Securities regulators approved $138.8 million in penalties Monday against seven banks and investment dealers in connection with the meltdown of Canada's $32-billion asset-backed commercial paper market in 2007.
The biggest settlement — $75 million to be paid by National Bank Financial — was actually approved earlier by L'Autorité des marchés financiers (AMF), the Quebec securities commission, but was not announced until other penalties were approved Monday by two other regulators. The AMF also approved a penalty of $3.2 million against Laurentian Bank.
The securities industry's self-policing organization, the Investment Industry Regulatory Organization of Canada (IIROC), approved a $29.3-million penalty for the Bank of Nova Scotia's Scotia Capital unit.
IIROC also endorsed settlements of $3.1 million against Canaccord Financial and $200,000 against Credential Securities. It also required Canaccord to submit to an independent review of its procedures for complying with securities regulations.
And the Ontario Securities Commission approved a $22-million settlement its staff had reached earlier with Canadian Imperial Bank of Commerce and its CIBC World Markets division, as well as a $6-million penalty against HSBC Bank Canada. Both of those banks admitted they did not act in the public interest in their handling of the securities.
The regulators found the banks and investment firms did not do enough to ensure their salespeople understood the complexities of ABCP before they sold it to their clients.
Two parties have yet to settle: Deutsche Bank Securities, a seller of ABCP, and Coventree Inc., a creator of the notes. Deutsche Bank faces an OSC hearing on Jan. 6 and Coventree on Jan. 14.
ABCP was sold to clients as a low-risk, liquid investment until the market seized up in August 2007. The banks and their clients worked out an arrangement granting them new bonds which they could sell and regain the money they had lost control of when the market froze. That was approved by a court in January 2009.
Regulation was light
The securities originated in what is called the exempt market, which does not have much of the regulation and risk disclosure requirements of stock markets, but had been restricted to large, sophisticated investors.
In 2005, provincial securities regulators opened the exempt market to smaller players as long as the securities had earned approval from a debt-rating agency. After that decision, the market for those types of securities ballooned from $10 billion to over $30 billion as poorly informed investors bought into the market.
Still unresolved is the question of whether there will be any regulatory issues to be faced by Quebec’s provincial pension fund, the Caisse de dépôt du Québec, which was a significant player in the ABCP market.