MFDA launches fund trading probe

(December 22, 2003) Citing concerns about investor confidence in the Canadian mutual fund industry, the MFDA is asking its 200 members to provide information on their fund trading policies and procedures.

The moves comes in the wake of a series of investigations into late trading and market timing abuses in the U.S., which have resulted in charges against a number of major fund companies.

“In this environment, it is important that the MFDA and its members take steps to ensure that relevant MFDA requirements are being met,” the dealer association said in a statement.

The MFDA says it wants to determine if late trading exists in Canada and also hopes to uncover the “nature and extent” of market timing activity.

“Members are expected to have effective trading procedures, supervisory arrangements and other internal controls to ensure that late trading and market timing practices are not occurring,” the MFDA says.

Completed surveys are to be returned to the MFDA by January 30.

In November, the Ontario Securities Commission (OSC) made a similar request to fund companies based in the province for information on late trading and market timing. The MFDA says it will co-operate with the OSC and other regulators on any subsequent follow-up activity and regulatory action on the issue.

Late trading — processing a trade after the close of business — is a violation of Canadian securities law. But there’s been no evidence to date that the practice even exists in Canada.

In a recent media briefing, IFIC noted that 90% of the country’s mutual fund trades are processed by FundServ, Investors Group and the big banks, all of which have strict time-stamping protocols in place.

“Opportunities for late trading outside those channels are very limited,” said IFIC vice-president John Murray.

Market timers profit from short-term trading, taking advantage of the difference between the price of a mutual fund’s securities and the stale values of the securities within the portfolio.

There are no specific prohibitions against market timing, but it hurts long-term investors since it generates transaction costs and strips out gains, IFIC says. Some firms implement discretionary short-term trading fees to discourage the practice. IFIC uses a process called “fair valuing,” where the price of a portfolio is adjusted to reflect changes that would otherwise result in stale prices.

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