Sunday, September 9, 2018

Effective and Fair OM Exemption complaint investigations


Effective and Fair OM Exemption complaint investigations

Based on discussions with unsophisticated retail clients that have been adversely impacted by the regulatory exemptions regarding exempt securities a nasty picture arises. Most do not appreciate the rules of engagement, the unique risks of this market and especially the lack of liquidity.  Any distribution of securities in Canada must either be qualified by a prospectus or be exempt from the prospectus requirement.

The Offering Memorandum (OM) exemption allows issuers to raise funds from investors who are either not sufficiently wealthy or not in a sufficiently close relationship with the issuer to qualify for certain other exemptions. It is found in section 2.9 of National Instrument 45-106 Prospectus Exemptions. Certain conditions of the OM exemption apply across all provinces and territories, while certain other conditions vary depending on the jurisdiction in which securities are distributed. The common conditions include a requirement that the OM contain financial statements of the issuer, and that investors acknowledge in writing that the investment is risky. The variable conditions include, in certain provinces and territories, an annual investment limit of $10,000 (all figures in CA$) per investor unless the investor satisfies certain criteria, including having a specified level of income or assets. Complaint investigators must become familiar with the varying provincial rules and how they are interpreted by regulators.  

OM investors are required to complete and sign a form highlighting the key risks associated with investing in securities acquired under the OM Exemption. Individual investors are also be required to complete two schedules to the offering memorandum which ask investors to confirm their status (as an eligible investor, non-eligible investor, accredited investor or an investor who would qualify to purchase securities under the family, friends and business associates exemption) and that the investor is within the investment limits, where applicable. The OM exemption is loaded with bear traps for unsophisticated retail investors.

Marketing materials used by issuers in distributions under the OM Exemption must be incorporated by reference into the offering memorandum and filed with the securities regulatory authority. As a result, the marketing materials are subject to the same liability for a misrepresentation as the disclosure provided in the offering memorandum itself. Misleading OM marketing materials have been a source of angst for retail investors but should come into play when investigating complaints.

The companies and Exempt Market Dealers (EMD) that sell exempt securities want to see investors do well. But companies are also interested in maximizing the amount of capital they can raise and dealers want to boost their commissions – so there are conflicts-of-interest and incentives for both groups to encourage investors to buy exempt securities.

Problems/ complaints often arise because EMD Reps have not informed themselves as thoroughly as they should have about the investor's ’ situation ( KYC), the features and risks of the exempt investments they have recommended (KYP) and how those two Assessments should be applied to the client’s situation. For instance , someone with low to medium risk tolerance and capacity , low financial literacy and a large mortgage or credit card balance shouldn't be sold securities under the OM exemption even if they technically are eligible and are willing to sign the risk disclosure document. It is vitally important also for complaint investigators to recognize that (a) disclosure is NOT the same as transparency and (b) the well known downsides and limitations of disclosure.

In May 2017, the Alberta Securities Commission (ASC) concluded in a report that while many exempt market dealers adhered to the KYC, KYP and suitability rules, numerous others had significant compliance deficiencies in the collection and documentation of KYC information, inadequate Know your Product analysis , marketing materials that contained unsubstantiated or exaggerated claims and inadequate identification and response to conflicts-of-interest. Furthermore, a large number of instances were uncovered where brokers' clients possessed unsuitable investments such as: low-risk investors holding high-risk securities; income investors holding growth securities; short-term investors holding long-term securities; and investors with portfolios over-concentrated in exempt securities.
http://www.albertasecurities.com/Regulatory%20Instruments/5331553%20_%20EMD_Project_Staff_Notice%2033-705.pdf

Unsuitable investments are bad enough but we have found that OM client complainants are also treated poorly. Attempts are made to blame the investor by citing he/she signed all the forms on risk and understood other complex matters related to investing in exempt securities. Complaint investigators need to go beyond the signed documents given the known vulnerabilities of retail investors.

In the EMD sector, OBSI closed 18 cases in 2017 with just one complaint (5 %) being upheld. This contrasts sharply with compensation recommendations for investment complaints generally- OBSI upheld 39% of investment complaints in 2017 (and 23% of banking complaints).

Our concern is that complaint investigators are not using proper complaint assessment principles to deal fairly with unique OM exemption complainants and complaints.

We suggest the following Checklist be adopted by OM complaint investigators to ensure complainants are treated fairly.
.
                                                                                                                            
EMD complaint investigation checklist

·         Basic Principle : KYP, Suitability determination is the sole responsibility of the Exempt Market Dealer – suitability and eligibility are NOT the same thing. Eligibility should be validated before suitability assessment  
·         Has the dealer exhibited due diligence in evaluating the exempt security?
·         Is there objective evidence that eligibility was verified? Income tax returns/ payroll stubs should be checked if client appears uncertain on responses  
·         Are marketing materials misleading or different than the OM materials?
·         Did the Dealer rely solely on self- certification of eligibility? Many retail investors do not understand the relevant terminology or have low financial literacy
·         Employment stability checked as appropriate by Dealer?
·         Was product risk adequately disclosed in terms the investor can understand?
·         Was time horizon properly defined? Liquidity , redemption fees
·         Has the lack of liquidity of exempt securities been considered in suitability determination re KYC?
·         Is the client a vulnerable investor? Low financial literacy, senior, poor literacy, weak numeracy , language issues
·         Does client have experience with OM exemption?
·         Are client life objectives documented? IPS ? financial plan?
·         Is Dealer NAAF/ KYC form adequate given the nature of the risks? Debt obligations, cash income needs, number of dependents , age , tax rate
·         How was the client’s financial knowledge determined? If determined to be Low or Fair, extra Dealer controls are  required especially as regards eligibility information provided and understanding of risks
·         Was risk tolerance determined by a Dealer approved test and process? Is objective evidence available?
·         Did the Dealer depend solely on client self -assessment of risk?
·         Was client risk capacity determined? e.g. a retiree , an investor with  a large mortgage /young family, unemployed
·         Did the Dealer rely solely on client completed risk acknowledgement form?
·         Was “informed consent” obtained?
·         Are Rep Notes available for review?  
·         Has the Dealer documented the suitability assessment?
·         What is Rep background? Registration, disciplinary history , designations, qualifications  
·         Any there any regulatory/ legal actions against Dealer, Issuer or product?
·         Is marketing and sales literature misleading? Deceptive?
·         Was Suitability assessed per transaction or on portfolio basis? Should be on individual security and on portfolio ( concentration of assets) basis.

We believe that complaint investigators should use such a checklist in order to ensure a fair assessment of an OM complaint. We appreciate however that every case will be fact-specific considering all of the evidence.

References


Jeffrey MacIntosh, "Enforcement Issues Associated with Prospectus Exemptions in Canada,"  August, 2017. “…By comparison, equity financing in the public market averaged approximately $16.5-billion a year in each of 2010 and 2011 – comprising $3-billion in initial public offerings, $1.5-billion in private-venture funding and $12-billion in secondary offerings (based on Prof. Jog's estimates).Indeed, the exempt market "dwarfs the public market," says Prof. MacIntosh. Given the enormous size of the exempt-securities market, the amount of harm inflicted on investors could be considerable if extensive non-compliance exists, he adds…”


Guidelines for obtaining meaningful consent - Office of the Privacy Commissioner of Canada
The Office of the Privacy Commissioner will begin to apply these guidelines on January 1, 2019. The release of these guidelines is part of the Office’s work to improve the current consent model under the Personal Information Protection and Electronic Documents Act (PIPEDA). For further details, please refer to the consultation on consent under the PIPEDA.
https://www.priv.gc.ca/en/privacy-topics/collecting-personal-information/consent/gl_omc_201805/. There are many issues re informed consent in the investment business especially given the asymmetry in knowledge and the clever (cunning) writing of consent agreements by industry participants. 

Ending abusive clauses in consumer contracts Report 2011 http://uniondesconsommateurs.ca/docu/protec_conso/EndAbusiveClauses.pdf



Thursday, August 23, 2018

Open Letter to the CSA on embedded commissions and DSC





“There is nothing so useless as doing efficiently that which should not be done at all." - Peter Drucker

As we have publicly disclosed, Kenmar Associates will no longer respond to any CSA consultation regarding, Best interests, DSC or embedded commissions. Our team has spent hundreds of person-hours dedicated to regulatory reform with no positive result over the last decade. The CSA has announced that it will conduct another consultation on embedded commissions in September.This Open letter therefore should be viewed as a reaction rather than a response.

In the planned consultation the CSA will be proposing to prohibit the payment of trailing commissions to dealers, such as discount brokers, who do not make a suitability determination (presumably, this is equivalent to banning the offering of products such as mutual funds with embedded commissions being paid to dealers, including discount brokers, for services they cannot and knowingly will not provide). This can be likened to Health safety regulators consulting on whether poison should be prohibited from retail grocery shelves. Consulting on such an obvious case of financial assault on investors is disrespectful of retail investors. The CSA should be ashamed to admit that for well over a decade hundreds of millions of dollars have needlessly been diverted from the retirement savings of Canadians despite numerous pleas from consumer groups.

The basic securities law of dealing honestly, fairly and in good faith with clients has been brazenly breached with not a whimper of regulatory enforcement or concern for retail investor protection. Further, the CSA has not warned investors via Alerts and education that it is permitting this broad daylight robbing of their hard earned money.

The CSA is in effect going to be asking for comments on an issue that is clearly unlawful and harmful to investors. It is treating common sense and basic morality as sidebars to the discussion. It is well aware that Fund Facts which states that trailers are for the provision of services (albeit unspecified) and personalized investment advice. The CSA therefore knows there are elements of misrepresentation involved when discount brokers offer A series of mutual funds with embedded trailer commissions.

The CSA is also aware that even the trade Association for the investment funds industry has called on them to establish rules to ensure that mutual funds carrying an embedded advisor fee are sold only in channels where advice is permitted.

“Investors who buy funds directly, for example through a discount broker, should be confident that they are not inadvertently overpaying by selecting a series that includes fees for services that are not available through that platform,” - Paul C. Bourque, Q.C., IFIC’s president and CEO.  Source: https://www.ific.ca/en/news/limit-series-a-sales-to-channels-that-permit-advice-ific/

The CSA has not yet addressed the enabler of these abusive trailer payments, the mutual funds. The mutual funds are knowingly reducing fund assets by paying discount brokers (sometimes even related parties) for nothing. These assets aren’t some intangible collection of cash. They are the retirement savings of millions of Canadians. Are there provisions in NI1-107 that exempt funds from protecting unitholder assets?  If not, why isn’t the CSA prosecuting those entities for a breach of fiduciary duty? Why must investors have to resort to Class Actions for such an in-your-face attack on their life savings?

Earlier this month IIROC abruptly suspended Section 2 from its notice that accompanies guidance for order-execution-only (OEO) services and activities, published in April this year. The section says IIROC expects OEO firms to make available, whenever possible, series of funds that don’t pay trailing commissions for ongoing advice. When no such series is available and an OEO firm offers a series with a trailing commission, IIROC says in the section that it expects the firm to address the conflict—by rebating to the client the portion of the trailing commission or by “taking other similar steps.”  So for now, those expectations are on hold and investors will continue to be exploited. In the meantime, OEO firms remain subject to IIROC’s rules concerning conflicts-of-interest, including the requirement to address conflicts considering the best interest of the client, says the IIROC Notice. That may be, but will IIROC protect investors by enforcing its rules with its Member discount brokers? Will the practice of unduly collecting trailers cease? Will there be rebates?

The Canadian Foundation for Advancement of Investor Rights (FAIR) has criticized IIROC’s decision.  Frank Allen, Executive  Director  of FAIR was “ dismayed that IIROC cites the upcoming CSA rule proposal prohibiting the payment of trailing commissions to online brokerage firms (discount brokerages) as the reason for the suspension.”  SIPA, individual investors and ourselves support FAIR in being critical of the IIROC action. The suspension leaves affected Retail investors subject to mitigation risk and one can reasonably argue that the statute of limitations time clock is already ticking.

Even if the CSA were to ban discount brokers from offering products with embedded service commitments we are concerned that such a ban might include exceptions or be open to future regulatory exemptions. There is even the possibility a cost-benefit analysis will be required, again delaying affirmative action. Kenmar are therefore calling for a cancellation of the consultation and an immediate banning of any dealer from offering a product or security that contains an obligation to provide a service or function that it cannot and/or will not provide. That would be common sense- it is the right thing to do and it will save people hundreds of person- hours of wasteful activity.

As to the planned consultation re a proposed ban on the DSC-sold fund, there is the same question. Why? Does the CSA not have enough data to make a decision? Has it not heard the voice of consumers pleading for a prohibition? Were Roundtable conclusions unclear? Is the client complaint data ambiguous? Is there any research that supports not banning DSC-sold funds? Is there any identifiable benefit to clients of a DSC-sold fund? Does the CSA buy the feeble arguments from a small minority of industry participants on the benefits of DSC? The CSA knows the answers and yet it continue to consult , dragging out the agony for investors for another year or two and more if there is a extended transition period.

Several responsible firms and Dealing Reps have stopped selling DSC Funds even as the CSA waffles on making a definitive decision. As with many CSA regulations we fear there will be carve outs or exemptions so that even a ban is nothing more than an illusion. Accordingly, Kenmar respectfully request that the CSA cancel this planned consultation since it clearly knows the answer. The CSA should make a decision- ban the sale of DSC-sold funds while defining the rules regarding unitholders currently holding such toxic funds. Such a positive action would help restore confidence in the CSA and definitely would be in the Public interest.

If despite all logic and fairness, the planned consultation proceeds, we draw the CSA’s attention to a public statement from the Ontario Securities Commission’s Investor Advisory Panel (IAP). The IAP is calling on the CSA to prevent possible further investor abuse by making their proposed bans on deferred sales charge (DSC) mutual funds and the payment of trailer fees to discount brokers retroactive to the launch of a consultation slated for September. The IAP says that it’s concerned about the possible risk to investors while the consultation plays out. It says that “In proposing the elimination of DSCs and the discontinuance of trailing commission payments to discount brokers, the CSA has noted that these fee practices are problematic, inappropriate and harmful.”

Kenmar fully support this backup choice approach and respectfully again request that the CSA immediately issue an educational pamphlet and Investor ALERT on the harmful effects of DSC-sold Funds and products with embedded trailing commissions offered by IIROC regulated discount brokers.

The CSA website states: The CSA protects Canadian investors from unfair, improper, or fraudulent practices and fosters fair and efficient capital marketsBy cancelling the upcoming consultation and making the necessary decisions, the CSA can demonstrate that it is serious about protecting investors. This is an incredible opportunity that should not be missed.

Sincerely,

Kenmar Associates




Sunday, August 19, 2018

The final insult for victims of financial Assault - the RELEASE form



The odds are that sometime during your investing lifecycle you will file a complaint with your investment dealer. The odds are also high the dealer will deny any responsibility for your losses. In those cases where they do concede some liability for the losses, they may agree to partially compensate you. In order to receive any compensation they will insist you sign a RELEASE form. If you don't sign you will not get your money back no matter how valid your complaint. You will then have to use the Ombudsman for Banking Services and Investments which does not provide a binding decision or proceed to costly , aggravating civil litigation.

In case you’ve wondered what a RELEASE form looks like we present a typical example here. If you think the deal is one-sided and ugly, you are right, it is. If you think some sharp lawyer working for the dealer crafted this document , you are right again.Note also this RELEASE serves as a Gag order in that you effectively cannot reveal what happened to you. Most Canadians are shocked that such silencing of a complainant is permitted in Canada. Many regard their experience with the financial services industry complaint system as life -altering. The possibility of a #MeToo movement is stirring against financial assault.

Investment Complaint handling in Canada  definitely isn't " If you're not satisfied, your money will be cheerfully refunded"  .This blog should open your eyes to Bay Street tactics to keep details of client complaints from the public. Be AWARE. 

To obtain a deeper understanding on how Bay Street can adversely impact the lives of Canadians visit Listen to the Voices. 


RELEASE


IN CONSIDERATION of the payment by Big Bank Dealers Inc. ( BBDI) of the sum of $XXX.00 in Canadian Currency (Cdn) and other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged) to Mr. I.M. Canadian for and on his own behalf and for and on behalf of his agents, heirs, executors, administrators, successors and assigns (hereinafter collectively referred to as the “Releasors”), the Releasor does hereby fully and finally release and forever discharge BBDI, together with each of their associated, affiliated, related and predecessor companies, partnerships and entities, as well as each of their respective directors, officers, shareholders, employees, servants, agents and insurers and each of their respective successors and assigns or any other person for whom they may be responsible in fact or in law (hereinafter collectively referred to as the “Releasees”), from any and all actions, causes of actions, judicial proceedings, suits, claims, demands, debts, dues, accounts, bonds, contracts and covenants, whether express or implied or direct or indirect, and for damages, indemnity, costs, interest, loss or injury of every nature and kind whatsoever and however arising which the Releasor may have had, may now have or may in the future have for or by reason of any cause, matter or thing whatsoever existing and, without restricting the generality of the foregoing, all claims and demands arising in, out of or in any way connected, directly or indirectly, with BBDI  Accounts 123-45678 and 123-45679 up to and including this day.

AND FOR THE SAID CONSIDERATION, the Releasor further agrees not to make any claims or to commence or maintain any action or proceeding, either directly or indirectly, whether in Canada or elsewhere, on his own behalf or on behalf of any class or any other person, against any other person, corporation or other entity in which any claim could arise for contribution or indemnity or any other relief over, against the Releasees (all the claims described in this paragraph are referred to as a “Prohibited Proceeding”).



THE RELEASOR agrees that in the event he commences a Prohibited Proceeding, and either or both of the Releasees are added in any capacity or manner whatsoever to such proceeding:

(a)         the Releasor will:

i.         immediately discontinue the Prohibited Proceeding; and

ii.         be liable for all legal and related costs incurred by the Releasees in connection therewith;

(b)         this Release:

i.         shall operate conclusively as an estoppel in the event a Prohibited Proceeding is commenced;

ii.         may be pleaded as a complete defence and reply in the event a Prohibited Proceeding is commenced; and

iii.         may be relied upon in any proceeding to dismiss a Prohibited Proceeding and no objection will be raised by the Releasor to the effect that other parties to the Prohibited Proceeding are not parties to this Release.

THE RELEASOR represents and warrants that he has not assigned to any person or corporation or other entity any claim which has been released by this Release.

THE RELEASOR acknowledges that before signing this Release, he has been afforded the opportunity to, or did in fact, seek independent legal advice in connection with all of the matters which are the subject hereof. The Releasor voluntarily accepts the consideration offered for the purpose of making full and final compromise and settlement of all claims as aforesaid.

IT IS UNDERSTOOD AND AGREED that the aforesaid consideration is deemed to be no admission of any liability or obligation of any kind whatsoever on the part of the Releasees.

IT IS FURTHER UNDERSTOOD AND AGREED that the Releasor hereby undertakes and agrees not to disclose the terms of the settlement and this Release to any third party without the prior written consent of the Releasees, except as required by law and except for any communications with securities regulatory and self-regulatory organizations.


THE RELEASOR AGREES that should he breach any terms of this Release, there shall be a complete failure of consideration in favour of the Releasees, and accordingly, they shall be liable, in addition to any other remedy the Releasees may have, to repay to the Releasees any and all of the consideration received in accordance with the terms of this Release.


THE RELEASOR UNDERTAKES AND AGREES to cooperate with the Releasees to execute and deliver such further and other documents as may be reasonably required to give effect to this Release.

IT IS UNDERSTOOD AND AGREED that this Release, once executed, may be retained in electronic form and has the same force and effect as the original executed Release.

IN WITNESS WHEREOF the Releasor has hereto set his hand this ___ day of __________, 2018.



SIGNED in the presence of:
}



}


______________________________
}
___________________________

Witness’s signature
}
Mr. I. M. Canadian


}


______________________________
}


[NAME]
}





______________________________
}


[ADDRESS]
}





______________________________
}


Wednesday, July 25, 2018

Remediation pitfalls to avoid



From time to time, and more frequently lately, investment dealers are obligated to compensate you for undue losses. The losses may be attributable to unsuitable investments, double billing, overcharging, misrepresentation, improper leveraging and the like. 

Typically, you will receive a letter from the dealer advising you of the compensation. However, it seems some brokers can’t miss the opportunity to kick victims one more time. They will ask you to sign off on the planned remediation thereby legally agreeing to the amount provided. So where’s the rub?

There is often insufficient information being provided for an informed consent to be given. The real reason for payment is not given- in most cases it’s because regulators or a Court ordered it. The numbers provided are not verifiable and victims are given a very short deadline to respond, sometimes less than three weeks, or the offer is off the table.  The explanation for the payment may be as deceptive as the sales practices used to deceive you.

You may be told the investment they have "might" not be suitable for you but if you want to stay in it, sign here and if you want to get out of it sign this gag order (referred to a Confidentiality Agreement) and a Release over here indemnifying the dealer who will pay some of the loss and excess costs inflicted on you the last "X" years.

What these brokerages fail to reveal is: "We didn't suddenly just discover this, we have had the regulators breathing down our necks and they have now disciplined us. We were fined for selling unsuitable investments or strategies to a group of people just like you. We didn't follow any of the industry rules and guidelines in setting this up for you, or the other hundreds or thousands or maybe it's even millions of people just like you that trusted us. 

We also used unethical sales practices to motivate and incentivize our sales team that you mistakenly were led to believe were professional advice givers working in your best interests.   We also sold it to you on a DSC basis so we could get a big fat commission right away and I think we forgot to mention that to you as well. “

So instead of something appropriate and suitable in your portfolio, that in a fairly good market you would have made money in, if they had actually cared about you, your goals and what they knew about you, you got this crappy investment instead or were overcharged and lost years of saving for your retirement.

These scoundrels may even take the opportunity to remind you what their website says

“We’re here to help you build your financial future and live a great retirement.”
When you are told the remediation plan is being handled by an independent monitor or an accounting firm you can be reasonably confident in the fairness of the calculations. Note however that an independent party may be given parameters which undermine the appearance of independence.If the disbursal of funds is being managed by the dealer- assume the worst and you will never be disappointed. 

So, when you get a remediation letter, read it carefully. Ask questions. What are the tax implications?How were the numbers calculated? Be skeptical. You may get a better deal via OBSI or civil litigation. Never forget- it’s your money. If the dollars are large, consider getting professional assistance.Know your rights.


Tuesday, July 10, 2018

What the heck are "Service fees" ?


More fee issues in mutual fund land

The industry has been plagued not only with high fees but with numerous scandals regarding overcharging, double billing, not applying breakpoints and charging for advice and not providing it.

There is also an important issue with trailers in “D” series funds used by DIY investors. The issue of discount brokers being compensated for "services" that they may or may not have provided to investors is one that deserves more attention. 

There are no mutual fund disclosure documents I Fund Facts, Simplified Prospectus) that define what is meant by "services" in the phrase "services and advice" that is the material phrase in the definition of a trailing commissions.  There does not appear to be a common definition applied to services by different mutual fund stakeholders. 

Our general impression is that the term “services” was left intentionally undefined by mutual fund companies so that different dealers can be left to interpret this term as they see fit and to their advantage under differing circumstances. However, the agreement to invest in a mutual fund is one between the mutual fund company and the investor - the definition of services rests with those parties (not the dealer) and most likely with the party that did not draft the mutual fund agreements (the investor). In our view, these D series trailer commissions are actually a redundant charge for services already implied in the Agreement the investor has with the discount broker.

As big a travesty as payments for advice that was not provided is the travesty of hundreds of millions of dollars of Canadian's wealth being transferred to dealers (discount and full service) each and every year for "services" that have never been defined. 

How can a retail investor know if he/she received a service that has no definition?  How can a dealer claim to have provided an investor with services when there is no definition for services?  Can a dealer double dip - charge you for a service through your mutual fund holdings that you have either already paid?  Can a dealer charge for a service for which there is no direct charge under the terms of your Relationship Disclosure with your dealer (e.g. access to quotes, research reports)? 

According to a paper released in January, 2017, by the Canadian Securities Administrators (CSA) that discussed the topic of discontinuing embedded commissions. there are a total of $30 billion held in mutual funds at discount brokers. And $1.5 trillion in other accounts. At a 0.25% rate estimate for services  this translates into about $3.75 billion per annum for “ services”.

Regulators should be examining this charge.

Friday, April 6, 2018

More issues with IIROC client complaint handling rules


IIROC Rule 2500B http://www.iiroc.ca/Rulebook/MemberRules/Rule02500B_en.pdf Client Complaint Handling has been subject to much criticism from the time it was released in early 2010. Experience has shown that investor advocate concerns were on the money. In this blog we relate new concerns that have arisen regarding this controversial Rule.

The Substantive Response Letter


One of the most problematic aspects of the current version of Rule 2500B from an investor protection standpoint relates to the extremely minimal and demonstrably inadequate standards in the “substantive response” of IIROC Member firms to client complaints. This issue needs to be considered from a comprehensive perspective, which includes taking into account the regulatory outcome(s) that the rule is supposed to achieve, together with the ‘framing’ of the conduct at the firm level, which is supposed to achieve these outcomes. One then may consider whether the regulatory framing of this conduct—which specifies what is to be done, when it is to be done, and how it is to be done—is sufficient to achieve the desired regulatory outcome(s) . In the present case, there is an evident deficiency in the way the “substantive response” is specified relative to the achievement of the claimed regulatory outcome, which is to ensure the fair handling of client complaints. 

The Rule does not introduce provisions that arguably will “ensure” that clients are made aware of the complaint process and that their complaints will be handled in a fair manner. The provisions relating to fair dealing in the current version are seriously deficient relative to the presumed regulatory outcome of ensuring the fair handling of complaints. The mere requirement that firms should provide a letter with a “summary” of the complaint, the “results of the Dealer Member’s investigation” and the “final decision, including an explanation” is completely inadequate to “ensure” fair dealing. On the contrary, it is our view that fair dealing will not be “ensured” by the current version and it would be seriously misleading to suggest this. To many retail clients, the responses would have appeared reasonable and authoritative, often to their detriment.

 
Investor advocates consider transparency and disclosure issues, as well as conflict- of-interest, while also taking into account retail client vulnerabilities. The Rule overlooks these vulnerabilities, which are clearly evident in a process in which there is, very often, a significant imbalance in power and an asymmetry in knowledge between the complainant and the firm. It is disappointing to find that these elements, which are essential in any consideration of investor protection, have not been adequately taken into account in the formulation of Rule 2500B.


Consider the original IIROC Staff response to the issue of conflict-of-interest and disclosure raised previously in a SIPA submission. The response acknowledged that the “submission of a complaint by a client usually results in the creation of opposing interests” and that “the proposed complaint handling rule will not eliminate this situation.” IIROC has not undertaken to provide a regulation that would serve to ‘manage’ this conflict-of-interest, especially where a client has a meritorious complaint that the firm might be inclined to deny, favouring its own financial interests and avoiding an offer of fair recompense. 

Moreover, the effectiveness of the Rule in achieving the public interest objectives is entirely questionable from a further perspective. These objectives are typically the promotion of “just and equitable principles of trade, the duty to act fairly, honestly, and in good faith”, the fostering of “fair, equitable and ethical business standards and practices” and the promotion of “investor protection”. If these objectives were being “promoted” or “fostered” by means of the present Rule, this would entail, for one, that clients with meritorious complaints who have suffered financial loss should be offered fair compensation by IIROC Member firms. Our own detection of errors, omissions, bias and fallacies in the firm’s responses is confirmed based on years of assisting clients resolve their complaints and published OBSI data. Complainants have also been exposed to made up KYC forms, defective risk profiling and selective non- disclosure of important documents. 

The IIROC rule contains no framing of Member conduct that “promotes” or “fosters” precisely the kind of conduct and outcome, that most people in our society would consider to be “just”, “equitable”, “ethical” and to reflect “fair dealing” in such circumstances. The mere provision that the Member firm should provide a summary of the complaint, the results of its investigation, and a final decision with an explanation is clearly inadequate to achieve these objectives.

An investor-centric substantive response letter should include a statement of facts; reference to the applicable rules , principles and standards on which the decision is based; identification of the files documents and records used in the analysis; and the methodology used for calculating restitution, if offered. This information is essential if the client is going to be able to make an informed decision whether or not to accept the firm’s decision. How is a retail client going to be able to know one way or the other whether the firm’s offer is fair if little information is provided regarding the methodology used to formulate/calculate the offer? The requirement that the firms’ decision should be “fair, clear and not misleading “does not suffice to ensure firms will treat complainants fairly.


Indirect regulation and obtuse language

We have noted that certain qualifications regarding how complaints are to be handled by dealers have been incorporated into the IIROC rule in a curious way that reflects indirect regulation. That is, certain provisions similar to those in the U.K. Financial Conduct Authority (FCA) policy have been incorporated into a requirement that member firms should develop policies and procedures having certain features. Hence , while the  FCA rule directly mandates certain conduct e.g. that firms must investigate complaints “competently ,diligently and impartially “,the IIROC  rule specifies  only that member firms must have in place policies and procedures that address  “the fair and thorough investigation of the complaint”. Or again, while the FCA  rule directly mandates that firms must assess complaints “fairly ,consistently and promptly”, the IIROC  rules specifies only that firms must have policies and procedures that address “the process by which an assessment is made regarding the merit of the complaint”.

Further concerns arise from the fact that the policy and procedures of SRO member firms are subject only to review and approval by private self-regulatory bodies and are inaccessible to those representing investor interests. This is a significant concern given the evidence of inadequacies in the policy development process used by IIROC to this point.

Compare to UK FCA Rule

Systemic Issues

Internal reporting procedures to management in the event of the occurrence of frequent or repetitive complaints is less specific then the U.K. FCA policy which is superior. Moreover, the policy contains no guidance regarding a firms consideration of the interests of other clients when it identifies some systemic problems or compliance failures. In other words, there is no indication that IIROC member firms should consider the interests of clients who have not complained but may have suffered detriment or have been disadvantaged by identified compliance problems. This is a serious deficiency, which raises the question as to why Canadian retail investors merit a lesser degree of protection than those in the UK.

Access to alternative dispute resolution sources

The IIROC 2500B Complaint Handling Rule states:

"Dealer Members must respond to client complaints as soon as possible and no later than ninety (90) calendar days from the date of receipt by the firm. The ninety (90) days’ timeline must include all internal processes (with the exception of any internal ombudsman processes offered by an affiliate of the firm) of the Dealer Member that are made available to the client. The client must be advised if he / she is not to receive a final response within the ninety (90) days time frame, including the reasons for the delay and the new estimated time of completion. "
 
One concern comes into play, where the client must be advised if he/she is not to receive a final response within the ninety (90) days time frame accompanied by reasons for the delay and the new estimated time of completion .The content of this communication with the client needs further specification. The firm should be required at this point to reiterate the 90-day timeline and indicate that the client now has the right to proceed directly to OBSI. As it stands, the way this communication is specified (above) in the current rule is inadequate. Clients need to be informed of their right to proceed to alternative dispute resolution once the allowable timeframe for a substantive response has been reached and not just be given reasons for further delay and a new estimated completion date. Furthermore, the Rule should make it clear that the timeframe is measured in calendar days.

Rule 2500B needs a complete rewrite if fair complaint handling in Canada is to take place.