IFIC releases guidelines on fund trading

• mandatory deterrence fees for inappropriate short-term trading
• fair value pricing
• restricting future purchases in client accounts where market timing or inappropriate short-term trading is identified.

“It is important to give fund managers the flexibility to protect the interests of their unitholders,” says Hockin. “Through the use of one or several of these tools, IFIC is confident that fund managers can effectively deter or prevent market timing and inappropriate short-term trading.”

The report maintains that market timing is relatively rare in Canada, partly due to the FundServ system, but also because most foreign investments are held by funds indirectly, often using American depository receipts which trade on U.S. stock exchanges and therefore offer no chance for time-zone arbitrage.

Hockin admits there have been incidents of abusive short-term trading, which IFIC carefully differentiates from legitimate short-term trading practices, but he says the problem has been in sharp decline since investigations began in the U.S. in 2003.

And while IFIC has no power to enforce the recommendations in the report, Hockin says IFIC holds moral authority over its members. Besides which, the recommendations come not from IFIC staff, but from the working group, which was made up of industry members.

Of course, IFIC cannot extend its moral suasion beyond its own membership, so the recommendations in the report do not extend to other products such as hedge funds or segregated funds. Murray points out that it is up to individual investors and their advisors to voluntarily play by the rules as well.

“The obligation of the advisor would be to warn the client on the possible sanctions that a manager may implement when they identify what they consider inappropriate trading,” says IFIC vice president John Murray. “Everyone’s prospectus now says what they will do when they identify inappropriate trading. There may be opportunities where the advisor sees that it’s worth the client’s risk of a 2% fee.”

The Ontario Securities Commission is said to be close to announcing the findings of its own probe of fund trading practices. Chair David Brown has warned that some fund companies could face an investigation. IFIC’s report is seen by some as a pre-emptive move, aimed at blunting any impact on investor confidence.

“The regulator sees this as the responsibility of the manager of the fund which is the victim,” says Murray. “The real weakness today is that there is no obligation on the dealer side not to facilitate that kind of activity. That’s something that I know the MFDA and IDA are looking at.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com