Advisors cautious as fund probe marches on

(September 22, 2004) Advisors are taking a wait-and-see approach after Ontario’s securities regulator finally named names in its long-running probe of the mutual fund industry. But there’s agreement that the reputation of the four fund companies singled out by the Ontario Securities Commission could suffer as a result of the investigation.

After the markets closed on Monday, the OSC sent notices to Investors Group, CI, AGF and AIC advising that they could be facing possible enforcement action in regards to allegations of frequent trading, often linked to market timing, between 1999 and 2003.

The four fund companies have until the end of the month to respond to the regulatory notice, although all publicly stated on Tuesday that they now have controls in place to detect any questionable trading before it becomes a problem.

Advisors say it’s too early to say how this latest development will affect their relationships with the fund firms, since no details have been released as to which specific funds and fund managers might be involved.

“I guess I would want to know specifically what the activity was and how it impacted fund performance,” says CFP Marc Lamontagne with Ryan Lamontagne in Ottawa. “Market timing in mutual funds would generally have a negative impact on the long term unitholder due to increased cost of the activity.”

“It is difficult to comment specifically since I don’t know if any clients or funds in which I have assets will be affected,” adds Blaine Dickson of Capri Intercity Financial in Kelowna, B.C. “That said, generally, I’d say it would affect my opinion of the fund company or manager, especially if the managers involved were ones I recommended.”

Indeed, it’s the fund companies’ reputations that could become the larger issue, even if the investigation ends up concluding that frequent trading, which is not illegal, did not harm investors.

“The allegations will do nothing to endear these companies to me,” states Brad Brain of Berkshire Securities in Fort St. John, B.C. “If I ever had a reason to consider these companies in the future I would want to know more about their trading policies.”

Still, Brain says he has looked closely at the fund scandals in the U.S. — which resulted in billions of dollars in fines against more than a dozen fund companies — and is satisfied that the Canadian system has better safeguards in place to prevent trading abuse. The bulk of Canada’s fund trades are handled by FundServ, which has a strict time-stamping policy in place, effectively preventing late trading. The OSC has said it has found no evidence of late trading in Canada.

John Hope of Allied Financial Services in London, Ontario, shares Brain’s point of view, noting that of the 105 fund companies investigated by the OSC, only four are so far facing possible enforcement action. “That is a massive vote of confidence in the Canadian mutual fund industry,” Hope says.

“The likelihood is that these four fund companies will be reprimanded for allowing this activity to occur but the OSC will very likely confirm that no additional regulations need to be put in place because of the voluntary action already taken by the industry,” he predicts.

As for talking to clients about the issue, Brain says he’s only had one or two mention the fund scandal, and only when it was headline news in the U.S. media. “I think they were more curious as to whether I thought that it was a problem as opposed to that they had already formed an opinion,” he says.

Dickson agrees. “I don’t think it would be a huge issue for most clients since most of them do not pay attention to these regulatory issues,” he says. “Sadly, clients seem to be more concerned with insignificant, normal daily fluctuations in the overall markets.”

The OSC investigation may actually help boost investor confidence, Hope believes. “I wouldn’t say that it’s a relief, but it’s certainly a confidence builder for me to be able to sit down with my clients and explain that my industry just passed a severe OSC test with flying colours.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com