From the Bottom UpFrom the Bottom Up

Presentation of EvidencePresentation of Evidence onon

THE FIVE YEAR REVIEW COMMITTEE FINAL REPORT: THE FIVE YEAR REVIEW COMMITTEE FINAL REPORT: REVIEWING THE SECURITIES ACT (ONTARIO)REVIEWING THE SECURITIES ACT (ONTARIO)

to theto the

Ontario Standing Committee Ontario Standing Committee

on on

Finance and Economic AffairsFinance and Economic Affairs

August 2004August 2004

Robert KyleRobert KyleInvestor AdvocateInvestor Advocate

Toronto, ONToronto, ON

Self–regulation, in the securities industry, has been a Self–regulation, in the securities industry, has been a MAJOR FAILUREMAJOR FAILURE

““The major failure has been at the SRO The major failure has been at the SRO (self-regulatory organization) level. (self-regulatory organization) level.

Whether you are talking about research or Whether you are talking about research or mutual funds or specialists, there has been mutual funds or specialists, there has been a failure to properly question a failure to properly question behaviorbehavior that that they know about before anyone else. they know about before anyone else.

Every one of those issues was understood Every one of those issues was understood by the industry and not responded to.”by the industry and not responded to.”

On the WarpathOn the Warpath, , Eliot Spitzer, New York State Attorney General, New York Post, 25 January Eliot Spitzer, New York State Attorney General, New York Post, 25 January 20042004

Self Regulation has done nothing to Self Regulation has done nothing to Protect InvestorsProtect Investors

“Self Regulatory Organisations (SROs) have scant incentives to monitor quality and expose fraud because fraud exposure is often interpreted by consumers as a bad signal of SRO quality.”

Can Self-Regulation work?: A game-theoretic approachMay 18, 2001, referred to in Investment Executive, June 2003

“Self-regulation has been an abysmal failure — an absolute, abject, complete zero.

It has not done anything to protect investors.”

Self-regulating groups under pressure to change, Eliot Spitzer, New York State Attorney General, Investment

Executive, June 2003

“…“…the document (Guidelines) the document (Guidelines) is not currentis not current, , nornor has has it been it been appliedapplied to our knowledge by staff of the to our knowledge by staff of the Division (IDA Enforcement) Division (IDA Enforcement) in any investigationin any investigation…”…”

IDA Legal Counsel, Letter of 01 December 1998IDA Legal Counsel, Letter of 01 December 1998

Condition of Recognition Order

““The Guidelines for Investigations of Supervisory Practices The Guidelines for Investigations of Supervisory Practices are to be are to be followedfollowed and and updatedupdated….”….”

October 1995, 18 OSCB 5293October 1995, 18 OSCB 5293

OSC and IDA Representations to the Ontario Information Privacy Commission (June 2001June 2001)

(in a bid to keep the Guidelines secret from the public)

…the Guidelines advise as to when and how the IDA will conduct investigations of member firm supervisory functions.

IDA Breach of Recognition OrderIDA Breach of Recognition Orderand OSC Corroborationand OSC Corroboration

“Nor is there effective oversight from other quarters. Politicians know little about securities regulation and care less. The Ministry of Finance struggles valiantly, but has neither the personnel nor the expertise to function as an effective cop. And the courts have given the regulators near carte blanche to make decisions that are perceived to be within their area of expertise.”

The Air Canada 'fine' is 'manifestly illicit', Jeff MacIntosh, Law Professor, Director of Capital Markets Institute, University of Toronto

National Post, 31 July 2001

OSC Oversight of IDA is a FailureOSC Oversight of IDA is a Failure

Investor Request for OSC Investor Request for OSC Analysis and Review of the Analysis and Review of the IDAIDA

The OIPC ordered the document be released:

“In essence, the position of the OSC and the IDA is that if the record is disclosed, the IDA will be reluctant to cooperate with the OSC in its reviews.

This submission lacks credibility.

I order the OSC to disclose the record to the appellant …”

Order PO-2206, [2003] O.I.P.C. No. 34 (QL)

OSC Representations to Information Privacy Commission

“The IDA has previously indicated to (the) OSC”…. “that the IDA would be unlikely to provide useful critical commentary on its own performance should that commentary be publicly available.”

Order PO-2206, [2003] O.I.P.C. No. 34 (QL)

NONO ACCOUNTABILITY TO PUBLICACCOUNTABILITY TO PUBLIC

The Ontario Court of Appeal ruled on June 25, 2003 in The Ontario Court of Appeal ruled on June 25, 2003 in Morgis v. Thomson Kernaghan & Co [2002] O.J. No. 4057, that the IDA has [2002] O.J. No. 4057, that the IDA has no duty of care to the individual investor.no duty of care to the individual investor.

Conflicts of Commitment and Conflicts of Commitment and Conflicts of Interest at IDA.Conflicts of Interest at IDA.

Guidance for Investors posted on OSC web siteGuidance for Investors posted on OSC web site

Where the registered firm is a member of a self-regulatory organization Where the registered firm is a member of a self-regulatory organization (“SRO”), either the IDA or the MFDA, you should direct your complaint to (“SRO”), either the IDA or the MFDA, you should direct your complaint to the Enforcement Division of the appropriate SRO.the Enforcement Division of the appropriate SRO.

It’s almost like having one lawyer represent both the bandit and the It’s almost like having one lawyer represent both the bandit and the victim, while promising to act in the best interests of both at the same victim, while promising to act in the best interests of both at the same time.time.

New Complaint System on the WayNew Complaint System on the Way,, The London Free Press, 23 July 2001 The London Free Press, 23 July 2001

… … there is a well-documented propensity for specialized bodiesthere is a well-documented propensity for specialized bodies such assuch as agencies agencies or regulatory commissionsor regulatory commissions to to develop very close relationsdevelop very close relations with with regulated entitiesregulated entities. . Specific mechanisms to assist public interestSpecific mechanisms to assist public interest and community based interveners in and community based interveners in policy-making and regulatory processes policy-making and regulatory processes are needed to counteract this tendencyare needed to counteract this tendency..

Drinking Water Protection in Ontario: A Comparison of Direct and Alternative Delivery Models: A Comparison of Direct and Alternative Delivery Models , , Issue Paper Prepared for Part II of the Walkerton InquiryIssue Paper Prepared for Part II of the Walkerton Inquiry

On December 1, 2001, in the United Kingdom, the FSA became the single regulator On December 1, 2001, in the United Kingdom, the FSA became the single regulator of financial services, banking and insurance. It assumed responsibility for of financial services, banking and insurance. It assumed responsibility for supervising firms formerly regulated by SROs. There is no reliance upon SROs supervising firms formerly regulated by SROs. There is no reliance upon SROs under the new U.K. Act. under the new U.K. Act.

… … one of the reasons for abandoning self-regulation is that SROsone of the reasons for abandoning self-regulation is that SROs were viewed as were viewed as associations that associations that represented their members’ interests over those of the investing represented their members’ interests over those of the investing publicpublic..

5 Year Review of the Ontario Securities Act Draft Report

IDA – Industry Regulator, Registered Lobbyist and IDA – Industry Regulator, Registered Lobbyist and Industry RepresentativeIndustry Representative

Sitting on the FenceSitting on the Fence

The IDA is Canada's only national entity with delegated responsibility for securities regulation and investor protection.

- Joe Oliver, President of IDA

Senate Standing Committee on Banking, Trade and Commerce, Evidence 02 November 1998

The IDA is merely an unincorporated voluntary Association of Securities Dealers governed by a constitution, bylaws and regulations which deal with the conduct, management and control of the Association’s affairs.

Although the IDA is not a statutory body, it does operate within a statutory regime.

IDA Factum filed with the Ontario Superior Court of Justice, Morgis v. Thomson Kernaghan & Co [2002] O.J. No. 4057

IDA 2004 Conference PamphletIDA 2004 Conference Pamphlet

“Cunning and clever, successful in outsmarting adversaries to achieve goals.”

““The regulation of financial services in Canada, according to Dr. The regulation of financial services in Canada, according to Dr. Yudelman, “remains a consumer’s nightmare, a tangled, confused Yudelman, “remains a consumer’s nightmare, a tangled, confused structure divided by type of government, type of financial service, structure divided by type of government, type of financial service, government regulation versus self-regulation, and by prudential and government regulation versus self-regulation, and by prudential and market regulation.””market regulation.””

The Scorpion and the FrogThe Scorpion and the Frog, A Consumer View of Canadian Financial Services and Ways A Consumer View of Canadian Financial Services and Ways to Transform Them; Consumers Council of Canada, June 2001to Transform Them; Consumers Council of Canada, June 2001

A Consumer’s NightmareA Consumer’s Nightmare

The consequences of inaction may well The consequences of inaction may well force a greater dependency on the social force a greater dependency on the social safety nets provided by government.safety nets provided by government.

NO TransparencyNO Transparency

Somebody said to me – ‘Boy if we have a scandal in Canada, Somebody said to me – ‘Boy if we have a scandal in Canada, we are going to have to be as transparent as the United States.’ we are going to have to be as transparent as the United States.’

And I said ‘Well, if we are, we could just destroy our markets.’ – And I said ‘Well, if we are, we could just destroy our markets.’ – David Brown, O.S.C. ChairmanDavid Brown, O.S.C. Chairman

Scandal would kill market, OSC head says, , Globe and Mail, 20 September 2002Globe and Mail, 20 September 2002

"We're not going to shrink from our responsibility to "We're not going to shrink from our responsibility to stand up for the public interest," he said. "We're stand up for the public interest," he said. "We're going to protect the Ontario public.”going to protect the Ontario public.”

Ontario Premier Dalton McGuintyOntario Premier Dalton McGuinty

Ontario won't give in on 407, Canadian Press, 12 August , Canadian Press, 12 August 20042004

Re: License plate denial on the basis of  non-payment of tolls for Re: License plate denial on the basis of  non-payment of tolls for use of Highway 407.use of Highway 407.

"This matter highlights the need in "This matter highlights the need in privatization initiativesprivatization initiatives for for accountability mechanismsaccountability mechanisms which will enable the government to which will enable the government to ensure that the ensure that the private sector partner acts fairly with the publicprivate sector partner acts fairly with the public.”.”

Clare Lewis Q.C., Ombudsman Ontario, Ombudsman Ontario Newsletter, Clare Lewis Q.C., Ombudsman Ontario, Ombudsman Ontario Newsletter, June 2000June 2000

Not all Ontarians or Canadians travel the 407, but they must invest Not all Ontarians or Canadians travel the 407, but they must invest through an IDA/MFDA member for the majority of their investments – through an IDA/MFDA member for the majority of their investments –

Who will protect investors that need help? Who will protect investors that need help?

PrioritizePrioritize

Government best serves the people when it listens. Government best serves the people when it accommodates. We need to do more in this Legislature to protect the public good, to listen to what the public wants, to hear their criticisms and to make amendments where those criticisms are justified.

Michael Prue, Member Standing Committee on General Government

STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS

HANSARD, 01 December 1994, Securities Amendment Act, 1994

I think I'm persuaded by the argument of not pursuing judicial review, just because of my own view that if there are too many avenues available for constant second-guessing the commission, we run the risk of bogging ourselves down, and if the commission is not performing its role, I think we fix the commission.

Gerry Phillips, Finance Critic, Member - Standing Committee on Finance and Economic Affairs

Bill 179, Time Allocation, Hansard, 28 October 2002

Judicial ReviewJudicial Review

The Wealth of NationsThe Wealth of Nations

"The interest of the dealers, however, in any particular branch of trade or "The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, manufactures, is always in some respects different from, and even opposite to, that of the public.that of the public.

The proposal of any new law or regulation of commerce which comes from this The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.most scrupulous, but with the most suspicious attention.

It comes from an order of men whose interest is never exactly the same with It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have upon many occasions, both oppress the public, and who accordingly have upon many occasions, both deceived and oppressed it."deceived and oppressed it."

Adam Smith, The Wealth of Nations (1776), Book One, Ch. XI, at p. 358, para. 262

OSC’s Measure of SuccessOSC’s Measure of SuccessRebecca Cowdery, the former head of the investment funds team at the Rebecca Cowdery, the former head of the investment funds team at the OSC, dismisses suggestions that the new rules favour funds. OSC, dismisses suggestions that the new rules favour funds.

""If the industry won, so did investorsIf the industry won, so did investors," said Ms. Cowdery," said Ms. Cowdery

I leave it to you to decide whether Adam Smith or I leave it to you to decide whether Adam Smith or Rebecca Cowdery has a better grasp on the criteria you Rebecca Cowdery has a better grasp on the criteria you as a committee should use to gauge the success of the as a committee should use to gauge the success of the current regulatory regime current regulatory regime vis-vis-àà-vis-vis ensuring the public ensuring the public interest.interest.

Who's standing up for the investor?,Who's standing up for the investor?, Globe and Mail, 22 June 2004 Globe and Mail, 22 June 2004

We need an independent tribunal We need an independent tribunal charged with a clear mandate of charged with a clear mandate of investor protection, empowered by investor protection, empowered by legislation to decide issues of law, and legislation to decide issues of law, and to order financial redress for abused to order financial redress for abused investors whenever appropriateinvestors whenever appropriate.

INVESTORS DESERVE BETTERINVESTORS DESERVE BETTER

FIX The SYSTEM!!!FIX The SYSTEM!!!