By LUIS MILLAN

Ablue-ribbon panel ofindustry, academic andpolitical leaders has urged

the Quebec government to intro-duce sweeping securities reformsto overhaul the province’s patch-work of rules and practices, over-seen by several different agenciesand ministries.

The Coalition to ProtectInvestors has called on the gov-ernment to bolster protection forinvestors by establishing an anti-fraud indemnity fund, introducingmandatory evaluation of manage-ment performance through asystem of certification and rating,and implementing a cohesive gov-ernment policy.

“The government has to gettheir act together,” says RobertPouliot, a member of the Coali-tion, and co-founder and vice-president of the Centre for Fidu-ciary Excellence (CEFEX).

CEFEX is an independentassessment and certif icationorganization that works closelywith regulators, the investmentcommunity and the f iduciaryindustry.

The public f inance com-mittee, a 12-member panel repre-senting all political parties in theQuebec National Assembly, heldhearings recently examininginvestor protection and themutual fund sector in the wake ofa series of financial scandals thatstruck the province over the pasttwo years.

It is estimated that investorsstand to lose more than $675million due to alleged misdeedsby Montreal hedge fund operatorNorshield Financial Group,Montreal financial services firmNorbourg Asset ManagementInc. and Montreal f inancialgroup Mount Real Corp.

More than 25 individuals andorganizations, including Quebec’sthree professional accountingassociations, submitted briefs tothe public finance committee butfew could boast the presence ofsuch luminaries as the Coalitionto Protect Investors, whose mem-bers include former Quebec pre-mier Bernard Landry, formerprovincial finance minister YvesSéguin and former head of thef inancial co-operative giantGroupe Desjardins, ClaudeBéland.

The f inancial scandals havehad a devastating impact,according to Andrée De Serres, afounding member of the Coali-tion and director of the MBAcorporate finance program at theUniversité du Québec à Mon-tréal. It has undermined investorconf idence and highlighted thefrailties of the existing financialsystem – an issue compoundedby the “piecemeal” approachembraced by the provincial gov-ernment when enacting new lawsand regulations governing thefinancial sector.

“The government needs tointroduce a more contemporary

and modern approach that takesinto account all facets of thef inance sector,” said De Serres“We’ve migratedfrom an industrythat was based ondeposits, wherebya person receivedhis savings plusinterest, to onebased on funds.Savers have nowbecome investorsand it is they whonow absorb market risk. Yet theregulatory environment hasn’tfollowed suit. Government policyat present is incoherent – and the

latest two bills that the govern-ment passed are a case in point.”

The Quebec government

recently enacted two bills aimedat modernizing securities laws.

Bill 30, otherwise known asthe act to amend the Supple-

mental Pensions Plans Act, sig-nif icantly amends the responsi-bilities of service providers such

as actuaries andinvestment man-agers, and bestowsthem with f idu-ciary obligations.

Bill 29 aims toh a r m o n i z eQuebec’s securi-ties laws withthose of the otherprovinces and ter-

ritories of Canada in order tomake the so-called passportsystem more effective. Under acommitment signed in 2004 by

all provinces except Ontario, thepassport system – formallyknown as the Provincial/Territo-rial Memorandum of Under-standing Regarding SecuritiesRegulation – will enable issuersand registrants to only deal withthe regulator in their principaljurisdiction, providing a singlewindow of access to capital mar-kets in Canada, except inOntario.

“In a nutshell, Bill 29 isdesigned to harmonize Quebec’ssecurities laws with the otherprovinces and territories,”

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Coalition urges more investor protection

See Watchdog on page 12

“The government needs to introduce

a more contemporary approach

that takes into account all facets

of the finance sector.”

Andrée De Serres, Coalition to Protect Investors

explained Alfred Buggé, an asso-ciate with the law f irm Blake,Cassels & Graydon. “Under Bill29, the regulation of capital mar-kets will be dealt through thepassport system.”

But neither bill does enoughto provide investors with addi-tional protection, according tothe Coalition to ProtectInvestors. In a 75-page brief pre-sented to the public finance com-mittee, the coalition instead pro-poses nothing less than fiduciaryconvergence.

“The legislator must underlinethe fiduciary responsibility of allprofessionals who manage,administer, intermediate andsafeguard assets on behalf ofthird parties,” notes the brief.“Drawing a distinction betweenthose who give advice and thosewho do not, no longer reflectstoday’s market reality. The wallshave become too thin to set sucha borderline.”

To boost investor confidence,the coalition also recommendsthe establishment of an anti-fraud indemnity fund that wouldoperate on the model of theCanada Insurance Deposit Cor-poration. The fund, which wouldonly protect against fraud orf iduciary negligence by fundsand investment managers regis-tered, regulated and rated inCanada, would be equallyfinanced by investors and invest-ment management firms.

The premium charged toinvestment management f irmswould be based on their f idu-ciary risk as rated by an indepen-dent organization that wouldhave to be created. The annualrating meted out by the indepen-dent organization would improvetransparency as well as helpinvestors “make a better selec-tion of their managers,” says thecoalition.

An anti-fraud indemnity fundwould also enable small-to-

medium sized investment man-agement f irms to competeagainst larger institutions, saysPouliot.

In December 2005, the 10largest investment managementfirms handled 78 per cent of allCanadian mutual fund assets,according to statistics quoted bythe public f inance committee.

The situation in Quebec is evenmore dramatic, where less thanf ive per cent of mutual fundassets are managed locally.

“The fund would be a way torestore a level playing f ield,”said Pouliot. “Large institutionsmay give the impression thatthey are more reliable because oftheir size but we need to main-tain competition within the

market. It would alsokeep fees low – whichare now high, and rankamong the highest in theworld.”

Proposals made byQuebec’s three profes-sional accountinggroups before the publicfinance committee weremore modest. TheQuebec Order of CAsbelieves it has come upwith a solution that willimprove investor protec-tion thanks to methodsalready applied by theFinancial Transactionsand Reports AnalysisCentre of Canada (FIN-TRAC), an organizationengaged in the f ightagainst money laun-dering and terroristactivity financing.

The CAs think it ispossible to prepare a list of

indicators that would allow CAsto notify the Quebec securitieswatchdog, the Autorité desmarches f inanciers (AMF), ofcertain facts that come to theirattention when performing auditengagements. The list of indica-tors could include the obligationto inform the AMF of certaintransactions that appear to be

inconsistent with the client’sapparent f inancial standing orusual pattern of activities.

“We have proposed to sitdown with the AMF to draw up alist of indicators that wouldallow it to intervene quickly,”said Daniel McMahon, presidentand chief executive off icer ofQuebec’s CA Order.

The Quebec Order of CGAs

has taken a different tack. Iturged the provincial governmentto compel investment funds toestablish a board of directorscomposed of a certain number ofindependent members, headed bya person other than the presidentor chief executive off icer of theinvestment fund. The CGAs alsorecommend the creation of anaudit committee that wouldreport only to the board of direc-tors. As well, it recommends thatthe AMF be granted powers tohand special mandates to audi-tors other than those who auditedan investment firm, if the securi-ties regulator suspects under-handedness.

“When an auditor receives amandate from an organization,his mandate is not to detectfraud,” explained Fortin. “Hismandate is to ensure that there isan absence of important inaccu-racies in the f inancial state-ments. The AMF has a differentmandate which is to protectinvestors, and we believe that ifthe AMF has suspicions, itshould be able to give a mandateto another auditor to examine thesituation.”

The Quebec Order of CMAshas adopted a far more conserva-tive approach, going so far as towarn the public f inance com-mittee over the dangers of furtherregulating an industry alreadyheavily regulated.

“We asked ourselves, how farshould the provincial govern-ment go in order to protectinvestors without compromisingthe necessary balance for thewell-being of the f inancialindustry?” said FrancoisRenauld, the president and exec-utive director of the QuebecCMA order.

“What is the tradeoff? Thetemptation to fall into the trap ofover-regulating can be verystrong. But even if we put apolice officer on every corner ofthe street, that will not stopcrime.”

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announced last October. Kerrnoted how, for instance, the gov-ernment made an exception threemonths ago by allowing RealEstate Investment Trusts (REIT)to maintain their tax free status,yet “never really fully identifiedto our satisfaction why theyexempted REITs and did not con-sider the royalty trusts.”

Supporters of the govern-ment’s decision also point out thattrusts can stifle competitionbecause they are establishedunder a tax system that encour-ages distributions and discour-ages retention of earned income,rather than the reinvestment ofprofit for research and develop-ment and thus, innovation.

“While the income trust struc-ture may be very appropriatewhere firms need only to manageexisting assets eff iciently, it isdefinitely not appropriate in caseswhere innovation and new invest-ment are key,” testified Bank ofCanada Governor Dodge to thefinance committee.

Kerr argues that the trust struc-ture encourages both innovationand investment. He points out thatenergy trusts are exploring anumber of innovative practicesthat involve healthier environ-mental alternatives.

Moreover, he says, they appealto a large group of investors whowant to take more risk and get abetter return than if they wereinvesting in guaranteed invest-ment certificates, but who alsoprefer a certain degree of stabilityand cash flow.

Energy trusts can provide that,which serves to enhance newinvestment prospects, Kerr says.

In a related development, theRCMP has laid a single chargeagainst a civil service bureaucratin connection with an alleged leakregarding government treatmentof income trusts.

Serge Nadeau, 50, has beencharged with criminal breach oftrust. The director general forpolicy analysis at the federalFinance Department allegedlyused insider information to playthe market in late 2005.

The then Liberal governmentof Paul Martin announced afterthe markets closed on November23, 2005 that they did not plan totax income trusts, but wouldlower tax rates for dividends.

From about 3 p.m. on until themarket closed at 4 p.m. that daythere was heavy trading in incometrusts and dividend-paying com-panies, an indication of advanceknowledge of the Liberal plan.

That led to allegations ofinsider trading and the RCMPinvestigation, announced as thefederal election campaign wasbeing fought on Dec. 28, 2005.

The RCMP now says itsinvestigation is over.

One man chargedContinued from page 8

Watchdog group says not enough done

DESE

RRES

“The fund would be a way to

restore a level playing field.”

Robert Pouliot, Centre for Fiduciary Excellence

Continued from page 11