No systemic abuses found in first stage of fund probe, Ontario regulator says

By Doug Watt | February 11, 2004 | Last updated on February 11, 2004
3 min read

(February 11, 2004) The Ontario Securities Commission (OSC) has completed the first phase of its probe into mutual fund trading practices. No details were released, but the regulator says it has found no evidence of systemic abuse.

The commission won’t say whether that means some abuses have been found.

The regulator is now moving onto phase two of its investigation, says the OSC’s Eric Pelletier, asking for more detailed information from about one-third of the fund firms originally surveyed. But the OSC stresses that doesn’t necessarily mean that improper trading practices have been found in those particular funds.

“We are pleased that the results of the survey thus far have not uncovered systemic abuses along the lines of those underlying the recent problems experienced in the U.S.,” said IFIC president Tom Hockin in a written response to the OSC probe. “The Canadian mutual fund industry is committed to maintaining the confidence of Canadian investors.”

Last November, the OSC sent letters to the 105 fund companies based in the province, asking if they were aware of any late trading and market timing abuses, and whether or not they had policies and procedures to address such practices.

The second stage of the probe asks for specific data on fund closing prices, assets, subscriptions and redemptions over a two-year period. It also requests information on trades over $50,000 that were backdated, processed manually, or processed electronically outside FundServ during the review period. It’s estimated that FundServ processes about half of all fund trades in Canada.

In addition, the OSC wants a list of all trades over $50,000 involving a purchase followed by a switch or redemption within five business days.

“We’re getting much more granular at this point and we’ll be able to analyze the data to see if there’s any further information we need to look at,” says Pelletier.

Although only a few dozen firms have been asked to take part in phase two, the commission hasn’t ruled out coming back later and asking information from other companies, says Pelletier.

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  • Data from the second phase will be analyzed in March. Pelletier says the third stage of the probe could involve on-site inspections of fund firms, examining records and procedures.

    The OSC is coordinating the fund probe with the IDA and the MFDA. The self-regulators have also surveyed their members on trading practices and will share those results with the commission.

    The probe comes in the wake of a series of mutual fund scandals in the U.S. involving trading abuses and sales practices. More than 20 U.S. fund firms are under investigation.

    Late trading — processing a fund trade after the close of business — is a violation of mutual fund regulations. IFIC has said that the vast majority of Canada’s mutual fund firms follow strict time-stamping protocols, effectively eliminating the possibility of late trading.

    Market timing takes advantage of short-term discrepancies between the price of a mutual fund’s securities and the stale values of securities within the fund. The practice is not illegal, but is considered unethical since it increases transaction costs and can reduce the long-term returns of investors.

    Still, IFIC says it would like to see some flexibility on market-timing issues to ensure that the rules “don’t punish the many for the deleterious behaviour of the few.”

    “There are legitimate circumstances when investors may decide to pull out of a fund shortly after investing in it,” IFIC said today.

    Filed by Doug Watt,,


    Doug Watt