Late mutual fund trading likely not a concern in Canada, says IFIC

(December 11, 2003) The vast majority of Canada’s mutual fund firms follow strict time-stamping protocols, effectively eliminating the possibility of late trading, according to the country’s investment fund industry association. IFIC officials held a media briefing today in Toronto to respond to the scandals that have plagued the U.S. fund industry.

Although the fund industries in Canada and the U.S. share many similarities, there are “profound, systemic” differences, says IFIC president Tom Hockin.

The U.S. scandals have centred on two specific fund industry abuses: late trading and market timing. Late trading — processing a trade after the close of business (typically 4 p.m.) — violates securities laws in both Canada and the U.S. But there are variations in how the trades are processed, IFIC says.

In the U.S., a fund order is deemed to be received when it is placed with the broker or dealer. In Canada, the order is not deemed received until it is processed by the fund company itself.

“Industry practice in Canada is that orders are time-stamped by the fund company or in the case of 50% of order flows, by FundServ, the independent industry-owned order-flow conduit,” IFIC said in a paper on late trading and market timing released today.

IFIC vice-president John Murray, who also took part in the briefing, notes that about 90% of all fund orders in Canada go through either FundServ, Investors Group or the six major chartered banks, all of which have strict time-stamping protocols in place.

“Opportunities for late trading outside those channels are very limited,” Murray says, adding that IFIC is not aware of any examples of late trading in Canada.

Market timing, which is not illegal, is more of a grey area, Hockin says, noting that there are no specific prohibitions against the practice. However, it is a risky investment strategy, he adds, and hurts long-term investors because it generates transaction costs and strips out gains.

IFIC’s main weapon against market timing is a practice known as “fair valuing,” where the price of a portfolio is adjusted to reflect changes that would otherwise result in stale prices, Hockin says.

“Canadian fund managers have been aware of market timing and the harm it can wreak on long-term investors for some time,” Hockin says. “Firms that have identified suspicious short-term trading activity have already moved to implement discretionary short-term trading fees.”

The Ontario Securities Commission has sent letters to the bulk of Canada’s fund companies, asking what practices and procedures they have in place to deal with market timing and late trading.

The results of that investigation will determine what, if any, action IFIC takes, Hockin says. “We want to be proactive and work closely with the Canadian Securities Administrators. But we have to wait for clarification on what the expectations are.”

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