At the conclusion of a recent media interview, the interviewer asked me a “what if” question. I usually avoid answering such questions, but this one intrigued me.

The question was: “If you were asked today to write a third report on the state of investment funds, what would your recommendations be? Would they differ from those you made in 1995 and in 1998?”

The thought of writing a third report filled me with panic. But after that feeling passed and my thought processes returned, I realized the question was relevant to the industry problems that continue to exist.

I realized my recommendations today would be substantially the same as they were in 1995 and 1998, although the details might differ. Despite the work of numerous industry, regulatory and self-regulatory committees, it is unfortunate that changes in the intervening years have addressed the problems’ symptoms but not their roots.

The core principles underlying my recommendations — “fairness and integrity” and “information and knowledge” — have been largely overlooked by the working groups in favour of more mechanistic measures. There is a certain irony to this as the industry and its regulators increasingly opt for principles-based regulation instead of rule-based regulation.

Nowhere is the inadequacy of the industry and regulatory response clearer than in the context of investment funds and similar structured products that in recent years have given rise to so many problems — market-timing; late trading (which remains unproven in Canada); conflicts of interest; misappropriation of fund assets; unsuitable investments; advice-skewing compensation structures; unconscionably high fees; inadequate internal systems, procedures, controls and oversight; and the failure to understand the product or how the manager is operating.

In Quebec, the Norbourg Financial Group Inc. fiasco motivated a coalition of industry professionals and university professors to submit a brief to the Quebec government’s Public Finance Parliamentary Commission urging regulatory reform to address the growing imbalance between investors’ needs and the functioning of the investment industry. The coalition’s September 2006 brief, To avoid another Norbourg … and look beyond for a national saving and investment policy, urges a shift of regulatory policy from strict rules or principles to one based on risk control.

The coalition urges a shift from a passive system of prescriptions to an active system of accountability. It also wants to shift the regulatory focus from products to those who manufacture them — the investment-management companies — and would impose a fiduciary standard of care throughout the chain of service providers.

The coalition believes the shift to functional regulation, combined with heightened emphasis on the advisory role of intermediaries to meet the needs of their clients, would optimize access to markets and help investors protect their capital.

Most important, the coalition recognizes the urgency of empowering investors by increasing their knowledge and providing them with a range of tools to enable them to be in control of providing for their own financial well-being.

Fund governance is an important component of the coalition’s recommendations, which have correctly recognized the need for a fund manager’s board to be composed of a majority of independent directors. The coalition has also recognized the need for a common regime for money management and ensuring that opening access to financial innovation is accompanied by strong control and risk-prevention systems.

Although I have philosophical differences with the coalition’s recommendation of an anti-fraud fund and concerns that opening the borders to foreign mutual funds may create unexpected tax concerns for Canadian investors, I read the coalition’s brief with a feeling of d»já vu. In many respects, it echoed recommendations I made 12 years ago, the merit of which was substantially endorsed by steering groups set up in Quebec and in the rest of Canada to review them.

Hopefully, industry and governments are listening this time, and will share my conclusion that the recommendations made then remain valid and needed today. IE