Retail investors who feel forgotten or ignored by securities industry enforcers are about to see some changes. Regulators plan to crack down on small-investor exploitation, abusive sales practices, inadequate disclosure and even mutual fund management expense ratios.

Small investors are not usually high on the securities commissions’ list of enforcement priorities. Scarce resources and a mandate to protect capital markets as a whole mean the market cops often go after high-profile cases in which significant harm has been done. Except for something sweeping, such as the recent mutual fund market-timing settlement, retail investors’ complaints often involve relatively small amounts or fairly confined issues that don’t capture
regulators’ attention.

Those comparatively small losses, however, can be personally devastating. Individual investors losing their retirement nest eggs may be pocket change for the overall capital markets, but it can effectively destroy lives.
The perceived indifference of regulators to such losses has led some investors to believe regulators are aloof and protective of the industry rather than committed to defending the public’s interests.

Aggrieved Ontario investors aired their
concerns last summer at hearings held by the provincial standing committee on finance and economic affairs. Their testimony led the committee to recommend
— and the government to endorse — several steps that would pay more heed to retail investors’ concerns, including a review of the role of self-regulatory organizations; a more effective system of investor restitution; mandatory fund governance; looser proxy solicitation rules; greater regulatory accountability; and independent adjudication of enforcement matters.

Now, it seems, the regulators’ enforcement departments have heard the call, as well.
They plan to put more emphasis on issues that affect retail investors, says Michael Watson, director of enforcement at the Ontario Securities Commission in Toronto, who is in the midst of drafting the department’s priority list for the coming year.
He cautions that it has not yet been submitted or approved by the OSC, but the early draft includes more attention to areas that are key to retail investors.

Small-investor issues overall are a growing priority for enforcement departments, says Watson. They recognize that the cases causing harm to investors that they have pursued have generally involved institutional investors, and regulators were drawn to those cases because the setbacks were substantial. In the future, however, they hope to chase more cases in which a significant number of small investors have been hurt, even if the monetary totals aren’t significant.

There are specific issues that involve retail investors on the OSC’s radar for the coming year, including mutual fund sales practices, abuse of the accredited investor exemption and conflicts of interest at mutual funds.
Watson says enforcement departments will be looking at possible abuses in investment fund MERs, as well, including excessive fees. The OSC doesn’t want to start stepping on the toes of the self-regulatory organizations, but it’s also keen to send the message that harming retail investors will
not be tolerated, he says.

Similar issues are popping up in British Columbia, too. In January, the B.C.
Securities Commission released a strategic plan for 2005-08, enumerating the chief risks it sees in its capital markets, including inadequate disclosure to clients on the part of advisors, proliferation of complex products that investors don’t really understand and abusive trading practices in the junior markets.

The BCSC plans to work with the SROs to improve disclosure so investors get a better understanding of the fees they pay for products, both directly and embedded in the products. It also wants to deal with conflicts of interest that may exist among advisors, their dealers and clients — and the risks that investments may carry. It also suggests that retail investors don’t fully understand the attributes of some of the increasingly complex investments that are being sold because of inadequate disclosure by the issuers and insufficient efforts by advisors to explain them.

Typically, the complaints and enforcement actions that come out of cases in which investors are sold things they don’t understand fall upon the advisor for not properly assessing suitability. But it appears issuers are going to face more scrutiny, too.

One reason the OSC anticipates enforcement will pay greater attention to investment funds is because its investment funds branch is being given more resources to monitor compliance and continuous disclosure by fund managers. Watson is expecting more enforcement referrals.