The Role of Securities Regulators
Canadian Securities Regulators
In the large framework of Canadian securities regulation, there
are various government administrative agencies which are responsible
for the securities legislation within their respective jurisdictions.
There are also self-regulatory organizations such as the Investment
Dealers Association of Canada and the Canadian stock exchanges,
which have the power to discipline members and securities issuers.
Government Regulators
The primary goal of the Securities Act, which is regulatory in
nature, is the protection of the investor but other goals include
capital market efficiency and ensuring public confidence in the
system. They try to be aware of potential signs of market manipulation
such as market dominance, price leadership, high closing etc.
The mandate of the Enforcement Division of Securities Commissions
is to protect the investing public through the investigation of
complaints and the enforcement of the Securities Act through administrative
proceedings. The decisions of a hearing panel can see a respondent
suspended or even barred from the industry. Substantial fines can
also be levied.
The provincial securities commissions and administrators have
formed a national group to work towards making securities regulations
consistent and harmonized across Canada. This group is called the
Canadian Securities Administrators (CSA).
Accessing Company Information
SEDAR is the System for Electronic Document Analysis
and Retrieval, the electronic filing system of the Canadian securities
regulatory authorities and provides a database of corporate information
such as annual reports, financial statements, news releases and
prospectuses on Canada's publicly listed companies. It was developed
by the Canadian Securities Administrators and CDS INC., a subsidiary
of the Canadian Depository for Securities (CDS), which acts as
the national depository for securities held in Canada.
Investors may access information on listed companies prior to
investing. Red flags should be raised if your "opportunity" is
not listed at www.sedar.com
Limited Protection
It should be noted that the Canadian Investor Protection Fund
(CIPF) only covers customers' losses of securities, cash balances
and certain other property such as segregated insurance funds that
result from the insolvency of a Member.
CIPF does not cover customers' losses that result from
other causes such as changing market values of securities, unsuitable
investments or the default of an issuer of securities. Also,
the customer's account must be with a CIPF Member.
Self-Regulation
The Investment Dealers Association is responsible for the regulation
of most of its Members. Each of the stock exchanges looks after
its own market, be it for stocks, options, futures or all three.
The IDA monitors the bond and money markets. An investment dealer
may be a member of both the IDA and the stock exchanges.
As the self-regulatory organization of the Canadian securities
industry, the Investment Dealers Association enforces rules and
regulations regarding the sales, business and financial practices
of its "member" firms. The IDA investigates complaints
and will impose penalties where regulatory violations have taken
place. The IDA does not have the regulatory authority to compensate
clients. That is a matter for the legal system, either through
arbitration, where it is available, or the courts.
Resolving Complaints With Members of the Investment Dealers
Association
As one of the last resorts in addressing losses you feel were
incurred by the actions of your stockbroker, you may consider the
process of arbitration, which members of the IDA are obligated
to follow once you have taken all other internal steps to rectify
the issue.
What is arbitration?
Arbitration is a method of resolving a dispute in which the parties
to the dispute ask an independent arbitrator to listen to their
facts and arguments and then decide how the dispute should be resolved.
An arbitrator's decision is binding. In choosing arbitration,
the parties give up the right to pursue the matter further through
the courts and they sign an agreement to this effect at the beginning
of the arbitration process. Parties can choose to be represented
by a lawyer during the arbitration process but this is not a requirement.
Arbitrations are conducted by a neutral agency which provides
the arbitrators who are usually retired judges and lawyers knowledgeable
about the securities industry. All aspects of the proceedings are
confidential and all the hearings private, unless both parties
agree otherwise.
What are the advantages of arbitration?
Going to court can involve significant costs and lengthy waits.
In some provinces, the average time before a case goes to trial
is two years and the costs for each party can average $37,500.
In comparison, the IDA program is structured to ensure that a typical
complaint can be resolved within a time frame of approximately
three months at a fraction of the cost. Arbitration is particularly
appropriate when the amounts in question are too small to warrant
high legal costs.
What does arbitration cost?
Total costs (including a filing fee, the arbitrator's hourly rates,
room rentals and other disbursements) can be expected to range
between $3,000 to $4,000 for a typical dispute. It's not unusual
for a typical dispute to be handled in an arbitration session lasting
less than a day.
Costs are generally split equally between the parties, but the
arbitrator can make a different determination. Each party is responsible
for their own legal fees, if they choose to be represented by counsel.
How does the arbitration program work?
It's important to realize that the program is available solely
at your option. If you decide to resolve a dispute through the
arbitration process, participation by the IDA Member firm is mandatory.
It's your choice.
Before arbitration can be considered, you must try to resolve
the problem with the Member firm. The problem can be discussed
with the investment advisor or, if that fails to resolve the problem,
with a more senior person in the organization, such as the branch
or sales manager, or the firm's compliance officer. If the dispute
is still not resolved, you may then proceed to arbitration.
In general most fraudulent operations do not belong to any industry
association, so this process is unavailable to their victims.
Role of U.S. Securities Regulators
Securities regulators investigate complaints against persons,
business entities, corporations, and broker-dealers alleged to
have violated licensing, registration, or antifraud provisions
of Securities Laws which fall within their jurisdiction and to
the extent permitted by law.
They investigate alleged violations of securities law and have
the authority to take administrative or civil action or make criminal
referrals against persons or entities who are alleged to have violated
those laws.
They are authorized to investigate and prosecute violations of
law but are unable to cancel any agreement or contract, order that
your money be refunded, give legal advice or act as your attorney,
or act as a court of law. They cannot summarily order a rescission
or require restitution for your case.
They do not have any authority or control over how a company conducts
its internal business affairs. If you have lost money or object
to the way a business is being run, your personal attorney can
advise you on whether to proceed with a private cause of action.
Complaint Investigation and Action. Once a complaint
is forwarded for action, it is assigned to a staff person, who
may be a compliance officer, investigator, or other professional
staff. Due to the sheer volume of cases under investigation, complaints
may not even be assigned for several months. The inquiry or investigation
may involve interviews of witnesses and the production and examination
of records through the legal process, which can also be time-consuming.
If violations are found they may initiate appropriate civil or
administrative action, or make a criminal referral to a law enforcement
agency.
Revocation of License. The revocation of a securities
agents license is in the public interest when their actions have
demonstrated conduct which is a threat to the investing public.
Such as when they have:
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engaged in dishonest and unethical
practices in the securities business; |
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made false statements of material
fact and omitted to state material facts necessary in order
for the client to knowingly invest in the purchase and sale
of a security; |
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improperly used their client's
money for their own personal use; |
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engaged in acts, practices or
courses of business which operate as a fraud or deceit on the
client; and |
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willfully violated the provisions
of the Uniform Securities Act and the securities rules. |
Litigation. When civil or administrative action
is taken, the process enters the legal phase, which can involve
administrative hearings or court. If a criminal referral is made,
the case will be handled by a law enforcement agency in the criminal
courts.
Once litigation occurs, you may be required to appear and testify
at a hearing, in front of a grand jury, or at trial. Litigation
may result in the issuance of a Cease and Desist Order, a final
order, conviction, settlement, or some other remedy as may be determined
by a hearings officer or the courts. At the conclusion of litigation
the case file is usually closed.
Civil Jurisdiction Only
The Securities Exchange Commission has only civil jurisdiction
so they cannot put people in jail. When the rewards of fraud are
high enough these cons are simply not deterred by the prospect
of civil injunctions, or even stiff monetary penalties, so other
agencies must be brought in to file criminal charges.
For example, the Santa Cruz District Attorney's Office recently
prosecuted an individual who had raised about $190,000 through
the fraudulent sale of securities over the Internet. He simply
stole the money he raised and used it to buy numerous items, including
stereo equipment and groceries. He was successfully prosecuted
and received a ten year jail term in a state penitentiary.
Under current law, if the SEC bars a broker from the industry,
even for fraud, they remain free to come back as a so-called "promoter",
over whom they have no direct regulatory jurisdiction. This creates
an avenue for corrupt brokers to continue to deceive investors.
Monitoring the Problem
The experience of regulators patrolling the Internet leads them
to conclude that the scams taking place online are the same basic
scams that have long plagued our markets. They mainly break down
into three categories. The first is sham offerings. Here, con artists
create fancy web sites and use mass e-mails, or "spam," to
pitch securities in offerings that either do not exist or are misleading.
These scams are often exotic. For example, they have seen interests
pitched in eel farms, coconut plantations, and even projects to
explore and mine near-earth asteroids.
In an effort to root out online investment fraud, the Securities
and Exchange Commission is considering using a software program
that would monitor Web sites and discussion groups and red-flag
unusual activity.
William McDonald, assistant commissioner of enforcement for the
California Department of Corporations, whose office deals with
investment fraud cases, said that he and other states have been
working with the National White Collar Crimes Center and the Los
Alamos Laboratory in New Mexico to come up with software to automate
the monitoring process.
Problem versus Resources
The need for regulations and the organizations to monitor online
investment activity is tied to an increase in the number of Internet
investing fraud cases. The SEC gets between 200 to 300 complaints
daily.
Officials say that even if the state security regulators, the
SEC and the National Association of Securities Dealers all put
aside their other tasks in a massive bid to shut down online investment
scams, it is doubtful that fraud on the Internet could be stamped
out altogether.
In the U.S., over 22,000 investment adviser
firms, entrusted with $10 trillion in customer funds, are registered
with the Securities and Exchange Commission, yet according to Chairman
Arthur Levitt, they can expect a visit, on average, only once every
44 years! He has stated publicly that his agency simply does not
have the resources to inspect and investigate smaller investment
advisers. So, the responsibility is left to the states and ultimately
the investor.
Elusive Operations
Most boiler room operations deliberately make themselves difficult
to investigate:
Inform Yourself
An informed investor looks first at the free company filing reports
from the SEC's EDGAR database at www.edgar-online.com Just
type in the company's name, and you can retrieve every report it
has filed with the SEC in the past five years. StockMarketYellowPages allows
you to search for public companies based upon descriptions.
This type of research may not be suitable for all investors as
the filed information, though required, is certainly not that understandable
to the average investor. Nor is it guaranteed to reflect the truth
regarding a company's finances or operations.
Don't Get Your Hopes Up
Based on this former SEC official's website at www.RealityAtTheSEC.com
the public expects far more from this agency than they can actually
deliver. A most informative but discouraging look at how the SEC
works. ( was down when I last looked )
The Central Registration Depository database, known as the CRD, is
owned jointly by state regulators and the NASD and
is accessible to the public by means of a phone call. It contains
the employment and disciplinary histories on the securities industry's
nearly 600,000 stockbrokers and 5,600 brokerage firms.
State regulators encourage all investors to contact them to check
out brokers and firms before making investments. Disciplinary information
in the CRD includes customer complaints,
arbitration's and actions by state, industry and federal regulators
and law enforcement agencies.
A newer system, know as "Web CRD," will
allow regulators to proactively search the database and generate
reports of bad brokers and troubling trends.
Web CRD - public data
on members from the National Association of Securities Dealers
The Regulatory Intelligence Agency www.the-ria.com is
a new international resource for police, government agencies, consumer
and investor protection officials and financial regulators. It
provides names and Wanted posters of individuals involved in fraud,
scams, insider dealing, money laundering, insider trading, financial
crime and regulatory financial offences.
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