comment letters on the Consultation Paper and conducted three consultation sessions in June and July 2013.

Through this consultation process, we identified four key themes:
1) There was significant disagreement about (a) whether the current regulatory framework for
advisors1 adequately protects investors and (b) what regulatory response is required.
2) A best interest standard must be clear.
3) The potential negative impact on investors and capital markets must be carefully assessed.
4) More work is needed.

Background
Consultation Paper

On October 25, 2012, the CSA published the Consultation Paper.2 The Consultation Paper: summarized the background of the fiduciary duty debate,
 described what a fiduciary duty is and when it arises at common law,
 discussed the current standard of conduct for registrants in Canada (including both statutory
and common law requirements),
1 References to “advisor” in this Notice mean, unless otherwise specified, advisers and/or dealers (and their representatives) that provide securities advice to clients.
2 Available online at http://www.osc.gov.on.ca/documents/en/S ... fiduciary- duty.pdf.
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 reviewed what the United States, the United Kingdom, Australia and the European Union are doing in this area,
 identified the five key investor protection concerns with the current standard of conduct applicable to advisors in Canada,
 described one possible articulation of a statutory best interest standard for advisors, and
 reviewed the potential benefits and competing considerations of imposing a statutory best
interest standard.

The Consultation Paper posed a variety of questions and requested comments from all interested stakeholders on the issues raised in the Consultation Paper. The CSA received 93 comment letters from a range of stakeholders, including investors, investor advocates, advisors, industry advocates, academics, law firms and professional associations. The list of commenters and copies of the comment letters are available online at http://www.osc.gov.on.ca/en/38075.htm.

Consultation Sessions
In addition, the CSA held three consultation sessions hosted by the Ontario Securities Commission (OSC) to further explore and discuss the issues identified in the Consultation Paper and the themes that emerged from the comment letters:
 The first consultation session was held on June 18, 2013 (Investor Roundtable). The Investor Roundtable was a three-hour discussion attended by approximately 30 stakeholders from the investor community.3 The discussion at the Investor Roundtable was focused on several key issues:
o what problem needs to be solved,
o shifting the suitability standard to a best interest standard,
o mitigating information and financial literacy asymmetry,
o impact on legal certainty of relationship,
o potential negative impact on advisory services for investors,
o potential shift by investors and advisors to alternative investments, o role of recent reforms, and
o other policy solutions that need to be considered.
 The second consultation session was held on June 25, 2013 (the Industry Roundtable). The Industry Roundtable was a three-hour discussion attended by approximately 55 stakeholders from the industry community.4 The discussion at the Industry Roundtable was focused on several key issues:
o whether the current standard of conduct offers the most principled foundation, o the effectiveness of disclosure for conflicts,
o shifting the suitability standard to a best interest standard,
o mitigating information and financial literacy asymmetry,
o impact on legal certainty of relationship,
o potential negative impact on advisory services for investors,
3 The transcript of the Investor Roundtable is available online at http://www.osc.gov.on.ca/documents/en/Securities- Category3/oth_20130618_33-403_transcript-roundtable.pdf.
4 The transcript of the Industry Roundtable is available online at http://www.osc.gov.on.ca/documents/en/Securities- Category3/oth_20130625_33-403_transcript-roundtable.pdf.
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o costs of introducing a best interest standard, and o the impact on capital raising.
 The third consultation session was a panel discussion held on July 23, 2013 (the Panel Roundtable). There were approximately 110 attendees at this two-hour session.5 The panel was moderated by James E. A. Turner (Vice-Chair, OSC) and consisted of:
o Connie Craddock (OSC Investor Advisory Panel),
o Jim Kershaw (SVP and Regional Manager, TD Wealth Private Investment Advice), o Anita Anand (Professor and Academic Director, University of Toronto), and
o John Fabello (Partner, Torys).
The intent of the Panel Roundtable was to build on the progress made at the Investor Roundtable and the Industry Roundtable and to move the dialogue forward by focusing on two fundamental issues:
o Should dealers (and their representatives) be subject to a best interest standard when providing advice to retail clients? What would the consequences be of introducing such a standard?
o What other policy options could securities regulators consider in addition, or as alternatives, to a statutory best interest standard?
We also had informal meetings with a variety of stakeholders to both explain the Consultation Paper and solicit feedback on the issues raised in it.
We thank those who have contributed to our consultation process to date by responding to our request for comments and/or by participating in the consultation sessions. We have gathered a great deal of information from this process and will be using it to inform our approach going forward.
Themes from the Consultation

Based on our consultations to date, the following are the four key themes that have emerged:

 There was significant disagreement about (a) whether the current regulatory framework for advisors adequately protects investors and (b) what regulatory response is required.

o Those stakeholders that support the introduction of a statutory best interest standard felt that the current regulatory framework for advisors does not adequately protect investors. Many also felt that targeted regulatory responses are also required in several specific areas, including titles, proficiency, suitability and conflicted compensation practices. Several took the view that recent international regulatory developments have left Canadian standards at a lower level than those in leading jurisdictions.

o Those stakeholders that do not support the introduction of a best interest standard explained how the current regulatory framework, coupled with recent Canadian regulatory reforms, provided a robust, flexible and principled regulatory foundation that affords strong investor protection and that addresses the investor protection concerns identified in the Consultation Paper. Most of these commenters also suggested that although there was no evidence of actual harm to investors under the current framework, if there were such evidence, the appropriate regulatory response would be targeted

5 The transcript of the Panel Roundtable is available online at http://www.osc.gov.on.ca/documents/en/Securities- Category3/oth_20130723_33-403_transcript-roundtable.pdf.
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solutions to these problems, not a statutory best interest standard. Regarding the relevance of international regulatory developments, we heard that the regulatory context is different, that those jurisdictions had different experiences and regulatory starting points, and that it is too early to definitely determine their impact in any event.

 A best interest standard must be clear.

o There was broad agreement that a best interest standard, if adopted, should be as clear as possible and include sufficient guidance to ensure all advisors understand how to comply with the standard. Many questioned whether certain restricted business models and certain compensation practices could continue under a statutory best interest standard.
 The potential negative impact on investors and capital markets must be carefully assessed.
o Many commenters strongly believe that the potential for negative impact on investors and capital markets from unintended consequences of a statutory best interest standard is significant. The main concern was that a best interest standard could result in advice that is more expensive, less accessible and too conservative.
 More work is needed.
o Many commenters suggested further work that should be completed before moving
forward with a statutory best interest standard or other regulatory response.
Below, we discuss each of these key themes in detail. The themes underscore that the issues surrounding a best interest standard are complex, and some aspects of the issues are interrelated to the issues surrounding the separate CSA consultation on mutual fund fees initiated on December 13, 2012 (Mutual Fund Fees Consultation).
1. There was significant disagreement about (a) whether the current regulatory framework for advisors adequately protects investors and (b) what regulatory response is required
Summary
Those stakeholders that support the introduction of a statutory best interest standard felt that the current regulatory framework for advisors does not adequately protect investors. Many also felt that targeted regulatory responses are also required in several specific areas, including titles, proficiency, suitability and conflicted compensation practices. Several took the view that recent international regulatory developments have left Canadian standards at a lower level than those in leading jurisdictions.
Those stakeholders that do not support the introduction of a best interest standard explained how the current regulatory framework, coupled with recent Canadian regulatory reforms, provided a robust, flexible and principled regulatory foundation that affords strong investor protection and that addresses the investor protection concerns identified in the Consultation Paper. Most of these commenters also suggested that although there was no evidence of actual harm to investors under the current framework, if there were such evidence, the appropriate regulatory response would be targeted solutions to these problems, not a statutory best interest standard. Regarding the relevance of international regulatory developments, we heard that the regulatory context is different, that those jurisdictions had different experiences and regulatory starting points, and that it is too early to definitely determine their impact in any event.
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The discussion below on this key theme is divided into the following areas:
 Supporters of a statutory best interest standard
 Opponents of a statutory best interest standard
 Appropriate influence of international developments
Supporters of a statutory best interest standard
Those commenters that support a best interest standard identified a variety of reasons why the current regulatory framework for advisors does not adequately protect Canadian investors, as follows:
 the existing regulatory requirements and industry practices are based on a regulatory foundation that cannot provide adequate protection for consumers of financial services in Canada. Fundamentally, they see the current regulatory foundation as inappropriate for the advisor-client relationship because it does not explicitly require that advisors put the interests of their clients ahead of their own and therefore does not align advisors’ interests with those of their clients;
 due to continued low financial literacy among Canadian investors, coupled with the ever- increasing complexity of financial products, information and financial literacy asymmetry is becoming more pronounced. This leads to investors that place increasingly more reliance on their financial advisor;
 most investors receiving non-discretionary advice already assume that their advisor is required to act in their client’s best interest when, at least in the common law jurisdictions, this is usually not the case for advisors that provide non-discretionary advice. We heard that part of this expectation gap may be driven by investor confusion caused by the lack of general understanding of various designations, titles and roles in the investment industry. We also heard that industry marketing and advertising (which often explicitly or implicitly states that clients receive ongoing, personalized financial advice) contribute to this expectation gap;
 the suitability standard is a low one that simply involves the advisor recommending products that match the general needs of the client, not necessarily the product that is in the client’s best interest. We heard that in practice, this means that the suitability analysis is vague and complex, involving a multi-factor analysis conducted by the advisor that is tied to whether the product (which may be connected to the advisor) is suitable to the client, not necessarily whether it offers the fairest price/cost for the investor based upon the complexity of the product and/or service being offered. Specific concerns in this regard related to costs of the products (and disclosure of such costs) and compensation bias affecting the recommendation, with the advisor recommending the products with the highest advisor compensation instead of products that he or she felt were objectively superior. Further, some commenters felt that a flaw with the suitability standard is that it is based on a product-transaction model rather than an ongoing- advice model and allows advisors to recommend leverage (or borrowing to invest) in order to increase assets under management, which inappropriately increases risk for most investors. The ultimate impact of this regime on investors is poor investor outcomes, including sub-optimal returns and/or inappropriate risk exposure;
 in an environment where most investors lack even basic financial literacy, the effectiveness of disclosure (which is the common industry practice) as an antidote for conflicts of interest, confusion about advisor remuneration, and other similar issues, is ineffective and leads to increased agency (monitoring) costs for investors. In addition, without a thorough
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understanding of such disclosure, these commenters argued, it is unlikely that truly informed consent can be granted by investors. Many commenters shared the view that some conflicts such as embedded compensation cannot be managed (they are inherently opaque, complex and difficult for consumers to understand) and should be avoided or prohibited and that this is critical for investor protection. Others proposed that all material conflicts of interest should be avoided altogether;
 advisor titles are confusing and even misleading (e.g., that inflate proficiency, scope of products reviewed and/or level of service provided), which results in investors being unable to differentiate between different financial service providers and the different advice options available to them;
 proficiency requirements for certain kinds of dealers are too low (e.g., brokers and bank staff are trained enough to know about in-house funds and products to sell them but not really whether they are beneficial for clients);
 in the absence of a statutory best interest duty, the current framework is uncertain and does not offer effective investor restitution in the event of investor harm caused by advisor misconduct;
 investors have a low level of trust and confidence in the financial services industry as a whole; and
 commenters from a variety of backgrounds touched on the importance of financial advice as part of a financial plan and expressed a concern that, because of the current regulatory framework, most Canadians are not receiving holistic advice but instead are receiving overly narrow, transaction-based advice on securities products.
These commenters felt that a statutory best interest standard is a highly desirable and feasible regulatory response to the concerns set out above and should be adopted promptly. In support of this view, they suggested that the introduction of a best interest standard would result in the following outcomes:
 it would require advisors to advance the best interests of their clients to the exclusion of all other competing interests that may exist;
 it would result in better financial outcomes for investors because it would (i) result in more objective recommendations, since a best interest duty, by addressing issues relating to conflicted remuneration, will reduce bias in recommendations, and (ii) explicitly require advisors to consider the investment costs in determining whether the investment is in the best interest of the client;
 it would ensure that conflicts are avoided and thereby eliminate much of the need for conflicts disclosure, which in their view is not effective for investors and which may cause unintended negative consequences (e.g., investors generally do not discount advice from biased advisors as much as they should; disclosure can increase the bias in advice);
 it would result in less investor confusion about the role of the advisor and ensure the most efficient allocation of responsibilities between the advisor and the client given the level of financial literacy of consumers, the degree of knowledge, specialized skills and abilities that the advisor needs to possess, and the complexity of financial products
 it would require regulators to consider whether embedded commissions (and other compensation practices) are compatible with a best interest standard. If embedded commissions were prohibited as a result of a best interest standard, investors would be encouraged to look more critically at what they are getting for what they pay. This would
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improve competition and economic forces would spur innovation in the delivery of cost-
effective advice that meets a best interest standard;
 it would help establish better means of restitution by removing the uncertainty about whether
the standard applies and improving the chances of the client securing some restitution. The greater impact, however, may be that existence of the legislated duty and greater chance of success in court will influence the behaviour and standards of advisors and their firms, both reducing the losses and encouraging out of court settlements.
 it would support investor education initiatives which, although helpful, cannot be expected to address the significant power imbalance between advisor and client
 it would align the CSA’s approach with the expectations of the International Organization of Securities Commission (IOSCO) and the G20 in how financial intermediaries should deal with their clients; and
 it would enhance the professionalism of the financial services industry and enhance public trust and confidence in the industry, thereby assisting the financial advice industry in its ambition to be recognized as a profession.
Although most of these commenters stated that a statutory best interest standard is necessary, most of them also took the view that it is not sufficient by itself. We heard that targeted reforms will likely also be necessary. Some of the key targeted reforms identified by commenters included (collectively, the Other Policy Options):
 Raising advisor proficiency and designations, especially for certain kinds of dealing representatives;
 Regulating advisor titles to ensure they are accurate and not misleading;
 Creating two categories of advisor similar to the U.K. model: one category (“adviser”) would offer independent, holistic advice free of any conflicts and be subject to a best interest standard and another category (“salesperson”) would offer restricted and/or conflicted advice that would be subject to the current regulatory requirement for advisors;
 Improving suitability (including allowing certain restricted dealers (e.g., mutual fund dealers) to offer a broader range of products);
 Improving the rules on conflicts of interest, including conflicted compensation models;
 Expanding financial literacy education programs to ensure investors understand, among other
things, the standard of conduct owed to them by their advisor;
 Ensuring sound management control mechanisms at advisory firms to ensure regulatory requirements are met;
 Requiring investment policy statements in certain circumstances;
 Prohibiting or standardizing embedded commissions so that they are neutral to the type of
product being distributed;
 Improving investor restitution by considering alternative (or additional) dispute resolution options;
 Examining the services provided by discount brokerages to determine if they could continue under a best interest standard and/or assessing whether certain services should be subject to a best interest standard; and
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 Increasing enforcement, and compliance reviews, of the current regulatory framework. Opponents of a best interest standard
Those commenters that do not support a best interest standard identified a variety of reasons why the current regulatory framework for advisors in fact does adequately protect Canadian investors, as follows:
 the current regulatory framework represents a robust, flexible and principled foundation that offers a high level of investor protection by:
o addressing in what situations a fiduciary duty will appropriately be found to exist between an advisor and his or her client.
o providing extensive investor protections through detailed rules and regulations of securities commissions and self-regulatory organizations (SROs), including:
 a requirement to deal fairly, honestly and in good faith with clients;
 suitability obligations (including recent SRO enhancements);
 a requirement to observe high standards of ethics and conduct in the transaction
of business with clients;
 proper disclosure and handling of conflicts of interest (including recent SRO
enhancements), including avoidance in certain circumstances;
 prohibited sales practices;
 dispute resolution requirements;
 supervision of activity in client accounts;
 background checks of advisors (such as police, credit, employment, education
and proficiency course completion) before licensing;
 industry-specific education requirements;
 compensation disclosure;
 cost disclosure and performance reporting (including the recent CRM2 reforms);
 referral arrangement disclosure;
 product disclosure (including management report on fund performance and Fund
Facts reforms);
 plain language requirements; and
 insurance and bonding;
 existing comprehensive securities legislation and recent CSA and SRO initiatives, including the new SRO conflict of interest rules, the Client Relationship Model reforms to cost disclosure and performance reporting (i.e., CRM2), the management report of fund performance, the Fund Facts disclosure document, the relationship disclosure reforms, the SRO enhancements to suitability, and the CSA-sponsored investor education initiatives (collectively, the Recent Canadian Reforms) address the investor protection concerns (or will address these concerns, once fully implemented) expressed in the Consultation Paper;
 the Consultation Paper neither captured the perceived failure in the current regulatory regime nor presented any evidence demonstrating any actual investor harm with the current standard of conduct for advisors;
 financial literacy and information asymmetry will vary dramatically depending on the advisor and the client and is one of the reasons why clients engage advisors in the first place;
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 an expectation gap does not exist in practice as most advisors already assume an obligation to provide advice in their clients’ best interest;
 it is misleading to compare a best interest standard to the suitability standard in isolation from the related duty of care and duty to act fairly, honestly and in good faith. Moreover, many commenters pointed to the recent SRO enhancements to their suitability requirements, which include more frequent triggering events and reference to the client’s portfolio in certain circumstances. Many were of the view that the duty to act fairly, honestly and in good faith would not allow an advisor to recommend a product that resulted in higher fees to the client. Some stated that a suitable product must, by definition, be a product in the client’s best interest. Others stated that identifying the “best” or “better” products is subjective and contentious and would be difficult to enforce. Several commenters are of the view that cost is already a consideration, but that it is only one consideration as a high cost investment may also have a better long-term performance. Many commenters were also not convinced that a gap exists between suitable investments and investments in the client’s best interest apart from the issue of cost and they believe that further study is required to determine what gap exists, if any; and
 since several of the Recent Canadian Reforms, including the SRO reforms relating to conflicts of interest (which now requires addressing conflicts of interest in a fair, equitable and transparent manner, and considering the best interests of the client), are not yet fully implemented, it is premature to conclude that the rules applicable to management of conflicts of interest are less effective than intended.
Finally, many industry commenters took the position that even if certain investor protection concerns remained (or emerged) after full implementation of the Recent Canadian Reforms, the appropriate regulatory response should be targeted in nature (some of the targeted reforms above were also suggested by certain industry commenters, such as improvements to title regulation, proficiency enhancements, and new investor education initiatives) rather than undertaking a foundational shift of the entire regime which may or may not address the concerns and may lead to negative unintended consequences for investors and capital markets (see discussion below under Key Theme #3). Their reasons against introducing a best interest standard as a solution to these concerns included the following:
 they did not see what investor protection issues a best interest standard would address that the current framework could not address, as the current regulatory framework either already imposes a best interest standard for advice to retail clients or imposes a standard that is functionally equivalent to a best interest standard. Certainty, advisors that provide discretionary advice to clients (or that have clients that are vulnerable and place significant trust and reliance on their advice) are subject to a best interest (or fiduciary) duty at common law. For all other advisors, the requirement to deal fairly, honestly and in good faith with investors along with rules around suitability, know your product, relationship disclosure, referral arrangement disclosure, continuous product disclosure, complaint handling, plain language requirements, conflict disclosure, compensation disclosure constitutes a standard that is functionally equivalent to a best interest standard;
 a best interest standard will exacerbate concerns around financial literacy and information asymmetry since investors will have less incentive to educate themselves on investments and place more reliance on their advisor. These commenters also feared that this will lead to
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increased investor apathy, with investors waiving their own responsibilities in favour of any advice they are given, and will place all of the responsibility on their advisor, even in non- discretionary relationships;
 the Recent Canadian Reforms demonstrate that Canada’s regulatory framework is successfully evolving further in the direction of achieving “best interest” requirements without the need to specifically impose a vague statutory best interest standard. Although concerns may remain or emerge, these commenters expressed the view that the current regime is robust enough to address any such concerns;
 among Québec’s 11 commenters, several are of the view that investors are adequately protected by Québec’s current requirements. They argue that Québec’s courts must keep the flexibility that the current regime provides, which allows them to factor in the specific circumstances of each case. Commenters pointed out that amending the current regime could have the effect of lowering investors’ sense of responsibility and could create an obligation focused on the ends (i.e., the returns of the investments) rather than on the means (i.e., the process used by the advisor to arrive at a recommendation) of advisory services. They are of the view that Québec’s current regime is (or almost is) a functional equivalent of the common law fiduciary duty, though civil law and common law remain two different regimes. Nevertheless, one Québec commenter is of the view that a statutory, uniform and flexible best interest standard should be adopted by all CSA regulators and SROs; and
 in common law jurisdictions, a best interest standard will create legal uncertainty because courts will no longer be able to rely on existing jurisprudence relating to the content of the suitability obligation or fiduciary duty. They will have to develop new law on the meaning of “best interest” as defined by the CSA.
Appropriate influence of international developments
Many commenters felt that jurisdictions such as the United Kingdom and Australia have made important strides in investor protection and, in the case of Australia, in introducing a best interest standard. They claimed that the investor protection concerns identified by regulators in these jurisdictions mirror the investor protection concerns with the current regulatory framework in Canada. These commenters suggested that Canada is lagging behind in this area, leaving Canadian standards at a lower level than those in leading jurisdictions, and should adopt a best interest standard to afford investors with similar protection as is provided in those other jurisdictions.
Others questioned the comparison between Canada and other international jurisdictions in the standard of conduct context. They pointed out that:
 the policy responses in other jurisdictions were designed to deal with market failures and deficiencies that arose in those jurisdictions. Since Canada does not exhibit these same issues and has its own statutory framework that includes a duty to deal fairly, honestly and in good faith with clients that may not have existed in some of the other jurisdictions, any move toward adopting similar reforms in Canada would be unnecessary and misguided.
 when the implementation and contextual considerations are closely examined, it is difficult to conclude that international initiatives point to Canada lagging other jurisdictions in providing a robust framework for investor protection or falling down on considering the investor’s best
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interest. Some also said that the rationale for introducing tighter market regulation in some of the jurisdictions highlighted in the Consultation Paper is related to:
o evidence of market failure or systemic mis-selling in these jurisdictions that does not exist in Canada, a further indication that the current rules are highly effective and appropriate to the Canadian market; and
o at least in Australia, mandated employee savings programs that create a large pool of clients for advisors which does not exist in Canada (where the industry operates in a competitive environment); and
 the CSA should take advantage of the fact that the international reforms in the U.K. and Australia are now in force and that we should carefully review the impact on these reforms in those jurisdictions before deciding whether to pursue similar reforms in Canada. Some also suggested deferring any decision in Canada until the U.S. approach is finalized.
2. A best interest standard must be clear Summary
There was broad agreement that a best interest standard, if adopted, should be as clear as possible and include sufficient guidance to ensure all advisors understand how to comply with the standard. Many questioned whether certain restricted business models and certain compensation practices could continue under a statutory best interest standard.
The discussion below on this key theme is divided into the following areas:
 Moving from ‘suitable’ investments to investments in the client’s best interest
 Responding to potential conflicts of interest in the client’s best interest
Moving from ‘suitable’ investments to investments in the client’s best interest
We received significant feedback that introducing a requirement for advisors to recommend securities that are in the client’s best interest (rather than investments that are suitable) is unclear and problematic. These commenters identified several areas of concern, including:
 it would be impossible to establish objective standards or guidance to determine whether one investment is “better” than another in every way. The review of trades against such a standard would not be practical and would depend on the extent of supervision expected by regulators.
 the risk that product cost would be a determinative factor in this best interest advice analysis. According to these commenters, cost is only one factor that advisors should consider when providing product-based advice (other factors include performance, reputation of fund manager, investment strategy, track record, product reputation and stability). Their concern is that cheaper investment options would be pursued by advisors purely because they are cheaper at the time of acquisition, rather than focusing on the likelihood of reaching higher risk-adjusted returns over the client’s time horizon. The commenters believe this implication to be simplistic and lacking in context as the least expensive option is not necessarily the “best” option for a client.
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 that this standard may be interpreted by investors as providing perfect advice or guaranteeing positive investment returns. We heard that if a best interest standard is implemented, it would need to be clear to investors, regulators and the courts that the duty to act in a client’s best interest should not mean that advisors would have to give “perfect” advice, provide “perfect” service, or provide a guaranteed positive investment outcome.
 whether the know-your-product (KYP) obligation under a best interest standard would require firms to be knowledgeable about the entire universe of securities products and the feasibility of such an expectation.
 how this requirement would apply to those dealers (i.e., mutual fund dealers, exempt market dealers and scholarship plan dealers) that are restricted in what they can offer their clients or for those that focus on specific sector or product specialties as a business decision. Some also questioned whether these business models could continue to exist at all and suggested that the current proficiency requirements were not sufficient enough to expect these advisors to be proficient in other kinds of products. See additional discussion below under Key Theme #3.
Other commenters believed it should be fairly straightforward to determine when advice would be in the client’s best interest. One commenter suggested that the criteria should include such factors as: (a) suitability (risk of loss, volatility, etc.); (b) diversification within current asset holdings; and (c) whether the client is able to hold the investment for any anticipated or requisite illiquid period. This commenter suggested that other important criteria would include the following: conflicts of interest must be eliminated or disclosed; decisions must be based on the whole portfolio rather than by security; and execution must always be in the client’s best interest and not based on soft dollars or on a commission’s basis.
Responding to potential conflicts of interest in the client’s best interest
We also received significant feedback on the implications of a best interest standard for how conflicts of interest must be responded to. Commenters identified a number of areas where there was potentially a conflict of interest but where they felt it was unclear how a best interest standard would apply to
certain common practices today, including whether:
 commission-based accounts would be banned (or restricted) in favour of fee-based accounts, which may not be accessible to low and medium-income investors and may not be the best option for clients that undertake frequent trading.
 advisors acting as principal (which currently allows for liquidity through market making, principal trading, and bond trading from inventory) would be banned or restricted.
 advisors selling proprietary products (which currently allows advisors to recommend underwritten offerings, proprietary products and affiliated issuer products) would be banned or restricted. This is particularly relevant for those dealers that focus on certain types of securities, such as mutual fund dealers, scholarship plan dealers and exempt market dealers as well as those advisors that are part of a large integrated distribution model.
In contrast, many commenters from the investor community felt strongly that conflicts of interest were often not addressed and that when they were, disclosure was industry’s preferred response. They felt that a best interest standard should, in most cases, require avoidance of any conflicts of interest, especially conflicts of interest involving advisor compensation. They felt that this was the clearest way to address conflicts in the context of advisory services.
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3. The potential negative impact on investors and capital markets must be carefully assessed Summary
Many commenters strongly believe that the potential for negative impact on investors and capital markets from unintended consequences of a statutory best interest standard is significant. The main concern was that a best interest standard could result in advice that is more expensive, less accessible and too conservative.
The discussion below on this key theme is divided into the following areas:
 Increase in costs
 Negative impact on choice, access and affordability
 Impact on different business models and registration categories
 Legal uncertainty
 Compensation model
 Potential for regulatory arbitrage with other non-securities products
 Application of duty on retail clients
Increase in costs
Many commenters believe that the introduction of the best interest standard will significantly increase costs for industry due to the increase in:
 litigation/complaints,
 compliance obligations,
 errors and omission insurance premiums,
 technology costs to build systems to comply with this standard,
 costs to educate individual representatives,
 costs to reassess products on firms’ shelves, and
 supervision and back office procedures.
In contrast, other commenters stated that a best interest standard would not lead to increased industry costs by pointing to the following:
 if they already act in their client’s best interest (as many advisory firms claim), then there should be minimal impact on cost of introducing this standard. So only advisors not acting in their client’s best interest would incur material costs.
 when the interests of both the client and the advisor are aligned, this may result in fewer compliance and legal issues, thus reducing these costs and ensuring that retail clients do not need to resort to litigation, which is a path to redress that many clients cannot or will not pursue.
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Negative impact on choice, access and affordability
Many commenters felt that the introduction of a best interest standard would have a negative impact on choice, access and affordability of advisory services for middle and low income Canadians for the following reasons:
 the increased costs for industry associated with implementing a best interest standard would be passed along to clients, making those services too expensive for many Canadians.
 it may cause a shift away from commission-based accounts, which for smaller investors, or those with more limited trading activity, are less expensive than fee-based accounts that often require minimum assets or a minimum fee.
 smaller profit margins for advisors may result in advisors increasing their minimum assets/account size (some suggested minimums of anywhere from $100,000 to $350,000), making advice less accessible.
 although large, integrated financial organizations will be better able to adjust to and/or absorb these costs, small and mid-market advisory firms will be less able to withstand these costs increases and will lead to their increased competitive disadvantage and their further decline.
 it may motivate firms to de-prioritize customers with small accounts.
 it may motivate firms to narrow the range of products available on their platform as the liability associated with choosing the “wrong” product for a client may drive firms to offer lower risk products that are viewed as having less liability risk. This would have the effect of lowering client returns since higher risk investments create the potential for higher returns.
 Canadians would receive less financial advice overall which would likely diminish Canadians’ overall personal saving and investing.
 there is some preliminary evidence that the U.K. may be experiencing an “advice gap” where, because of the increased costs of advice as a result of its recent reforms, low-income U.K. investors who, before the reforms, were receiving advice are no longer receiving advice after the reforms.
In contrast, other commenters disagreed that a statutory best interest standard would lead to a negative
impact on choice, access and affordability of advisory services for the following reasons:
 the financial services industry is extremely entrepreneurial and innovative and has shown it will find profitable ways to deliver advisory services under any regulatory regime imposed by the CSA,
 although initially some clients may potentially lose access or experience increased costs from the advice channels they have previously utilized, they believe these would be a temporary effects,
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 new business models will be encouraged, new choices will emerge, and innovation and competition will drive down consumer cost, and
 claims of increased costs to investors ignore the agency (monitoring) costs that clients are incurring today as a result of the suitability standard. In particular, a best interest standard will result in lower investor agency costs of monitoring the advisor since the new standard will require that the advisor put the client’s interests first.
Impact on different business models and registration categories
Some commenters expressed concerns that a statutory best interest duty has the potential to be interpreted as requiring the dealer to offer all types of securities. For many, this would call into question how dealers that are only allowed to deal in one type of security (e.g., mutual fund dealers, exempt market dealers and scholarship plan dealers) can comply with this standard. As a result, commenters have questioned if the introduction of this standard will lead to an elimination of the traditional retail dealer, and if we will have a situation where the industry goes to two extremes: discount brokerages on one end of the scale (where a best interest standard may not apply) and portfolio managers on the other end (where a fiduciary duty already applies).
In this vein, some commenters pointed out that unless the best interest standard was “business model neutral” and carefully qualified to take into account all business models, these more narrow business models may not be feasible. These commenters point out that reforms in Australia and the U.K. allow restricted advice and scaled advice, respectively, to be provided. Some commenters preferred the Australian approach where even the so-called “scaled” advice has to consider the best interest of a client.
Some commenters did not support qualifying the best interest standard because they felt such qualification has the potential of causing more confusion as to the level of service and investment advice being received. These commenters felt that any standard short of a full fiduciary duty applied uniformly will continue to perpetuate unequal investor protection. Further, these commenters felt that if there were a lower tier of duty for certain dealers and therefore the duty would not be applied equally across the continuum for providing advice, the investor protection concerns outlined in the Consultation Paper would not be addressed. Other commenters took the view that instead of having different standards and rules for advisors depending upon the advisor’s registration category and rather than drafting a standard with numerous carve outs (which adds complexity and dilutes its perceived benefits to investors), the CSA’s investor protection goals can be more easily achieved through targeted policy initiatives.
Legal uncertainty
Several commenters felt that there is no uncertainty when a fiduciary duty is applied at common law to a given advisor-client relationship. In fact, most of these commenters felt that a statutory best interest standard would increase (not decrease) legal uncertainty because:
 the courts’ appropriate discretion to apply its principled and fact-based analysis of whether or not a fiduciary relationship exists would be replaced with a “one-size-fits-all” duty that would apply to every retail client, regardless of their vulnerability or sophistication or whether they grant discretionary authority to the advisor;
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 it may take several years for courts to conclusively define what a best interest standard means in respect of all aspects of the advisor-client relationship and along the way courts may interpret the standard differently;
 the CSA will not have control over how courts handle the application of a common law fiduciary duty or how it will impact the securities industry as a whole;
 unlike the common law, a statute does not have the flexibility to consider specific fact situations and that this will cause practical implementation problems;
 the equitable remedies available to the courts (such as those for a breach of fiduciary duty) would be inappropriate in circumstances where a fiduciary duty is imposed by regulation but would not have been imposed under common law. The application of equitable remedies could be misused by retail investors, especially sophisticated retail investors;
 the courts in Québec may be uncertain with how to interpret a statutory best interest standard in light of its current regulatory framework that already references a best interest duty and a duty of loyalty; and
 it would be impossible to ensure that a common principle would be adopted across all jurisdictions, and be applicable to all competing products in any particular jurisdiction. Creating a single compliance and supervisory oversight framework for those products with national distribution would be problematic, with the likely result that Canadians would find themselves being treated differently on a regional basis, with investors in smaller provinces at the greatest risk for reduced choice and access.
Other commenters disagreed. They felt that a statutory best interest standard would clarify that a fiduciary duty was always owed at common law and therefore clients in non-managed accounts would not need to be concerned whether the relationship with their advisor demonstrated the relevant interrelated factors sufficient to result in a fiduciary relationship. They believe that a statutory best interest standard would have a positive impact on advisor-client litigation because the parties would be clear at the outset that the advisor’s fundamental duty is to put the client’s interests ahead of their own.
Compensation model
Several commenters were concerned that if a best interest standard required the elimination of commission-based accounts and trailing commissions, for example, this would have a variety of negative impacts on Canadian investors. In particular, these commenters were concerned that:
 middle-class and less affluent investors would be most disadvantaged by a shift away from use of commission-based brokerage accounts, especially for those who trade infrequently and/or maintain small accounts;
 this will lead to a decreased choice in affordable investment products;
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 investors in the US face higher costs and less transparency in the marketplace since embedded fee compensation model have disappeared from the United States mutual fund market and has been replaced primarily by a fee-for-service model;
 the embedded fee model represents the most popular, efficient and lowest-cost option for investors; and
 this may create an “advice gap” since investors may stop seeking advice as clients are generally unwilling to pay directly for advice, which preliminary evidence suggests may be happening in U.K. as a result of its recent reforms in this area.
Several commenters urged the CSA to consider alternatives to banning certain compensation arrangements so that advisors could receive compensation in respect of product sales but which would be neutral to the type of product being distributed. This would presumably eliminate the concern that products offering higher compensation would attract advisors to sell those products over other equivalent products with a lower compensation structure.
Some commenters submitted that permitted fee structures and compensation methods would need to be fully consistent with the duty of care established by a best interest standard. Most of these commenters stated that certain conflicts of interest, especially those related to embedded commissions, should be avoided altogether. These commenters expressed difficulty in understanding how advisors could meet a best interest duty to their clients while accepting payments from a third party.
Finally, there was broad acknowledgement that the issues around embedded compensation in the mutual fund context are explored in more detail in the Mutual Fund Fees Consultation and that CSA staff working on both projects should coordinate their analysis in this respect.
Potential for regulatory arbitrage with other non-securities products
Many commenters expressed the concern that a statutory best interest that applies only to securities products and related advice could create an opportunity for regulatory arbitrage for those advisors that are also licensed to offer non-securities products such as insurance products, which fall within a different regulatory framework. For example, these advisors would be subject to a best interest standard when selling mutual fund products but another standard when discussing segregated fund products. Commenters are concerned that this could potentially create product sales arbitrage opportunities. Some commenters felt that without a common standard of conduct that applied to all financial products, the CSA should not attempt to strengthen the standard only in the securities context. Others felt that despite the CSA’s ability to regulate only the securities context and the potential for regulatory arbitrage, such concerns should not discourage the CSA from introducing a best interest standard.
Application of duty on retail clients
The best interest standard described in the Consultation Paper only applies when advisors provide advice to retail clients. Some commenters felt that all clients should have the benefit of a statutory best interest standard. In addition, commenters stated that it would not be appropriate to try to define a retail client with metrics such as income or financial assets as these are not reliable indicators of investment knowledge. Other commenters expressed that the application of the standard ought to be based on the nature of the relationship and not the type of client as sophisticated clients and those not vulnerable or
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dependent on advisors do not require this standard. In addition, it was pointed out that there are permitted clients that may not be sophisticated clients such as pension committees or charitable organizations that would benefit from a best interest standard.
Some commenters suggested that contractual adjustments could be allowed by some investors such as sophisticated institutional investors or certain sophisticated retail clients to opt out of a best interest standard. However, other commenters were critical of this approach and stated that if the registrant had an ability to modify the standard by contract, there would be the potential for abuse and misuse of the advisor's position, which negates a key rationale for the standard in the first place and that too often, such contractual variations would become the rule in the industry, rather than the exception.
4. More work is needed
Summary
Many commenters suggested further work that should be completed before moving forward with a statutory best interest standard or other regulatory response.
The discussion below on this key theme is divided into the following areas:
 Ensure the investor protection concerns are well defined
 Consider adopting the Québec model
 Conduct impact analysis
 Assess the international reforms
 Conduct further legal analysis
 Consider the Other Policy Options
 Coordinate with other financial-product regulators
The following sets out the main areas where further work was suggested by commenters. Several commenters from the investor community felt that the CSA should proceed as soon as possible rather than delay this initiative with further study or research.
Ensure the investor protection concerns are well defined.
As discussed above, many commenters not supportive of a best interest standard stated that there was not sufficient evidence of one or more problems or that a best interest standard would solve these problems. Many industry commenters suggested allowing the Recent Canadian Reforms to become fully implemented before evaluating whether any investor protection concerns with the regulatory framework remain. Many commenters from the investor community disagreed, arguing that the concerns are sufficiently defined and evidenced.
Consider adopting the Québec model.
Several commenters suggested conducting further research to compare the effect on investors and advisors of the standard of conduct for advisors in Québec versus the common law jurisdictions in Canada. Depending on the result of this comparison, the CSA should consider whether this model could be adopted by the common law jurisdictions in Canada.
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Conduct impact analysis.
Many commenters stated that the CSA should conduct a robust Canadian cost-benefit analysis (CBA) before moving forward. Suggested areas of focus for the CBA should include the consideration of the transition from commission-based accounts to fee-based accounts, the effects of pricing low balance accounts out of the market and the resulting effects on middle class investors. Many commenters from the investor community disagreed, arguing that a best interest standard will not lend itself to traditional cost-benefit analysis.
Assess the international reforms.
Many commenters suggested that the CSA take the opportunity to allow the reforms in the U.K. and Australia to fully implement and analyze their regulatory impact before deciding whether to introduce similar reforms in Canada. Many also suggested conducting a detailed assessment of the initiatives within their jurisdictional context, including the current regulatory framework, retirement savings policy, and the market failures identified by those regulators.
Conduct further legal analysis.
Some suggested that the CSA conduct further legal analysis of what a fiduciary duty will mean for the sale of investment products. The analysis should include a survey of the principles from case law, the application to the investment industry of those principles, and a prospective understanding of the implications of a fiduciary duty. Consideration should also be given to the practical reality of how long it might take for case law to settle on an agreed understanding of the scope of a statutory best interest standard.
Consider the Other Policy Options.
As discussed above, commenters identified a variety of Other Policy Options in addition, or as an alternative, to a statutory best interest standard that the CSA should consider before deciding on its policy direction.
Coordinate with other financial-product regulators.
Many commenters highlighted the risk of regulatory arbitrage (i.e., the risk of advisors and/or clients seeking out non-securities products) with the introduction of a best interest standard or any other regulatory response that differs significantly in the regulatory approach of non-securities financial products. Commenters have requested that we make every effort to coordinate with other financial product regulators to ensure they is a consistent approach to the regulation of financial products for Canadian retail investors.
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Conclusion
A number of the key messages from industry participants and investors set out above are similar to those that have emerged from the Mutual Fund Fees Consultation. We refer you to CSA Staff Notice 81-323 – Status Report on Consultation under CSA Discussion Paper and Request for Comments 81- 407 Mutual Fund Fees, published concurrently with this Notice, for an overview of the key themes provided by stakeholders in response to that separate consultation.
The similarity of the feedback received from stakeholders demonstrates a connection between the two consultation initiatives and suggests a need for CSA staff to coordinate their policy considerations on these initiatives going forward.
Accordingly, in collaboration with the Mutual Fund Fees Consultation initiative, CSA staff continue to consider and discuss the information gathered through our consultation process with a view to determining next steps. We anticipate communicating in the coming months what, if any, regulatory actions and/or research we intend to pursue.

http://www.osc.gov.on.ca/documents/en/S ... 33-403.pdf
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Re: GET YOUR MONEY BACK!

Postby admin » Wed Dec 04, 2013 2:00 pm

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Financial Advisor Chicanery: Imagine a two-tiered health care system in which some doctors were legally obligated to do what's right for their patients and others, like snake-oil salesmen of yore, could recommend whatever treatments made them the most money, as long as they didn't kill patients outright. Now imagine that the shysters did all they could to blend in with the real doctors. That's effectively the type of system we have today among the people Americans count on to tell them how to invest their life's savings. Registered investment advisors must, by law, put clients' interests first. Many thousands of other "advisors" at places like Morgan Stanley, Merrill Lynch and smaller shops are held to a much lower "suitability" standard. In essence, even though these people often refer to themselves as "financial advisors" or by some other comfort-inducing title, they're really glorified salesmen. Some do a great job serving their clients. Others don't. It's up to them. Under the law, as long as they avoid putting an 85-year-old widow into an exotic derivative with a 20-year lockup, they're bulletproof. Few clients know this fiduciary-suitability gap exists. The suitability crowd has worked tirelessly to keep the standard low and the distinctions murky. The cost to the public is incalculable but huge.

Full article is found here: http://www.americanbanker.com/bankthink ... 940-1.html

keywords: Weinberg AmericanBanker editor fiduciary bait and switch suitability
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Re: GET YOUR MONEY BACK!

Postby admin » Tue Dec 03, 2013 8:19 am

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asc2.jpg (60.47 KiB) Viewed 22974 times
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In a wonderful example of "how many lawyers does it take......" comes this OSC policy, dated 2002 referring to requirements for those investment persons who lead the public to believe that they are professional "advisor's", whilst not having the advisor license.

With the active lobbying of 20-30 "stakeholders", and none of public protective or public interest groups, the securities industry is able to use the alchemy of the crowd, to lawyer up the rationale to allow persons who are licensed and acting in commission sales capacities to purport to the public (mislead:) that they are financial professionals of some description. The end result of 1000 regulatory lawyers typing on 1000 computers is to simply fool the public into a false sense of trust in the commission salesperson and to part more easily with their investment money and more of their rightful investment return.........

The regulators are confirmed as being paid 100% by the financial selling industry, and one of the major concerns about this is cases like this, where the regulator acts more like a trade and lobby support group that acting like a protector of the public.

see the document here: https://drive.google.com/file/d/0BzE_LM ... sp=sharing
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Re: GET YOUR MONEY BACK!

Postby admin » Tue Nov 05, 2013 9:15 am

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Investment dealers who refuse to compensate angry clients have been publicly named and their disputes exposed by the Canadian banking system’s ombudsman five times over the past year, most recently on Tuesday.

But the Ombudsman for Banking Services and Investments has no teeth to enforce its recommendations, and some industry players say the public airing of disputes through “naming and shaming” is doing little more than exposing OBSI’s own shortcomings.

“The more they draw on the naming, I’m not even going to say shaming, the less of a deterrent it becomes… There’s really nothing to it,” said John Fabello, a partner at law firm Torys LLP who frequently represents investment dealers in disputes with clients.

Before last year, OBSI had only unleashed its power — likened to a “nuclear deterrent” for its ability to ratchet up pressure on firms to comply with compensation recommendations before being named — one time.

But on Tuesday, the ombudsman extended a string of publicized disputes over the past 12 months. It said De Thomas Financial, a mutual fund dealer based in Thornhill, north of Toronto, should compensate a retired investor identified as Mrs. R. to the tune of $254,323. After looking into her complaint, OBSI said the inexperienced investor was given “unsuitable” advice to borrow money in order to invest.

Related
Toronto investment dealer latest in OBSI’s ‘name and shame’ campaign
OBSI makes good on pledge to 'name and shame' investment dealers that refuse compensation
De Thomas Financial “has chosen not to fulfill its responsibilities to Mrs. R. by providing the compensation she is owed based on the facts of the case,” OBSI said in a statement.

Mr. Fabello took issue with OBSI’s language, given that its recommendations are not binding, and its investigations are not subject to challenges as they would be in an arbitration or civil court. But he said “naming and shaming” firms in this manner is more of a “nuclear dud” than a deterrent because, once it is deployed, there is not a war nor mutually assured destruction.



There is no ammunition left in the ombudsman’s arsenal to motivate a firm to compensate, a reality acknowledged Tuesday by Tyler Fleming, OBSI’s spokesman.

“Once we go public, that incentive is gone,” he said.

As a result of its mandate, the ombudsman did not even find out whether the four firms named between September of last year and March of this year compensated the clients after the public exposure.

“Once OBSI goes public, our work on that case is finished,” Mr. Fleming said.

Tony De Thomasis, president of De Thomas Financial, said the public “naming and shaming” of his firm marked the first time in 25 years in the business that he has dealt with the ombudsman. He said he is “shocked” at the process, which endangers small and medium-sized investment firms.

“In the case at hand, the regulator found no fault,” Mr. De Thomasis said, adding the Mutual Fund Dealers Association closed the case some time ago. What’s more, he said, E&O (errors and omissions) insurance he purchased for his firm and advisors won’t provide coverage based on the compensation recommendation of the ombudsman.

“If we start paying, as a small dealer, where does it end?” Mr. De Thomasis said. “What happens if it happens four of five times? We wouldn’t be in business.”

He said he heard last year that large banks were pulling out of OBSI, but he didn’t pay much attention.

“Now I’m beginning to understand why they moved out,” he said.

Royal Bank of Canada joined Toronto-Dominion Bank in withdrawing from OBSI, though the investment dealers they own are compelled by the industry’s self-regulatory agency to remain.

Susan Copland, a director at the Investment Industry Association of Canada, said the “name and shame” campaign doesn’t appear to have made much of a ripple in the way firms in her association do business.

The tool has been on the books since OBSI began operations more than a decade ago, and large firms continue to use internal resolution mechanisms to resolve many complaints before they reach the stage of the public ombudsman.

“I’d say for our industry, nothing has really changed,” she said.

http://business.financialpost.com/2013/ ... itics-say/
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Re: GET YOUR MONEY BACK!

Postby admin » Tue Nov 05, 2013 9:13 am

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Canadian regulators are taking a hard look at the relationship between investment dealers and their clients. Under consideration are rules that would hold advisors who deal with retail clients to a higher standard, and large-scale changes to fees and incentives. In this three-part series, the Financial Post’s Barbara Shecter looks at the current landscape of advisor-client relations, the debate over potential changes, and the patchwork system of handling disputes when investors lose money.

Ray and Dawn-Marie Brown didn’t finish high school and had never played the markets but, as they moved into retirement a financial advisor suggested — and they agreed — to borrow $200,000 and try to invest their way to a more comfortable life in their golden years.

Five things clients — and advisors — should do to protect themselves

Disputes between advisors and clients will inevitably crop up, but lawyers who work on both sides of such disputes have a list of suggestions that can help avoid trouble, or swing the balance of liability when it does.

Continue reading.
Instead, they have found themselves no richer from their investments and more than $30,000 in debt after borrowing money on a line of credit to get out of the much larger loan they realized they could not repay. Now 74 and 72 years old, the couple had already burned through virtually all the money in their Registered Retirement Income Fund to make interest-only payments on the loan they took out to invest — and the money from the loan had been sunk into a resource-based fund that declined in value.

“We had never invested in anything before. I understand now it was called leveraging,” says Mr. Brown. “The word leveraging was new to me.”

Only after things fell apart did he and his wife learn they should not have signed a document indicating their knowledge about investing was “excellent” and that they were willing to take on high-risk investments.

“We signed something but I don’t know what we signed. It was several pages of small type,” Mr. Brown says.

“Not having experience, I must admit I did not fully understand what he (the advisor) was talking about.”

Related
Getting your money back: The long and winding road
Should all investors be treated as 'completely vulnerable'
Costly advice: Canadian Investor Protection Fund difficult to tap
‘Shocking’ crackdown on advisors threatens smaller players: Tony De Thomasis
Investor advocacy group warns about risks of borrowing to invest
OBSI makes good on pledge to 'name and shame' investment dealers that refuse compensation
Some of the details of the Browns’ story are unique, but others are familiar to lawyers who deal with investor losses and spend their days trying to get to the bottom of complaints.

Harold Geller, a civil litigator who specializes in dispute resolution at Ottawa law firm McBride Bond Christian LLP, says many investors across Canada rely on advisors with no real appreciation for their expertise, and what the recourse is, if any, when things go badly.

Among the problems, Mr. Geller says, is there are a number of titles used by advisors across the country that don’t say much about their qualifications or the standards they must meet when dealing with clients.

While there are designations that take years to earn, such as chartered financial analyst, other titles like wealth manager or advisor can be used by anyone registered to sell mutual funds.

“It’s not an indication of whether you’re protected [as a client] or whether you’re going to get quality advice,” says Mr. Geller, who has acted for advisors and for clients in various disputes. “It’s a minefield for investors, and this should change.”


Matthew Sherwood for National PostRay and Dawn-Marie Brown with Anthony Pichelli, president of Investment Loss Recovery Group, who is helping them to recover some of their lost money.
Lawyers, doctors, and other professionals are subject to much more rigorous training and sanctions if things go wrong, says Mr. Geller.

While achieving some financial advisor designations require years of study and a series of tough exams, others demand far less robust training. But staying in the business requires practitioners to quickly build a book of business and critics say this structure sets the stage for the least experienced advisors to make the most aggressive pitches.

“If a dealer gives you an innovative product pitch, chances are he doesn’t know enough to know the risks… You want an advisor who follows a process,” says Mr. Geller, who was appointed Friday to the Ontario Securities Commission’s Investor Advisory Panel. The nine-member group advises the regulator on investor protection issues and brings forward policy issues for consideration.

Those who criticize the current system are wary of incentives that allow advisors to recommend investment products with high commissions and trailer fees, as long as the investments are “suitable” for the client.

But John Fabello, a partner at Torys LLP who has worked extensively for dealers and advisors, says many of the complaints about investment dealers and their advisors erupt because investors don’t take responsibility for their investments — including their decision to buy stocks and other securities in the first place.


Tim Fraser for National PostSecurities lawyer John Fabello.
“Nobody has to invest in the capital markets,” Mr. Fabello says. “Nobody is out there putting a gun to any investor’s or potential client’s head saying ‘You must invest in the capital markets now.’”



Challenging your investment advisor: Where to start

If an investor loses money and believes an investment dealer or advisor may have done something wrong, the first place to start is usually with the management or compliance department of the investment dealer, or bank ombudsman. If there are still concerns, an investor can seek one or more of the following options:

Complain to the Ombudsman for Banking Services and Investments OBSI investigates cases and can recommend compensation of up to $350,000 to investors for their losses. However, financial institutions are not required to follow the compensation recommendations. OBSI has begun a campaign to “name and shame” firms that do not compensate clients according to the ombudsman’s recommendations.

Seek arbitration through the Investment Industry Regulatory Organization of Canada In successful cases, an IIROC arbitration panel can award up to $500,000 in compensation to an investor, plus interest and legal costs.

Pursue mediation through the Autorité des marches financiers (Quebec only) Participation is voluntary and requires agreement from both the firm and client. The mediator does not have authority to impose a resolution on the parties.

Make a claim through the Canadian Investor Protection Fund CIPF pays up to $1-million in compensation to investors, but only if their investment dealer is regulated by IIROC, and becomes insolvent.

Commence private litigation This option is available for investors with the time (and money) to take their case to civil court to pursue a settlement or trial. Small claims court is a cheaper alternative in most provinces, but claim amounts are limited to between $7,000 and $25,000, according to the Foundation for the Advancement of Investor Rights.

Complain to the Ontario Securities Commission If an investor thinks their dealer or advisor has done something that breaches securities or even criminal law, complaints can be made to provincial securities regulators such as the OSC, national self-regulatory agencies such as the Mutual Fund Dealers Association or IIROC, or to the RCMP. While some of the regulators extract money through settlements, or after successful hearings, the funds generally do not go directly to investors who have been harmed by the events or behavior.
In many disputes, he says, an advisor has followed the rules and done what the client agreed to, yet faces their wrath when it turns out the client was simply not prepared to lose money.

Mr. Fabello points out that brokers and dealers prevailed in two-thirds of the 27 cases stemming from the stock market meltdowns of 2001 and 2008 that have been tried in civil court.

In six of the nine cases that were decided in favour of the client, he notes, the investor was held partly responsible which reduced the damage award.

“You can’t and shouldn’t be diminishing an investor’s responsibility,” Mr. Fabello says.

The duty of an advisor is to offer advice on “suitable” investments and to sell them honestly and in good faith. But regulators across Canada are taking a hard look at the relationship between advisors and their clients, with a particular focus on fees and incentives, and they are considering raising the standards dealers and advisors must adhere to when dealing with retail clients.

Nearly 50% of Canadians have a financial advisor, up from 42% in 2006, according to the Canadian Securities Administrators. The next steps in the potential regulatory overhaul are to be announced by the end of this year and, less formally, industry players say there is a parallel focus by regulators on specific investment issues affecting seniors.

But before new standards are put in place, investment industry players are pushing back. They suggest higher standards will drive up the cost of doing business, and therefore, of investing — possibly putting it out of reach for many Canadians.

What’s more, they argue, there are more free or inexpensive ways than ever before to seek redress if investors feel things have gone wrong.

On the other side of the debate, investor advocates say the changes under consideration by regulators that would put the “best interest” of the retail investor at the forefront of all investment decisions should be implemented as soon as possible. They argue that existing mechanisms to help investors recover losses are too slow, too expensive, or both.

Anthony Pichelli, a former advisor who has set up the Investment Loss Recovery Group to help people like the Browns try to get some of their money back, says he was told by the Ombudsman for Banking Services and Investments that it would take eight months before an investigator would be assigned to their case. Any resolution would take even longer.

Mr. Pichelli also contacted the Mutual Fund Dealers Association, and was notified once the self-regulatory agency for the industry had looked into the case that no action would be taken.

He says the Browns can’t afford to take their case to civil court, even if they wanted to, unless they can find a lawyer willing to take the case on contingency and get paid only if they recover some money.

Mr. Brown, who is semi-retired, does part-time work landscaping to try to make ends meet, and the couple lives in one of their main assets — an inherited house in King City, a small community north of Toronto.

“I’m looking for an avenue to help my clients – I can’t find it,” says Mr. Pichelli.

“Mr. and Mrs. Brown did not have the capacity to sustain investment losses. Their investment knowledge was so limited that they believed when their fund investment dropped in value, so did their loan.”

Mr. Pichelli argues that the Browns are out more than just the money they borrowed to extricate themselves from the $200,000 loan.

They also spent more than $30,000 paying interest on that loan over the years it was outstanding, and there was a 3%, or $5,000, fee applied when they sold their investments to pay off the loan, he says.

The Browns dealt with an advisor at Quadrus Investment Services Ltd., a mutual fund dealer affiliated with London Life and Great-West Life, insurance and financial services firms.

A spokesperson for Great-West Life declined to comment specifically on the Browns’ case. In an emailed statement, she said the company does not comment on matters being reviewed by the Ombudsman for Banking Services and Investments.
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Re: GET YOUR MONEY BACK!

Postby admin » Tue Nov 05, 2013 9:11 am

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Canadian regulators are taking a hard look at the relationship between investment dealers and their clients. Under consideration are rules that would hold advisors who deal with retail clients to a higher standard, and large-scale changes to fees and incentives. In the second of this three-part series, the Financial Post’s Barbara Shecter looks at the debate sparked by what could be the biggest overhaul of the investment industry in years.

There have always been conflicts between financial advisors and their clients when things go badly and losses are involved, but the relationship could be entering a new phase.

Costly advice: 'Leveraging was new to me'

Ray and Dawn-Marie Brown didn’t finish high school and had never played the markets but, as they moved into retirement a financial advisor suggested — and they agreed — to borrow $200,000 and try to invest their way to a more comfortable life in their golden years.

Instead, they have found themselves no richer from their investments and more than $30,000 in debt after borrowing money on a line of credit to get out of the much larger loan they realized they could not repay. Now 74 and 72 years old, the couple had already burned through virtually all the money in their Registered Retirement Income Fund to make interest-only payments on the loan they took out to invest — and the money from the loan had been sunk into a resource-based fund that declined in value.

“We had never invested in anything before. I understand now it was called leveraging,” says Mr. Brown. “The word leveraging was new to me.”

Continue reading.
Canadian regulators are considering changes that would hold those who sell investment products to retail clients to a higher standard.

Discussions about putting the client’s “best interest” at the forefront of any investment decision are in their early stages. But some industry watchers say the higher standard would address inherent conflicts of interest in the sale of securities and the chronic problems that result from a splintered system where trying to get compensation is a complicated and expensive process.

Others, however, say regulators should stick to enforcing existing and recently adopted rules, and argue that the courts are the best place to settle legitimate disputes between firms and advisors and their clients.

David Di Paolo, a partner at law firm Borden Ladner Gervais LLP, who often represents dealers and advisors in investor loss cases, says regulators appear to be preparing to treat all retail investors as “completely vulnerable.” Their advisors will be held to a standard comparable to that imposed on those who administer funds for children, he says.

“It doesn’t make sense… and the courts [in investor loss cases] have refused to do that,” Mr. Di Paolo says. “It’s a completely different duty to the duty they have to their clients right now.”

The adoption of an across-the-board “best interest” or fiduciary standard could lead to bigger compensation awards to investors, including the commissions or fees earned by the advisors for the subpar work. But it could also result in unwanted consequences, Mr. Di Paolo warns. Among them could be the disappearance of affordable advice that falls between the level offered by discount brokers — none — and portfolio managers who are expressly paid to manage a client’s portfolio once initial parameters are set.

Related
Five things clients — and advisors — should do to protect themselves
Costly advice: 'Leveraging was new to me'
“Industry has to bear the cost” of any added compliance and legal burden from new standards for retail advisors, “or they get out of that model,” Mr. Di Paolo says, adding that this could push the cost of investing with advice out of reach for many Canadians.

“I’m not sure the regulators have thought that much through to those issues,” Mr. Di Paolo says.

But Ken Kivenko, an investor advocate who is also a member of the Ontario Securities Commission Investor Advisory Panel, says changes along the lines of the ones being contemplated now have been called for since the mid-1990s.

Despite some slow strides in the past couple of years, issues such as conflict of interest and a rebalancing of the advisor-client relations are “still not resolved. It’s really sad,” says Mr. Kivenko. “Here we are, 2013, and we’re still talking about it.”


Steve McKinleyKen Kivenko, an investor advocate and member of the Ontario Securities Commission Investor Advisory Panel.
Investor advocates such as Mr. Kivenko say the industry is fighting the changes because, if adopted, they will lead to more litigation, larger potential compensation payouts ordered by the courts, and lower profits for investment advisors and dealers. But as the debate drags on, he hears more stories about investors — particularly seniors — living in reduced circumstances because they received unsuitable advice.

“It is getting harder and harder for the fund industry to argue against the prohibition of embedded sales commissions and a best interests obligation,” Mr. Kivenko says.

As regulators continue to consider clamping down on fees and incentives and holding those who offer investment advice to retail investors to a higher standard, Mr. Kivenko warns there are signs dealers and advisors are looking for ways to shift client assets between investment products to keep ahead of any rule changes.

Challenging your investment advisor: Where to start

If an investor loses money and believes an investment dealer or advisor may have done something wrong, the first place to start is usually with the management or compliance department of the investment dealer, or bank ombudsman. If there are still concerns, an investor can seek one or more of the following options:

Complain to the Ombudsman for Banking Services and Investments OBSI investigates cases and can recommend compensation of up to $350,000 to investors for their losses. However, financial institutions are not required to follow the compensation recommendations. OBSI has begun a campaign to “name and shame” firms that do not compensate clients according to the ombudsman’s recommendations.

Seek arbitration through the Investment Industry Regulatory Organization of Canada In successful cases, an IIROC arbitration panel can award up to $500,000 in compensation to an investor, plus interest and legal costs.

Pursue mediation through the Autorité des marches financiers (Quebec only) Participation is voluntary and requires agreement from both the firm and client. The mediator does not have authority to impose a resolution on the parties.

Make a claim through the Canadian Investor Protection Fund CIPF pays up to $1-million in compensation to investors, but only if their investment dealer is regulated by IIROC, and becomes insolvent.

Commence private litigation This option is available for investors with the time (and money) to take their case to civil court to pursue a settlement or trial. Small claims court is a cheaper alternative in most provinces, but claim amounts are limited to between $7,000 and $25,000, according to the Foundation for the Advancement of Investor Rights.

Complain to the Ontario Securities Commission If an investor thinks their dealer or advisor has done something that breaches securities or even criminal law, complaints can be made to provincial securities regulators such as the OSC, national self-regulatory agencies such as the Mutual Fund Dealers Association or IIROC, or to the RCMP. While some of the regulators extract money through settlements, or after successful hearings, the funds generally do not go directly to investors who have been harmed by the events or behavior.
“We see it as an emerging issue,” he says, citing the movement of client funds from mutual funds to segregated funds. The two securities share certain characteristics, but segregated (or “seg’) funds are sold through insurance firms.

Such product “arbitrage” takes advantage of distinct regulations and separate dispute resolution mechanisms for the investment and insurance industries, says Mr. Kivenko.



Securities commissions and self-regulatory agencies including the Mutual Fund Dealers Association of Canada and Investment Industry Regulatory Organization of Canada regulate mutual fund dealers and advisors in Ontario. Disputes are heard by the Ombudsman for Banking Services and Investments, popular among investor advocates because of healthy historical compensation decisions and willingness to “name and shame” financial institutions that don’t abide by its compensation recommendations.

Insurance companies and credit unions in the province have their own regulator, the Financial Services Commission of Ontario (FSCO), which has established unique criteria for determining whether an investment is right for a particular client. Disputes over insurance products are heard by the OmbudService for Life and Health Insurance.

It is not usual to find an advisor who is dual-licensed to sell both insurance and mutual fund products, which clears the way for “arbitrage,” says Mr. Kivenko.

“The OSC, IIROC, the MFDA, they don’t deal with seg funds,” Mr. Kivenko says. “Even if all the rules [proposed by these agencies] come in, the advisor can just switch hats and say, ‘I was an insurance advisor when I sold that.’”

The perceived attempt by individual investment advisors to adjust to, or skirt, the prospect of new standards isn’t slowing the broader investment industry from mounting a fight against the changes.

Michelle Alexander, director of policy at the Investment Industry Association of Canada, says the industry group is pushing regulators to re-think imposing a new standard and fee structure for advisors, which the industry sees as little more than a response to “untested” global trends. The United States is studying the costs and benefits of imposing a legal fiduciary standard on financial advisors, and the United Kingdom and Australia have both taken aim at making the industry more transparent and eliminating conflicts of interest.

But Ms. Alexander said the IIAC doesn’t see evidence of widespread problems with the current Canadian system, or the resolution of investor disputes through the courts. What’s more, she says, the timing of any new standards or fee regimes is ill-advised because recent rules governing disclosure and the management of conflicts haven’t been fully implemented in Canada.

“Before we make radical changes to the current system, let’s see if these fulfill the intended objectives,” Ms. Alexander said.

John Fabello, a partner at law firm Torys LLP who frequently represents dealers and advisors in disputes with clients, says a new “best interest” standard will add a layer of complication to the system without a demonstrated upside. What’s more, he says, it would confuse the established court process.

“The courts have developed, over decades, the concept of what the standard should be that a dealer owes a client. A spectrum is required because no broker-clients relationship is the same,” Mr. Fabello says. “No system is perfect, but by and large, judges have accepted the spectrum that gives them the flexibility to determine what kind of duty or standard is going to be applied in any particular case.”

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Re: GET YOUR MONEY BACK!

Postby admin » Tue Nov 05, 2013 9:09 am

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Canadian regulators are taking a hard look at the relationship between investment dealers and their clients. Under consideration are rules that would hold advisors who deal with retail clients to a higher standard, and large-scale changes to fees and incentives. In this three-part series, the Financial Post’s Barbara Shecter looks at the current landscape of advisor-client relations, the debate over potential changes, and the patchwork system of handling disputes when investors lose money.

Of the myriad and complex options investors have to try to recover money lost when things go sour with their financial advisor, the Ombudsman for Banking Services and Investments is widely seen as the most accessible.

It’s cheap to pursue for any client who feels they received poor or unsuitable advice and the ombudsman’s service provides for a potentially large payout that takes into consideration what a client would have earned if their money had been invested differently.

Five things clients — and advisors — should do to protect themselves

Disputes between advisors and clients will inevitably crop up, but lawyers who work on both sides of such disputes have a list of suggestions that can help avoid trouble, or swing the balance of liability when it does.

Continue reading.
But OBSI is imperfect at best and broken at worst, according to both dealers and investor advocates.

Dealers sanctioned by the dispute resolution agency feel they’re being unfairly penalized — especially when industry regulators such as the Mutual Fund Dealers Association decide not take any action against the firm or the advisor.

Investors wait months, sometimes years, for a decision about compensation from OBSI, only to find that, even when they win, they are sometimes unable to collect the money.

“What’s shameful about the end result is that there is a disaffected client who won’t get anything because of a system that is not working,” Earl Evans, whose retail brokerage Macquarie Private Wealth declined to follow OBSI’s recommendations in two cases, told the Financial Post last year.

Ken Kivenko, who helps investors navigate the process of trying to recover losses, supports OBSI. But he says the ombudsman is painfully slow and, on top of that, it is planning to pull back on an important mandate to probe widespread or “systemic” problems at investment dealers.

The ombudsman can recommend individual compensation of up to $350,000 and pledges to handle 80% of its cases within 180 days. But that self-imposed standard is routinely missed.

Related
Should all investors be treated as 'completely vulnerable'
Costly advice: ‘Leveraging was new to me’
Costly advice: Canadian Investor Protection Fund difficult to tap
‘Shocking’ crackdown on advisors threatens smaller players: Tony De Thomasis
OBSI makes good on pledge to 'name and shame' investment dealers that refuse compensation
“It’s so far off the standard, it’s out of control,” says Mr. Kivenko, who is also a member of the Investor Advisory Panel that brings investor concerns to the Canada’s largest capital markets regulator, the Ontario Securities Commission.

In 2012, the ombudsman took nearly a year, on average, to handle a case, according to OBSI’s annual report. That means many cases took far longer than the average 326 days to resolve.

An 82-year-old woman Mr. Kivenko is helping filed her complaint in February of 2012, and is still waiting for a probe to get under way.

“She’ll be dead before they finish this investigation,” Mr. Kivenko says.



Despite the slow pace, investor advocates are fighting to protect and even beef up the powers of the independent ombudsman amid concerns its mandate is being watered down. They’d like to see regulators enforce OBSI’s recommendations when dealers refuse to pay, and pick up the slack when it comes to investigating and compensating for widespread lapses.

“OBSI is the most consumer-friendly alternative [for those seeking compensation],” says Ermanno Pascutto, executive director of the Foundation for the Advancement of Investor Rights (FAIR Canada).

He says the “hand holding” type of service provided by OBSI is unique, and crucial because many people who wind up there “cannot articulate a legitimate complaint” even if they have one.

Going to court is “extraordinarily expensive” and is not recommended unless an investor loss claim is worth upwards of $150,000, says Mr. Pascutto. And while arbitration at the Investment Industry Regulatory Organization of Canada can take less time, that process is very legalistic and can therefore involve the expense of hiring a lawyer, he says.

“That’s why very few people go through the IIROC arbitration.”

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Re: GET YOUR MONEY BACK!

Postby admin » Tue Nov 05, 2013 9:08 am

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Canadian regulators are taking a hard look at the relationship between investment dealers and their clients. Under consideration are rules that would hold advisors who deal with retail clients to a higher standard, and large-scale changes to fees and incentives. In this three-part series, the Financial Post’s Barbara Shecter looks at the current landscape of advisor-client relations, the debate over potential changes, and the patchwork system of handling disputes when investors lose money.

The name of the Canadian Investor Protection Fund can instill great confidence in an investor.

Five things clients — and advisors — should do to protect themselves

Disputes between advisors and clients will inevitably crop up, but lawyers who work on both sides of such disputes have a list of suggestions that can help avoid trouble, or swing the balance of liability when it does.

Continue reading.
But the reality is that the fund — with an investment portfolio valued at a healthy $432-million at the end of last year — can be very hard to tap when investors go looking for compensation.

Shayne Kukulowicz, the court-appointed lawyer overseeing claims from hundreds of investors in defunct Ontario real estate investment firm First Leaside Group, says officials at the Canadian Investor Protection Fund are putting up unnecessary roadblocks.

“We wanted to make it as easy as possible for hundreds of investors to seek compensation from the industry protection fund. But CIPF decided that each investor needed to file a separate claim… They wouldn’t engage with us on a global claim or overall resolution,” says Mr. Kukulowicz, a partner at Toronto law firm Denton’s Canada LLP.

Mr. Kukulowicz says the process could affect the outcome.

“In my view, it is a divide and conquer strategy which makes it more difficult for individual investors to successfully assert their compensation claims,” he said.

Since 1971, CIPF has returned just shy of $36-million to investors, with more than 40% of that paid out following the demise of a single firm, Osler Inc., in 1987.

“In my experience, they don’t want their big, big fund to be depleted by investor claims,” said a lawyer now in private practice who has worked extensively on regulatory files over the past decade and has had dealings with CIFP.

Related
Costly advice: Read our special series on investor compensation
The investor protection fund is backed by the Investment Industry Regulatory Organization of Canada, and was established to compensate investors dealing with firms that become insolvent – provided they are members of IIROC, a self-regulatory agency.

Individual investors with a valid claim are entitled to up as much as $1-million in compensation.

But meeting the criteria can be difficult, even in an insolvency, as illustrated by the 1999 demise of investment dealer Essex Capital Management Ltd. and affiliate Nelbar Financial.



CIPF initially denied compensation to some investors. The reason: even though Nelbar shared office space and senior management with Essex, it was not a member of the Investment Dealers’ Association, IIROC’s predecessor.

Officials at CIPF are still evaluating potential compensation in the case of First Leaside, where clients invested nearly $300-million in the firm’s proprietary securities.

Mr. Kukulowicz says the case is a prime example of what was contemplated when CIPF was created in the 1970s with the “sole purpose” of providing investor protection. And he says there is a reasonable expectation that CIPF will provide compensation for losses incurred “solely as a result of the insolvency of First Leaside Securities Inc.,” and the IIROC member’s “failure to return funds” to clients.

However, given the strict terms by which CIPF operates, others familiar with the case and the fund say there could be roadblocks beyond the lengthy process of filing individual claims.

The deadline for filing claims to the Canadian Investor Protection Fund was Oct. 12. The organization posted a notice on its website Friday that said staff are processing and reviewing a “very high” number of claims in the First Leaside case.


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Re: GET YOUR MONEY BACK!

Postby admin » Tue Nov 05, 2013 9:06 am

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When your investment goes bad

Republish Reprint
Barbara Shecter | 05/11/13 9:38 AM ET
More from Barbara Shecter


Costly advice: Read our special series on investor compensation
When an advisor-client relationship sours, there are different routes an investor can take to seek compensation. Cost, mandates, and outcomes are among the factors that make some busier than others.

1. The Ombudsman for Banking Services and Investments (OBSI):

446 investment complaints in 2012, up 10% from the prior year. The number one issue investigated by OBSI is “unsuitable investments and investment advice.”

42% of investment complaints (161 of 381) ended with monetary compensation of $3.64-million. The highest individual payout was $193,943, with average compensation of $22,613.

2. IIROC Arbitration:

4 cases opened in fiscal 2013 (ended in March) dealing with misrepresentation breach of fiduciary duty, negligence, unsuitable trading and churning.

1 case settled

Average amount claimed: $153,148.

Cost: Arbitration and file opening fees were $450. The people making the claim in three of the four cases was represented by legal counsel.

7 cases opened in fiscal 2012. Three closed within 12 months.

Average claim: just over $320,000. Amounts paid out were not disclosed because settlements were private.



Cost: Administration and file opening fees for arbitration were $450. Maximum disclosed arbitration fees were just over $5,700.

3. CIPF (Canadian Investor Protection Fund) payments or provisions, net of recoveries:

2011 – $2.88-million in MF Global Canada Co.

2012 – $1.16-million in Barret Capital Management Inc. and a $337,000 provision for third party costs in First Leaside.

4. THE COURTS:

27 trial decisions across Canada stemming from the 2001 and 2008 market crashes.

· 18 cases, or 66%, dismissed (i.e. won by the broker/dealer)

· 9 cases, or 33%, won (at least in part, by the investor). In 6 of these cases, the client was held to be partly responsible which reduced the damages award by 30% to 85%.

5. IIROC – Enforcement:

1,500 (approximately) – number of complaints received each year by IIROC

Most common complaint in 2012: unsuitable investment recommendations (accounted for nearly one-third of IIROC’s prosecutions).

256 – number of investigations initiated by IIROC in 2012

nearly 1/3 – percentage of cases involving investors 60 years of age or older

56 individual – number of successfully prosecuted individuals

16 firms – number successfully prosecuted by IIROC

$1.4-milion – fines against individuals

almost $10-million – fines imposed against IIROC-regulated firms.

34 individuals – suspended

4 firms — suspended

9 individuals — permanently barred from working at an IIROC firm in a registered

capacity.
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Re: GET YOUR MONEY BACK!

Postby admin » Tue Oct 15, 2013 9:26 pm

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Class action statement of claim for those who lost money to broker-jokers who advised borrowing to invest:

http://www.thomsonrogers.com/sites/defa ... cision.pdf

or

https://docs.google.com/file/d/0BzE_LMP ... sp=sharing

(see also FINRA "suitability" comments in previous post, mentions a comment about brokers who advocate leveraged investing to maximize their own commissions, which is the most common reason for anyone on commission to do this) For doubters, or those wishing to argue the opposite, just ask if the "advisor" who advocated the leveraged strategy also applied the "maximum" possible commission choice to the investments, when lesser cost yet equal investments were available to meet the same investment strategy. Your answer there will tell you in whose interest the salesperson was working, and also whether or not they were at all interested in the best interests of the customer. (leverage PLUS highest fee choice makes two wrongs in one deal. Three is you throw in the TRUST violated by a person posing as a financial "professional":)
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Re: GET YOUR MONEY BACK!

Postby admin » Tue Oct 15, 2013 9:08 pm

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Keyword "suitability"

Suitability Questions and Answers

From page 3 of this report http://www.finra.org/web/groups/industr ... 126431.pdf

Firms’ recent questions regarding Rule 2111 have focused on the following topics: the obligation to act in a customer’s best interests; the scope of the terms “recommendation,” “customer” and “investment strategy”; the use of a risk-based approach to documenting suitability; information-gathering requirements; reasonable-basis and quantitative suitability; and the institutional-customer exemption. The questions addressed below
are representative of the issues firms are attempting to resolve as they finalize their compliance strategies. FINRA emphasizes, however, that it previously addressed numerous issues during the rulemaking process and immediately after the SEC approved the rule. FINRA encourages firms to review its responses to comments13 and Regulatory Notices 11-02 and 11-25, which provide additional information regarding the rule’s requirements.

Acting in a Customer’s Best Interests

Q1. Regulatory Notice 11-02 and a recent SEC staff study on investment adviser and broker-dealer sales-practice obligations cite cases holding that brokers’ recommendations must be consistent with their customers’ “best interests.”14 What does it mean to act in a customer’s best interests?

A1. In interpreting FINRA’s suitability rule, numerous cases explicitly state that “a broker’s recommendations must be consistent with his customers’ best interests.”15 The suitability requirement that a broker make only those recommendations that are consistent with the customer’s best interests prohibits a broker from placing his or her interests ahead of the customer’s interests.

16 Examples of instances where FINRA and the SEC have found brokers in violation of the suitability rule by placing their interests ahead of customers’ interests include the following:
A broker whose motivation for recommending one product over another was to receive larger commissions.17
A broker whose mutual fund recommendations were “designed ‘to maximize his commissions rather than to establish an appropriate portfolio’ for his customers.”18
A broker who recommended “that his customers purchase promissory notes to give him money to use in his business.”19
A broker who sought to increase his commissions by recommending that customers use margin so that they could purchase larger numbers of securities.20
A broker who recommended new issues being pushed by his firm so that he could keep his job.21
A broker who recommended speculative securities that paid high commissions because he felt pressured by his firm to sell the securities.22
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Re: GET YOUR MONEY BACK!

Postby admin » Thu Oct 03, 2013 5:47 pm

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SEC sanctions firm for selecting higher cost mutual funds for clients
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Three clients of Manarin Investment Counsel paid almost US$700,000 in unnecessary trailer feesOctober 02, 2013 14:20


The U.S. Securities and Exchange Commission (SEC) charged a Nebraska investment advisory firm for putting clients into the pricier version of mutual funds when cheaper versions were available.

The SEC said Wednesday that Manarin Investment Counsel Ltd. and its owner, Roland Manarin, agreed to pay more than US$1 million to settle the commission's charges. Without admitting or denying the SEC's findings, Manarin and his brokerage firm agreed to pay disgorgement of US$685,006, prejudgment interest of US$267,741, and a US$100,000 penalty, along with consenting to censures and cease-and-desist orders.

The regulator says that its investigation found that they violated their obligation to seek 'best execution' by consistently selecting higher cost mutual fund shares for the three fund clients even though cheaper shares in the same funds were available.

Specifically, the SEC says that the three clients were sold class A funds when they were eligible for lower-cost institutional funds; which meant they paid almost US$700,000 in unnecessary trailer fees. As a result, it found that Manarin and his firm violated their fiduciary duty to clients, among other violations.

"Investment advisers must fulfill their fiduciary duty of best execution when selecting mutual fund shares for their clients," said Marshall Sprung, co-chief of the SEC enforcement division's asset management unit.

"Manarin and his firm breached that duty by choosing more expensive shares that would pay higher fees to an affiliate when their clients were eligible to own lower-cost shares in the very same mutual funds."

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(advocate comment: It is not clear if the sales firm was licensed as an "advisor" (which makes what they did wrong) or just faking the "advisor" title and only registered as broker-dealer (which would be negligent misrepresentation BUT would give them a free ride around the fiduciary duty:) (Imagine screwing investment customers by cheating them out of their fiduciary duty, OR more commonly (standard industry practice as matter of fact) deceiving them of your title by pretending to be an "advisor" but not having to deliver a fiduciary standard of care because you are not really "licensed" as an "advisor".

If that last line does not make any sense, just picture a fake "doctor", being held not responsible for harm to a patient, "since he never was licensed as an actual doctor". This is a bit of how the investment selling industry plays, "heads we win, tails you lose", victimizing clients while maximizing commissions.....
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Re: GET YOUR MONEY BACK!

Postby admin » Tue Oct 01, 2013 3:54 pm

Some fantastic tips in here about the kinds of deceptions that brokers and commission investment sellers use to fool the public into greater trust and vulnerability. I am grateful to Forbes Magazine for getting away from the trivial and getting into the truth.
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6 Pointed Questions To Ask Before Hiring A Financial Advisor

Kenneth G. Winans

This is a guest post by Kenneth G. Winans, a veteran investment manager based in Novato, Calif.

Despite what you might read elsewhere about managing your own finances, it is often a good idea to get some help. It’s for roughly the same reason you hire an attorney. You don’t have the skills to handle a divorce or a property dispute.

First, though, you need to understand a little bit about the mind-bending terminology Wall Street uses to describe those who want to help you enlarge your nest egg. This basically comes down to two words: advisor and broker.

An advisor is a professional you hire to pick stocks, bonds, real estate investment trusts and other investments for you. Advisors are “fiduciaries,” which means they’re legally obliged to act in your best interest. They usually charge a flat salary or fee or receive a cut (1 percent is typical) of the assets under management. Because of the compensation structure, advisors are seen as having fewer conflicts of interest than brokers.

Broker is short for stockbroker—someone working for an investment firm whose job it is to persuade a client to buy or sell stocks, bonds, mutual funds, ETFs and other financial products. Brokers are salesmen, and they’re paid on commission: no transaction, no pay. So there’s considerable incentive for them to gin up business. And they’re not fiduciaries. The broker’s standard is “suitability.” That means the investment should be appropriate for a client, but doesn’t have to be the best or even conflict-free.

“In their ads, the brokerages sell themselves again and again as providing comprehensive financial planning,” says Scott Ilgenfritz, a Florida securities lawyer and past president of the Public Investors Arbitration Bar Association, an advocacy group that helps public investors in securities arbitrations. “They send the message: You’ll be safe with us—right up until you have the audacity to complain. Suddenly, it’s: `We’re not advisors, we’re just order takers.’”

The distinction between advisor and broker used to be reasonably clear. But traditional brokerage revenues turned out to be vulnerable to competitive pressure from discount investment firms, no-load mutual funds and exchange-traded funds, and the advent of the Internet. And in the 1990s, the major brokerages stopped calling their salespeople “brokers” and started calling them—surprise!—“advisors.”

This triggered a decade-and-a-half-long fight, brought by traditional investment advisors who argued these renamed brokers were deceiving the public into thinking they were money-managing fiduciaries. The brokerages responded that they were better policed, by the Financial Industry Regulatory Agency (FINRA), than traditional advisors, who, depending on size, were regulated by either the U.S. Securities and Exchange Commission or state securities departments.

At first, the SEC passed “rule 202,” which sided with brokerages, allowing brokers earning commissions to also call themselves financial advisors and charge advisor-type fees in exchange for guidance without registering with the SEC as investment advisors or living up to tougher fiduciary standards. But advisors sued and, in 2007, won. The rule had “created an unlevel playing field,” says Duane Thompson, a senior policy analyst with Fi360, a fiduciary-standards advocacy and education firm based in Bridgeville, Pa.

Alas, the SEC still offered brokerages exemptions that allowed them to call their brokers “advisors”
and charge fees based on the size of a client’s brokerage accounts, as long as they met some more stringent disclosure standards.

The Obama administration has called for changes to SEC rules that would force anyone called an advisor to adhere to the tougher fiduciary standard. But with the Dodd-Frank Act in 2010, Congress left the decision up to the SEC. The SEC has studied the issue and asked for public comment, but hasn’t ruled on the matter since the comment period ended in early June. And last month, when President Obama pressed regulators to tighten financial-industry rules to avoid a repeat of the 2008 economic crisis, he didn’t deal specifically with the advisor-broker controversy.

Until the SEC makes its next move, who is stuck in the middle of all this? You, especially if you don’t want to overpay for good investment guidance.

I happen to be a long-time financial advisor who started his career working for big brokerages. Here’s my take on this:

If you take full responsibility for your investments and really just need somebody to carry out your orders and handle basic administrative tasks, then a salesman—a broker or broker-type advisor—is probably all you need. FINRA provides some good tools to help you pick one. To check out the background of any broker, including complaints and disciplinary matters, go here.

If that’s not you, you need a real investment advisor. To be sure, not every genuine investment advisor is an angel. In 2006, the SEC ordered Bernie Madoff to register as a fiduciary, but that didn’t help his investors when his Ponzi scheme collapsed in late 2008. I’ve also seen registered investment advisors who charmed their clients, opened brokerage accounts, then stuffed them full of mutual funds and ETFs using canned asset-allocation programs requiring little effort on the part of the advisor. The client ended up paying not only the advisor’s quarterly fee but also a second level of fees charged by the mutual funds. There was very little ongoing advising and lots of portfolio neglect.

So I say ignore the word advisor altogether—along with other terms like financial planner, wealth manager, investment counselor and portfolio manager. And don’t be overly trusting of the alphabet soup of credentials that follows them, either: CFA, CMT, CFP, CFC, WMI just to name a few.

Instead, find out what this person actually does.

The Department of Labor publishes a pretty good list of questions to start with. And Forbes has published numerous stories on how to pick an investment advisor. To add to these resources, I’ve developed a list of six questions that I think provide the most revealing answers. Have it in front of you when you grill a prospective advisor:

1. Who is actually managing my investments? A genuine advisor keeps your funds in a discretionary account and can conduct transactions involving individual stocks, bonds, ETFs, mutual funds and so on without your trade-by-trade approval. Beware the investment pro who claims to be a “money manager” and touts his “assets under management” but is really just a middleman between you and another investment advisor doing the investment research and management.

2. What is your track record? Ask for a copy of the Form ADV, which discloses possible conflicts arising from securities trades and answers a lot of other questions. Also request a risk-adjusted performance record going back at least five years, in writing. Get a list of client references—and call them.

3. What is your background? Many registered investment advisors have advanced degrees in business and finance and years of experience as investment analysts or traders at major financial firms. Be wary of an advisor with little or no previous experience outside of his or her years in brokerage and/or insurance sales.

4. Who pays you? Virtually all the compensation an investment advisor receives should come directly from his clients. Any other sources of income should be insignificant and fully disclosed. Brokers, on the other hand, can earn commissions on trades, trailer fees for mutual funds and annuities, and bonuses tied to their firm’s proprietary investment products or trading. These other sources of income create lots of conflicts.

5. Can I pay you by the hour? The going rate for a genuine financial advisor has historically hovered around 1 percent of assets under management. But one benefit of the Internet has been a dramatic reduction in transaction costs. If you and your advisor agree that most or all of your money should be put in a mix of index funds, mutual funds and exchange-traded funds that’s practically on autopilot, ask him to charge less. Get him to subtract the cost of the fund expenses from her percentage. Or better yet, ask if you can pay by the hour, as Forbes’ William Baldwin suggests here.

6. [flash=]Are you always legally bound to act in my best interest? The answer has to be yes, all of the time. If it is, get it in writing.[/flash] This is fiduciary duty. It’s a well-established legal principle, backed by decades of precedent. An advisor who acts as your fiduciary knows you can haul her into court or, if you agree, arbitration.

Finally, beware of any “advisor” who swears you’ll always be the boss. From a legal standpoint, brokers are free to carry out your orders, even ones they think are unwise. But mindful of his fiduciary duty, a true advisor will say he’d decline to make an investment he believes could threaten your financial health. At the very least, he should try hard to talk you out of it. If he can’t, he should give you your money back and let you go it alone.

Kenneth G. Winans is a veteran investment manager based in Novato, Calif.

http://www.forbes.com/sites/janetnovack ... l-advisor/
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Re: GET YOUR MONEY BACK!

Postby admin » Wed Sep 25, 2013 9:38 am

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http://www.canlii.org/en/on/onsc/doc/20 ... aWEAAAAAAQ

Some useful and interesting info in here for investors who are abused and victimized by commission salespeople "posing" as "advisors". (some fraudulent or similar industry "standard practices" outlined in red for emphasis)

Home > Ontario > Superior Court of Justice > 2012 ONSC 1150 (CanLII)
French and Karas et al v. Smith and Stephenson et al, 2012 ONSC 1150 (CanLII)
Date: 2012-02-17
Docket: 10-0690
URL: http://canlii.ca/t/fq4qb
Citation: French and Karas et al v. Smith and Stephenson et al, 2012 ONSC 1150 (CanLII), <http://canlii.ca/t/fq4qb> retrieved on 2013-09-25
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CITATION: French and Karas et al v. Smith and Stephenson et al
2012 ONSC Number 1150
COURT FILE NO.: 10-0690
DATE: 20120217

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:
GEORGE FRENCH
Plaintiff

— and —

INVESTIA FINANCIAL SERVICES INCORPORATED, MONEY CONCEPTS (BARRIE), DIAMOND TREE CAPITAL INC., DAVID KARAS and FINANCIAL VICTORY ASSOCIATES INC.
Defendants

AND BETWEEN:

BRUCE SMITH and EDITH IRENE SMITH
Plaintiffs

– and –

INVESTIA FINANCIAL SERVICES INCORPORATED and JAMES STEPHENSON

Defendants

COUNSEL:
Alan A. Farrer, L. Craig Brown and Adam Halioua for the Plaintiff George French;

Harold Geller for the Plaintiffs Bruce Smith and Edith Irene Smith;

David Di Paolo and Caitlin Sainsbury for the Defendant Investia Financial Services Incorporated;

Roger Horst, Ian Epstein and Jessica Grant for the Defendants Money Concepts (Barrie), Diamond Tree Capital Inc., David Karas, James Stephenson and Financial Victory Associates Inc.;





HEARD: December 12, 13, 14, 2011 and February 13 2012

Shaughnessy J.


REASONS FOR DECISION ON A MOTION FOR CERTIFICATION OF A CLASS ACTION PROCEEDING


[1] The plaintiffs in each action bring a motion for certification of the proceedings as a class action pursuant to s.5 (1) of the Class Proceedings Act, 1992.

[2] David Karas (“Karas”) and James Stephenson (“Stephenson”) were registered salespersons who owned Diamond Tree Capital Inc., which operated Money Concepts Barrie (“MCB”). MCB was a branch office or franchise of an organization known as Money Concepts Canada (MCC”). MCC was acquired by AEGON which in turn was acquired by Investia Financial Services Inc. (“Investia”).

[3] Investia is a mutual fund dealer registered with and regulated by the Ontario Securities Commission (OSC) and the Mutual Fund Dealers Association (MFDA). AEGON and Investia were the Responsible Dealer, in relation to the activities of MCB, Karas and Stephenson. Karas and Stephenson were also subject to the regulatory authority of the OSC and the MFDA.

[4] It is alleged in the statement of claim that Karas and Stephenson encouraged, recommended and arranged for clients to borrow significant amounts of money to invest in mutual funds and/or segregated funds. It is alleged that there was a ‘one size-fits all” investment strategy that is called the “Leveraging Scheme.” It is alleged that Karas and Stephenson made these recommendations systemically without regard to suitability of the strategy for any individual client and without consideration for each client’s investment objectives. It is alleged that Karas and Stephenson made these recommendations for their clients in a manner that breached industry regulations and standards. It is further alleged that Karas and Stephenson undertook this strategy to increase their assets under management (AUM) and Investia’s mutual fund sales, thereby increasing their own compensation (and that of Investia) and did so without due regard to the interest of the proposed Class Members. It is alleged that Investia failed in its compliance responsibilities by allowing the Leveraging Scheme to be applied systemically, in a manner that breached industry standards and regulations.

[5] The proposed Representative Plaintiff George French was a MCB client. He borrowed approximately $ 900,000.00 to buy mutual funds through David Karas.

[6] The proposed Representative Plaintiffs in the second action, Bruce and Edith Irene Smith were retired and receiving disability income and they borrowed approximately $100,000.00 through James Stephenson.

[7] The proposed class actions are on behalf of a class of persons all of whom were clients of Karas or Stephenson who participated in the Leveraging Scheme through MCB and held leveraged investments at MCB prior to the branch closing on or about March 2010.

[8] David Karas also created and operated the defendant Financial Victory Associates Inc. (“FVA”) which it is alleged provided financial services to MCB clients for additional compensation. FVA is not registered with the OSC. Further FVA and MCB shared advisors, office premises, staff, clients, private client information, advice to clients and written communications.

[9] Karas was the directing mind of MCB, FVA and Diamond Tree Capital Inc. (hereinafter referred to as the “Karas Companies”). It is alleged that all the acts of Karas and his staff and through the Karas Companies, were within the scope of their employment, agency and regulatory responsibility, and as such, Investia is vicariously liable for his actions and those of the Karas Companies and their employees and agents.

[10] Stephenson became a mutual fund advisor at MCB in 2000. In 2005 he became a principal in Diamond Tree and the sales manager for the branch.

The “Leveraging Scheme”

[11] The statements of claim and supporting affidavits allege that Karas and Stephenson advocated and implemented the Leveraging Scheme as an investment strategy to their respective clients indiscriminately.

The Leveraging Scheme was based on layering levels of debt for each client. First, he had Clients borrow as much from their lending sources as possible with a view to raising money to buy mutual funds, increasing the Clients’ assets under his management (or “AUM”). This permitted Karas [ and/or Stephenson] to use client’s AUM as collateral to have them borrow more money from lenders who advanced loans on the collateral security of mutual funds he acquired for class members, effectively using borrowed money to borrow more money. (Amended Statement of Claim, French v Investia para. 14).

[12] It is alleged that Karas and Stephenson recommended the Leveraging Scheme systemically and that MCB arranged the loans for clients. Effectively, it is alleged that clients invested money they did not have, which increased the AUM managed by Investia, and consequently, fees for Karas, Stephenson and Investia.

[13] It is alleged that Investia knew, or ought to have known, of the Leveraging Scheme that was being applied systemically by Karas and Stephenson through MCB. It is stated that Investia had a duty of increased monitoring of Karas and Stephenson and failed to do so.

[14] The defendants deny the existence of a Leveraging Scheme or a “one size-fits all” strategy. Further the defendants state that borrowing money is a long standing investment strategy. The defendants state that whether leveraging is a suitable investment strategy for investors cannot be determined on a common basis. They state that the suitability of Leveraging as an investment strategy requires an assessment of the individual investor followed by an assessment of whether the portfolio purchased is suitable given the individual characteristics of the investor.

[15] While the plaintiffs allege that leveraging was recommended to all clients, nevertheless the defendants Karas and Stephenson state that 2/3 and 1/3 of each of their respective client base of approximately 400 persons borrowed to invest.

MFDA Regulations

[16] Rule 2.6 of the Mutual Fund Dealers Association requires members to provide a risk disclosure document to a client who borrows money to purchase mutual funds but this rule does not provide guidance for when leveraging is a suitable investment strategy.

[17] The plaintiffs plead that the MFDA regulates the duty of care owed by mutual fund dealers with respect to leveraging strategies. Through its Member Regulatory Notice MR-0069 (enacted in April 2008) the MFDA has established guidelines that detail the standard it requires. MR-0069 provides the following preamble to its “Leveraging” section:

A number of previous MFDA Member Regulation Notices have reminded Members that using borrowed funds to invest (or leveraging) is not suitable for all investors and have highlighted the Member’s responsibility to ensure that all leveraging recommendations are suitable for the client and in keeping with the client’s KYC [Know Your Client] information, in accordance with MFDA Rule 2.2.1…..



[18] The plaintiffs allege that Investia, inter alia, failed to supervise the services provided by Karas and Stephenson to their clients. They seek to certify as a common issue whether Investia breached its duty to members of the class to monitor and supervise the conduct of Karas and Stephenson to ensure that they complied with internal guidelines and MFDA guidelines, and to address any breaches and duties by Karas and Stephenson. Investia states that MFDA Policy No.2 establishes minimum industry standards for account supervision. Save and except for the requirement to establish written policies and procedures and to hire qualified people to supervise those procedures, the obligations set out in Policy 2 are to individually supervise client accounts in accordance with the policy. The obligations in Policy 2 to supervise individual client accounts are bifurcated between supervisory activities that are to take place at the branch office and those at the head office. The only individual located at the branch office with supervisory compliance responsibilities is the Branch Manager or alternate.

Leveraging ---George French

[19] George French became involved with MCB in approximately 1992 when he opened an account with his father. He had several financial advisors at MCB. His first advisor was Virginia Lamb. He made his first two leveraged investments while Lamb was his advisor. Lamb retired and his account was transferred to Karas in approximately 2003. While a client of MCB, French made multiple leveraged loans. Between 2003 and 2008, the plaintiff alleges that Karas advised and arranged for him to borrow over $900,000.00 for the purposes of participating in the Leveraging Scheme with Karas and the defendants. French, a dairy farmer sold his dairy quota and ceased to earn income from his dairy operation in 2005. He states that Karas continued to recommend and arrange for him to borrow even more money after 2005.

[20] Counsel for the plaintiff French state, that in order for clients to qualify for the “Leveraging Scheme” they had to meet certain requirements relating to their net worth, investment knowledge, investment objectives and risk tolerances among other things. George French states that his investment knowledge in or around January 2003 would have been fair nevertheless the applicable KYC form completed by MCB indicated his investment knowledge was either “good” or “excellent” (on different forms). French states that “he [Karas] was always pushing those loans----more loans so I just do what he wanted me to do.” He states that Karas never explained the risks of the Leveraging Scheme to him.

Leveraging---The Smiths

[21] The Smiths made a single leveraged investment. Stephenson was their only financial advisor while they were clients from December 2005 to March 2010. Edith Smith had stopped working in 2000 and received a disability pension. Bruce Smith had stopped working in 2002 also because of a physical disability. His disability entitlement had run out. Bruce Smith had a Locked-in Retirement Account (LIRA), which he transferred to MCB. At their first meeting with Stephenson they received his only financial recommendation to borrow money to invest in mutual funds. It is alleged that Stephenson recommended and arranged for the Smiths to borrow $ 100,000.00 against their home for the purpose of participating in the “Leveraging Scheme.” They already had a substantial mortgage on their home. They state they were told that they would not need to pay for the loan as it was “self-funding.”

[22] As their disability related medical expenses became too great for the Smiths to pay the loan from their limited cash flow, Stephenson assisted them in arranging for withdrawals from Bruce Smith’s LIRA based on financial hardship and medical necessity. The Smiths state by the end of 2009 they still owed the $100,000.00 loan but the underlying investment declined to approximately $ 61,000.00

[23] Bruce Smith testified that his investment knowledge in or around December 2005 would have been “poor”. The KYC form completed by MCB at that time indicated his investment knowledge to be “good.” The Smiths state that Stephenson did not discuss their risk tolerances with them, nor did he explain the risks of the “Leveraging Scheme” to them.

[24] David Karas opened Money Concepts Financial Planning Centre in Barrie, Ontario, which evolved into MCB in 1986. He published three books on financial planning and was a regular commentator on two radio stations in Barrie for many years. He was the leader of the financial advisors at MCB.

[25] Karas states in his affidavit (Joint Compendium Tab 4 pgs. 23-24):

Any client referred to me would go through a financial planning exercise to determine a suitable financial plan. The process involved a review of all of the client’s assets and liabilities, their income, their insurance needs, their investments and their tax situation.

[26] In his affidavit Karas gave the following evidence about when he recommended Leveraging to clients:

Through the assessment process, the client and I would agree on a financial plan. Sometimes a leveraging structure was part of that client’s investment, tax, or risk conversion portion of their financial plan. Some clients did not meet the appropriate criteria for using a leveraging structure as an investment tool and I recommended against a leveraging structure for those clients. Some clients did meet these criteria to use leveraging. If they did, I would review with them the risks of borrowing money to invest. If the client was still interested, I recommended that we proceed to arrange a loan structure for them.

Other Financial Products

[27] The motion record and the Affidavit of John Hollander refer to three other strategies implemented by Karas and MCB to advance his interests through greater compensation; the “insurance scheme”, the “FVA scheme” and the “RRIF scheme”.

[28] In the case of the insurance it is alleged that French and Class Members did not need the insurance, could not afford it and could not afford the escalating premium costs associated with the manner in which the policies were underwritten.

[29] In relation to the “FVA scheme” it is stated that Karas claimed he had a system that could pick mutual funds and/or segregated funds and time their purchase and sale so as to maximize gains and avoid losses. The amended statement of claim in the French action states that

[t]oward the end of 2006, Karas created FVA, to provide market timed alerts with appropriate moments to sell or purchase funds. These alerts were intended to serve as investment recommendations to Clients. FVA included a stop-loss component for Clients which required Karas to sell relevant holdings if they reached pre-defined loss thresholds. Karas represented to Clients that they would make greater market profits and eliminate the exposure of their holdings to loss by subscribing to and paying a fee (the “FVA FEE”) for this service.

[30] In the case of the “RRIF scheme”, it is pleaded that the conversion of RRSP to RRIF to pay current debt obligations conflicted with the purpose of RRSP/RRIF, which was to provide retirement income.

Expert Opinion

[31] Expert evidence was adduced by the plaintiffs and the defendants.

[32] In support of the plaintiff’s claim was filed the affidavit of Professor Eric Kirzner, who is the John H. Watson Chair in Value Investing at the Rotman School of Management at the University of Toronto and is also a director of the Investment Industry Regulatory Organization of Canada (IIROC). The plaintiffs retained Professor Kirzner as an expert to provide an opinion as to whether the defendants complied with the industry standards for suitability of investments for clients such as the plaintiffs and class members. Professor Kirzner concluded that it was his expert opinion that assuming the allegations in the Statements of Claim to be true, Karas, Stephenson and Investia failed to meet industry standards in managing the accounts of the representative plaintiffs and in the recommendations provided. Professor Kirzner opined that not only was the “Leveraging Scheme” unsuitable for the representative plaintiffs, but also that a “common investment approach for all clients would be a direct violation of suitability and inconsistent with industry standards.”

[33] In cross-examination on his affidavit, Professor Kirzner, by way of summary in relation to leveraging generally and determining the suitability of an investment in a client account stated:

(1) in cases where leveraging is an issue the first step is to review the know-your-client (KYC) forms to determine the suitability of investments held in the account of a client;

(2) suitability is an individual process;

(3) suitability must be analyzed and determined;

(4) in conducting a suitability analysis, one looks at what investments were in a portfolio in addition to looking at the information in the KYC;

(5) borrowing money to invest may be suitable for some investors, depending on their personal circumstances;

(6) even if an advisor failed to take into account an investor’s essential facts in making an investment recommendation in accordance with MFDA Rule 2.2.1 the investment may nevertheless be suitable relative to the individual’s circumstances; The suitability for the particular client must be examined to make this determination.

[34] Julia Dublin was retained by Investia to provide expert evidence. Ms. Dublin is a lawyer in private practise specializing in securities law. Prior to entering private practise Ms. Dublin spent 18 years at the Ontario Securities Commission as Senior Legal Counsel and for a period as Deputy Director, Registration. Ms. Dublin was requested, inter alia, to provide an opinion regarding the factors that must be considered in determining whether an investment recommendation was suitable and whether there were additional factors to consider if a client used borrowed money to invest. Ms. Dublin on cross-examination stated:

(1) suitability is a case-by-case assessment;

(2) the nature of suitability is in fact individual specific or customer specific

(3) there are many variables as to whether there is a breach of the suitability standard.

[35] C. Douglas Fox was retained by the defendants other than Investia. Mr. Fox is an independent consultant with twenty-five years experience in the securities industry. He has held the positions of Chief Compliance Officer and Ultimate Designated Person with various Dealers. Mr. Fox’s evidence in relation to determining the suitability of an investment for a customer is:

(1) the suitability process involves the advisor learning the essential facts of their client

(2) the suitability determination is made by the advisor according to the information obtained and their experience in discussions with the client;

(3) the standard requires the advisor to use “due diligence” to learn the essential facts of each client to ensure the recommendation made for that client are in keeping with their age, sophistication and financial circumstances;

(4) there are many and varied circumstances for individual investors that may or may not determine the suitability of leverage as a strategy;

(5) the question of whether leverage is suitable may only be answered in reference to a specific investor after assessing their individual investment need and risk tolerance.



Issues and the Law

[36] The Class Proceedings Act, 1992 (CPA) in section 5(1) sets out the test for certification. It states that a Court shall certify a class proceeding on a motion if:

(a) the pleadings or the notice of application discloses a cause of action;

(b) there is an identifiable class of two or more persons that would be represented by the representative plaintiff;

(c) the claims or defence of the class members raise common issues;

(d) a class proceeding would be the preferable procedure for the resolution of the common issues; and

(e) there is a representative plaintiff who,

(i) would fairly and adequately represent the interests of the class;

(ii) has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding; and,

(iii) does not have, on the common issues for the class, an interest in conflict with the interests of other class members.

[37] There are a number of general principles that emerge from the case law summarized as follows:

(1) The CPA should be construed generously to ensure that Courts have a procedural tool to deal efficiently, and on a principled rather than an ad-hoc basis with the increasingly complicated cases of the modern era. (Hollick v. Toronto (City) 2001 SCC 68 (CanLII), [2001] 3 S.C.R. 158 (S.C.C.) at para 14);

(2) The question at the certification stage is not whether the claim is likely to succeed on the merits, but whether the claims can appropriately be prosecuted as a class proceeding. (Hollick v. Toronto (City) supra at para.16);

(3) The purpose of a certification motion is to determine how the litigation is to proceed and not to address the merits of the plaintiff’s claim; there is to be no preliminary review of the merits of the claim (Hollick v. Toronto (City) supra paras. 28-29);

(4) Motions for certification are procedural in nature and are not intended to provide the occasion for an exhaustive inquiry into factual questions that would be determined at a trial when the merits of the claims of class members are in issue (Lambert v. Guidant Corp.,[2009] O.J. No. 1910 (S.C.J.) at para 82);

(5) To certify an action as a class proceeding the class representative must “show some basis in fact for each of the certification requirements set out in s. 5 of the Act, other than the requirement that the pleadings disclose a cause of action.” The representative plaintiff must present a minimum evidentiary basis for a certification order (Hollick v. Toronto (City) supra, at para 22-25). The Ontario Court of Appeal refined this concept in Cloud et al v. Attorney General of Canada et al [2004] O.J. 4924 (C.A.) at para. 50 as follows

Hollick also makes clear that this does not entail any assessment of the merit at the certification stage. Indeed, on a certification motion the court is ill-equipped to resolve conflicts in the evidence or to engage in finely calibrated assessments of evidentiary weight. What it must find is some basis in fact for the certification requirement in issue.



(6)The “some basis in fact” standard has been referred to in other cases as a “minimum standard” or “very weak” evidentiary threshold. (Lambert v Guidant Corporation, [2009] O.J. No. 1910 at paras. 60-61 and 67-71; Taub v Manufacturers Life Insurance Co. 1998 CanLII 14853 (ON SC), (1998), 40 O.R. (3d) 379 (Gen. Div.) aff’d 42 O.R. (3d) 576 (div. Ct.); Griffin v Dell Canada Inc., [2009] O.J. No. 418 (Div. Ct.); Sauer v Canada (Agriculture), [2009] O.J. No. 402.)

(7) This low factual threshold applies to each of the certification elements, other than the pleadings issue. (Hollick v Toronto (City) supra para 25; Sauer v Canada (Agriculture) supra para. 15).



[38] The defendants acknowledge that the plaintiffs have satisfied the requirement set out in s. 5(1) (a) of the CPA. In all other respects the defendants submit that the proposed class action does not meet the requirements of the CPA.

An Identifiable Class, s. 5 (1) (b) of the CPA.

[39] In Bywater v. Toronto Transit Commission, [1998] O.J. No. 4913 (Gen. Div.) the three purposes of a class definition are:

(a) to identify persons who have a potential claim for relief against the defendants;

(b) to define the parameters of the lawsuit so as to identify those persons who are bound by the result; and,

(c) to describe who is entitled to notice.

[40] The Supreme Court of Canada in Western Canadian Shopping Centres Inc. v. Dutton, 2001 SCC 46 (CanLII), [2001] 2 S.C.R. 534 at para 38 stated that the class must be capable of clear definition:

……It is essential, therefore, that the class be defined clearly at the outset of the litigation. The definition should state objective criteria by which members of the class can be identified. While the criteria should bear a rational relationship to the common issues asserted by all class members, the criteria should not depend on the outcome of the litigation. It is not necessary that every class member be named or known. It is necessary, however, that any particular person’s claim to membership in the class be determined by stated objective criteria….

[41] There is no requirement that all class members have an equivalent likelihood of success. The defining aspect of class membership is an interest in the resolution of the proposed common issues. (Western Canadian Shopping Centres Inc. v. Dutton, supra, paras. 38 and 54).

[42] The class must be defined without elements that require a determination of the merits of the claim: (Markson v. MBNA Canada Bank 2007 ONCA 334 (CanLII), (2007), 85 O.R. (3d) 321 (C.A.) at para 19).

[43] Class membership identification is not commensurate with the elements of the cause of action: there simply must be a rational connection between the class member and the common issue(s): (Sauer v. Canada (Attorney General), [2008] O.J. No. 3419 (S.C.J.) at para 32, leave to appeal to Div. Ct. refused [2009] O.J. No. 402 (Div. Ct.).

[44] There must be a rational relationship between the class, the causes of action and the common issues, and the class must not be unnecessarily broad or over-inclusive: (Pearson v. Inco Ltd. 2006 CanLII 913 (ON CA), (2006), 78 O.R. (3d) 641 (C.A.) at para. 57).

[45] The class definition is particularly important because the scope of the class definition affects the commonality of the proposed common issues, the manageability of procedures and whether a class action is preferable, which also affects the ability of the representative plaintiffs to represent class members without conflict and the appropriateness of the litigation plan. (Fischer v IG Investment Management Ltd. [2010] O.J. No. 112 para 133; rev’d on other grounds [2011] O.J. No. 562 (Div. Ct.) and appeal dismissed [2012] O.J. No. 343 (C.A.).

[46] The class definition proposed by the plaintiffs is:

All clients of David Karas [and/or James Stephenson] who borrowed money to invest in mutual funds or segregated funds (the “Leveraging Scheme”) through Money Concepts (Barrie) and held leveraged investments at Money Concepts (Barrie) prior to the branch closing on or about March 2010 (the “Class”), excluding the named Defendants and their immediate family members.

[47] The defendants submit that that the class as identified does not state whether the leveraged account had to be at MCB on the date referred to. Further it does not deal with the issue of leveraged accounts recommended many years ago and maintained for many years by different advisors. Therefore, it is submitted that the proposed class definition does not define an identifiable class for purposes of the CPA.

[48] I find that the proposed class definition meets the requirements detailed in Bywater v. Toronto Transit Commission, supra and Western Canadian Shopping Centres Inc. v. Dutton, supra. Since the class members are all clients of Karas and/or Stephenson who participated in the “Leveraging Scheme” through MCB and held leveraged investments through MCB prior to the branch closing on or about March, 2010, the class members can easily be identified through the MCB records. I would also add that this class definition is a workable, rational, fair and objective definition.

[49] Accordingly I find that the criteria under s. 5 (1) (b) of the CPA has been satisfied.



Common Issues, s. 5 (1) (c) of the CPA.

[50] The common issues proposed by the plaintiff are as follows:

Scope of the Duty

(a) What was the scope of the Duty owed by the Defendants to the Class Members?

Breach of Duty

(b) Did Karas, Stephenson and/or the Karas Companies breach their Duty to Class Members by:

(i)Adopting a systemic (one-size-fits-all) approach to investment advice, resulting in recommending the leveraged investments to Class Members?

(ii)Systemically providing investment advice to Class Members:

1. Without warning them of the true risks of the recommended investment strategy?

2. Without regard to the industry standards for leveraged investments set out by the MFDA?

3. Without regard to the internal standards for leveraged investments set out by Investia?

(iii)Preferring the interest of the Defendants over that of Class Members ?

(c) Did Investia breach its Duty to Class Members by:

(i) Failing to monitor and supervise the conduct of Karas, Stephenson and/or MCB?

(ii) Failing to ensure its agents complied with its own guidelines and those of the MFDA?

(iii) Failing to prevent its agents from providing advice that was contrary to its own guidelines and that of the MFDA?; and

(iv) Failing to take steps to advise Class Members of breaches of duty by its agents or take steps to address and correct those breaches in a timely manner?

Damages

(d) What is the appropriate amount of damages for:

(i) Losses suffered by Class Members as a result of the Leveraging Scheme, including:

1. How to determine the value of the loss of use of funds (i.e. the amount that ought to have been generated by any non-leveraged investments, if any)?

2. How to determine a crystallization date?

3. How to calculate the amount of loans and the cost of borrowed money?

4. How to value the tax implications, if at all, on any losses?

(ii) Expenses associated with participating in the other initiatives, including:

1. How to calculate the recoverable expenses associated with the Life insurance scheme?

2. How to calculate the recoverable expenses associated with the FVA scheme?

Punitive Damages

(e) Does the Defendant’s conduct warrant an award of punitive damages?



[51] The position of the defendants is that the proposed common issues are not suitable for certification for the following reasons:

(a) there is no basis in fact, or any evidence at all, in support of any of the proposed common issues;

(b) the common issues are inherently flawed, as by definition, they are dependent upon individual findings of fact that have to be made with respect to each individual claimant;

(c) a resolution of the common issues on liability would not advance the litigation as they would only inform the issue of whether the duty owed by the salespersons to the class members was breached, but would not dispose of that issue and would not resolve the issue of causation;

(d) the degree of knowledge and understanding of each class member will be relevant to all parts of the proposed common issues. Even if most class members did not understand the risks of leveraging, it cannot be said for all of them. It is not possible to make a common finding on the knowledge of class members about the risks of leveraging;

(e) if the action were to be certified as a class action, it would break down into an individual analysis of each class member’s particular circumstances, thereby defeating the common issue requirement. The common issue then requires an individual assessment.

(f) the individual issues also affect the damages analysis and accordingly neither an aggregate assessment of damages, a common issue related to the measure of damages, or an assessment of whether the defendants’ conduct warrants an award of punitive damages is appropriate in this case;

[52] In Western Canadian Shopping Centres Inc. v Dutton supra (para 39) the Supreme Court of Canada in relation to the requirement of common issues stated:

Commonality tests have been a source of confusion in the courts. The commonality question should be approached purposively. The underlying question is whether allowing the suit to proceed as a representative one will avoid duplication of fact-finding or legal analysis. Thus an issue will be ‘common’ only where its resolution is necessary to the resolution of each class member’s claim. It is not essential that the class members be identically situated vis-à-vis the opposing party. Nor is it necessary that common issues predominate over non-common issues or that the resolution of the common issues would be determinative of each class member’s claim. However, the class members’ claims must share a substantial common ingredient to justify a class action. Determining whether the common issues justify a class action may require the court to examine the significance of the common issues in relation to individual issues.

[53] Therefore for an issue to be a common issue, it must be a “substantial common ingredient” of each class member’s claim and its resolution must be necessary to the resolution of each class member’s claim. (Hollick v Toronto (City) supra para. 19)

[54] The decision of the Ontario Court of Appeal in Cloud et al. v The Attorney General of Canada et al. [2004] O.J. No. 4924 (para 55); (leave to appeal to the SCC refused [2005] S.C.C.A. No. 50) provides direction in relation to the determination relating to a common issue. The Court states that the focus of the analysis of whether there is a common issue is not on how many individual issues there might be but whether there are issues, the resolution of which would be necessary to resolve each class member’s claim and which could be said to be a substantial ingredient of those claims.

[55] The underlying question of a common issue is whether the resolution of the common issue will avoid duplication of fact-finding or legal analysis :(Western Canadian Shopping Centres Inc. v. Dutton supra para. 39).

[56] The comparative extent of individual issues is not a consideration in the commonality inquiry, although it is a factor in the preferability assessment; (Cloud v. Canada (Attorney General) supra para. 65).

[57] Whether a duty of care exists and whether the defendants have breached their duty of care has been found to be common issues that would substantially advance the proceedings, even in cases where complex individual issues remain. (Rumley v. British Columbia, 2001 SCC 69 (CanLII), [2001] 3 S.C.R. 184; Cloud v Canada (Attorney General) supra; Tiboni v Merck Frosst Canada Ltd. [2008] O.J. No. 2996 (S.C.J.); Lavier v MyTravel Canada Holidays Inc. [2009] O.J. No. 1314 (Div. Ct.)

Proposed Common Issues (a)-(c)

[58] The proposed common issues (a) to (c) concern allegations of a breach of duty. In the present case it appears that the duty issue is common to the claims of all the investors. In determining the common issues the Court will determine whether there have been breaches of duty to class members by the defendants. In relation to all class members the Court will determine, inter alia, whether Karas and Stephenson had a duty to provide reasonable investment recommendations; warn clients of the risks of the leveraging scheme; avoid conflicts of interest; and consider industry and Investia-prescribed standards and/or guidelines. Therefore these issues and the questions posed in questions (a) –(c) are common to all the investors in the class.

[59] The responsibility of Investia, as the mutual fund dealer, to supervise its sales representatives (Karas and Stephenson) is likewise an issue common to all the class members. It is alleged that Investia failed to ensure compliance with the MFDA regulations and guidelines or the internal guidelines of MCB.

[60] The defendants state that there is no evidence of any single or common statement made by Karas or Stephenson to the proposed class members and therefore it is necessary to examine what each individual class member was told by Karas or Stephenson in order to resolve the proposed common issue related to the salesperson’s breach. Accordingly it is submitted that this type of individual inquiry is fatal to certification of that common issue. It is argued that there is no means to determine liability on a class wide basis. This position of course mistakenly merges the commonality of the questions with the commonality of answers to the questions. As stated in Western Canadian Shopping Centres Inc. v Dutton supra (para 39), the underlying question is whether allowing the suit to proceed as a representative one will avoid duplication of fact-finding or legal analysis. I find that the substantial common ingredient of each class member’s claim relates to a duty of care and whether there was a breach of that duty of care. Further the question relating to the liability of Investia involves a consideration of whether it failed to ensure compliance with the MFDA regulations and guidelines and the internal guidelines of MCB. Accordingly it is readily apparent that the determination of that common issue question by a single trier of fact will afford judicial efficiency.

[61] As detailed above (para.57), a duty of care and a breach of the duty of care have been found to be common issues that would substantially advance the proceedings, even in cases where complex issues remain. Therefore I find that the Court in deciding questions (a)-(c) will substantially advance the litigation for the class members and the defendants.

Proposed Common Issue (d)

[62] In relation to damages (question (d)) as detailed as a common issue the plaintiffs state that if one or more of the common issues (a) through (c) are answered affirmatively, the Court will be able to answer this question conditionally for those members of the class who are subsequently able to establish valid claims.

[63] The defendants state that whether the plaintiffs seek an aggregate assessment of damages under s. 24(1) of the CPA or to certify the common issue of new damages, the issue is incapable of certification because each issue and sub-issue is dependent upon an assessment of individual circumstances related to each class member.

[64] Section 24(1) of the CPA provides that a court may determine the aggregate or part of a defendant’s liability to class members, if no questions of fact or law other than those relating to the assessment of monetary relief remain to be determined, and if “the aggregate or a part of the defendant’s liability to some or all class members can reasonably be determined without proof by individual class members.”

[65] In order for the plaintiffs’ entitlement to an aggregate assessment of damages be certified as a common issue, there must exist a reasonable likelihood that the conditions under s. 24 (1) of the CPA are met (Fresco v Canadian Imperial Bank of Commerce, [2009] O.J. 2531 (S.C.J.) para. 83 aff’d 103 O.R. (3d0 659 (Div. Ct.).

[66] In the present case, it is not reasonably likely that the conditions for an aggregate assessment could be met.

[67] The evidence shows that the quantification of the harm suffered by investors is an individual and not a common issue. The evidence shows that the calculation of harm is the summation of the investor’s individual harms. It was not suggested by the plaintiffs that in the circumstances of this case that it would be possible to use statistical sampling as provided for under s. 23 of the CPA.

[68] The measure of damages and any assessment thereof are necessarily specific to individual members of the class. This assessment on an individual basis would include inter alia:

(a) the date on which the class member’s investments were purchased, and in certain circumstances, redeemed and the value of the accounts on these dates;

(b) the interest rate applicable to the loans at issue;

(c) any tax benefits received by the class member as a result of borrowing money to invest and whether as a matter of law any tax benefit for the individual investor should be considered in the damage assessment;

(d) whether or not each class member mitigated his/her damages and the impact of mitigation on the measure and assessment of the damages;



[69] The defendants submit that each of the issues detailed in the previous paragraph requires an individual assessment that cannot be engaged in on a class wide basis. It is further submitted that to varying degrees, each of these issues will have an impact on both the measure and assessment of damages rendering it both impractical and inappropriate for class wide assessment.

[70] I agree with the defendants position and I find that assessment of the class member’s damages will require individual assessment for each potential class member. Accordingly I will not certify question (d) as common issues.

Proposed Common Issue (e) Punitive Damages

[71] The plaintiffs submit that the issues of punitive damages and an aggregate assessment of damages are matters best dealt with through a common issues trial. The plaintiffs rely on the Court of Appeal decision in Cloud et al. v The Attorney General of Canada supra para 70 which states:

[I]n a trial of these common issues, the claims for an aggregate assessment of damages and punitive damages are properly included as common issues. The trial judge should be able to make an aggregate assessment of the damages suffered by all class members due to the breaches found, if this can reasonably be done without proof of loss by each individual member. Indeed, this is consistent with s. 24 of the CPA. As well, given that the common trial will be about the way the respondents ran the School and their alleged purpose in doing so, it can properly assess whether this conduct towards the members of the [class] should be sanctioned by means of punitive damages.

[72] Whether a defendant’s conduct justifies an award of punitive damages has been accepted as a common issue in a number of class proceedings. (Cloud v The Attorney General of Canada supra para. 72; Rumley v. British Columbia supra). In the recent decision of Robinson v Medtronic Inc., [2010] O.J. No. 3056 the Ontario Divisional Court upheld the motion certification judge’s decision ([2009] O.J. No. 4366(S.C.J.) which held that in class actions where the common issues judge is unable to determine compensatory damages for the whole class, punitive damages are not amendable to certification since their assessment requires an appreciation of the factors governing punitive damages detailed in Whiten v Pilot Insurance Co., 2002 SCC 18 (CanLII), [2002] 1 S.C.R. 595. These factors are: (Robinson v Medtronic Inc.,[2009] O.J. No. 4366 at paras. 164, 189-190)

(a) the degree of misconduct;

(b) the amount of harm caused;

(c) the availability of other remedies

(d) the quantification of compensatory damages; and,

(e) the adequacy of compensatory damages to achieve the objectives of retribution, deterrence and denunciation.

[73] The Divisional Court in Robinson v Medtronic Inc supra does approve of the common issue certified in Anderson v St. Jude Medical Inc., [2010] O.J. No. 8 (S.C.J.), which is stated as:

“Does the defendant’s conduct merit an award of punitive damages?”

[74] In other recent cases courts have indicated that the question for certification with respect to punitive damages would be: “Does the conduct of the Defendant justify an award of punitive damages in the circumstances?” (Schick v Boehringer Ingelheim (Canada) Ltd. [2011] O.J. No. 1381 paras. 63-65 (S.C.J.); Robinson v Rochester Financial Ltd., [2010] O.J. No. 187 aff’d [2010] O.J. No. 1481 (Div Ct.) paras 56-61; Anderson v St. Jude Medical Inc., supra paras.33-38; McCracken v Canadian National Railway Authority [2010] O.J. No. 3466 (S.C.J.) paras. 326 and 360; 578115 Ontario inc.,(C.O.B.) McKee’s Carpet Zone v Sears Canada Inc., [2010] O.J. No. 3921 (S.C.J.) paras 52-53).

[75] The position of the Defendants is that any assessment of punitive damages in these cases will necessarily be specific to individual members of the class. It is submitted that the entitlement to punitive damages cannot be determined until after a trial of the individual issues and therefore it is not a common issue.

[76] I find based on the principles developed in the case law that the common question whether the Defendants’ conduct justifies an award of punitive damages allows for a common answer to the necessary inquiry with respect to the degree of misconduct that is required under the Whitten v Pilot Insurance Co., principles summarized above. I find that this question as framed can be answered on a common basis and that a common answer will advance the action even if individual assessments are required. Therefore, punitive damages are a proper common issue for trial as the question is framed.

Preferable Procedure s. 5(1) (d) of the CPA

[77] For a class proceeding to be the preferable procedure for the resolution of the claims of a given class, it must represent a fair, efficient and manageable procedure that is preferable to any alternative method of resolving the claims. (Cloud v Canada (Attorney General) supra paras. 73-75). Preferability captures whether a class proceeding would be an appropriate method of advancing the claim and whether it would be better than other methods such as joinder, test cases, consolidation, and any other means of resolving the dispute. (Markson v MBNA Canada Bank (2007) (3d) 321 (C.A.) para 69).

[78] Whether a class proceeding is the preferable procedure is judged by reference to the purposes of access to justice, behaviour modification, judicial economy and by taking into account the importance of the common issues to the claims as a whole, including the individual issues. (Markson v MBNA Canada Bank supra at para 69; Hollick v. Toronto(City) supra; Hollick v Toronto supra para. 31.)

[79] In determining whether a class proceeding is the preferable procedure for the resolution of the common issues, all alternative proceedings put before the court must be considered. (Williams v. Mutual Life Assurance Co. of Canada (2000) 51 O.R. (3d) (S.C.J.) at para. 50, aff’d [2001] O.J. No. 4952(Div. Ct.), aff’d [2003] O.J. No. 1160 and 1161 (C.A.). The defendant must support the proposition that another procedure is to be preferred with an evidentiary foundation, (1176560 Ontario Ltd. V Great Atlantic & Pacific Company of Canada Ltd., 2002 CanLII 6199 (ON SC), (2002), 62 O.R. (3d) 535 (S.C.J.), aff’d 2004 CanLII 16620 (ON SCDC), (2004), 70 O.R. (3d) 182 (Div. Ct.).

[80] In the most recent decision of Fischer v. IG Investment Management Ltd. [2012] O.J. No. 343 (C.A.) Chief Justice Winkler (para. 80) states:

…in considering whether an alternative means of resolving a class members’ claims is preferable to the mechanism of a class action, a court must examine the fundamental characteristics of the proposed alternative proceeding, such as the scope and nature of the jurisdiction and remedial powers of the alternative forum, the procedural safeguards that apply, and the accessibility of the alternative proceeding. The court must then compare these characteristics to those of a class proceeding in order to determine which is the preferable means of fulfilling the judicial economy, access to justice and behaviour modification purposes of the CPA. In a given case, certain characteristics will drive the preferability analysis more than others.



Ombudsman for Banking and Investment Services (“OBSI”)

[81] In the present case the defendants submit that each member of the class has the right to have their claim for compensable losses to be addressed through the dispute mechanism provided by the Ombudsman for Banking and Investment Services (“OBSI”). The defendants state that the OBSI procedure is the preferred procedure to a class action.

[82] The OBSI is a complaint handling process mandated by the MFDA By-laws and MFDA Policy No. 3. The terms of reference of the OBSI is detailed in Exhibit “R” to the affidavit of the defence expert Julia Dublin sworn July 29, 2011. These terms provide inter alia:

(a) that the Ombudsman shall serve as an independent and impartial arbiter of Complaints;

(b) within limitations investigate Complaints with a view to their resolution through appropriate dispute resolution processes;

(c) if appropriate in the circumstances, make recommendations to Participating Firms and Complainants to resolve Complaints or reject complaints on their merits (emphasis added);

(d) the Ombudsman may not make a recommendation that a participating firm pay an amount greater than $ 350,000.00 in respect of a single Complaint or in a Systemic Issue, any single individual or small business;

(e) the Ombudsman’s recommendation is not binding on the Participating Firm or the Complainant;

(f) if a Participating Firm does not accept the recommendation of the Ombudsman, the Ombudsman shall make the name of the Participating Firm, the recommendation and the circumstances of the case public in a manner considered appropriate by the Ombudsman;

(g) If a Participating Firm does not cooperate in the investigation of an individual complaint against it, OBSI shall make public the name of the Participating Firm and the circumstances of the refusal to co-operate in a manner considered appropriate by the Ombudsman. OBSI will inform the regulating authority of non-cooperation by a Participating Firm.

[83] The defendants submit that the OBSI’s dispute resolution process achieves the three goals of the CPA;

(i) Behaviour Modification

▪ payment up to $ 350,000 per complaint;

▪ publishing the names of firms who do not accept recommendations and/or fail to comply with OBSI requests;

(ii) Access to Justice

▪ OBSI is a free service with no lawyers involved in the investigation process;

▪ MFDA By-law 1 and OBSI’s Terms of Reference require Members to provide all non-privileged information to OBSI which it is submitted is a form of document discovery;

▪ OBSI requires parties to enter a tolling agreement, therefore complainants do not need to be concerned with losing their right to commence a civil action if they are unsatisfied with the OBSI recommendation;

▪ The OBSI process eliminates the need to retain experts to opine with respect to suitability and damages.

(iii) Judicial Economy

▪ The process will spare judicial resources;

▪ OBSI’s Terms of Reference states that OBSI will endeavour to complete its investigation within 180 days which is significantly less than a civil action.



[84] Applying the analysis of the Court of Appeal in Fischer v IG Investment Management Ltd. supra (para. 10), I note that focussing on the outcome of the OBSI proceedings is not a relevant factor in the comparative analysis under s. 5(1)(d) of the CPA. Rather the court has to consider the regulatory nature of the OBSI jurisdiction and its remedial powers, as well as the lack of participatory rights to affected investors by the OBSI proceedings.

[85] I find that the OBSI proceedings would not fulfill the CPA goal of providing class members with access to justice in relation to their claims for the reasons that follow:

1) The scope and nature of the OBSI jurisdiction and remedial powers are very limited and summarized as follows.

(a) the characteristic of the OBSI is that it invites participation by the Participating Firm but it cannot compel cooperation;

(b) the OBSI can make a recommendation but it cannot compel the Participating Firm to make the payment recommended;

(c) the only remedy for non cooperation in an investigation and/or not following a recommendation is the rather anaemic remedy of publishing the name of the Participating Firm and details of the refusal;

(d) the enforcement procedure is not binding on the Participating Firm;

(e) the OBSI can only receive Complaints and make recommendations for amounts not greater than $350,000.00 (except if the parties otherwise agree);

(f) it is not readily apparent that punitive damages can be claimed in the OBSI proceeding.

2) The appearance of impartiality and independence of the OBSI is to some extent in play. While the Terms of Reference states that the Ombudsman shall at all times serve as an independent and impartial arbiter and shall not act as an advocate for the Participating Firm or the Complainant nevertheless the same Terms state at s. 24 (d) that the Ombudsman’s recommendation is not binding on the Participating Firm or the Complainant. A truly impartial and independent body would have control over its process.

3) This dispute process is sparsely defined. In s.16 (b) of the Terms of Reference there is a listing of non-privileged information that the Participating Firm may be asked to produce and which the OBSI reviews in making any recommendation. There is no hearing process defined wherein the Complainant may introduce evidence or make submissions. The Ombudsman is not bound by the rules of evidence (s.15). The OBSI does not provide legal, accounting or other professional advice (s.3 (i)).

4) In contrast to the procedure underlying a class proceeding, which is premised on facilitating transparency and participation on a class wide basis, the OBSI proceedings provide little or no basis for investor participation.

5) Similarly the procedure by which recommendations are arrived at does not facilitate investor participation or a record of how the OBSI recommendation, if any, is calculated

[86] The cross-examination of John Hollander counsel to the plaintiffs is that the OBSI is not logically set up to deal with a large number of claims and it is significantly backlogged with claimants facing delays.

[87] A class action involving the common issues will promote access to justice for all class members. A common issues trial in the present case would focus on the knowledge and conduct of the defendants. It would also involve a determination of the motives of the defendants in relation to the alleged breaches of duties. A common issues trial will not require substantial participation from class members. The fixed costs of the common issues trial may be equitably shared among class members, making the litigation affordable and thereby promoting access to justice.

[88] In contrast to the OBSI, a class action procedure allows for the appointment of a representative plaintiff who shares a sufficient common interest with members of the class. The representative plaintiff conducts the litigation on behalf of the class members under court supervision and within the principle of an open court.

[89] The fact that the OBSI proceedings can only make a recommendation and not bind the Participating Firm is itself a denial of access to justice. To reason by analogy to Fischer v IG Investment Management Ltd. supra (para 73): “access to justice by the investors surely could not be achieved through the completion of a process that was not made accessible to them.”

[90] I further find that a class action proceeding will address the issue of behaviour modification which does not appear to be the objective or mandate of the OBSI process. A class action is the only forum to properly and comprehensively address the alleged conduct of the defendants and modify behaviour in the future.

[91] I therefore find that the underlying nature of the OBSI process does not adequately resolve the class member claims when compared to the procedure under the CPA. In coming to this conclusion on the preferability analysis I am considering the law in Hollick v Toronto (City) supra that there need only be “some evidence in fact” to ground the conclusion that a class proceeding is the preferable procedure.

Representative Plaintiffs CPA s 5(1)(e)

[92] The next criterion for certification is that there is a representative plaintiff who would adequately represent the interest of the class without conflict of interest and who has produced a workable litigation plan.

[93] The representative plaintiff must be a member of the class asserting claims against the defendants. (Drady v Canada (Minister of Health), [2007] O.J. No. 2812 (S.C.J.) paras. 36-45; Attis v Canada (Minister of Health), [2003] O.J. No.344 (S.C.J.) para 40, aff’d [2003] O.J. No. 4708 (C.A.).

[94] The determination of whether the representative plaintiff can provide adequate representation depends on such factors as : their motivation to prosecute the claim; their ability to bear the costs of the litigation; and the competence of their counsel to prosecute the claim. (Western Canadian Shopping Centres Inc. v Dutton supra para. 41).

[95] The defendants acknowledge that the threshold to be a representative plaintiff is relatively low. It is submitted that the distinguishing feature of George French is that he is wealthier than the other class members. I reject this submission as it is not a valid criterion to disqualify French. Other objections put forth by counsel for Investia are that French has no dependants; is working almost full time; that “he realized significant tax benefits as a result of the leveraging recommendation”; that he was an experienced investor for many years and therefore his claims are likely statute barred. By way of contrast it is submitted that most of the other class members “are approaching or are in retirement; and many are elderly.” Again I reject these submissions as none of the criteria meets the factors in Western Canadian Shopping Centres Inc. v Dutton supra . I am satisfied that both French and the Smiths would adequately represent the members of the class. In light of the reasons set out above, there would be no common issue about the assessment of individual damages and therefore there cannot be any conflict among the class members about the distribution of the damages. In any event this Court can deal with problems, if any, concerning distribution of judgment funds. There is no conflict that affects the common issues to be tried which the representative plaintiffs have common cause with their class.

[96] The defendants also state that the Litigation Plan fails to provide a mechanism to determine individual liability and causation issues or to assess contributory negligence. I observe however that the plaintiffs have not had the opportunity to revise the litigation plan in light of the common issues that would actually be proceeding. The class action of the common issues is to have the court determine some complex questions about duty of care and whether that duty has been breached as well as a consideration of whether the defendants’ conduct merits an award of punitive damages, with individual trials to follow. Litigation plans are subject to revision and adjustment as the litigation progresses. There is substantial precedent for maintaining flexibility. (Frohlinger v Nortel Networks Corp., [2007] O.J. No. 148 (S.C.J.) at para. 28; Howard v Eli Lilly & Co., [2007] O.J. No. 404 (S.C.J.); Nantais v Telectronics Proprietary (Canada) Ltd. 1995 CanLII 7113 (ON SC), (1995), 25 O.R. (3d) 331 (Div. Ct.) para 15). Litigation plans are something of a work in progress and may have to be amended during the course of the proceedings (Cloud v Canada (Attorney General) supra para. 95).

[97] Therefore I am satisfied that the criteria under s. 5(1)(e) of the CPA has been satisfied subject to filing a revised Litigation Plan relating to the common issues that are actually proceeding.



Application to Adduce Fresh Evidence

[98] Subsequent to the hearing of the motion for certification but before a decision had been delivered the plaintiffs brought a further motion to introduce fresh evidence on the certification in the form of a Settlement Agreement between the Mutual Fund Dealers Association (MFDA) and Investia Financial Services Inc.

[99] On or about January 23, 2012 the plaintiffs became aware of a Notice of Settlement Hearing dated December 16, 2011 by the MFDA to consider a settlement agreed to by the staff of MFDA and Investia. An in-camera hearing took place on January 27, 2012 and the MFDA panel approved the settlement on January 30, 2012. The motion for fresh evidence was then made returnable on February 13, 2012.

[100] The relevant portions of the Settlement Agreement in summary are as follows:

(1) In September 30, 2008 the parent company of Investia acquired another Member of MFDA namely Aegon Dealer Services Canada Inc. (AEGON) and the operations were merged. The deficiencies identified in the Settlement Agreement do not relate to the operations of AEGON;

(2) During the period January 2009 to April 2009 Investia failed to establish and maintain adequate internal controls, books and records, pertaining to leveraged accounts contrary to MFDA Rules 2.9, 5.1 and 2.2.1;

(3) Investia pays a fine of $ 100,000.00 upon acceptance of the Settlement Agreement;

(4) Investia agrees to implement revised policies and procedures and a Leverage Review Action Plan.

[101] The Settlement Agreement on its face does not appear to relate to MCB or Karas or Stephenson.

[102] In 2001, AEGON purchased the assets and trade name of Money Concepts. Included in the acquisition were the operations of the Barrie branch.

[103] The defendants submit that the test for adducing fresh evidence is detailed in Palmer v The Queen 1979 CanLII 8 (SCC), [1980] 1 S.C.R. 759 at 775. The defendants acknowledge that the plaintiffs could not, by due diligence, have adduced the Settlement Agreement at the hearing of the certification motion as it was not available at that time. Further, it is acknowledged that the Settlement Agreement is credible in the sense that it is an agreement reached between the Staff of the MFDA and Investia and approved by a Hearing Panel. However, it is submitted by the defendants that the plaintiffs have failed to establish that the Settlement Agreement is relevant to the Certification motion or that the admission of the Settlement Agreement would be expected to affect the result of the Certification motion.

[104] Counsel for the defendant Investia also states that if the Settlement Agreement is admitted into evidence then it would like the opportunity to introduce further and other affidavit material and documentation.

[105] I have also been referred by counsel for the plaintiffs to the decision of Justice Lauwers in Jackson v Vaughan (City) [2009] O.J. No. 145 (S.C.J.) at paras 22-23.

[106] I am not satisfied that the Settlement Agreement has been shown to be relevant or that it would affect the result on this Certification motion. It may be relevant at the discovery stage when other ancillary documents related to it may be examined. However, I am not dealing with what documents may be relevant at discovery.

[107] Accordingly, I dismiss the application to introduce fresh evidence.



Summary

[108] In the result the certification order shall issue on the condition that a revised Litigation Plan is submitted for approval. Counsel may also submit a formal order to be settled, if necessary.

[109] Counsel may contact the trial coordinator at Oshawa to arrange an appointment to speak to the issue of costs.





_________________________________________

The Honourable Mr. Justice Bryan Shaughnessy



DATE RELEASED: February 17, 2012




































CITATION: French and Karas et al v. Smith and Stephenson et al
2012 ONSC 1150
COURT FILE NO.: 10-0690
DATE: February 17, 2012

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

GEORGE FRENCH
Plaintiff
v

INVESTIA FINANCIAL SERVICES INCORPORATED, MONEY CONCEPTS (BARRIE), DIAMOND TREE CAPITAL INC., DAVID KARAS and FINANCIAL VICTORY ASSOCIATES INC.
Defendants

AND B E T W E E N:

COURT FILE NO.: 11-0234

BRUCE SMITH and EDITH IRENE SMITH
Plaintiffs

V

INVESTIA FINANCIAL SERVICES INCORPORATED and JAMES STEPHENSON
Defendants

Mr. Alexei Goudimenko, for the Landlord/Respondent, Moving Party on Motion






_______________________________________________

REASONS FOR DECISION ON A MOTION
FOR CERTIFICATION OF A
CLASS ACTION PROCEEDING
________________________________________________

Shaughnessy J.
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Re: GET YOUR MONEY BACK!

Postby admin » Thu Sep 12, 2013 8:42 am

dually posted in fiduciary topic (Very important in my opinion to those seeking to gain their own money back from professional financial abuse)

Key concept is highlighted in red below:


From: Knut A. Rostad [mailto:kar@rpjadvisors.com]
Sent: Tuesday, September 10, 2013 5:48 PM
To: Knut A. Rostad
Subject: Institute Releases Fiduciary Duties Paper; Cites SEC Case in Explaining What Fiduciary Duties Mean for Investors

Friends,

The Institute for the Fiduciary Standard continues its celebration of Fiduciary September with the release of a paper, “Six Core Fiduciary Duties for Financial Advisors,” today. It is attached.

The paper seeks to explain what these six duties mean to investors and uses an SEC case to do so. The case In the Matter of Arlene Hughes offers a valuable lesson. Arlene Hughes, a dually registered broker – advisor, sells her own securities to her clients, who by all accounts, trust her emphatically. In her clients’ eyes, Hughes is portrayed a true fiduciary. Unfortunately, however, the SEC found in its fact finding that Hughes’ clients failed to understand that Hughes chose to put herself in a conflicted position, and clients also failed to understand what that conflicted position meant to them.

The SEC’s handling of this case is important. Its clear and concise explanations of many issues central in the today’s discussion of potential rulemaking stand out. Conflicts of interest, the nature and meaning of disclosure in different circumstances, and the responsibilities of both the advisor and the client are addressed. The meaning of loyalty is articulated in meaningful terms. The relationship between loyalty and conflicts is discussed. You will find this case of interest.

Thank you for your interest in this issue. Please contact me with any questions or comments.

Knut

Knut A. Rostad
Institute for the Fiduciary Standard
http://www.thefidcuiaryinstitute.org
703-821-6616 x 429
301-509-6468 cell


====================
Screen Shot 2013-09-12 at 9.31.25 AM.png

study mentioned above is found here:

http://www.thefiduciaryinstitute.org/wp ... Duties.pdf

See this video for further elaboration about the conflict of interest mentioned above in red: http://www.youtube.com/watch?v=KH6XMXlf ... JBa_l0w7AQ

Screen Shot 2013-09-12 at 9.43.45 AM.png

Investment Advisor Bait and Switch, GET YOUR MONEY BACK!
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