IDA returns $7 million to fundcos

(April 1, 2005) The IDA is refunding more than $7 million in trailer fees to mutual fund companies who were affected by market timing at brokerage firms. The IDA says it expects the money to be returned to investors.

CI will receive $3.6 million, Franklin Templeton $1.2 million, AIC $1.2 million and AGF $1 million. Thirteen other unidentified fund companies will receive $225,000 with individual amounts varying from $546 to $66,000.

Last December, the IDA reached settlement agreements with BMO Nesbitt Burns, RBC Dominion Securities and TD Waterhouse Canada over market timing violations. Penalties totalling more than $41 million, the largest ever by the brokerage industry association, were imposed against the three firms, comprised of $20.3 million in fines and $21 million disgorgement of revenues.

Those revenues included commissions and trailer fees paid to the firms by the mutual funds. “It is the trailer fees, totaling some $7,170,047.00 (including interest), which are being returned to the mutual fund companies for reimbursement to unitholders,” the IDA says.

“Our objective is to make the funds whole and give back to small unitholders the revenues that our members earned from their funds,” explains IDA senior vice president Paul Bourque. “The total revenue was around $20 million and of that about $7 million came from the funds in the form of trailer fees, so that’s the amount that should be reimbursed to those unitholders.”

Critics point out that the fund company payment leaves the IDA with a substantial sum — around $34 million. “Our approach was that we wanted the revenue back plus a 100% penalty, we weren’t thinking about the optics of such a large amount of money,” Bourque says.

The money has been deposited in a discretionary trust account that is used to pay for the cost of hearings, he adds. “This amount is far in excess of that, so the fund is also available, with the approval of the board, to support projects and initiatives that are in the public interest and the interest of the capital markets.”

In the past, the IDA has used the additional funds to pay the capital invested in the national registration database and to support the work of the Canadian Capital Markets Association in the straight through processing and T+1 initiatives, Bourque says.

The IDA does not have the legal power to force fund companies to refund the $7 million to investors, but Bourque says the association expects mutual fund managers to act in a manner consistent with their fiduciary duties.

“We think they have an obligation under the Securities Act to return the money to unitholders and that’s why we’ve paid the money to the fund companies,” he says. “Their boards will have to make a decision as to how they should handle the money.”

The Ontario Securities Commission wrapped up a year-long probe of mutual fund trading last month, resulting in settlements with AGF, AIC, CI, Franklin Templeton and Investors Group which will return an additional $205 million to investors.

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