AIC settles with Ontario regulator

(December 15, 2004) Mutual fund firm AIC has reached a settlement with the Ontario Securities Commission over allegations related to market timing. The Burlington, Ont.-based firm is the last of four firms publicly named by the OSC to reach a deal. Investors Group, AIC, AGF and CI will appear before an OSC panel on Thursday.

“Certain investors holding accounts in AIC Funds have been identified as having profited as a result of frequent trading market timing strategies that were pursued in certain AIC Funds,” the OSC said in a settlement agreement released late on Tuesday.

“The conduct of AIC in failing to protect fully the best interests of the relevant funds in respect of the frequent-trading market timing was contrary to the public interest,” the OSC said.

Although the terms of the settlement agreements remain confidential until approved by OSC staff — and there’s no guarantee that will happen on Thursday — insiders expect the fund firms to face significant fines and perhaps also to be ordered to reimburse investors to some degree.

“I don’t have any firm estimate of what the penalties are going to be, but I suspect they are going to be in the multiple millions of dollars and that they will be levied so as to be a significant future deterrent to companies that fail to detect frequent trading or market timing activity,” says Rudy Luukko, Investment Funds Editor at Morningstar Canada.

It’s also decision day for three major brokerage firms, as the IDA also holds hearings on settlement agreements reached with BMO Nesbitt Burns, RBC Dominion Securities and TD Waterhouse Canada.

Those three firms are accused of failing to implement supervisory systems to detect and prevent potentially harmful market timing activities. They are also expected to be fined, although the penalties may not be as severe as those handed out to the fund companies.

“These firms seem to be at the distribution end of this,” says Luukko. “The OSC hasn’t explicitly stated this, but connecting the dots, it would seem that there would be some connection between the three brokerage firms and the one large national dealer that have also reached or are about to reach settlements.”

The MFDA is holding a settlement hearing with Investors Group on Thursday afternoon regarding an allegation that IG permitted an institutional client to conduct a frequent trading market timing strategy in certain mutual funds between 2000 and 2002.

If a decision is reached Thursday, it could result in the MFDA’s first-ever enforcement action.

The OSC has emphasized that no evidence of market timing activity has been found since its review of the Canadian mutual fund industry began in November 2003, and that there has been no late trading in the industry.

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