After receiving phone calls from concerned investment firms and financial advisors, the Securities Commission of Newfoundland and Labrador launched an investigation into an investment club conducting business in the province that was apparently associated with a financial company. The quick investigation revealed that neither the investment club nor the financial company was registered to do business in Newfoundland and Labrador.

Following its findings, the SCNL quickly issued a public notice. But had it not been for those industry calls, it is unlikely the government would have looked into the situation at all, says Vanessa Colman-Sadd, a spokesperson for the Newfoundland and Labrador Department of Government Services, which oversees the provincial securities commission.

At issue were complaints about the Canadian Federation of Investment Clubs Inc. , which is affiliated with Faubourg Financial Inc. In its public notice, which Colman-Sadd calls “standard operating procedure,” the commission noted that neither entity is registered to conduct business as required under the province’s Corporations Act, nor are they registered as investment dealers as required under the province’s Securities Act. Therefore, the notice stated, both are prohibited from conducting business in Newfoundland and Labrador, or from acting as investment dealers in the province.

There is no information easily available about either the investment club or the financial firm on the Web — at least, after expending reasonable effort — and neither name appears on the Ontario Securities Commission’s database. This seems to indicate a problem.

Investment advisors have an important role to play in sounding the alarm, says Eric Pelletier, manager of media relations with the OSC in Toronto.

Industry insiders play two key roles. First, they help protect the public and the individual investor by bringing forward information and raising concerns. Second, they help to protect the integrity of the industry, which, in the wake of Enron Corp. and other financial scandals, is suffering from a serious lack of investor confidence.

But bringing information forward may not be as easy as it sounds, says Marc Flynn, vice president of regulatory and corporate affairs with CSI Global Education Inc. in Toronto. First, there are practical issues; even though it is crystal clear in the securities world who the regulators are, depending on the issue in question, advisors may not know the reporting process or whom to call. “Situations are not always clear-cut,” says Flynn.

And it is that same uncertainty that gives rise to the second issue with which financial advisors must grapple. “You need to identify your moral compass when there is no black-and-white rule,” says Flynn.

Organizations such as CSI and the OSC are helping advisors keep their compass pointing true north by providing information, insight and education on ethics. In fact, says Flynn, about one-third of the final exam in the conduct and practices handbook course — the rule book of the Canadian investment industry — is now devoted to ethical issues.

The handbook itself has been “beefed up and expanded” in this area, and inclusion of ethics is spreading beyond this course to other CSI courses. Advisors completing their mandatory 30 hours of professional development and 12 hours of compliance training are also looking to instructors to help them address ethical issues. “We’ve found some of the most in-demand courses are our ethics workshops,” says Flynn. “[As a result,] there has been an emphasis on ethics in the past few years.”

There is also an expectation that another Enron, on an international scale, or another Faubourg Financial, on a much smaller scale, is just around the corner. Certainly the Newfoundland and Labrador public notice is not unique. A quick glance at securities commission Web sites yields a wealth of warnings.

The OSC, for example, is cautioning investors to watch out for unsolicited investment offers after receiving complaints about aggressive telephone stock promotions: “Typical complaints describe high-pressure sales tactics and verbal promises that the stock will soon be listed at a higher price. These promises violate the Ontario Securities Act.”

Moving west, an Alberta Securities Commission panel has ordered $55,000 in administrative penalties and costs, in addition to market bans, against Trevor William Park, for participating in one of the largest illegal distributions of securities to come before the ASC. Park participated in an illegal distribution of about $8.5 million worth of securities to Alberta investors.

@page_break@Back on the East Coast, the New Brunswick Securities Commission has also issued a public warning to investors to beware of investment scams in the wake of hurricane Katrina.

“Investors should be cautious about investing in any scheme that presents itself as an opportunity resulting from the fallout of any tragedy or crisis,” says Rick Hancox, executive director of the NBSC. “Any scheme that appears to take advantage of a tragedy should be a red flag for investors.”

When these notices become old news, there will be more to replace them. “I’m sure there will be another scandal — there always is,” says Flynn.

And dealing with such scandals, he adds, is a matter of making ethical considerations an ingrained part of the culture of enterprise and the culture of the industry.

In the case of the SCNL’s public notice, a third element was muddying the waters. The business in question was apparently being promoted by an investment club. According to the Investors Association of Canada, there are thousands of investment clubs in Canada and in the U.S. These clubs, formed by people wanting to pool their money and invest collectively, first began in Texas about 100 years ago. They arrived in Canada in 1928, when a group of schoolteachers in Oshawa, Ont., formed the Old Canada Investment Co.

These clubs were very popular during the technology stock boom of the 1990s, Flynn notes, but they are less popular today.

They can present advisors and regulators with an interesting dilemma, he adds: “Some are well intentioned. It’s a question of what they provide. If one is used as a front, it is a difficult situation for regulators to deal with.”

All regulators can do, as in the case of the Newfoundland investment club, is inform the public and, it is hoped, educate its members about the process.

Advisors play a similar role, but the landscape is perhaps a shade greyer. There is an ethical obligation to inform clients about possible problems, but that means understanding if there really is a problem.

Then there is the issue of public perception and public confidence. “It’s a fine line for the securities commissions and the individual advisors,” says Flynn. “If there is a scam, it hurts the industry as a whole.”

However, he points out, it is a balancing act to ensure public awareness while at the same time avoiding panic. After all, no one wants the public to think that the safest place to invest is under the mattress. IE