After her widely-reported speech to the Canadian Club calling for securities enforcement reform in Canada, The Analyst interviewed the Chair of the CFA Institute Board of Governors for her thoughts on markets, regulation and restoring public trust.

Following are some noteworthy extracts from the interview:

The Analyst (TA): In your speech to the Canadian Club you mentioned three areas the financial services industry in Canada must pay more attention to if public trust in the industry is to be restored: improving ethical standards, changing the regulatory structure through the creation of a national securities regulator and better securities law enforcement but your emphasis seems to be heavily on Canada’s enforcement record. Is that the biggest problem we face in restoring public trust?

Margaret Franklin (MF): High ethical standards and securities laws that protect investors come first but without proper enforcement they are meaningless. Unfortunately Canada’s record of enforcement speaks for itself. In the seven years since the RCMP’s Integrated Market Enforcement Teams were launched 26 individuals have been charged with 1,008 counts of capital market fraud offences with only five convictions at a total cost of more than $100 million—a dismal set of statistics that stems in large part from undertrained or inexperienced investigators and lawyers working at the senior levels of the provincial securities commissions. Moreover 62 percent of MFDA penalties and 80 percent of IIROC penalties are uncollected as people simply leave the industry to avoid payment. We need a single national regulator to streamline operations and to avoid the regulatory arbitrage between provincial jurisdictions and we need properly trained, experienced personnel at all levels.

As for ethical standards, education is our most effective tool for inscribing the best practices into the financial markets. Better disclosure of conflicts of interest is a further source of public investor protection. Our industry has seen too many instances of high compensation for performance without accountability for the risks, both financial or reputational. If incentives are not to be misplaced they must incorporate measures of return that go beyond short-term profits, must incorporate risk measures and, very importantly, the basis should be properly disclosed.

TA: You emphasize the public in your comments but the majority of capital market transactions are done by institutions who presumably are sophisticated investors and therefore less in need of protection?

MF: It’s true that most trading activity is done by institutions but individuals control the bulk of investment assets in Canada. The investment business I entered 20 years ago was dominated by institutions but the growth in RRSPs, the shift from defined benefit to defined contribution pension schemes, the “empowerment” of the individual investor that has come from the use of the internet, and the proliferation of financial media have combined to bring about this change. That is why I’ve described white-collar investment crime as a form of community violence. The victims are on Main Street now, not just on Bay Street or Wall Street.

TA: What role can CFA charterholders play in working to restore public trust in the financial services industry?

MF: They should strive to educate themselves and their clients fully in the complexities of new financial products and their related ethical issues. They must ensure that they invest themselves continually in understanding new market dynamics, new market instruments, and how the changing environment affects their fiduciary responsibilities to clients. They must have a commitment to professional excellence and ethical standards that goes beyond lip service. Also, now more than ever, Canadian investors need to better understand the financial industry and to seek the services of highly qualified advisors. CFA charterholders should hold the education of their clients as a continuous high priority.

TA: Are there grounds for optimism about achieving these goals?

MF: Yes. I’m encouraged by Federal Finance Minister Flaherty’s determination in pursuing the objective of establishing a single national securities regulator despite the small importance that the average Canadian ascribes to this matter, the opposition of a small but influential group and the limited political currency to be won on this matter. I’m also encouraged by the appointment of new OSC Chair, Howard Wetston, who has pledged to make enforcement a top priority during his term. And I believe that the financial and ethical failures that we have seen in the past three years have caused a great many people in positions of influence to ask if not now, then when? And we charterholders, as members of the organization that has lead the development of a code of ethics and standards of practice in the field of investment management and research should join regulators in also asking if not us, then who?

Thank you. We all look forward to playing our part in that effort.

To address the deficiencies in Canadian securities enforcement, Franklin recommended the following actions:

1. “The Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA) should be granted the statutory ability to collect fines to avoid situations in which individuals leave the industry in order to avoid having to pay enforcement- related penalties.”
2. “Obtaining the Canadian Securities Course should be a minimum requirement for employment as an investigator with a Canadian regulator.”
3. “There should be more securities lawyers with industry experience, particularly those with compliance backgrounds, working at the most senior levels of the provincial securities administrators.”
4. “Canada needs to adopt a single national regulator that will help streamline detection, investigation, and disciplinary proceedings.”

“Consistent with CFA Institute’s mission of professional excellence through education and ethics training, I’m pleased to announce that CFA Institute will now offer Canadian provincial administrators and self regulatory organization (SRO) employees easier access to the CFA Program,” she added.

Franklin said that CFA Institute will be calling for a federally commissioned task force to create the awareness and political will to tackle these issues. As part of its mandate, this task force will examine the recommendations from previous task forces – notably the 2006 Task Force to Modernise Securities Legislation in Canada which provided 33 well-received enforcement-specific recommendations – with a goal of determining why so few have been introduced.

She added “we will be inviting others in the industry who share our interest in regaining investor trust and confidence by enhancing enforcement practices to join us in the push for this task force. The task force will be made up of associations and advocates who believe that Canada needs a fair playing field for all investors.”

Toronto-based Margaret Franklin was recently named by Women’s Executive Network as one of Canada’s top 100 most powerful women, an award that she quips has had only a marginal effect so far on her bargaining power over the family dinner table.

In the financial world, as elsewhere, it is relative power that counts. Franklin has made it clear that she intends to exert her influence as chair of the world’s leading association of investment professionals to help to make changes that are vitally important to the financial markets and that are, in all-too-many cases, long overdue.

Marg Franklin, CFA – Winner of WXN’s Canada’s most powerful women: top 100

On 29 November 2010 the Women’s Executive Network held their summit and gala for Canada’s Most Powerful Women: Top 100 which honours women who are proven achievers in the public, private, and not-for-profit sectors. Ann Medina, one of Canada’s most respected and well-known journalists, and keynote Arianna Huffington, co-founder and editor-in-chief of the Huffington Post, spoke to a room full of companies and people who came out to support one of their own.

CFA Institute and Toronto CFA Society also came out to support and celebrate one of our own, Marg Franklin, CFA who won in the KPMG Professionals category which recognizes women who are professionals in practice who play a leadership role within their organizations. Four criteria were used to judge nominees: management role, vision and leadership, corporate performance, and community service.

Marg Franklin is past president of Toronto CFA Society and played a key role in its expansion of products and services to members that began several years ago. She is also the current chair of CFA Institute’s Board of Governors where she works with volunteers and staff all over the world to enhance the profile of the designation as well as services to members.

Please join us in congratulating Marg on her achievement.