IDA joins mutual fund trading review

(January 16, 2004) Canada’s brokerage industry association is surveying the mutual fund trading practices of its 200-plus dealer members, the third regulator to undertake such a review. The IDA says it wants to know more about policies and procedures related to late trading and market timing.

The moves comes in the wake of a series of investigations into trading abuses in the U.S, which have resulted in charges against a number of major fund companies. There’s been no evidence of similar problems in Canada.

“While many differences might exist between dealers’ practices in our two countries, concern for the public interest and for the integrity of the capital markets is common to participants in both venues,” the IDA says.

“In particular, the association would like to know more about provisions, restrictions and/or prohibitions your firm might have in place for handling non-exchange-traded, non-BayCOM or non-FundServ mutual fund transactions,” states a letter from IDA senior vice-president Paul Bourque, posted on the IDA’s Web site.

Last month, the MFDA announced a similar survey, as did the Ontario Securities Commission in November of last year. The three regulators plan to share information and coordinate on any subsequent follow-up activity or potential regulatory action on the issue.

Late trading — processing a trade after the close of business — is a violation of Canadian and U.S. securities law. Market timing, which is not illegal, involves short-term trading (usually in large volumes by institutional investors) to take advantage of differences between the close of a market and the pricing of a mutual fund invested in that market.

The practice is considered harmful to long-term investors since it generates transaction costs and strips out gains. Some fund firms have implemented fees for short-term trading to discourage market timers.

The IDA’s 13-question survey, which is also posted on the association’s Web site, is to be completed by members by the end of the month.

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