By Richard Neil Kennedy
Another Friday means another installment of Friday Finds on the CBLB! What better way to start your weekend than a round-up of the top five corporate and securities law news stories that have been circulating headlines. Some of the news dominating the headlines this week include further news from WeWork, enforcement and regulatory developments from the Mutual Fund Dealers Association of Canada, and the collapse of the historic Thomas Cook travel company.
Following up on the WeWork news from last week, two top Canadian executives at the firm have left following its failed initial public offering (“IPO”). WeWork’s CEO, Adam Neumann, has also stepped down after pressure from the board and investors. Mr. Neumann will, however, remain the firm’s nonexecutive chairman. There is also rumours that his voting power will be further reduced from 10 votes per share to only 3, a significant decrease from his original 20-to-1 voting power. He is being replaced by two deputies, Sebastian Gunningham and Artie Minson, who have alluded to potential cutbacks at the company, leading to fears of serious job loss. WeWork is also planning to sell a $60 million private plane that Mr. Neumann has been using to travel the world, a purchase that originally raised some red flags for corporate governance analysts. All of these developments come after a month of heavy scrutiny on Mr. Neumann’s behaviours as CEO and reports that the company lost $1.6 billion last year. It will be interesting to see how this shakeup in corporate governance affects the future of WeWork and its proposed IPO. This story is an example of how important good corporate leadership is in order to access the public capital markets.
In enforcement news, the Mutual Fund Dealers Association of Canada (MFDA) has agreed to a settlement with David Michael Gordon on Thursday that will see him permanently banned from the mutual funds industry. Mr. Gordon failed to ensure that his advice to six investors met MFDA’s “know-your-client” requirements. Specifically, he advised these investors, who all had a low-risk tolerance, limited assets, limited capital markets knowledge, and were all retired or close to retiring, to invest in a relatively risky precious metals sector. He did not explain the risks and potential benefits of investing in such a sector. The investors lost about $74 thousand before pulling their funds out of the investment account. Mr. Gordon has agreed to pay a $25,000 fine and $2,500 in costs. Fortunately, the investors were compensated by FundEx for their losses. This is an example of how poor financial advising can significantly harm investors and the need to ensure dealers meet the standards set out by the MFDA.
In regulatory developments, the Ontario Securities Commission approved the MFDA’s proposed continuing education requirements for fund dealer and their representatives on Thursday. Specifically, the MFDA program will establish minimum continuing education requirements for MFDA members and their approved persons. The requirements will be similar to the continuing education requirements for members of the Investment Industry Regulatory Organization of Canada (“IIROC”) and will be run on a two-year cycle. What this means is that MFDA members will have to complete a certain number of continuing education courses (or “credits”) in order to remain in good standing within every two-year cycle. This will include continuing education components regarding ethical issues, changes in MFDA rules and policies, changes in legislation, and other regulatory requirements. There are other topics that the courses can cover, such as a refresher on the know-your-clients standards. If a person fails to comply with these courses then they will not be allowed to act as an MFDA approved person until the credential-granting authority (that is created under the rules) has determined that they met the prescribed continuing education requirements. The purpose of these new requirements is to ensure high standards of professionalism and ensure members keep their industry knowledge current. These new requirements will become effective at some future date determined by the MFDA. Given the last story we covered, these continuing education requirements appear apt in order to protect investors.
In international news, the 178-year old British travel company Thomas Cook announced and declared bankruptcy this week. This affected about 150,000 travellers and left about 20,000 employees without a job. This move was caused by what the CEO of Thomas Cook called an “insurmountable” debt of £1.7 billion. What caused this collapse of a reputable, long-thriving company despite a booming travel market? Some say it was caused by the competition from the internet, a declining interest in travel packages, and the depreciation of the Sterling Pound given the looming Brexit. Indeed, this story shows that even long-standing companies are not immune from new forms of competition, political climates, and foreign exchange markets. Some even claim that the firm’s merger with rival travel agency firm MyTavel Group in 2007 strapped the firm with too much debt that it was never able to fully recover from. The Chinese conglomerate Fosun was on the verge of saving Thomas Cook from bankruptcy with a cash injection of nearly £900 million but, at the eleventh hour, withdrew its support because a lack of additional funding from other financiers. Not even the British government was willing to save Thomas Cook, with the transport secretary Grant Shapps calling any bail-out of the firm as “throwing good money after bad”. It will be interesting to see if any other corporation decides to buy Thomas Cook and try and keep the 178-year old firm alive or if it will shut its doors for good.
In somewhat Canadian, somewhat international news, the International Organization of Securities Commissions (IOSCO) released a report that found that Ontario and Québec fail to meet IOSCO standard when it comes to industry incentive policies for financial dealers. These standards are based on nine principles that are intended to prevent financial firms from taking advantage of retail investors by selling them complex financial products. In other words, the standards are in place to suppress the incentive of dealers to sell retail investors complex products when simpler products would better meet their investment goals and needs. IOSCO was hopeful that proposed Canadian Securities Administrators (“CSA”) regulations would remedy these deficiencies. This story relates to an underlying theme in news this week in that Canada must do more to inform investors and ensure that dealers and advisers are properly accounting for their desires and wants.
That wraps up this week of Friday Finds! Thanks for joining us and be sure to check back next week for another round-up of the top business and securities law news stories.