OSC targets 4 fund managers over market timing

Date: Wednesday, September 22, 2004

Securities regulators in Ontario said Tuesday they have warned four mutual fund managers of possible enforcement action over alleged market timing improprieties. The Ontario Securities Commission said the fund managers were notified following the close of stock trading on Monday. The OSC said the four fund managers, which it did not name publicly, will have an opportunity to respond to the allegations. Investors Group, AGF Funds Inc., AIC Ltd. and CI Fund Management later issued separate statements saying they were the ones that had been sent letters by the OSC. The provincial securities watchdog said the allegations stem from a probe that began last November into potential trading abuses in the fund industry. Regulators said they have not uncovered any evidence of late trading. Market timing involves quick in-and-out trading. It is not inherently illegal, but many fund companies prohibit it because it can add costs and eat into profits. And regulators frown on it because it means all unit-holders are not treated equally. "As we near the end of our investigation into the four fund managers, we are following our routine practice of providing them an opportunity to respond to our concerns and with any reasons why we should not initiate proceedings against them," said Michael Watson, enforcement director for the securities commission. The securities commission's probe is in its third and final phase, and is expected to continue over the next several months. Of the seven funds that were the initial focus of the probe, four were referred to the commission's enforcement branch. The other three fund managers are not expected to become the target of an enforcement action by the regulator. The seven fund managers account for about 40 per cent of total mutual fund assets. While market timing is not contrary to securities laws, the OSC sees two potential problems with the practice. Rapid trading (which is what market timing involves) is only done by a handful of unit-holders and is not available to the vast majority of the fund's investors who hold their units for the long term. That runs contrary to the fiduciary requirement that funds not give any investor preferential treatment. "It's only a handful of people who are allowed by fund managers to engage in this kind of activity," OSC enforcement director Michael Watson said. "Fund managers aren't supposed to prefer one client over another, yet this is clearly preferential treatment when it happens," he told CBC Business News. The second potential problem is one of disclosure. The OSC points out that many funds state in their prospectuses that the fund does not engage in market timing. If they did engage in market timing, that would be a problem. Because no Securities Act violations are being alleged, formal court prosecutions will not be carried out. Instead, the OSC has the power to begin administrative proceedings where it feels it's in the public interest. Written by CBC News Online staff.