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Borrowing Trouble by akgame


									 6          NOVEMBER 2005 ADVISOR’S EDGE REPORT                                                                                                                                                              

                                                                                                                     wasn’t a fiduciary relationship.          Lending activities at day-trading   up, though, says McGuinness.
Borrowing Trouble                                                                                                       The MFDA’s not alone. The           firms also caught regulatory atten-    “We’ve seen people who borrow
                                                                                                                     Investment Dealers Association         tion during the late 1990s. Using a    money from clients and that’s gen-
Securities regulators frown on advisors                                                                              recently expelled an Alberta regis-    process called “journalling” day-      erally inappropriate,” she says.
who borrow money from clients                                                                                        trant for a borrowing scheme that      trading firms facilitated the lend-        In some cases, the arrangements
                                                                                                                     took thousands out of the pockets      ing of money among traders to          emerge when an advisor starts par-
                                                                           covered in the MFDA’s rules. It’s         of his clients. His multi-year pyra-   ensure margin calls were met.          ticipating in an investment club.
                                                                           generally prohibited, as are the          mid scheme used the proceeds of           Similar surveillance systems are    Sometimes, advisors join clubs
BY PHILIP PORADO                                                           extension of credit to clients and        recent borrowings to pay off older     employed at Canadian firms.            with an eye toward becoming a de
                  Sure, you might                                          the selling of securities on margin.      loans. He also funnelled money into    According to several branch man-       facto portfolio manager and, ulti-
                  be able to borrow                                        The exceptions are generally situa-       offshore investments that his firm     agers, exception reports generated     mately, generating themselves
                  money from a                                             tions in which the borrowers are          and his clients knew nothing about.    daily, weekly and monthly tell man-    additional income. “They could
                  client at a better                                       family members of the advisor.                                                   agers and compliance officers when     have their own money in it and say,
                  rate than you                                                Bottom line, according to             An advisor needs to                    buying spikes take place in reps’      ’This is an appropriate strategy,’”
could get from a bank. But just                                            MFDA compliance director Karen            ask himself whether                    personal accounts. “If something       says McGuinness. “But in an
because you can, doesn’t mean you                                          McGuinness, is that the self-regu-        the client would make                  looks fishy,” says a branch manager    investment club, it’s supposed to be
should.                                                                    latory organization doesn’t want                                                 at a bank-owned firm, “the rep         everyone’s joint decision.”
                                                                                                                     the same loan to
   It does happen, though, and that’s                                      advisors putting their own interests                                             will be called into an office and          Worse, a branch manager says
why the Mutual Fund Dealers                                                before those of their clients.            someone with whom                      asked, ‘What’s going on?’”             he’d likely view an advisor taking a
Association chose to issue a notice                                        “We’re asking [advisors] to bring         there wasn’t a fiduciary                  John Rothwell, president of         lead role in an investment club as
outlining how it expects advisors to                                       things to their compliance officers       relationship.                          Wellington West Capital, was sur-      engaging in outside business activ-
behave. The guidance acknowledges                                          if they think it’s a conflict of inter-                                          prised the MFDA felt compelled         ity. If an advisor was skimming
the MFDA’s rules don’t explicitly                                          est,” she says. “And it’s letting the        The problems aren’t unique to       to issue its notice. The idea of       extra commission off that kind of
prohibit borrowing from clients, but                                       dealer know that once this is             Canada. In the U.S., both the          borrowing from clients is nonsen-      arrangement, or borrowing money
then quickly states such behaviour is                                      brought to their attention they           National Association of Securities     sical in his view and such an obvi-    from other club members to pur-
clearly a conflict of interest and                                         have a responsibility to consider         Dealers and the New York Stock         ous conflict of interest. Rothwell     chase investments, then a manager
should be prohibited.                                                      the conflict issue.”                      Exchange instructed compliance         says Wellington is working up a        has to ask why that rep didn’t sim-
    It goes on to say, “borrowing                                              McGuinness says a lot of advi-        departments to watch trading in        mortgage lending business and is       ply bring the club member into the
from a client by either the member                                         sors figure they’re good for the          reps’ personal accounts to see if      going to make sure it’s clearly sep-   office, fill out the proper paper-
or approved person raises a signif-                                        money and can pay the client 3%.          more stock was being bought than       arated from the other investment       work, and open a client account.
icant and direct conflict that in                                          But, at the end of the day, an advi-      a person would reasonably have         operations to ensure there’s no            Absent some good answers, the
almost all cases will be impossible                                        sor needs to ask himself whether          cash to purchase. In theory, that      confusion in clients’ minds about      advisor might find himself a mem-
to resolve in favour of the client.”                                       the client would make the same            tips a compliance officer as to        what’s going on.                       ber of the stripped-of-registration
Lending, by contrast, is specifically                                      loan to someone with whom there           whether he’s borrowing to trade.          Lending arrangements do crop        club.                            AER

IDA Wants It All Continued from page 1                                                                               increase efficiencies. “There are      there’s more focus on independ-        he says he plans to stay in his cur-
                                                                                                                     simply too many regulators for a       ence and conflicts of interest.”       rent role on the regulatory side.
Tack on an MFDA membership                                                 registrations.” He warns, however,        country our size.”                        Separating the IDA’s dual roles     Additional meetings will be held
and the regulation costs can jump                                          the longer these two organizations           The MFDA wouldn’t elaborate         removes a significant stumbling        with member firms and a vote is
anywhere from $70 to $93 per                                               stay apart, the more entrenched           on its reasons until its board had     block to a marriage between the        expected in mid-December. If a
million dollars of assets under                                            the MFDA will become, making it           a chance to review them, which is      two organizations, but it might be     majority of the IDA’s approxi-
administration, depending on the                                           more difficult for the two bodies         expected to be around the middle       too late to make a difference – a      mately 200 firms approve, the
size of the firm.                                                          to merge later.                           of November – roughly two              point Oliver freely admits. “We        restructuring plan will go forward.
   John Novachis, president of the                                             The MFDA’s members would              weeks after they made their deci-      couldn’t have done the merger              “They finally figured out that
mutual fund dealer at IPC                                                  like to see the two SROs fused            sion.                                  without moving on this issue, but      they can’t row and steer at the same
Investment Corp., agrees. “It                                              into something resembling the                The IDA is already setting the      that doesn’t guarantee that it’s       time,” says investor advocate
wouldn’t be a bad idea to have one                                         U.S. model, which doesn’t have the        stage for its next attempt to merge    going to happen.”                      Robert Kyle, a staunch critic of
organization looking after the two                                         equivalent of the MFDA. Under             with the MFDA. Since the                  In the meantime, the IDA is         the association. “But it’s a good
                                                                           that structure, a single SRO is des-      MFDA snubbed its merger pro-           turning its attention towards          step, it will relieve the public of
                       John Milne, senior vice-
                                                                           ignated to issue licences and con-        posal, the IDA has endorsed a          bringing Market Regulation             thinking there’s conflict if they are
                       president, Rogers Publishing                        duct exams.                               plan to spin-off its trade associa-    Services into its fold, although as    truly separated.”
                       Ltd., Healthcare & Financial
                       Services Group, is pleased                              Given the number of hybrid            tion function into a separate          of press time talks had not begun.         Still, Kyle feels the regulatory
                       to announce the appoint-
                       ment of Garth Thomas to                             products that don’t clearly fall          organization and focus solely on       RS’s Tom Atkinson didn’t want to       environment won’t change signifi-
                       the position of publisher,
                       Advisor’s Edge magazine,
                                                                           under the jurisdiction of either the      self-regulation.                       say much before receiving a formal     cantly until Canada’s SROs get
                       Advisor’s Edge Report                               MFDA or the IDA, there is a                                                      proposal. “We’re always looking at     legislative power to enforce rules.
newspaper and website. Since joining
Rogers in 1997 Garth has consistently demon-                               pressing need to have one regula-         “There are simply too                  ways to make regulation more effi-         “The IDA has a contract with
strated the customer affinity, enthusiasm and
strong work ethic that have earned him the                                 tor to address these types of             many regulators for                    cient and more effective,” he says,    its members, not with the public
respect of his clients and coworkers. In his new
role Garth will be responsible for the day-to-day
                                                                           issues, says Jim Rogers of Rogers         a country our size.”                   adding it will be up to the board to   or the government. Therefore, the
management of these properties, building upon                              Group Investment Advisors.                                                       debate and decide.                     public won’t be protected whether
their excellent track record, and leading the
advisor sales and editorial teams to capitalize on                             Take Portus Asset Management              Critics have long complained          As for the new trade association,   the IDA separates or not. The
their many opportunities.
     Garth will report to Paul Williams who is now                         as an example, he says. It provided       that the IDA’s advocacy role con-      Oliver, who has been travelling the    SROs still do not have the proper
responsible for all of Rogers Publishing’s
Financial and Advisor Services properties and
                                                                           mutual fund reps the ability,             flicted with its regulating brokers    country explaining the proposed        tools to do the job.”
took Rogers into the retail advisor market in                              through a referral process, to do         and dealer firms. In the past, IDA     change to member firms, expects            As for the MFDA, its letter
1998. The consolidated group includes such
market-leading titles as Benefits Canada,                                  something that they couldn’t do           president Joe Oliver maintained        the new trade association will be      seemed to keep the door open to a
Canadian Investment Review and their sister
conference and online businesses.                                          otherwise; that is to say sell a          there was no inherent conflict in      housed in a different building with    merger with the IDA, but its mem-
Advisor’s Edge, Advisor’s Edge Report,, Benefits Canada,
Canadian Investment Review and Canadian Healthecare Manager are
                                                                           product that is available ‘only’ to       the association’s structure, but now   a separate board of directors.         bers will have to wait until it
a part of Rogers Publishing, a division of Rogers Media Inc., a division
of Rogers Communications Inc. (TSX: RCI; NYSE: RG) Rogers
                                                                           IDA members, Rogers explains.             says times have changed.                  “We have about 300 staff, and       releases the reasons for its deci-
Communications Inc. is a diversified Canadian communications and
media company. It is engaged in cable television, high-speed Internet          “We are being drowned with                “We continue to believe that the   maybe 25 people will move,” he         sions. Of course, if you ask its
access and video retailing through Canada’s largest cable television
provider, Rogers Cable Inc.; in wireless voice and data communications
services through Canada’s leading national GSM/GPRS cellular
                                                                           regulatory requirements, including        dual structure provides a substan-     says. Structurally it won’t be much    members if there is an advantage
provider, Rogers Wireless Communications Inc.; and in radio, television
broadcasting, televised shopping and publishing businesses through
                                                                           whopping fees,” says Rogers. “It is       tive advantage to the association,     of a change since only about 15%       for keeping the IDA and MFDA
Rogers Media Inc.
                                                                           just annoying.” He believes the           but along with that there’s an opti-   of the IDA’s budget goes to the        separate, as Novachis says, “nothing
                                                                           markets will be served better if the      cal problem,” Oliver conceded in       trade association.                     jumps to mind.”                 AER
                                                                           two organizations were merged             an interview. “Perception has been        Although Oliver has been the
                                                                           since it would reduce costs and           evolving over the last few years –     face of the IDA’s lobbying efforts,    With files from Doug Watt

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