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.
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 securities market.
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
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.
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.
Canadian investor awareness website discussing abuses allowed by regulatory agencies.
Breach of Trust forum discussions by Canadian Investor Advocates
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:
|engaged in dishonest and unethical practices in the securities business;|
|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;|
|improperly used their client's money for their own personal use;|
|engaged in acts, practices or courses of business which operate as a fraud or deceit on the client; and|
|willfully violated the provisions of the Uniform Securities Act and the securities rules.|
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., there are tens of thousands of investment adviser firms, handling trillions in investor funds, registered with the Securities and Exchange Commission, yet they can expect a visit, on average, only once every 44 years!
The agency simply does not have the manpower to monitor all the smaller investment advisers. This leaves the responsibility to the states and ultimately the investor.
Most boiler room operations deliberately make themselves difficult to investigate:
by tailoring their schemes to operate in locations where specific government regulatory organizations lack definite jurisdictional control;
|by operating in areas where the authorities have limited staff or are busy with more pressing criminal activities;|
|by changing company names or method of operation;|
|by emphasising the urgency of investing right away so victims won't have time to investigate;|
|and by targeting people who may not know how or where to verify that they are legiimate.|
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 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.
News articles on the role of regulatory agencies to combat telemarketing fraud.