COVER

The voice of reform

JOHN SCHOFIELD January 27 1997
COVER

The voice of reform

JOHN SCHOFIELD January 27 1997

The voice of reform

COVER

JOHN SCHOFIELD

In those first few seconds, it seemed like just another nuisance call—perhaps some smooth talker looking for free financial advice, or an angry mutual fund executive eager to blow off some steam. “My first thought was, ‘How will I ever get off the phone?’” recalls Glorianne Stromberg, the author of a landmark 1995 report on the investment funds industry and a member of the Ontario Securities Commission. As it turned out, the voice on the line last fall belonged to a garden-variety investor who just wanted to express his thanks. “Every time I read about a new reform in the mutual fund industry,” the caller said, “I just stand up and say: Thank you, Glorianne Stromberg!’ ” Such praise is rare for securities regulators, who are more accustomed to gripers than groupies.

But when it comes to mutual funds, no one has done more to protect individual investors than Stromberg. Her controversial report, unveiled in January, 1995, cast a critical eye over virtually every aspect of the $212billion mutual fund business and unleashed a flurry of activity aimed at tightening up its operations. ‘The underlying theme of the report,” says Ed Waitzer, the former OSC chairman who handed the task to Stromberg, “is that the industry has got to put investors’ interests first.” Stromberg’s recommendations—based on nine months of research and interviews with executives, fund managers, financial planners and other industry figures—took aim at everything from the bafflegab that fills many fund prospectuses to the sometimes cumbersome, costly nature of the regulatory system. The 256-page report highlighted the need for better-trained investment dealers and a strong selfregulatory organization to oversee the roughly 80,000 bank employees, insurance brokers, fund-company reps and financiad planners who sell mutual funds. It also targeted the average Canadian’s woeful ignorance of investment issues, and underlined the industry’s responsibility to help educate consumers.

Stromberg saved some of her sharpest criticism, however, for what she termed “questionable” sales practices and incentives in the mutual fund industry. That includes “trailer fees,” the one-quarter to IV2 per cent annual commissions that fund companies typically pay dealers if their clients stay in particular funds. In most cases, Stromberg noted, trailer fees are deducted from the fund, indirectly reducing an investor’s return.

The report’s criticisms of mutual-fund sales practices set the investment community abuzz, and stole most of the spotlight from the other problems that Stromberg tackled. By the time the dust settled, however, the Investment Funds Institute of Canada (IFIC), which represents most Canadian fund companies, had put in place a voluntary code limiting some sales incentives—though not trailer fees. In fact, says Waitzer, the industry has so far agreed to about 80 per cent of Stromberg’s recommendations.

For that contribution alone, investors have good reason to be grateful. But the influence of Stromberg, a veteran securities lawyer, on the mutual funds business goes beyond her

No one has done more to protect fund investors than Glorianne Stromberg

report. Stromberg was also the driving force behind National Policy No. 39, a comprehensive set of regulations that effectively governs the Canadian mutual-fund industry. As a volunteer member of the OSC’s securities advisory committee, she was picked in 1985 to weave a confusing patchwork of rules, developed over decades by provincial regulators, into a uniform policy. After three years of negotiations, the policy was adopted by the country’s 12 regulatory bodies in 1988. “I can’t think of anyone else,” says Harold Hands, chairman of the investment funds institute and an executive vice-president of Mackenzie Financial Corp., “who has played as great a role in causing the industry to look at so many issues for the purpose of protecting investors.”

Stromberg did not set out to champion the rights of average investors. “I don’t consider myself a consumer advocate,” she says. “I guess I’m just motivated by a sense of fairness and integrity.” Those are values the 57-year-old Stromberg learned from her parents, Rhoda and Oscar—a doctor who moved | the family from Montreal to North Battleford, Sask., when ¿ firstborn Glorianne was 3. “He cared a lot about people,” she | says of her father. “I think that was his main motivation for s| going into medicine.” None of his seven children followed him to medical school, but four chose another profession: law. Stromberg’s sister, Sunni, is a judge on the B.C.

Supreme Court, while her brother, Robert, is a prominent lawyer in Saskatoon. Another sister, Bonnie, is a Regina-based lawyer specializing in health care and labor relations.

Stromberg’s love for the law developed almost accidentally. As a 19-yearold with a BA from McGill University, she enrolled in Toronto’s Osgoode Hall Law School on the advice of a professor. “I never really intended to practise, but I really quite liked it.” In 1965, she joined the high-powered

TRACKING THE PROPOSALS

A progress report on some of Glorianne Stromberg's recommendations:

Canada should create a national system of securities regulation.

The Investment Funds Steering Group, an industry body set up to address Stromberg’s report, endorsed this proposal in November. The issue is before the federal and provincial governments.

Mutual-fund managers should adopt a code of ethics dealing with such issues as personal investing.

The Investment Funds Institute of Canada is reviewing a proposal for strict rules, but not a ban, on personal investing by fund managers.

Mutual fund “trailer fees” and marketing costs should no longer be charged to the fund.

No action. The investment industry has defended the current practice.

A task force should set mandatory educational standards for financial planners.

The Financial Planners Standards Council was created last year to set voluntary standards. Individuals who use the title “financial planner” would still not be required to have official accreditation, except in Quebec, where they are already regulated.

who are independent of it in the way that Glorianne is,” says Waitzer. At the time, mutual fund assets were beginning to mushroom, and both Waitzer and Stromberg were convinced of the need to take a closer look—before an unexpected controversy forced regulators to step in. “The time to fix your roof is when the sun is shining,” says Stromberg.

Not surprisingly, her report left some members of the mutual fund industry feeling less than sunny. Selwyn Kossuth, who stepped down as president of the IFIC in 1994, maintains the report completely ignored the efforts the industry had already made to address regulators’ concerns. He charges that Stromberg was too selective about whom she interviewed, and did not even talk to him. Stromberg, for her part, says she spoke to IFIC representatives several times, including Kossuth. “I made myself available to everyone who wanted to talk to me.” Although much of the debate has been civil, a handful of critics angrily slammed the report, labelling it an unwarranted intrusion on the natural forces of the marketplace. One mutual fund executive went so far as to call Stromberg a disgrace to the securities industry.

Wright’s view is that Stromberg has done the mutual fund industry a great favor by raising standards. “I think they owe her a real debt, and it’s probably one they don’t realize,” says Wright, now chairman of Teck Corp., a Vancouver-based mining company. Meanwhile, securities regulators in other jurisdictions have also taken notice. At the 10th International Investment Funds Conference in Toronto last fall, many of the 63 delegates, representing 31 countries, eagerly requested copies of the Stromberg report. “So many other countries are dealing with the same issues,” says Hands.

Hands acknowledges that Stromberg’s recommendations will benefit the mutual fund sector in the long term by preserving the public’s confidence in the industry. Even more important, he adds, the report has brought the industry and regulators together in order to protect investors. “I wouldn’t be critical that she raised issues for discussion,” says Hands. “I would be critical if she expected every one of her recommendations to be implemented. I wouldn’t say that everything she says is gospel.”

The fact that the industry has endorsed most of the report’s recommendations is encouraging, says Stromberg, but now it’s time for industry and regulatory action. Two years after the report’s release, for example, the OSC has yet to pass its own rules on mutual fund sales practices, although it is expected to do so later this year.

Meanwhile, Stromberg waits, and patience is not one of her strong suits, says Waitzer. That’s not the way she sees it. “I think I’ve been patient,” she counters. “Some people have told me I’ve been far too patient” Stromberg’s second three-year term on the OSC ends in December of this year, but there is no sign she will stop speaking out about what she believes. “She’s a fighter,” says Wright. “She basically doesn’t care what other people think if she thinks she’s doing the right thing.” With an attitude like that, Stromberg is bound to receive more calls from appreciative investors, not to mention a few critics. □

Toronto law firm of Cassels, Brock and Blackwell, where it did not take long for partner Robert Law to spot her talent. “She was always extremely hardworking, and, to a degree, a perfectionist,” says Law, who has been with the firm for 40 years. Stromberg worked closely with Law for the next 25 years, specializing in corporate and securities law, including work for several mutual fund companies. “He’s a very brilliant lawyer, and a great influence in my life,” says Stromberg.

By 1990, however, the law had lost some of its lustre. Stromberg had just turned 50, “and somehow the correlation of 25 and 50 kind of blew my mind and I thought, ‘As long as I’m practising law, I’m not going to do anything else.’ ” Moved by the grinding poverty she had witnessed 20 years earlier on a trip to South America, she became heavily involved in Foster Parents Plan Canada and its global affiliate, Foster Parents Plan International. Sitting on the boards of both organizations, she helped implement a corporate reorganization aimed at streamlining their operations. Although she has never married, Stromberg is the foster parent of a 14-yearold girl in Columbia, to whom she provides financial support.

Stromberg returned to the world of law and finance in late 1991, when then-OSC chairman Bob Wright invited her to serve as a part-time commissioner. “There was no one on the commission who knew as much about mutual funds, and she had vast experience,” says Wright. “Plus, I thought it would be helpful to have somebody who is extremely meticulous. She’s a line-by-line reader. Some people on the commission were much more bigpicture people.”

Those same qualities persuaded Wright’s successor, Ed Waitzer, to give Stromberg the job of reviewing the mutual fund business in February, 1994. “There are few people who are as knowledgeable and who care as much about the industry, but