Beyond the windswept canyon that is Bay Street, few Canadians have ever heard of Jack Geller, who resigned unexpectedly last week as interim chairman of the Ontario Securities Commission. But the millions of investors who are busy shovelling retirement savings into mutual funds probably should be concerned about the issue that precipitated Geller’s departure.
The mutual fund industry needs tougher standards. But who should enforce the rides?
Briefly put, Geller appears to have been a victim of a backroom struggle over who should regulate the companies that manage and sell mutual funds. Should the role of watchdog be left to the fund industry itself, or should it be given to a broader group representing the investment community and consumers?
This is more than a spat over administrative turf. For years, critics inside and outside the fund business have called for tougher regulation to protect investors.
Canadians now have $284 billion stashed away in mutual funds, yet the industry continues to operate with little oversight. The OSC, which has led the drive for closer scrutiny, recently audited 23 fund distributors and uncovered widespread abuses, including inadequate supervision of salespeople and failure to ensure that clients’ money is kept separate from the firms’ own accounts. In several cases, dealers also encouraged people to borrow money for investments that were clearly not suitable given their financial circumstances.
As the acting head of the country’s leading securities regulator, Geller was committed to helping clean up this mess. To that end, he pressured the Investment Funds Institute of Canada, the industry’s lobby group, to agree on a framework for a new self-regulatory agency that would be in place by September, 1998. Geller sensibly proposed that IFIC form a joint regulatory body with the Investment Dealers Association of Canada, which already has plenty of experience overseeing the country’s 168 investment dealers.
The fund industry, however, has other ideas. In public, IFIC officials make all the right noises about the need to protect investors. But behind the scenes they are pushing to run their own show—to the point of threatening to take the securities commission to court over its policies on regulation. By some accounts, IFIC also lobbied Ontario Finance Minister Ernie Eves not to make Geller the OSC’s permanent chairman, which appears to be what prompted Geller’s decision to resign.
For the record, Eves denies caving into— or even being subjected to—pressure from the mutual fund industry. “If anything, I would like a chair who is more vigilant, not less vigilant,” he told Maclean’s. Although Eves declines to discuss his reasons for not appointing Geller chairman, it’s clear there is much bitterness between the two. “Perhaps his feelings are hurt, but Mr. Geller knew going into this process that his appointment was on an interim basis. Now, you can either honor the commitment you made, or you can get your nose out of joint and go off and do whatever you want to do. I don’t think that is a very mature attitude, but that’s just my opinion.”
To give Eves his due, he has taken a step that every previous Ontario government resisted for 10 years: on Nov. 1, the province will proclaim legislation making the OSC a self-funding body, freeing it from government spending and salary constraints. Henceforth, the fees it collects will be used to run its own operations. That will allow the commission to hire more inspectors and ensure closer compliance with securities regulations.
But that still leaves unsettled the issue of mutual fund regulation. Those who believe the industry needs an independent watchdog agency will be dismayed to hear that, contrary to the OSC’s recommendation, Eves is still open to the idea of the fund business policing itself. “If the industry can demonstrate it is capable of self-regulation, I think we should be willing to sit down and talk about that.” With Geller gone, the question is whether anyone else will speak up for investors.
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