It can be argued that tumultuous times such as these \u2014 ripe with uncertain market conditions and a slew of bad news \u2014 are when advisors work their hardest for their paycheques, fielding phone calls from anxious clients who want constant updates on the state of their portfolios.
The plight of clients who have asset-backed commercial paper in their portfolios is bad enough. But the recent collapse of U.S. investment bank Bear Stearns & Co. Inc. adds another layer of anxiety. Clients worried about the security of their investments may well want to know: what happens if an investment or mutual fund dealer goes belly up on this side of the border?
The Canadian Investor Protection Fund<\/b> was launched by members of the Investment Dealers Association of Canada<\/b> almost 40 years ago to address this concern. When a firm is accepted as a member of the IDA \u2014 there are about 200 member firms today \u2014 that firm commits to making payment to the CIPF and its clients are automatically eligible for coverage, says Rozanne Reszel, CEO of the CIPF: \u201cIronically, many clients have the benefits of CIPF coverage and have not necessarily known about it.\u201d
Accounts with member firms are protected for up to $1 million if a firm declares bankruptcy. But that doesn\u2019t mean that clients with more impressive portfolios are out of luck. The CIPF groups accounts together by category, with each category eligible for the $1-million maximum. Many investors, for instance, Reszel says, would have two accounts: a general account, which would include cash, margin and U.S. dollars; and a retirement account, which would cover their RRSP, RRIF and LIRA accounts.
Reszel also points out that the $1-million limit applies only to an account\u2019s shortfall after the firm\u2019s inventory is assessed and placed into the customer pool. \u201cIt\u2019s essentially a topping-up process,\u201d she says of the CIPF program.
SPEEDIER PROCESS<\/b>
It\u2019s also a speedier process than it used to be, Reszel says. In 1998, the federal Bankruptcy Act was changed to include special procedures for insolvencies of securities firms. This change means that the trustees in these cases no longer have to trace losses to individuals \u2014 an unnecessarily time-consuming and unfair process that tended to punish latecomers to the fund, she says. Now, losses are pro-rated across all clients (save for those rare accounts that are held in clients\u2019 names), a more time-sensitive method.
\u201cOur priority in working with a situation in which there\u2019s been an insolvency,\u201d Reszel says, \u201cis to try and move the accounts as soon as we can.\u201d
The time frame between an insolvency and the moment at which a client has access to his or her assets varies and can depend on the complexity of the firm\u2019s books. \u201cWe\u2019re pretty lucky that most of the investment dealers use one of three major service providers for their back-office processes,\u201d she says. \u201cSo, it\u2019s a pretty recognizable and familiar bookkeeping system.\u201d
Although it can be several weeks before a situation is resolved \u2014 accounts are either moved to another investment dealer or clients receive the assets \u2014 the CIPF does take steps to make sure the process is as smooth as possible.
To that end, it attempts to make arrangements with the trustee and the provincial securities commissions to allow clients to reduce their exposure in the market, if possible, Reszel says. It also covers emergency payments for individuals who might rely on investments for retirement income or to close a home purchase, for instance.
In the CIPF\u2019s almost 40-year history, the fund has been dipped into 17 times, Reszel says. Its most recent payout was in 2002, when it covered an $18.1-million shortfall for the 15,000 clients of bankrupt investment dealer Thomson Kernaghan & Co. Ltd.
The CIPF today is worth about $320 million and also maintains a $100-million line of credit and a $100-million insurance policy.
A much smaller fund, also handled by a self-regulating organization but with little history, is Investor Protection Corp. <\/b>, which is under the Mutual Fund Dealers Association of Canada<\/b>\u2019s umbrella. The IPC\u2019s fund is worth about $17 million, with a goal of reaching $30 million in the coming years, says IPC president Joni Alexander. The IPC was launched in July 2005 and was essentially modelled on the CIPF, she says.
@page_break@DIFFERENCES<\/b>
The MFDA initially wanted to join the CIPF. But the two groups were unable to resolve several differences and the MFDA was forced to go out on its own. (The CIPF\u2019s member fees, at the time of the MFDA\u2019s decision to go its own way, were based on revenue. Today, those fees are based on risk, which is more compatible with mutual fund dealers.)
The IPC still has some growing to do. It hasn\u2019t yet handled a bankruptcy case among its 160-strong member roster. \u201cWe\u2019ve formed our own [fund] to allow the members to accumulate funds,\u201d Alexander says, \u201cto adjust to paying into a fund, to adjust to a regulatory regime and to bring our standards up to where we\u2019d like them to be.\u201d
Both the CIPF and the IPC are open to a future together once this adjustment period is over.
The IPC fund is almost identical to the CIPF in structure, with a $1-million maximum applied to accounts. As with the CIPF, the IPC has provisions for submitting a claim as part of its formal procedure, but, in most cases, this would be a virtually automatic process for investors.
If an investment or mutual fund dealer declares bankruptcy, member records usually outline which assets are involved and that figure is sent to clients, with room for clarification.
Both the CIPF and the IPC have a number of communication options, including their own Web sites, brochures and helplines, which advisors can pass along to clients to address any questions.
But advisors might want to stress that both the CIPF and the IPC are only in the business of protecting clients from losses stemming from dealer bankruptcies. They can\u2019t, for instance, save the day when there are market losses, unsuitable investments and a bankruptcy within a portfolio \u2014 including that of a mutual fund company.
\u201cThere is some confusion,\u201d Alexander says. \u201cIt\u2019s difficult for people to comprehend, sometimes, the difference between the return of assets that may be inaccessible due to the bankruptcy of the dealer and protection against a decline in the value of those assets.\u201d\tIE<\/b>
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