U.S. fund scandal prompts OSC move

"We believe that we don't have the same level of problem in the Canadian industry as we've seen emerging in the United States," Mr. Pelletier said…While many industry executives have expressed confidence that the types of problems regulators have exposed in the United States are not happening here, they said there is no way of knowing for certain what is going on without some type of industry review.

The Globe and Mail
November 4, 2003

U.S. fund scandal prompts OSC move
Sends questionnaire on trading abuses
Karen Howlett and Carolyn Leitch

The Ontario Securities Commission plans to send out a questionnaire in the wake of a widening scandal in the United States to determine whether mutual fund trading abuses are also occurring in Canada.

OSC spokesman Eric Pelletier said yesterday that the regulator is preparing a letter, to be sent out in the next few days, that will ask mutual fund companies what policies and procedures they have in place to deal with buy and sell orders that come into the firm after the normal 4 p.m. cutoff time.

The Canadian regulator is seeking to assure itself that the $409-billion domestic industry is free of the sorts of abuses unearthed south of the border. "We believe that we don't have the same level of problem in the Canadian industry as we've seen emerging in the United States," Mr. Pelletier said.

He would not say what companies the OSC plans to send questionnaires, beyond saying it will broadly target the industry.

Peter Loach, mutual fund analyst at BMO Nesbitt Burns Inc., says he has never known Canadian firms to engage in late trading. "I've never, ever heard of it," says Mr. Loach, who has worked in the industry for years.

In late trading, investors buy fund shares after 4 p.m. at that day's price to take advantage of late-breaking news. FundServ Inc., a company that electronically processes mutual fund buy and sell orders, time-stamps orders as they come through so there is no room for abuse by funds that use that channel, president Alan Hutton said. However, he said, many companies still process orders manually.

Market timing involves the fast-paced buying and selling of funds. Mr. Loach says that practice has occurred in Canada but the big mutual fund companies have taken steps to make sure it doesn't happen to their funds. "Nobody wants to run that business risk."

Mr. Loach says he expects Canadian fund companies will need to take steps to quell any concerns that their unitholders may have.

While many industry executives have expressed confidence that the types of problems regulators have exposed in the United States are not happening here, they said there is no way of knowing for certain what is going on without some type of industry review.

"I'm sure there's some of it, but I really don't know if we have problems here to the same extent," said Purdy Crawford, a lawyer and author of a report calling for sweeping change to the Canadian industry.

The final report by the Five Year Review Committee, headed by Mr. Crawford, proposes making it easier to fire fund managers and that all mutual funds be required to have some kind of independent governance body.

It is not clear when — or even if — the proposals will be adopted. Former Ontario finance minister Janet Ecker tabled the committee's report in the legislature in May. At the time, she said the government would set up a select committee of the legislature to review the entire report, which covers a range of topics governing the securities industry, and report by this fall.

The select committee did not get appointed before the provincial election in Ontario, Mr. Crawford said. "So the ball is now with the new government."

With U.S. regulators and politicians calling for major enhancements to mutual funds' corporate governance practices, Canada will fall farther behind its neighbour if it fails to implement the same measures. Mutual funds in the United States have had independent watchdogs for decades.

The Crawford report says an independent governance body would represent the interests of fund investors by monitoring fees and expenses charged to unitholders. But the report's suggestion that the independent boards be given the right to terminate managers has angered fund companies.

IFIC chief executive officer Tom Hockin said some mutual fund companies have been receiving calls from worried unitholders. He added that several firms have advised their telephone representatives of how to reassure investors.

Mr. Hockin says mutual funds in Canada tend to have a smaller asset base than the U.S. behemoths and therefore market timing is less feasible and less attractive.

"We're not as big, so we're not as juicy a target."


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