January 04, 2013

Me Anne-Marie Beaudoin Corporate Secretary
Autorité des marchés financiers 800, square Victoria, 22e étage C.P. 246, Tour de la Bourse Montréal, Québec

H4Z 1G3
Fax: 514-864-6381
e-mail: consultation-en-cours@lautorite.qc.ca

John Stevenson, Secretary Ontario Securities Commission 20 Queen Street West
Suite 1900, Box 55
Toronto, Ontario
M5H 3S8
Fax: 416-593-2318
e-mail: jstevenson@osc.gov.on.ca

COMMENTS ON CSA Consultation Paper 33-403 To whom it may concern:

Further to CSA Discussion Paper 81-407 Mutual Fund Fees, which examines the mutual fund fee structure in Canada and identifies potential investor protection issues arising from that structure.

I now have slightly over 30 years of experience with the Canadian investment industry. I feel privileged to have this dialogue about matters which are not typically allowed to be discussed in this industry. I will try and cut straight to the points that I feel are most important to the welfare of Canadian investors.

1. The investment industry is perversely incentivized to increase profits even at the expense of doing intentional harm to investors interests. The protective duty owed to the public interest by industry, and by regulatory and self regulatory agents, appears to have been lost, forgotten, or silenced. I have found this to be the case time after time. Despite all attempts to portray the industry as a professional body acting in positions of trust, this submission will attempt to show how far short the industry has come in living up to the promises.

2. The regulatory industry appears to have become a “business within a business”, earning considerable salaries and job security by catering to the investment industry, while acting willfully blind to numerous public harms. Provincial regulator salaries of triple to quadruple those paid to provincial premiers, have ensured a loyalty and a protective bias towards the industry

Regulatory actions appear to be aimed only at the smallest and least important players, while large scale or systemic crimes against the public have an investigation or prosecution rate that is statistically zero. It is

1

an industry where it appears that “anything goes” as long as it is profitable to the strongest financial institutions in the world.

One result of the “sale” of the public protective interests by regulators, is that the average Canadian could be cheated, shortchanged or abused by persons in positions of trust, to an extent where half of their future retirement (or more) could be removed from them, and placed into the hands of those persons posing as trusted professionals.

This commentary hopes to open a dialogue on the abusive nature of our system. How it relates to retail mutual funds is but one example of many.

The author, Larry Elford, worked inside the retail investment industry for two decades, and upon retirement, founded the web forum for ethical professionals at www.investoradvocates.ca . The forum is directed to industry best practices, and to highlighting abuses of the public which appear to run rampant.

This commentary will look at the issue of high investment costs from the standpoint of a former industry insider. It will look at some facts about the industry, some possible explanations why things are as they are, and two simple solutions.

Executive Summary:

1. Mutual fund costs in Canada are the highest in the world.

2. Coincidentally, the Canadian financial system is reputed to be the strongest in the world.

3. That strength now appears to have become an abuse of market dominance.

4. Highest-cost investments are typically sold to consumers by persons on commission, but who are allowed to deceive the public into the belief that they are licensed professional “advisors”.

5. Most investment customers thus fail to receive investment advice, from so-called professionals who promise investment “advice”.

6. Customers are thus being tricked into a relationship where the product or service they get is not what was promised to them, nor what they are led to expect. It is the foundation for intentional deceit of the public.

7. Regulators are incentivized toward protecting the interests of the industry that pays them, while having little interest in protecting consumers from systemic industry deception.

8. Other countries have the ability, and maturity, to discuss and address these issue, to the benefit of all. (UK, Australia etc) Canada stands alone in the practice of letting the strongest financial institutions in the world get away with abuse, misconduct and sales malpractice against the public.

Larry Elford Lelford@shaw.ca Lethbridge, Alberta

2

Table of Contents

CANADIAN SECURITIES ADMINISTRATORS DISCUSSION PAPER AND REQUEST FOR COMMENT 81-407 MUTUAL FUND FEES

January 13, 2013

1. Cover Letter and executive summary
2. Are Mutual Fund Fees Abusive in Canada?
3. A former industry participant looks at a few reasons why.
4. Two simple solutions.
5. Codes, rules, promises, laws, etc., often violated by “trusted” investment professionals. (page 11)
6. Candid quotes about violations of the public. (deception, deceit, fraud) (page 16)
7. Conclusion/Summary page (page 15)
8. Some legal definitions (page 16)

(page 1) (page 4) (page 5)

(page 9)

3

Section 2
Are Mutual Fund Fees Abusive in Canada?

Are mutual fund fees too high in Canada? The answer is yes. Further to the high costs, is the abusive manner by which Canadians are tricked into the belief that their mutual fund seller is a trusted “advisor”.

I refer to the Keith Ambaschteer (U of T Rotman School) study titled The $25 Billion Dollar Pension Haircut as a very credible analysis. His study suggests that Canadian retail investors are being gouged to the tune of $500 million dollars a week. Half a billion each week, transferred from the hands of trusting Canadian investors, into the hands of people claiming to be “trusted professionals”.

In my own experience, this is not simply a matter of charging customers a “fair, honest or good faith” amount for a service, as the industry requires. It is the result of an unfair, and un-level playing field, where misleading clients helps them to be cheated and shortchanged of their rightful returns. A predatory relationship is provided where a professional one is promised. Simple fraud is a rather impolite term for this but perhaps it is time to move beyond polite, for the sake of Canadian’s financial health.

The $25 Billion dollar figure represents 2% to 3% of the total amount of mutual fund assets held by Canadians. It should be noted that a consumer “haircut” of 2% of annual investment returns will cut ones future portfolio in half, over a 35 year time frame.

Thus, without even factoring in examples outside of the scope of Keith Ambaschteer’s study, Canadians retirement lifestyles are being cut by half, or more by the current self regulating and self serving system. Also mentioned, or linked herein are additional methods, tricks of the trade, if you will, that in my opinion increase the “take” from Canadians to closer to one billion dollars per week from systemic abuses.

In recent work as an expert witness and investigator of financial misconduct and malpractice, I have seen investment products, or portfolios, consisting of fees, on top of fees, sometimes on top of other fees. Always on top of about 5% commissions to the salesperson (or “advisor”). It seems apparent that the industry has found the perfect manner of capturing and then abusing their dominant position in the markets.

I refer to these results as “systemic financial abuse of consumers, by persons in positions of trust”. This appears to be “standard” industry practice, or at very least, the path that four out of five persons referring to themselves as “advisor’s” are willing to take to earn greater commissions. Sadly, I can now also include management as well as regulators in this same category of practice, all too often.

This “request for comment 81-407” encouraged comments on the broader aspects of the industry, and not only on the mutual fund segment. I will dedicate the remainder of my comments to some of the underlying causes I found for abuses of Canadian investors.

4

Section 3

A former industry participant looks at a few reasons why.

The ability of this industry to “self” regulate, is one of the root causes that allows abuse of market dominance and abuse of Canadian retail investors.

Self regulation appears to be mastered by the financial industry to an extent where police, prosecutors, civil and criminal courts either “defer” action against this industry, or accept without question the actions and decisions of the industry. Notwithstanding that financially abusing investors of their rightful returns may be damaging Canadians to an amount greater than each and every other “traditional” crime in Canada, combined.

To think that one industry can, with the help of thousands of industry helpers and handmaidens, can serve themselves to nearly one billion dollars a week of money that rightfully belongs to Canadian investors is amazing. They do this by ignoring the requirements of “fairness honesty in good faith”. They get away with this through use of the high moral ground of “self” regulation and captured regulation. All of this is done by ignoring the requirements of “fairness, honesty and good faith” dealing with the public.

One foundational example of the “willful blindness” which self regulation allows is the standard industry practice of allowing persons licensed, trained and paid in the capacity of commission salespeople, to misrepresent themselves to an uninformed Canadian public as trusted “professional advisors”.

An entire country is duped into a game of “professional advisor bait and switch”, through massive advertising, and promotional efforts, with the public losing at nearly every turn, and the industry profiting immensely.

By way of background, on the following page I have reprinted a recent industry article written by myself about this ability to deliberately deceive the public.