Brokerages hit with $41 million in penalties

(December 16, 2004) Three Canadian bank brokerage firms have been penalized more than $41 million by the IDA for mutual fund market timing violations. It’s the largest penalty decision ever issued by the brokerage industry association.

The penalties, described by an IDA panel investigating the matter as “very substantial,” were announced Thursday afternoon in Toronto, shortly after the Ontario Securities Commission announced that four mutual fund companies would be forced to refund $156 million to investors for similar offences.

TD Waterhouse Canada was hardest hit by the IDA, penalized $20.7 million. RBC Dominion Securities was penalized $17 million, while BMO Nesbitt Burns was slapped with a $3.7 million penalty.

In all three cases, the IDA took the sum the firms made via market timing and fined them that same amount. TD Waterhouse was fined $10.3 million and ordered to disgorge $10.3 million in gross market timing revenues. The trio were each also ordered to pay $50,000 in investigation costs.

In TD Waterhouse’s case, the firm acknowledged that from January 2002 to December 2003,the firm “engaged in potentially harmful practices” by executing market timing trades and executing nearly 6,000 trades involving at least 39 funds on behalf of three offshore and two retail clients.

RBC Dominion Securities executed 4,160 trades involving 56 funds for two offshore retail clients, while in BMO Nesbitt Burns’ case, the majority of market timing occurred in a single mutual fund by means of a special arrangement with the fund company, the IDA noted.

Market timing is not illegal, but it can adversely affect mutual fund holders by diluting the value of the fund, since market timers buy and sell frequently to take advantage of pricing inefficiencies, the IDA explained.

IDA senior vice-president Paul Bourque says all three firms violated an IDA regulation requiring dealer firms to ensure that the handling of client business is within the bounds of ethical conduct, consistent with just and equitable principles of trade and not detrimental to the interests of the industry. “Those are the obligations that were breached,” Bourque told reporters following the panel’s decision.

“The message today for all our members is that we will not countenance this activity, so I’m very hopeful that we won’t seen market timing or frequent trading in mutual funds,” he added. “The fact that this wasn’t picked up by the compliance and supervision mechanisms [at the firms] suggests that they weren’t doing their job in looking for this kind of activity,” he added.

George Lewis of RBC Dominion Securities defended his firm, saying that at the time the market timing activity took place, the majority of IDA firms did not have policies and procedures in place to detect such action.

“RBC-DS has since enhanced its policies and procedures to provide additional guidance to its sales force on mutual fund market timing issues,” Lewis said in a statement. “The firm also adopted a number of measures to monitor frequent trading in client accounts and will continue to work with fund companies, who in our opinion bear primary responsibility for activity in their products, to detect and limit such trading activity.”

The IDA investigation has so far only focused on BMO Nesbitt Burns, TD Waterhouse and RBC-DS, but Bourque warned that if more evidence of market timing is uncovered, other firms could also face penalties.

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