Investor advocacy group calls on watchdogs to take harder stance on activities that are 'close to the fraud line'
Fraud Prevention Month is taken as a chance to remind investors to be wary of fraudulent practices, but it also represents an opportunity for securities regulators to protect investors. And as one investor advocate suggests, it can also be an appropriate time for watchdogs to get tougher on similarly harmful activities.
“Regulators routinely urge investors to check the registration of any persons or company offering an investment opportunity and to review the investor materials on their websites,” said Kenmar Associates in a letter to regulators. “While checking registration is certainly a good idea, regulators allow activities that while not exactly fraudulent, are real close to the fraud line.”
To reduce the ongoing financial assault on retail investors, Kenmar suggested that the online National Registration Search database be updated to inform investors whether a registrant has been approved for outside business activities. The Ontario Securities Commission’s successful whistleblowing program, the letter added, might also be replicated through a similar program across all Canadian registrations to reduce fraud.
Regulators can also take the opportunity to set enforcement examples on what may be described as fraudulent misrepresentation, Kenmar argued, referring to rules that forbid representatives from using business names or designations of qualifications that could mislead clients as to the qualifications or proficiency of the representative.
“Charging investors for active management but not providing it may not be fraud, but it’s close enough,” the letter said. “Clamp down on mutual fund companies that practice closet indexing.” Similarly, it called for a requirement that discount brokers give rebates to investors who own Series A mutual funds on their platforms, as those investors effectively paid millions in trailing commissions monthly for advice they didn’t get.
Since prohibitions preventing investment and mutual fund dealers from selling DSC mutual funds won’t take effect until June 1, 2022, Kenmar called on regulators to take aggressive enforcement action against mis-selling or, alternatively, move the effectivity date forward.
The letter also reiterated previous recommendations to better protect investors who were wronged by dealers, including granting a binding-decision mandate to the Ombudsman of Banking Services and Investments and running a compliance review on complaint-handling processes, particularly in relation to low-ball settlements.
Kenmar also took aim at how stockbrokers and fund salespersons are able to alter key account documents without client approval and, when caught, are generally treated with a “light-touch” regulatory enforcement approach. In the worst cases, the letter said, they can forge client signatures and not fear fraud charges; some offending brokers have been banned from the securities industry but were able to find second careers as insurance agents selling segregated funds, life insurance, and annuities.
