Securities law "exemptions”. A license to steal?

Securities law "exemptions”. A license to steal?
Posted on February 25, 2017 | larry elford | Written on February 23, 2017
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Pssst…Wanna buy a pass to avoid the law?

If the rare occasion arises when police are called upon to break the law, they are required to go in front of a judge to explain the circumstances, and obtain temporary permission to do so. It may be granted only if it is deemed necessary to protect the public interest. 

Imagine if a citizen like yourself, or your neighbour, could surreptitiously apply to be exempt from our laws. What if you could apply for an exemption from speeding laws on the road you take to work each day, giving you, and only you, permission to drive at speeds in excess of 200 kms per hour?  

Now imagine a financial regulatory system where 14,000 times in the past decade or so, investment industry players quietly applied for permission so that the products they sell, the advice they give to your family could be like them driving the freeway at 200 kms per hour. It would be dangerous to you and the public, and beneficial only to them.  

Now, imagine that the persons who possess this ‘discretionary’ power to exempt our financial laws, are persons whom are paid 100% by the financial industry. 

Finally, imagine that these investment regulatory ‘judges’ if you will permit the comparison, are usually paid hundreds of thousands of dollars in this position, (some over $700,000).

Here is where you think “impossible, I live in a safe country.” Beware of the brain’s tendency to trick you with cognitive dissonance, because this story is based on public documents and those dealings are sometimes being done to your life savings.  

 

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One of the hidden risks to investing is the risk of buying an investment which does not carry the protection of law. Most investors do not know this, but many investments are sold to consumers under special ‘exemption’ to Canadian rules or laws. 

“This does not meet the criteria of protecting Canadian investors.”

For example, investors with O'LEARY FUND MANAGEMENT fund were likely not informed that this company had obtained exemption from the Securities Act requirements on borrowed or lent out securities.  http://www.osc.gov.on.ca/en/SecuritiesL ... y-fund.htm

Most investors assume that if they own shares in a fund, and that fund owns shares in various companies, that the fund would actually hold/own what it says it owns. However in this exemption application it is unclear whether O’Leary funds intend to lend out securities they are supposed to own, or whether they intend to supply it’s fund holders with securities they are ‘borrowing’.

Other aspects of the exemption allow to permit “the collateral delivered to each Fund in connection with a securities lending transaction to not be held….” etc.

Most investors are not aware, for example that 14,000 ‘exemptions’ to rules or laws, have been granted to securities industry players since 2000. The authors of this report are not aware of fair and honest notice to the public of these. This may raise questions about whom the Securities Commissions are paid by, and to whom do they feel they owe loyalty to’, investment industry players, or the public?

Prior to 2006, one popular investment scheme was sub-prime (lower quality, higher risk) mortgages, which were bundled and sold as a package of highly rated, or in some cases, bank ‘backed’ investments. The problem was that they did not have high ratings as promised, or even the backing of some banks on some cases. Many of those investments could not legally be sold to Canadians without an ‘exemption’ from a securities commission.

Billions of dollars were lost to thousands of Canadians ($32 Billion) of dollars. Some never to be repaid. My own local government has just recovered some 80% of the millions of tax dollars they lost to this scheme, after a delay of nearly a decade. The cost to investors was far more than in money, but also in lost trust, hope, and in some cases suicide. 

There were zero prosecutions for these ‘products’ sold to investors and zero systemic interest in asking Securities Commissions why they grant exemptions to investment laws. 

An Ontario Securities Commission Vice President stated after seeing the effects of her signature on some exemptions that drained billions from Canadians, we “had no clue…”
 

"Back in August, I had no clue," "I didn't know there were retail investors, or how many retail investors.”

http://www.theglobeandmail.com/report-o%20...%20153/?ord=1

These very same regulators (who granted the exemptions) then fined the perpetrators one-half of one penny, for every dollar lost to Canadians. This while not bothering to mention the regulator’s role in allowing these investments to be sold via their exemptions. Curious.

 

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One must ask how they do this without bothering to inform investors, whose money is being lured by the marketers of these products? Its strikes the authors of this report as not complying with Securities Act requirements of “fair, honest and good faith dealings” with investors.

The process appears to be so far from transparent as to be rendered invisible to the Canadian investing public. 

After sub-prime mortgage investment schemes collapsed in 2008, there was an Ontario Legislature standing committee, that looked into the inner workings of the Ontario Securities Commission. However the committee failed specifically to report on the area of greatest importance. The Commission earns fees in the millions by granting (selling) semi-secret exemption to our laws. Could regulators be thought of as running a ‘business within a business’, raising money through passes to skirt financial laws?

It seems disingenuous for the Commission to claim public protection, without also telling investors who buy investments which may be “factory seconds”.

Several exemptions are found on the record which allow banks or investment dealers to skip around the dividing ‘wall’ between bank mutual fund investors, and the bank’s underwriting (sale of new investments) departments.

The risk to clients when this wall is removed can be that the bank gets to keep all the benefits of a top selling share issue, while it could, if it wanted, dump the poor selling issues directly to their own mutual funds.

This allows bank mutual fund customers to be used as the ‘solution’ by unknowingly taking the poor-selling product off the bank’s hands. 

There are enough examples of this type of exemption to ask Securities Commissions to provide the protocol for insuring that exemptions do not harm the public interest. Unfortunately, the closest one gets to an answer from any Provincial Securities Commission is this statement:  
 

“Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.” 

From industry insiders comes the tale of one offering of shares in an Ontario company, where the bank was in such a tight situation with the poorly selling issue, that it applied to the commission, after hours on a Friday evening, and was able to get the ‘go ahead’ to allow the bank to skirt that law. With that kind of rapid-fire service, they were able to place those shares inside the holdings of bank managed mutual funds, solving the bank’s problem (with bank fund investors money) before business opened up on Monday. 

Here is one bank exemption “Relief for dealer-managed mutual funds to invest in distributions of debt securities for which dealer-manager acts as underwriter during distribution period or 60 day period following distribution” http://www.osc.gov.on.ca/en/SecuritiesLaw_ord20100813_2110_cibc.htm

Of course, not every of the 14,000 or more exemptions on Canadian regulators books do harm to investors, but it would be fair to say that there are not many investment Corporations who apply to bypass laws unless there is something in it for them.  

Hundreds and hundreds of exemptive relief applications studied, appeared to have a beneficial effect to issuers only, if some involve mere paperwork or reporting matters. Buried within those dull ‘paperwork matters’ are clever exemptive relief applications which cost Canadian investors as much as the cost of running some provinces. Each year.

Valeant Pharmaceuticals was an up and coming, can-do-no-wrong kind of operation in 2012 when they applied to the Ontario commission for “Exemption from the requirement to include the financial statement disclosure”. What could possibly go wrong when you have a can-do-no-wrong company?

Here is a link to the exemption from the legal requirement to include in a business acquisition report, the financial statements....
http://www.osc.gov.on.ca/en/SecuritiesL ... aleant.htm

Fast forward to November 2016 to find this headline:

“The CEO of Valeant's secret pharmacy has been charged with engaging in a multimillion-dollar fraud and kickback scheme” 
Nov 17, 2016

About The Author

 

Investment Misconduct and Malpractice Analyst

Larry Elford is acclaimed as one of Canada’s top qualified experts on the subject of White Collar Crime as it relates to the investment... More

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