While not illegal, market timing has a negative impact on long-term investors. The OSC says the conduct seems to have ceased. As well, it indicated that there was no evidence of late trading, which is trading that takes place after hours, usually following news that could move stocks. Such conduct is illegal.

The OSC probe comes after a U.S. crackdown on mutual fund trading practices in that country, which to date has resulted in almost $3 billion in fines. Stan Buell, founder and president of SIPA, says when it comes to investing and consumer protection, more needs to be done by both the industry and investors themselves.

"Investors need to become educated, as that is really the only way that they can avoid the pitfalls of losing their savings due to wrongdoing by the industry," he says.

Average investors need an industry watchdog
The report, which was presented to Tony Ianno, the federal minister for families, caregivers and seniors, sets out 17 recommendations and highlights the problems small investors face when investing.

The biggest is a lack of national investor protection. SIPA wants the federal government to pass an Investor Protection Act, which would establish a national securities regulator, which Canada currently lacks. Normally, oversight of the public markets is done at a provincial level, through securities commissions and self-regulating organizations.

A national securities commission is currently being examined and debated by a number of industry participants, but there is little consensus among provincial and federal governments on the need for a national regulator.

SIPA is also calling for the establishment of an Investor Protection Fund, similar to the Canada Deposit and Insurance Corporation, to protect investors if a fund company or dealer goes broke.

The 20-page report also calls for an overhaul of complaint systems that are "foggy and ineffective." It also calls for better disclosure of fees and the risks involved in owning a mutual fund and better reporting of fund performance.

The report also attacks what it calls "undisclosed marketing arrangements that could encourage financial advisers to recommend one fund over another for personal/corporate gain," noting that such arrangements should be disclosed or prohibited.

The coalition has other ideas on how better to protect the investments of Canadians, such as a 15-day cooling-off period, which would allow investors to cancel investments bought at an investor education seminar, in the same way that consumers can back out of deals made by door-to-door salespeople.

The report also wants the arbitration system governing disputes between investors and their advisers to increase its limits to $350,000 from the current $100,000.

Industry players say existing rules are enough
Another area of concern is how complaint records are maintained and retained in the mutual fund industry. The report calls for more transparency, but the Investment Dealers Association of Canada (IDA), which regulates brokerage firms and their sales forces, says those are already in place.

The IDA largely panned the SIPA/CARP report, noting in a statement that it contained "redundant recommendations" and "a number of inaccuracies."

For example, the IDA notes that Canadian regulators have "rules in place to prohibit compensation arrangements that create unacceptable conflicts of interest in the sales of mutual funds."

It also points out there are already regulations in place requiring investment firms to maintain and retain records of complaints.

John Hall, a lawyer in the financial services practice at Toronto's Borden Ladner Gervais LLP, says the "level of analysis was shockingly poor" in the SIPA/CARP report. He says a lot of issues the report raises are already being addressed by regulators "or are in the throes of coming into place."

As for the notion of an Investor Protection Agency, Hall says it's wishful thinking, noting that provincial regulators can't agree on setting up a single, national securities regulator, something that has "floundered for the last two decades. I don't think it's going to happen," he says.

However, Hall agrees with the report's call for whistler-blower legislation that would protect employees who report non-compliant activities by their employers.

But when it comes to SIPA/CARP criticism of industry practices toward investors, Hall says there are already a lot of investor safeguards in place. "The real issue is whose job is it to educate the public on that and what's the best way?"

Buell, whose organization documents abuses investors have suffered at the hands of their financial advisers, says the problem is "there are codes of ethics and written rules, but it seems even corporate guidelines are not followed."

But he's optimistic the system will be changed for the better. "It will take time, but the industry is aware of the problem and (participants) realize that they must change if they are to survive. If they do not change investors will seek other alternatives."

Jim Middlemiss is a freelance writer and lawyer based in Toronto.
He's a frequent contributor to National Post, Investment Executive and Wall Street & Technology.