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Doug Harris

From: Elizabeth Naumovski <enaumovski@caldwellsecurities.com>Sent: Tuesday, August 25, 2015 4:34 PMTo: Doug HarrisCc: Tom Caldwell - BlackberrySubject: Submission by & Sent on behalf of: Thomas S. Caldwell, C.M., Chairman & CEO,

Caldwell, Securities Ltd. - IIROC: Request for Comments on Strategic Issues Attachments: Death by Regulation Natl Post Oct 28 2013.pdf; NP Comment Regulated Feb 2013.pdf;

NP War on Advisors Nanny State Jan 2014.pdf; Request for Comments on Strategic Issues August 2015.pdf

August 25, 2015 Mr. Doug Harris Vice President and General Counsel Investment Industry Regulatory Organization of Canada 121 King Street West, Suite 2000 Toronto, ON M5H 3T9 Sent by email: dharris@iiroc.ca

Request for Comments on Strategic Issues Submission by: Thomas S. Caldwell, C.M.

One of the challenges facing both individuals and institutions is that posed by the

Scottish bard Robbie Burns: “...to see ourselves as others see us”.

I have attempted to present some perceptions of IIROC, which hopefully, may form a

component for future thinking and strategy. The partial examples are for illustration

purposes.

“Self Regulation” – There does not seem to be any “self” in self regulation. This comment

by a senior government official reflects the wide spread industry view that IIROC does not

have any empathy with, or real understanding of, the investment process. By not adequately

addressing the overall health of the investment industry, IIROC has lost its raison d’être and

is simply a duplicate regulator which will be eventually absorbed.

“Attitude” – Despite IIROC’s purpose statement, in reality, our Self Regulatory Organization

(“SRO”) does not appear to be overly concerned about regulatory balance. This balance is

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required to build healthy capital markets in order to sustain the Canadian economy as well as

to safeguard investors. IIROC’s practice and publications imply industry participants are

both rapacious and unethical. This does not help anyone and is seen as “self promotive” at

the expense of hard working and ethical industry participants.

“Inputs” – IIROC is heavily influenced by people from the administrative side of its larger

participants and self appointed investor advocates rather than direct participants involved in

the daily exercise of buying and selling securities, those who know, understand and yes, care

about investor needs. Bottom line, there exists a sense of IIROC’s isolation from the reality

of our industry, beyond its administrative focus.

“Burden” – IIROC appears to have little concern with the industry burdens it is imposing

regarding procedural matters. The primary goals of efficiency and meaningful regulation are

long gone. The time burdens now being imposed by non-substantive and paper trail

requirements have created an unsustainable business model for independent firms. Many

feel that is the end goal of this exercise as it drives business into the packaged products of

IIROC’s larger participants.

The loss of independent firms is no doubt explained away by market conditions, metals and

energy pricing etc. Make no mistake – over regulation is an important part of this

trend. Many independent firms or individual Advisors wonder how long they can last after

each IIROC audit, as they see the noose (regulatory burden) continually tightening.

“Conflicts” – The fact that a regulator, supported by its participants’ fees, supports its own

lobby groups is an outrageous conflict of interest. These lobby groups describe themselves

as “fair” but in fact continually promote the thesis that more regulation is required. It is

similar to the fire department hiring someone to yell “fire” through town to get bigger

budgets and new fire engines. At a minimum, IIROC should ponder this practice as a

misappropriation of funds.

“Disclosure” – There is a mantra within the legal world that more disclosure is better than

less – even if what is being disclosed is more theoretical than substantive. This has infected

the regulatory environment such that we now have no real disclosure. More disclosure is

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less. We have passed the tipping point whereby clients don’t read anything because of the

volumes of legal necessities thrown at them.

For example, no one reads a prospectus anymore. Some clients are now even refusing to

update new client application forms (“NCAF’s”) because of paper fatigue.

We, in our industry, must suffer through this process, clients have lives beyond their

investments and “store” disclosures received in a drawer for later reading i.e., never.

My job as an Advisor is to sift through news and research to discern what is

important. Volume undercuts substance. We should be aiming for meaningful.

“Shoe-horning” – IIROC is determined to fit investors into boxes and thus constrain their

best interests. It is important that the bond/stock components of portfolios be flexible, yet

NCAF’s insist on fixed rates or require an NCAF change with asset mix alternatives. Asset

mix should be altered to market conditions. For example, a 1.5% yielding 10 year

government bond is not a “low risk” investment. Asset mix is an important portfolio

management tool. Any “stickiness” imparted by regulation impacts client risk profiles and

yes, having to alter forms each time is a friction that causes many Advisors to simply avoid

the portfolio adjustment.

Further, as someone over sixty-five years of age, with no mortgage and less in the way of

cash requirements, I often participate in speculative securities. I also like to think I have

become a little smarter with age. These being said, regulators feel seniors should be

precluded from seeing such opportunities (and risks) as no Advisor would risk offering any

new potential growth opportunities to older clients.

The risks to the Advisor are now too high to service both smaller and older

clients. Regulators have taken the view that the modern Advisor has evolved little from the

old “penny stock promoter” and their regulatory paradigm is structured accordingly.

“Arrogance” – I have only touched upon a few points in these notes because of my well-

founded suspicion that anything I may say will simply be discounted as “vested” or

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“biased” inputs by an industry participant and thus “tainted”. Therein lies the Achilles heel

of IIROC and its fatal flaw.

My fifty years plus experience in this industry has given me the opportunity to see how

Advisors work hard for and care about their clients. The commitment of the vast majority of

people in our industry is unparalleled in any other business environment.

Maybe it would be better for IIROC to attempt to build on the positives rather than their

present destructive course of being the toughest cop in town.

“A Goal” – The future IIROC might consider setting a new, positive goal of capital market

efficiency. This requires a new vision which would mean trying to make regulations more

efficient (less volume but greater relevance). It also requires greater skills and industry

knowledge. IIROC’s people are up to the task and I suspect would be energized by a greater

and more positive spectrum of opportunities.

It also means assisting the regulators to balance their approach in order to support

economic growth and job creation.

Yours respectfully,

Thomas S. Caldwell, C.M. Chairman and CEO Encl. Articles

MEMBER: INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA & CANADIAN INVESTOR PROTECTION FUND ________________________________________________________________________________________________________________________ 150 KING STREET WEST, SUITE 1710, TORONTO, ONTARIO, M5H 1J9 TEL: (416) 862-7755 ●1-800-387-0859 ● FAX: (416) 862-2498

www.caldwellsecurities.com

 

  Elizabeth Naumovski Vice President Marketing Caldwell Securities Ltd. 150 King Street West, Suite 1710, P.O. Box 47 | Toronto, ON | M5H 1J9 Tel: 416.862.7755 | 1.800.387.0859 Fax: 416.862.2498 www.caldwellsecurities.com

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FULL COMMENT

Thomas S. Caldwell: The Canadian economy is regulated to death

Thomas S. Caldwell, National Post | Feb 4, 2013 12:01 AM ET | Last Updated:Feb 1, 2013 5:00 PM ET

Thomas Caldwell, chairman and CEO, Caldwell Securities, speaks to the Empire Club of Canada's 19th Annual Investment Outlook

luncheon, in Toronto, Ontario, Canada, on Thursday, January 3, 2013. Caldwell, who used the opportunity to attack over-regulation

of the securities industry, holds two copies of the Ontario Securities Act, one a small book from the 80's and the newest edition,

bigger than a phonebook.

The following is an edited excerpt of a speech given by Thomas S. Caldwell at the Empire Club in Toronto on Jan. 3, 2013. We are now at a point where a major impediment to economic growth, job creation, innovation and business formation is regulatory strangulation within the financial-services sector.

Before I am pounced upon by regulators and media, let me state that I have, throughout my career, been a strong advocate for intelligent, clear and effective securities regulation for the protection of investors, the securities industry and our country’s economy. We have now gone far beyond that, into the realm of regulatory overkill or strangulation, under the mantra that “more is better.” This has gone on undetected by politicians who do not see the complex issue of capital markets as having any political upside. The unintended consequences of unfettered regulators continually elude our law makers. The number of Ontario securities regulations, and the size of the regulatory bodies, has grown exponentially over the years, with a parallel deterioration in investor protection. The fact that the great scandals have occurred as regulations have become more numerous is partly because regulators are unfocused, and partly because of a massive regulatory volume burying what is really important. Bre-X and Sino Forest are cases in point, with the latter being a replica of the former. Auditors indeed have some responsibility here, but regulators should have spotted Sino, with its identical modus operandi to Bre-X, on day one. Despite the fact that regulators have let big scandals slip right under their noses, and have been slow following-up when they’re finally spotted, regulators, seeking to expand their mandates and staff, insist on focusing on the retail investor and stacking up more and more obligations on the financial-services sector, particularly independent brokers and advisors. Small investors are now too risky and too costly to be served by independents, who generally provide more personalized service and broader advice. Thus, small investors are forced to buy the wholesale products offered by the big banks. The unfortunate reality is that the small investor is long gone from the investment scene. If exchanges stripped away high-frequency trading — which is done by computers and indirectly encouraged by regulators — the volume of trade by individuals would be a small fraction of their historical levels. To make matters worse, our regulators support lobbyists who are critical of the investment industry, and have created a vicious cycle in which the lobbyists have a pecuniary interest in investment advisors being penalized. This is like the fire department hiring someone to run up and down the streets yelling “fire,” in order to get more fire engines and bigger budgets. Regulators are now expanding their “concerned” lobby group sponsorships. I would remind regulators that their task it to assist in building a healthy financial-services environment, not to destroy it. Rarely a day goes by without our industry being slagged by media — usually fed by regulators. Non-major violations of securities regulations are typically branded as “acting against the public interest,” which to the public sounds like a crime against humanity. The ombudsman for the financial-services industry tries to punish firms that disagree with the regulators’ judgements in the media. That hurts every firm in our industry. To some degree, it is self-promotion by regulators at the expense of those they regulate. Looking at the above, one could easily ignore the fact that billions of dollars change

hands each day in hundreds of thousands of transactions by tens of thousands of people who are both hard working and highly ethical. We also have to contend with a situation in which Canadian and American regulators are in a “race to the bottom,” each trying to out-regulate the other. Canadian regulators, mesmerized by America’s slow suicide, are determined to appear tougher. But the U.S. economy has the size and depth necessary to partly absorb regulatory over-reach and abuse. Canada lacks that bulk and is at a different historical phase in its development. By imitating U.S.’s knee-jerk regulatory changes, we are removing the opportunity for Canada to become a world financial centre — a “Switzerland of the north.” Securities regulations should be simple and clear in order to effectively police and to comply with. That is far from the current situation. As one securities firm’s compliance officer recently stated: “I need roller skates just to keep up.” Compliance now comprises between 30% to 50% of administration costs for independent brokers and advisors. That is simply not sustainable, as regulators have lost all sense of, or concern for, the costs and consequences of their actions. The immediate consequences of unchecked regulatory competition here in Canada are as follows:

1. Investors are being deprived of investment choices, in terms of both products and service providers. Although our banks are also suffering from regulatory overkill, they have the size and diversity necessary to sustain their business models. Independent firms do not. They are dying.

2. Entrepreneurs and innovators are being starved for funding to try new things. Banks fulfill a key roll in our economy, but backing new or small enterprises with equity investment is not one of them. Apple, Intel, Microsoft, BlackBerry plus hundreds more, including many of our large resource companies, may never have got off the ground in our current Canadian regulatory environment. It’s important to remember that smaller independent brokers finance new enterprises. Kill the former, and the latter dies or goes elsewhere.

3. Because the regulators have lost focus, they have allowed, and indeed encouraged, an overly complex financial market to develop. High-frequency trading now accounts for a significant portion of all equity trades. You cannot be considered a true investor if your holding period is a fraction of a second. The situation we have now is one in which the folks with faster computers, or better programs, are continually able to jump in front of legitimate investors.

4. The destruction of “open and visible” trading markets, as sanctioned and encouraged by regulators, has now undercut the basis of all investment and trading: The accurate determination of the price at which a trade should take place. It is too easy now to fix prices. Many individual investors now see the game as rigged against them and are opting for other investment choices, such as commodities, condos, land, etc.

5. Companies seeking financing are now avoiding public markets whenever possible. They currently seek funding in the private capital world or — in the case of the U.S., U.K. and

Australia — “crowd financing” on the Internet. Anything to avoid the regulatory costs and threats of public markets.

6. The main concern of industry regulators still appears to be procedures and paper trails. One firm was recently fined for doing the right thing, but not having a written procedure for doing the right thing. The new Client Relationship Model being developed by Ontario regulators will complete the overkill. It is similar to holding car salesmen responsible for all future breakdowns or accidents. This should keep brokers fully focused on paper trails. With every crisis, the regulatory strangulation is accelerated, whether relevant or not to the individual securities industry registrant. As Oscar Wilde said, “The bureaucracy has to expand to meet the needs of an expanding bureaucracy.” There are, however, a few things that can be done to start rectifying the situation:

1. Take the Ontario Securities Act and cut it in half. Remove the redundant, dated and unnecessary regulations, and focus on what really matters: principles and goals. At the same time, we need to stop funding lobby groups whose role is to slag the investment industry and aggrandize regulators.

2. Regulate the regulators, at all levels. A mechanism must be established to curtail regulatory abuse, other than appealing to the regulator itself, whose only interest is building upon what already exists — despite the cost and overall economic consequences of their actions or inaction.

3. Provincial securities commissions should not outsource their regulatory responsibilities, and should focus on those regulations that lead to good governance and disaster prevention. This step is particularly important to provinces other than Ontario, as a national industry sub-regulator using a “one-size-fit- all” model can be regionally destructive. Farming out regulation has removed broader capital market accountability. Also, self funding of regulators has led to self-aggrandizement. At present, with no effective check on securities industry regulators, they have become destructive forces impacting the public, the securities industry and the economy as a whole. The regulators themselves need to be regulated. National Post Thomas S. Caldwell Chairman of Caldwell Investment Management Ltd.

150 King Street West, Suite 1702, P.O. Box 47

Toronto, ON M5H 1J9

Tel: 416-593-1798 | 1-800-256-2441 Fax: 416-862-2498

tcaldwell@caldwellsecurities.com www.caldwellinvestment.com

Thomas S. Caldwell: Death by regulation THOMAS S. CALDWELL, NATIONAL POST | 28/10/13 | Last Updated: 24/10/13 4:37 PM ET

Peter J. Thompson/National Post Canada's unaccountable securities regulators are strangling the country's economy with ceaseless expansion of their own powers.

To put the case simply, there are three main “levers” that governments can operate when seeking to grow

the economy. They can exert all the expansionary influence they wish on the first two levers — fiscal and

monetary policy, but if securities regulation, the third lever, is over-burdensome or locked down, no lasting

positive result can occur for the economy as a whole.

Sadly, Canada’s third lever is precariously close to being locked down already.

The importance of efficient securities regulation is ignored by politicians because it is not well understood by the public at large and thus moves few votes. Securities regulators, who monitor and regulate tradable financial assets, have, with the support of their sponsored lobby groups and the media, taken on the role of guardians of the public. But they are not themselves accountable. In recent years, they have become self-sustaining empires that also provide considerable revenues to their governments. Fines and fees are now part of a hidden tax structure. And these costs are eclipsed by the resources and time companies must expend keeping up and complying with the massive growth in regulatory requirements. Every securities transgression is portrayed as proof of a widespread problem, demanding even more regulation, despite the fact that tens of thousands of Canadians handle hundreds of thousands of transactions involving billions of dollars each day, in an industry with extremely high overall levels of professionalism and integrity.

Regulatory strangulation in the securities sector has tremendous relevance to Canadian economic growth, innovation, job creation and our future standard of living. Our country’s real generator of economic growth are small businesses. For these enterprises to start up and grow, they require access to capital. Banks have little interest in share ownership of newer or smaller enterprises and borrowing is an inappropriate means of financing new companies. As a result, new enterprises

typically access public capital via smaller investment dealers, not the large bank-controlled companies.

And herein lies the problem: Regulatory burdens for smaller to mid-sized investment firms are devouring cash flows and profits at an unsustainable rate. This means that the investors we need to drive our economic growth are spending so much money on bureaucratic requirements that they are limited in how much they can invest. If the offending regulations were substantive and relevant to client protection, there would be some justification for this economic drag. But they have gone far beyond that into procedural rules largely irrelevant to the goal of investor protection.

At a time when the majority of independent investment companies are struggling for survival, the recent proposal by the Ontario Securities Commission (OSC) to increase fees by 50% over three years, shows the major disconnect between Canadian securities regulators and the investment industry. The 2013 Ontario Securities Act is now approximately 3,500 pages, up from 2,800 pages in 2012. To help hide this growth, the OSC has now switched to thinner paper.

Canada needs to do a better job regulating its regulators, and ensuring that bureaucratic obligations do not needlessly stifle our prosperity But the effect on our economy cannot be so easily hidden. The Act is updated every six months and even securities lawyers are complaining about not being able to keep up with the volume of changes. The costs of producing a corporate prospectus, a disclosure document which describes a security to potential buyers, and which is rarely read, now routinely costs as much as $100,000. This has a direct impact on jobs, economic growth and innovation.

Canadian entrepreneurs who have developed or wish to build an innovative technology company are now faced with the choice of a complicated and costly effort to gain access to public financing or of simply selling their business to a larger, generally American, company. Many choose the latter, to the great detriment of our country’s future.

Canada needs to do a better job regulating its regulators, and ensuring that bureaucratic obligations do not needlessly stifle our prosperity. A good place to start would be ensuring that Canadian entrepreneurs, and those who specialize in investing in growing companies, are given more of a voice in Canada’s financial oversight community. Only they can be trusted to ensure that the government’s solution to infrequent cases of negligence or abuse won’t be yet further layers of regulations, lawyers and bureaucratic busywork.

National Post

Thomas S. Caldwell is chairman of Caldwell Securities Ltd and chairman of the Canadian National Stock Exchange (CNSX). Caldwell Securities Ltd does not provide corporate finance to small or large companies.

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OPINION

War on advisors Nanny-state regulators and lobby groups are sidelining investment experts

THOMAS S. CALDWELL, SPECIAL TO FINANCIAL POST | January 8, 2014 5:05 PM E

The current regulatory assault is based on the premise that investment advice is worthless. This is an abuse of power

It is part of human nature to “buy high” and “sell low” because of the comfort of being in tune with the prevailing

“wisdom.” The typical investor rarely invests during dark or crisis periods but that is where the bargains live.

Over my long career in the investment industry, I have observed two key components behind successful investing. The first is the correct interpretation of information. Investment success is not dependent upon information but rather on how one looks at or behind that information. What is it really telling you against the backdrop of a wider picture, experience, intuition and often contrary thinking?

Information itself usually just reinforces existing trends or facts which are often already priced into the market. Gains come from changes in events, perceptions and possibilities, which are rarely anticipated in the public forum. That is where experience and professionalism come into play.

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The second successful investing ingredient is that of quelling one’s emotions. Throughout my experience, I have seen more money lost, or simply left on the table, because of emotions than any other single cause. The inability to pause and take a broader or longer view in duress situations is common to many investors. It is a costly failing.

It is also part of human nature to “buy high” and “sell low” because of the comfort of being in tune with the prevailing “wisdom.” The typical investor rarely invests during dark or crisis periods but that is where the bargains live.

Many years ago I purchased a seat on the New York Stock Exchange for $2-million for our company. Within a month, and as a result of a scandal, they were trading at $1-million. That quick sharp drop certainly gave me a pause, but upon discussing it with our company’s partners (a key part in quelling one’s emotions) we resolved the upside possibilities still existed and proceeded to purchase another 48 seats, whose value eventually reached $9-million per seat. What I am pointing to is the critical role of advice in helping the investor to clarify what is really going on in markets and assisting to quell the emotions of greed, fear and anger.

These critical success factors point directly to the important role of the “Investment Advisor” or broker and yes, they are not all the same and yes, we do not win with every investment and yes, we too have bad periods. This also holds for other professions. But as Red Adair, the famous oil well firefighter, put it: “If there is anything more expensive than hiring a professional, it is hiring an amateur.” Any success I have had in investing has come from bouncing my ideas off our team or my “Investment Advisors” and they are worth every penny I pay them.

Throughout 2013, the critical role of advising investors has come under constant and withering attack by regulators, their sponsored lobby groups and some elements in the media. Their rationale is certainly not borne out by the facts if anyone looks at overall investment results and the most recent survey of investor satisfaction with their Investment Advisors.

One can only conclude that self interest, empire building and revenues could be factors – at the expense of a critical component in Canada’s economic growth.

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Provincial securities commissions and their sub-regulators have expanded their reach geometrically over the years, far beyond investor protection into procedural audits, in order to make sure the correct paper work is in place to validate the obvious.

For example, the expansion of the Ontario Securities Act is proceeding at such a rate that even securities lawyers are complaining about not being able to keep up.

The costs of compliance of this regulatory onslaught are now decimating the last of the independent brokerage firms and thus depriving investors of choices, beyond bank controlled mutual funds. Corporations are also avoiding accessing public securities markets and staying within the realm of “private equity” investment, thus depriving the average retail investor of opportunities and yes, risk as well.

The regulatory “nanny state” view of the world is now moving to effectively prohibit all but wealthy investors over 65 from holding an equity (stock) portfolio. Instead, it is mandated that they must hold bonds (currently yielding 3% or under) versus a portfolio with higher dividend or growth companies. Let me help regulators by pointing out that a major portion of many of us over 65 are not stupid. In fact, we tend to become a little smarter and wiser with time. Further, we now have a life expectancy which will require growth and inflation protection (yes, inflation will be back). In short, bonds are high risk at current interest rates.

Another of the current assaults on Investment Advisors is the war on “trailer fees” paid to brokers who have clients in mutual funds. The biggest error in buying mutual funds is not owning them long enough. The role of keeping investors in place is a valid one. Most mutual fund managers get it right after a year or so of poor results. Switching mutual funds at times like these is like changing lines at the airport – takes you longer to get where you want to go.

The bottom line is the current unprecedented regulatory assault is based on the premise that investment advice is worthless (part of an earlier media campaign) and fees would be better spent on yet more regulations. The attack on the independent investment industry is reinforced by lobby groups who, in many cases, have been sponsored by regulators. This is clearly an abuse of power and smacks of conflict of interest. It is like the fire department hiring people to yell fire in order to get bigger budgets.

Complicit in all of this are some media personalities who seek to craft themselves as unlicensed investment authorities.

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The role of the media is to disseminate information. The task of savvy investors and their investment advisors is to look behind the headlines and the obvious and to anticipate possibilities. Investment advisors have historically been key players in Canada’s prosperity. It is far too dangerous to allow their function to be further diminished or destroyed.

As far as provincial governments are concerned, they have given their regulators a free, unchecked hand to do as they will with our economic and capital market potential. I would remind governments at all levels that fiscal, monetary and grant efforts will have little lasting economic impact if capital markets are inefficient, inaccessible and unnecessarily costly or cumbersome.

Thomas S. Caldwell is Chairman & CEO, Caldwell Securities Ltd. and Chairman, Canadian Securities Exchange.