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Savvy advice averts lawsuits

|Written By Robert Todd

Investment advisers should thank their lawyers for the savvy advice that has helped them avoid an influx of lawsuits stemming from portfolio losses caused by the recent economic recession, says a Toronto counsel who acts for dealers.

‘The ground has shifted. This is a once-in-a-generation change, and the objectives and circumstances of many retail clients will have changed from where they were a year ago,’ says Mark Evans.

Mark Evans, a partner at Fraser Milner Casgrain LLP whose practice focuses on securities and capital markets, says Investment Industry Regulatory Organization of Canada statistics show “a trend of increasing complaints.”

The organization - the national self-regulator of investment dealers and trading activity - reported 1,205 complaints in 2007 and 1,312 in 2006. That number rose to 1,532 in 2008, and as of June 30 this year, 733 complaints had been received.

“But what we haven’t seen . . . is an increase in actual lawsuits - civil complaints launched across the country,” notes Evans.

IIROC also reports that 382 civil claims were launched against its members in 2006, 277 in 2007, and 224 in 2008. As of June this year, 189 civil claims had been pursued.

Evans suggests that dealers have not been subject to the high volume of lawsuits experienced during the last severe market decline of the early 2000s following the bursting of the tech bubble.

He says dealers have been “much more proactive and committed” to compliance and supervisory programs.

“Our clients are committing a lot of time and resources, and a lot of bright folks are involved in ensuring that those processes are effective and work,” he says. “I think that’s the primary driver of that trend.”

Evans says he and his FMC colleagues are responding to what he calls “the current economic climate” by reconnecting with retail clients, and have advised their own clients to do the same. He suggests that may have helped dealers avoid the type of outcry that came with portfolio losses early this decade.

“The ground has shifted. This is a once-in-a-generation change, and the objectives and circumstances of many retail clients will have changed from where they were a year ago,” he says. “Our advice to our clients has certainly been to use this as an opportunity to go and reconnect with those clients and set the objectives again, set the parameters again.”

He adds that his clients are taking notice of clients of their own who are eager to quickly recoup losses incurred over the recent recession. He says they are taking steps to protect themselves from clients who may make “reckless” attempts to regain lost wealth.

Such clients have protected themselves, says Evans, by “not agreeing to act on that client’s behalf in the pursuit of such a strategy, as they’re certainly entitled to do, but similarly the client is entitled to purchase the securities that they desire.”

He says clients also seem to have taken heed of lawyers’ advice to take notes of conversations with their clients.

“It still remains the single most effective way for investment advisers to protect themselves,” says Evans.

Nigel Campbell, a partner at Blake Cassels & Graydon LLP who practises mainly in securities and corporate-commercial litigation, often gives speeches within the industry on the need for risk-management measures.

“I would like to think that is helping,” he says. “I do think people are generally more in tune with regulatory and civil requirements, so there may be a more proficient audience than perhaps they once were.”

But he points out that it’s difficult to compare the current market instability to the tech bubble situation.

“The decline that has been experienced in this market was broader, and didn’t have the concentration argument attached to it that the high-tech market immediately did,” he says. “Because the marketplace was hit more generally and even the best-quality stocks have been injured, I think that has something to do with it.”

He adds that the current market decline was forecast, giving people enough time to protect themselves from greater losses. Many did so by taking part of their portfolio to cash, for example.

Campbell also believes the market is now coming back, making it a gentler drop with better prospects for quick


Ian Russell, president and CEO of the Investment Industry Association of Canada, suggests the average number of complaints to IIROC are “fairly low” on a yearly basis. He also notes that the organization conducts about 500 investigations each year.

“When you put that all in context, it means that if investigations are a proxy - and a very rough proxy I might add - for serious complaints, there’s just not a lot of serious complaints,” says Russell.

He says many “very distinguished lawyers” have made a positive contribution to the Ombudsman for Banking Services and Investments system, which resolves disputes between banks or investment firms and their clients.

“The consumer redress system works pretty efficiently, and I think the real value of it is it’s efficient and very cost-effective for the average investor,” says Russell. “That’s a good thing for the investor.

That would be where I would say lawyers have made a very positive contribution in helping the system work more efficiently, whether at the firm level, through IIROC, through OBSI, and I think by and large the investor is pretty confident in the system.”

He adds that it’s always best to avoid courtroom battles, and that the system aims to protect smaller investors.

“The fact that we don’t see a lot of cases in courts I think is a good thing,” says Russell.

But Campbell suggests it may be too soon to tell whether lawsuits stemming from the recent market collapse have been generally avoided.

“Who knows what the fall will bring?” he says. “I think there could be people just sitting in the wings seeing if they do have a problem or not, rather than an instance of having it brought home dramatically that they do have losses from which there is little likelihood of immediate recovery.”

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