Firm fires broadside at CSA, withdraws from consultation

Industry reform proposals likened to deciding whether to ban poison from grocery stores

Firm fires broadside at CSA, withdraws from consultation

A firm dedicated to investor protection and education has said it will no longer take part in the Canadian Securities Administrators’ reform consultation process, branding the proposals “disrespectful”.

In an open letter explaining its decision to withdraw from the discussion on changes to best interests, deferred sales commissions and embedded commissions, Kenmar Associates said that consulting on “such an obvious case of financial assault on investors” is a waste of time.

The letter added that the company had spent hundreds of person-hours on regulatory reform “with no positive result over the past decade”.

It read: “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 and 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 firm accused the CSA of ignoring breaches of the basic tenets of securities law – dealing honestly, fairly and in good faith with clients – and of not warning investors via alerts and education that it is “permitting this broad daylight robbing of their hard-earned money”.

It also turned its ire on the failure of the CSA to get to what it believes is the root of the problem – 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?”

In pulling out of the consultation period, Kenmar said it was calling for the cancellation of the consultation as well as 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 or will not provide.

The letter said: “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 continues to consult, dragging out the agony for investors for another year or two and more if there is an extended transition period.”