It has been one year since securities regulators got a first-hand blast of ire from investors who complained of poor treatment at the hands of the regulatory system. Yet efforts to soothe the wounds remain a work in progress.

The Ontario Securities Commission held its first Investor Town Hall last May 31, a well-attended meeting that was dominated by investors venting about bad experiences with the investment industry, and their often-fruitless efforts to get redress. The OSC then published a report summarizing the event, and outlined steps it planned to take. The OSC said it would work to demystify the complaint process; come up with ways to improve access to restitution; alert the government to concerns about shrinking limitation periods for civil actions; and develop means for more dialogue between investors and regulators.

So far there has been some work on the commitments, but not much has actually changed. The only obvious achievement is the founding of the OSC’s investor advisory committee, headed by Eric Kirzner, finance professor at the University of Toronto. Although it has yet to produce anything substantive, the committee does offer a voice for retail investors that didn’t previously exist.

The OSC’s other efforts have not been quite as productive. It has held discussions with the self-regulatory organizations and the Ombudsman for Banking Services and Investments about ways to improve handling of complaints.

“We’ve been talking with the SROs about how to update our Web sites to deal with complaint handling to make them far more accessible and easier to navigate,” says Susan Wolburgh-Jenah, OSC vice chairman.

The OSC has also held investor focus groups about the quality of complaint handling by its contact centre and, as a result, has shifted some of its training to try to make the experience more investor friendly and less bureaucratic, says Wendy Dey, director of communications.

Wolburgh-Jenah says the approach has changed. “We’ve decided we should focus our efforts on improving the front end, because if you can get the complaint-handling system to work the way it should for all investors, they shouldn’t feel frustrated. It shouldn’t take a long time to handle their complaint and, as a result, they’ll get through the system quicker.”

David Agnew, the Ombudsman for Banking Services and Investments, says that he takes investor complaints about navigating the dispute resolution system very seriously. “In part, that is ensuring we are giving consistent messages, as well as making sure there aren’t complaints falling between the cracks,” he says.

As well as meeting with the regulators, Agnew says the Financial Services OmbudsNetwork, which encompasses the OBSI and two insurance ombudservices, “are streamlining contact with consumers” in an effort to “get consumers with complaints to the right service quicker.”

Although the efforts to improve complaint handling are commendable, investors’ navigation chore is probably not much easier today than it was a year ago.

Wolburgh-Jenah says she’s not sure whether investors now better understand the system, and the OSC is writing a report on its progress in the past year for release some time in June. “Part of the reason why we want to report back to investors is we want to try to keep that dialogue going with them, and we do feel that the ball is in our court on that issue,” she says.

One goal that the town hall meetings apparently did achieve was to alert regulators to investors’ frustrations with the system. Before the event, executives at the highest levels of the OSC were insulated from angry retail investors, notes Wolburgh-Jenah. The meeting made them realize the need for an ongoing dialogue with retail investors.

The result, notes OSC chairman David Wilson, is that high-level personnel at all regulators are now taking the issues seriously. He says both he and Wolburgh-Jenah have attended meetings with investors, and the complaint-handling discussions are taking place among other senior management, as well.

The activity, however, doesn’t mean that the OSC is rushing to have another town hall anytime soon. “It’s safe to say we will have another one at some point in the future,” Wilson says. But, he notes, there first needs to be time to make more substantive changes.

In the meantime, it’s still not clear whether regulators are really getting at the heart of the issues that underlie investor complaints. As a result, investors may not be any better off now than before the town hall.

@page_break@Certainly, that’s the view of investor advocates. “Those that are managing their own investments are probably much better off because of the bull market. Those that are depending upon the industry are probably being exposed to more risk and have less protection than a year ago,” says Stan Buell, the founder of the Markham, Ont.-based Small Investor Protection Association. Buell sat on the panel at the town hall as the voice of the small investor.

He says investors may even be worse off now because of reduced limitation periods and the lack of regulatory action to beef up investor protection for retail-focused products, particularly those that have attracted criticism for insufficient disclosure, such as income trusts and principal-protected notes.

Independent industry commentator Glorianne Stromberg agrees that investors are probably worse off, and she also points to deficient disclosure as one main reason.

Concern about the lack of regulation of PPNs were first raised when Portus Alternative Asset Management Inc. went bust, and it became apparent that small investors were buying into hedge funds and other assets through products that are typically exempt from securities regulation and that carry complex fees.

As the Investment Dealers Association of Canada cautioned in a report more than a year ago: “The regulatory issue, particularly with respect to PPNs, is whether these types of investments, with locked-in maturity periods of as long as five to 11 years, little or no certainty of positive returns, minimal disclosure and minimal assessment of suitability, should continue to be sold to small retail investors on an exempt basis. Lack of oversight also results in the inability to detect fraud and other misconduct at early stages, and the opaque nature of the industry could certainly attract fraudsters and other market malefactors.”

Although securities regulators have been looking at the issue for some time, they have yet to make a move to bring PPNs within the boundary of securities regulation.

It’s much the same story in the income trust world, where critics have voiced concerns about the lack of standardized disclosure requirements. The credit-rating agency Standard & Poor’s Corp. issued a report explaining that there is little consistency in how trusts calculate and report their distributable cash. Accounting industry critic Al Rosen, head of Toronto-based Accountability Research Corp. , has also pointed out that many trusts are paying distributions that are well in excess of their net income, and that the whole sector is overvalued because investors don’t understand the relatively complex products.

Regulators are well aware of the transparency concerns dogging income trusts, but they have yet to do anything definitive to improve it.

Regulators realize that rash decisions to scrap the banking exemption for PPNs or force an inflexible reporting regime on income trusts could have unintended negative consequences, yet they have not followed through on their pledge to develop restitution alternatives.

The subject is complicated by the fact the government has pledged to work with the OSC to develop a system of effective restitution, a promise it made in response to the 2004 report by the standing committee on finance and economic affairs. As the government has yet to move on the recommendation, the OSC hasn’t done anything about its own promise to develop ideas. Wilson says that although there has been no action taken by the government on restitution, “I think in the next year there’ll be some specific attention turned to that by the government.”

In the meantime, regulators have become more conscious of the need for effective restitution. In the past few years, the OSC has negotiated a handful of settlement agreements that have provided restitution as part of enforcement cases. Most notably were fund dealers agreeing to pay back the commissions they earned from Portus, and the mutual fund market-timing case. The IDA has taken the issue to heart, too. In a recent speech, Joe Oliver, IDA president and CEO, said that it will be asking its disciplinary panels to provide restitution in certain cases.

It remains to be seen if the government or the OSC fulfils their promises to create a meaningful restitution system. Buell, for one, is skeptical.

“It is hard to be optimistic for investors, and it is only a few politicians that appear to be getting it. Hopefully, they will make some noise that is heard,” he says. IE