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Now that regulators are close to extracting $130-million in penalties from banks that sold the $32-billion of asset-backed commercial paper that froze in 2007, the focus will shift to what market watchdogs can do better to avoid future blowups.

Bank of Nova Scotia, Canadian Imperial Bank of Commerce and a handful of other firms are set to pay multimillion-dollar penalties after the Investment Industry Regulatory Organization of Canada and the Ontario Securities Commission announced Friday that they have reached settlement agreements that will go to hearings Monday for approval. Quebec regulators have hammered out a deal with National Bank of Canada which has yet to be announced, sources said.

All of the settlements are on the same theme, that the banks and investment dealers sold clients commercial paper that was flawed, and did not do the proper due diligence on these products.

The fines, if all are approved, will turn the page on a significant chapter in the ABCP debacle, which began in August, 2007, when the market froze as buyers disappeared amid concern about exposure to subprime mortgages. Investors who had been sold the paper as a secure, short-term investment found they couldn't sell it or redeem it.

With the settlements, which sources said range as high as about $70-million for National Bank and about $30-million for Scotia Capital, regulators have exacted penalties from the parties they have decided were responsible for continuing to sell the paper even as the market crumbled. But there are still many significant unanswered questions about how regulators allowed the market to grow unchecked and unwatched, and whether they have done enough to prevent similar mishaps in the future.

"It was a very bad chapter in our history that I think points to a very important thing going forward, and that is the need to think very hard about what the mandate for [securities]commissions is going to be, because fundamentally every basic principle of good securities was violated in those contracts," former Bank of Canada governor David Dodge said in an interview Friday. He said the commercial paper was opaque and investors were unable to determine what the underlying assets were.

The complexity of the product "violates every first principle of what the [securities]commissions should be doing, and points to a need for a rethink of the mandate we're going to give to the [securities]commissions going forward," Mr. Dodge said.

Asset-backed commercial paper was supposed to be a safe, short-term investment. It was sold under an exemption from securities rules that enabled it avoid much of the disclosure required for other securities, such as corporate shares.

Securities regulators, which were focused on companies that sell stocks and bonds, did little to oversee the market for ABCP, which critics say existed in a regulatory vacuum.

In response, the regulators, for their part, have proposed changes based on the ABCP issue. The Canadian Securities Administrators, the umbrella group for securities commissions, set up a committee to study the freeze. It has made a number of key recommendations, including changing the laws so that future ABCP sales will not benefit from a current exemption from prospectuses that outline in great detail how an investment works.

The public comment period ended in February, 2009, and the CSA is assessing comments received, OSC spokeswoman Jill Homenuk said.

While such changes aimed specifically at ABCP might stop another blowup in the specific area of asset-backed commercial paper, they still leave open the possibility that another complicated type of investment product could be invented that could take advantage of exemptions to push a risky product on investors.

As a result, many observers feel that the securities commissions must broaden their oversight from just stocks and bonds to more complicated types of securities that are increasingly popular.

It's not only Canada that needs to take action to widen the purviews of regulators, Mr. Dodge said. Regulators and bodies such as the Financial Stability Board have been more focused on reforming banks than they have on reforming capital markets, he said.

Colin Kilgour, head of Kilgour Advisory Group and a consultant who has helped ABCP holders understand their options, said he hopes that the experience with ABCP will push regulators to focus more on credit markets, which have tended to be relegated to second place behind stocks in the minds of watchdogs.

"But I think my sense and my hope is that's changed, but it's a catch-up game," he said.

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