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Market timing focus of OSC mutual fund crackdown: Selloff not expected


Date: Saturday, July 24, 2004

Wojtek Dabrowski - Financial Post - Saturday, July 24, 2004 - The Ontario Securities Commission's impending disciplinary action against the mutual fund industry in Canada is likely to be focused on market-timing abuses, observers said. "I don't think we're going to get much in terms of illegal activities," said one Bay Street analyst who covers the industry, referring to the illegal practice of late trading also being investigated by the OSC. Many in the fund business are on edge after the OSC signalled this week it would commence "proceedings" within weeks against parties in the industry for trading abuses. Charges of late trading would deliver a black eye to the industry as a whole and could be highly damaging to firms and spark large-scale outflows of funds, sources said. "As long it stays sort of, 'frequent trading' and 'everybody was doing it' and 'they paid their fines' ... then I don't think we're going to get that spike in redemptions for the companies that are implicated the way we did in the United States," the analyst said. He added he views market timing as "fairly widespread in the Canadian industry." Glorianne Stromberg, a former OSC commissioner and mutual-fund expert, also predicted market timing will likely be "at the heart" of the regulator's pending enforcement action. The comments come after the Financial Post reported yesterday that the OSC plans to begin proceedings against an undisclosed number of fund companies within weeks as a result of its investigation into market timing and late trading in the $476-billion industry. OSC spokeswoman Wendy Dey gave little detail as to the nature, scope and target of the planned regulatory action, which drew Ms. Stromberg's criticism yesterday. "An announcement of this nature without the details to allow the industry and the public to assess what's behind it is irresponsible," she said. "If they were not in a position to provide the detail, they shouldn't have made the announcement." John Murray, vice-president of regulation and corporate affairs at the Investment Funds Institute of Canada, said the industry group has been working with the OSC "on all of these issues." He said the commission has indicated it plans to make the results of its investigation public by late August. However, "in all of our discussions with the OSC, we haven't been advised of any issues that they've uncovered," Mr. Murray said. The OSC probe started in November with 105 fund companies and has since narrowed greatly in scope to about 15 which have been targeted for on-site visits by the commission's enforcement and compliance staff. Yesterday, Bank of Montreal spokeswoman JoAnne Hayes confirmed the bank's mutual-fund arm has received such a visit and "and the OSC is actually now just reviewing the information they collected." CI Fund Management Inc. has previously said it has been visited. The regulator began its probe in response to U.S. investigations in the by Eliot Spitzer, the New York State Attorney General, and the U.S. Securities and Exchange Commission. There, fund companies have been slapped with millions of dollars' worth of fines for market timing and allowing the illegal practice of trading after the regular close of markets, or late trading. IFIC has also said the possibilities for late trading are next to none in Canada, thanks to a centralized system for processing orders -- either through banks or FundSERV Inc. Both options time-stamp orders and "effectively eliminate the possibility of late closing," IFIC has stated.