OSC looks abroad in considering mutual fund fix

(November 1, 2004) The Ontario Securities Commission (OSC) has a close eye on American and British rulemaking efforts to deal with fallout from the late-trading and market-timing scandals that afflicted the mutual fund industry last year.

The Commission is also reviewing IFIC comments proposing better internal controls, the use of watch lists and enhanced focus by firms on compliance with trading practices, said Leslie Byberg, manager, investment funds at the OSC.

Going through compliance also lets a fund tailor a solution to its particular business model, she told today’s Dialogue with the OSC conference. She added the regulator is considering a short-term trading fee, because it could help make market timing financially unattractive.

Mutual fund companies in the U.S. have seen internal costs rise in the wake of new rules aimed at trading-practice problems. But those costs are largely temporary, said Robert Plaze, associate director of the Securities & Exchange Commission’s (SEC) division of investment management. Plaze told the panel its recently adopted rules did create some spending requirements, while funds brought compliance up to snuff. In some cases, funds did not have procedures in place to cover trading activities, so those had to be drafted and that meant funds had to pay for “lawyer time.”

The SEC’s rules also require mutual funds to hire a chief compliance officer who reports directly to the board of directors, rather than to the fund managers. Plaze said SEC examiners looking into mutual fund trading practices sometimes found compliance officers reported irregularities but were ignored “because there was money to be made.”

The reporting change adds some teeth to the compliance function, and the requirement may lead to longer-term cost increases, since those professionals will be senior operatives and command a high salaries.

Filed by Philip Porado, associate editor of Advisor’s Edge, Advisor.ca, philip.porado@advisor.rogers.com