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Guidelines

Introduction

Regulation of the investment industry is fragmented and securities regulation is a provincial responsibility. The securities regulators are responsible for administering provincial securities acts and have delegated this responsibility to self-regulatory organizations such as the Investment Industry regulator of Canada and the Mutual Fund Dealers Association. However, banks fall under a federal act, and other financial institutions are regulated federally or provincially depending on their charter.

The lack of one federal regulatory authority makes it difficult for the individual investor to find their way through the maze of regulators. In 2001 the Financial Consumer Agency of Canada was established with a regulatory responsibility for consumer issues with banks and other financial institutions with a federal charter, however most regulatory agencies do not have a mandate to order restitution with some exceptions notably Quebec.

Investors should be aware that most investment disputes are resolved through the civil system. However, several provinces have recently reduced the limitation period from six years to two years. This means you must initiate your civil action within two years of the cause of the action to avoid the possibility of being statute barred from seeking justice. It should also be noted that most other forms of dispute resolution will result in only partial restitution although results may be obtained more quickly.

We recommend that aggrieved investors first discuss their situation with a good securities litigation lawyer before deciding which process to follow. 

What do you do when you think something is wrong?

Unless it is a simple mistake you should spend some time and investigate prior to contacting your advisor or regulators. You should also seek legal advice with regard to how you could be affected by the limitation period.

There are some things you should know:

  • Most discussions with advisors are never confirmed in writing.
  • When a dispute arises most advisors have a recollection different from yours.
  • Managers and compliance officers are paid by the same company as the advisor.
  • Regulators will only investigate to determine if rules have been breached.
  • In cases where the only evidence is statements by clients and advisors, the regulators will generally say there is not sufficient evidence of rule breaching.
  • Clients rarely are offered a fair settlement if they pursue their complaint without expert help.

What you can do before proceeding with a complaint

Before consulting with an expert there are some things that you should do. You need to invest some time if you wish to recover your loss. Take a month or two of concentrated effort to prepare for a difficult encounter. It is your money at stake.

  • Write a description of what you believe is your complaint.
  • Make sure your files are in order and that you have your statements filed in chronological order.
  • Ensure that you have your account opening form or Know Your Client Form and any correspondence preceding your account opening. If you don’t have a signed copy ask your investment firm for a copy.
  • Inquire in writing to the provincial regulator to determine whether your advisor is registered and whether he has been disciplined. At the same time inquire whether the firm he works for has been disciplined for failure to supervise. If the answer is yes, ask for copies of the disciplines.
  • Review the regulatory rules that apply for your advisor and the requirements for supervision.
  • Read a book that describes the types of activities that are against the rules.
  • Review some disciplinary agreements to see what the regulators say.
  • Review some court judgments to see what the judges say.

Once you have become a little more familiar with how the system works, and the rules that are to be followed, you should review your statements objectively to see if there are issues in addition to your initial perception of the problem. You should now be in a position to speak with an expert and seek guidance.

Speaking With an Expert

You need to speak with someone who has experience with that part of the industry with which you are investing. Investment dealers, mutual fund companies, banks, insurance companies, etc. are required to comply with regulations that may be quite different. Therefore, you should speak with someone experienced in the appropriate field.

Ask the expert if he has experience in that area and what are his fees. Often the expert will spend a half hour with you free of charge to make an initial determination. However, it is generally worth paying for an hour of an expert’s time to get an opinion to help guide you in future activities.

Types of Problems Investors May Encounter

Investors normally become concerned when they see a major decline in the value of their account or they have difficulty in withdrawing their funds or regular payments are suddenly deferred. Based upon the experience of many of our members, some of the many problems are the following:

Unsuitable investments

Many investors do not realize the risk associated with different types of investments and may be over-concentrated in investments with a greater degree of risk than is appropriate for them.

Discretionary trading without proper authority

Many investors want to depend on their advisor to manage their investments. It is possible to have a discretionary or managed account for which firms will charge a fee in the order of 2% per annum. However this imposes a fiduciary duty on the firm and these accounts may only be managed by qualified investment managers. Thus there is the risk that your advisor may not want to lose control of your account and the opportunity of generating commissions for himself, and he may offer to look after your account. In other cases your advisor may simply start making trades in your account and if you don’t complain the practice will continue. This discretionary trading without proper authority is one of the most common causes of investment loss.

Excessive leverage

Many investors are encouraged to mortgage their house to invest, to take a bank loan to invest, or to use margin in their investment account. All of these methods of leverage expose the investor to a greater degree of risk and can result in substantial loss if the value of the investment declines.

Excessive trading

If your advisor trades excessively to generate commission income it can result in your account losing value even in a rising market. In order to compensate for the amount of money taken out in commissions and margin interest these advisors may invest in higher risk securities hoping their bets will pay off. In effect they are gambling with your money and their commissions are paid whether you win or lose.

Incompetence

Sometimes investors lose simply because their advisor is incompetent. It may be simply poor selection of investments or failure to structure an appropriate approach for each individual. Many investors lose with Limited Partnerships when the management does not have the capability to manage a project successfully. Generally these managers are not at risk as they are paid a management fee. Often the investors are leveraged and can end up losing all of their investment and being left with the debt.

Fraud

Many investors find out too late that they have been victims of fraud. Investors who deal with independent advisors may be at risk if their advisor commits fraud. While fraud is a criminal offence and the perpetrator can be punished with a jail term, civil action would be necessary to recover funds. In many fraud cases the money has either been spent on lavish living or hidden away so that it can’t be recovered.

Ensuring that your advisor and the firm are properly registered can avoid this type of fraud, However fraud is also committed by registered representatives but in this case the firm may be held accountable for the actions of their representative so there is the possibility of gaining restitution.

Dispute Resolution Mechanisms

Depending upon the type of dispute you have and the type of organization you are dealing with there may be several avenues open to you. The following are some of the ways that disputes are resolved.

Direct negotiation

You can negotiate directly with the company. This should be with senior management. If your advisor happens to be a bad one, you will not resolve the problem by talking to him. Most individuals will not fare well in this type of negotiation, and therefore it may be appropriate to engage expert assistance.

Ombudsman

If the company you are dealing with is a bank, or owned by a bank, you have the option of appealing to the bank ombudsman. If he is unable to resolve your dispute, you can then take your complaint to the Ombudsman for Banking Services and Investments (OBSI) that has superceded the Canadian Banking Ombudsman. The advantage of this option is that it is generally low cost, and if you do not agree with the recommendation of the ombudsman you are free to pursue other options.

The OBSI is also available for clients of members of the Investment Industry Regulator of Canada, the Investment Funds Institute of Canada and the Mutual Fund Dealers Association.

However, you should be aware that while OBSI claims to “stop the clock”  with regard to the limitation period, they do require investors to proceed through the industry process before they will open a file. Their latest terms of reference include a “90 day rule” which indicates they may open a file after the investor has spent 90 days going through the industry process.

It seems that OBSI can’t “stop the clock” in all provinces and in some provinces the clock will continue to run while OBSI investigates. This is an issue you will need to clarify before spending too much time with the industry complaint handling process.

We recommend that after your initial preparation you engage the services of an expert to provide guidance on the options available to you and a recommended course of action.

Small Claims Court

Small claims court provides lower cost access to the court system to sue for small amounts (up to $15,000 in Ontario). It is possible to represent yourself, and guides are available from the small claims court. There is a fee when you file your claim. Unless you have considerable knowledge of both the industry and the legal system it may be appropriate to engage a lawyer to represent you. If you win the judge may award legal costs as defined by the court.

Regulatory Authorities

Generally, regulatory authorities will not get your money back. They may investigate to determine if rules have been breached and may even fine or suspend your advisor. Even when rules are breached they may only issue a reprimand. If your advisor is disciplined for breach of rules, it may help to strengthen your case as you pursue other options.

It may be appropriate to pursue direct negotiation or the ombudsman before complaining to the regulators in the event that your advisor’s company has the ethics and morality to do what is right and resolve the dispute.

In Quebec a new Authority was established in February 2004 which not only investigates complaints but will also examine claims and may pay restitution in certain cases.

Mediation

If you are unable to resolve your dispute through direct negotiation or the ombudsman you may be able to engage a mediator to attempt to resolve your dispute. To do this both sides must agree to mediate and then agree upon a mediator. The mediator could be anyone who specializes in mediation. A number of retired judges offer this service. The mediator should be one that has experience with the type of dispute that you have.

Arbitration

Arbitration is another option that is available provided that both sides agree to arbitration and agree upon an arbitrator. If you are dealing with a member of the Investment Industry Regulator of Canada, there is a program that provides for arbitration provided your dispute falls within certain criteria. If your situation suits the criteria you can request arbitration and the IIROC member is required to participate. This option may be preferable to civil litigation in some cases and has the advantage generally of shorter times and lower costs than civil litigation. The main disadvantage is that the decision is final and binding. So, if you decide on this option, you should ensure that you have done everything you can to bring out all of the facts that support your complaint, and you should consider engaging legal representation.

Civil Litigation

Prior to entering civil litigation you should explore all of the options available and determine a course of action that should lead to the resolution of your dispute. You should develop a plan with a time frame. Cases need to be managed and there will be many delays along the way.

While it may be a fairly simple process to initiate a Statement of Claim, you can rest assured that the defense has a large arsenal at their disposal and generally employ delaying tactics. They can agree to court appointed dispute resolution and then opt out at the last minute. They can introduce motions to have the case thrown out which introduces delay to determine court time, and additional costs to argue the motion. There are examinations for discovery that can also be delayed. Defense lawyers generally have full schedules and seem to use this as an excuse for delay.

Therefore, you need to select a lawyer that is well experienced in litigation and also has a good knowledge of the particular industry with which you are dealing. You must be prepared to stay the course. If you do win at the lower court, the defense has the right to appeal to a higher court. If you also win at this level, the defense has the right to appeal to the Supreme Court. In the same way, if you lose, you also have the right to appeal.

There is also the added risk that if the case is lost the loser can be assessed damages to pay the winner’s legal costs.

It is because of the length of time and the costs involved to pursue a case to completion that many investors will agree to an out of court settlement to resolve their dispute. These out of court settlements are generally for pennies on the dollar and include confidentiality clauses or “gag orders” that prevent victims from speaking out.

Preparing for Resolution

In order to prepare yourself for resolving the dispute you will need to consider your situation. Generally, any offer to settle will be for an amount that seems less than you consider fair, but you must consider several factors.

  • How long will it take to get a court decision?
  • What would be the likely amount of the award?
  • What will be the additional cost of pursuing the case to final resolution?
  • Do you have the financial resources to continue the pursuit?
  • Do you have the physical and mental stamina to continue the pursuit?
  • Are you 100% confident of winning the final decision?
  • What will be the cost if you lose the decision?
  • Will the final award be in time for you to enjoy it?
  • Would you accept an earlier decision at less money to resolve the dispute?

These are issues that you will face during the pursuit of resolving your dispute. The decisions you will be faced with should be made by you in consultation with expert help. You need to be aware of all the alternatives and you need to understand the costs in money and time. Your decision on how to proceed is yours alone.

The Good News

Many investors have resolved their disputes by various means.  

  • A few investors have been able to negotiate settlements for themselves. They are the minority.  
  • Many have employed experts to negotiate on their behalf and have been successful in gaining restitution.
  • Some have gone to ombudsmen to have their dispute resolved.  
  • Many have used mediation or arbitration to resolve their disputes.  
  • Many have started civil litigation and settled out of court by negotiation or mediation.  
  • Some have gone to court and received settlements. Armand Laflamme fought for ten years and received a Supreme Court decision to recover all of his money.
  • There are a number of court decisions that provide support for investors in their civil suits.

The Final Solution

To have your dispute resolved you simply need the determination to pursue your complaint. Submitting your complaint to the regulators may provide you with some ammunition, but it will not get you money back. You need to pursue a course of action aimed at getting restitution. 

Firstly, get prepared by getting to know the details of your situation and how the investment industry operates and the roles of the regulators. Read some court decisions to see how courts react. 

Secondly, meet with an expert such as a securities litigation lawyer to assess your particular situation and help you arrive at a recommended course of action.  

If time permits it could include approaching industry and regulators. Develop a schedule and follow up on a regular basis. Don’t wait too long for a response. Two weeks is enough. Do not spend more than 90 days going through the industry complaint handling process. Two weeks before the 90 days are up write to OBSI if you plan to follow that route. 

At the same time you could make your complaint to the regulator. If the regulator finds that rules have been breached it could support your case. Keep in mind regulators will generally not get your money back. 

The most effective method for achieving restitution are direct negotiations with an expert on your side, or civil litigation. The expert could be a securities litigation lawyer or someone with appropriate knowledge of investment and the regulatory system and proven success in negotiation. 

If you fail to try to resolve your dispute you will receive nothing. If you do take action and persevere you will most probably receive some restitution to enable you to put the issue behind you.