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Ability to deal with related parties possible

Move hinges on fund companies having the blessing of review committee

Mutual fund companies may get the freedom to do deals with related parties as long as they have the blessing of an independent review committee appointed by the fund, David Brown, head of the Ontario Securities Commission, said yesterday.

The move marks a departure from proposed rules released earlier this year and is the latest instalment in a long and at times controversial effort by the Canadian Securities Administrators to overhaul the governance structure of funds.

After proposing sweeping changes two years ago that included a requirement for funds to establish independent committees with powers similar to those of a corporate board, regulators changed course following strong resistance from the industry. Instead, this January they released new rules that envisaged the scrapping of a decades-old ban on related-party transactions in return for the establishment of independent committees with limited powers . Several investor advocates criticized the measures as inadequate to protect the interests of unitholders, especially at a time when U.S. funds are facing even greater regulation in light of a series of trading scandals.

In an interview yesterday, Mr. Brown characterized this latest move as a shift in thinking brought about not only by public comments, but by the OSC investigation of the mutual fund industry. "There have been comments that the role we have assigned to the independent review committee is not strong enough. Frankly, we are looking at that role based not only on the comments but now on the experience that we have gotten in the probe."

That investigation led yesterday to notices to four of Canada's largest mutual fund companies that they could face enforcement proceedings as part of a probe into potentially abusive market timing. He said that experience led to a reconsideration of the role of the proposed independent committees.

"One of the things that we could do is leave prohibitions in the statute but allow the independent review committee on a transaction-by-transaction basis to determine whether there are adequate measures in place to avoid conflicts of interest."

The proposed change, if enacted, would mean that the authority for sanctioning such related-party deals would be moved from regulators to the fund committees. Under current rules fund companies must seek special permission from regulators in order to conduct transactions that are on the prohibited list.

This idea of replacing a firm ban with independent oversight was first raised four years ago in a report by Stephen Erlichman, but at that time he introduced the notion as a kind of carrot to entice mutual funds to set up boards.

But yesterday, Mr. Brown said any thought that funds would be required to set up boards, as they are in the United States, is unlikely -- as is the expansion of the committee's powers to include the firing of fund managers.

"I don't think that is currently contemplated," he said.

He also indicated that it was unlikely that unitholders would be given the power to elect the committee members that would be entrusted with protecting their rights.

One thing regulators are considering, he said, is the requirement for funds to have a compliance plan and a role for the independent committee to monitor that plan.

Toronto securities lawyer Philip Anisman dismissed the latest proposals as "tinkering," rather than a serious move to an independent governance system that has the authority to protect investor interests.

He also was critical of Mr. Brown's decision to raise the possibility of changes through interviews with the press. "Floating a trial balloon through the press is not, in my opinion, the way to obtain comments in a policy review."

Former OSC commissioner Glorianne Stromberg, who wrote a report 10 years ago that advocated the establishment of independent fund boards, said this latest move still does not go far enough to protect the interests of unitholders. "It's a failure of regulation, I think," she said.

Ms. Stromberg said she believes exceptions for related-party transactions should only be granted in rare cases and she questions whether a body appointed by a fund would have the wherewithal to stand up to fund managers in such cases.

CI FUND MANAGEMENT INC.

Assets under management: $39.8-billion

Largest fund: CI Harbour Fund, $2.4-billion

Ownership: Publicly traded on the Toronto Stock Exchange with 34-per-cent interest held by Sun Life Financial Inc.

Never one to shy from the media spotlight, Bill Holland, CI president and chief executive officer, has become the sector's most outspoken executive on market timing. In June, he conceded that investors had market timed in CI Funds. Yesterday, he was the sole industry executive to speak about the OSC probe.

"I don't think I could characterize myself as surprised," Mr. Holland said.

"You just don't know what's going to happen. You know there's a very wide-ranging process going on."

Mr. Holland is considered one of the sector's most astute CEOs, rapidly increasing CI's product line, services and assets in a series of deals.

Over the past 10 years, the Toronto firm has completed eight acquisitions, including the November purchase of financial planning firm Assante Corp. of Winnipeg for $887-million in cash and stock.

There is no upside to the OSC allegations and many expect Mr. Holland will be the first to reach a resolution with regulators.

Sun Life could play an important role behind the scenes. A U.S. investigation found evidence of rampant market timing by hedge funds in Sun Life's U.S. subsidiary Massachusetts Financial Services Co. Earlier this year, MFS paid a $350-million (U.S.) settlement to regulators.

Sun Life holds a minority interest in CI and there's much speculation the firm will move to buy up majority control next year.

Like its rivals, CI may fine an investor a short-term trading fee of up to 2 per cent.

In practice, the firm has warned first-time offenders and has charged some on the second offence.

Keith Damsell and Karen Howlett

INVESTORS GROUP

Western-based firm prefers

a low profile

Assets under management: $42-billion

Largest fund: Investors Dividend Fund, $7.9-billion

Ownership: Investors Group is a subsidiary of holding company IGM Financial Inc. Control of publicly traded IGM rests with Power Corp. of Montreal.

Allegations that Investors Group was one of the four firms involved in market timing trading was met with surprise by the industry.

The low-profile Winnipeg company is considered far removed from the deal making on Bay Street. The firm has no institutional clients.

"We are focused right now on going forward and understanding the specifics of the OSC's concerns," said spokesman Ron Arnst. "We have approximately one million clients and there are certain accounts that were involved according to the OSC. I guess what I'm saying is it doesn't take many of those million to perhaps draw their attention."

Investors Group has made a fortune catering to the needs of middle-class Canada. Its sales force of 3,200 financial planners have unique one-on-one relationships with their clients, selling everything from mutual funds and insurance to mortgages. The company has a mixed reputation -- its funds are regarded as high-cost mediocre performers yet the firm's one-stop shopping model is the envy of the industry.

"Enduring client relationships tend to be a hallmark of how we serve our clients," Murray Taylor, Investors Group's newly appointed president and chief executive officer, told an industry conference last month. As a result, redemptions "tend to have been a little better" than the balance of the industry.

He added that the company has lowered fund fees and increased compensation to consultants.

Like the bulk of fund companies, Investors Group may charge a 2-per-cent short-term trading fee to discourage market timing. Fees may apply for trading within 10 days but can be for frequent trades within periods of up to 90 days.

Keith Damsell

AIC LTD.

Investors continue

to jump ship Michael Lee-Chin, chief executive officer.

Assets under management: $11.4-billion

Largest fund: AIC Diversified Canada $3-billion

Ownership: A private firm controlled by billionaire Michael Lee-Chin.

Market timing allegations mean more bad news for Burlington, Ont.-based AIC. Investors continue to jump ship, dumping $173-million in AIC funds last month. Since the beginning of 2002, more than $1.8-billion in investment has headed out the door in the form of net redemptions.

It's hard to separate the private fund manager from its chairman and chief executive officer Michael Lee-Chin. His value investing philosophy dominated AIC. In the '90s, growth-oriented funds AIC Value Fund and AIC Advantage Fund were the toast of the sector, racking up billions in investment dollars.

But the company's investing style has fallen from favour and Mr. Lee-Chin has been distracted by other interests, including Jamaican banking.

Fund performance has suffered. In an August survey by Morningstar.ca, a whopping 23 of 50 AIC funds received the firm's lowest rating. Sentiment toward the company from some financial planners is hostile.

This summer, the firm appointed three fund veterans to right the ship, including David Whyte, executive vice-president of sales and marketing. But industry sources argue its fund performance must recover if the company is to return to the roaring '90s.

Market timing allegations are expected to add further complications for the company's turnaround. AIC declined to comment yesterday, but it an interview with Report on Business Television, Jonathan Wellum, chief investment officer, described market timing as a "tough issue."

"I feel comfortable that we have a very strong procedure in place," Mr. Wellum said, noting that since the beginning of this year, the firm has imposed a 2-per-cent fee for trading prior to 90 days.

Keith Damsell

AGF MANAGEMENT LTD.

Assets under management: $23-billion

Largest fund: AGF International Value Fund, $4.6-billion

Ownership: The Goldring family controls 80 per cent of AGF's voting stock. About 91 million common shares are publicly traded on the Toronto Stock Exchange.

Market-timing allegations come at a critical juncture in AGF's 47-year history. Last month, Blake Goldring, president and chief executive officer, undertook a sweeping plan to revive AGF's diminishing mutual fund business. Industry sources fear the OSC probe could be a distraction for the 45-year-old executive.

Mr. Goldring must exercise a blend of leadership and damage control over the next few weeks, said an industry source close to the firm.

"It frankly depends on whether this is something that becomes a long drawn-out, lingering process that distracts the organization or whether, in fact, it is an issue that is dealt with fairly quickly and AGF has the ability to move on," the source said.

August marked the 28th successive month of net redemptions for AGF. Mutual fund assets under management have shrunk to $23-billion from a peak of $29.9-billion in 2001. Planners report the firm is simply not top of mind any more.

In response, Mr. Goldring has shaken up the management team, letting underperforming staff go and bringing in new talent, including Randy Ambrosie, the former North American head of sales at HSBC Securities. AGF's sales force has been bulked up, reorganized and restructured to better reward wholesalers that can keep clients happy. The master plan was presented to a receptive financial audience last week in Toronto.

But Mr. Goldring is not known to back down from a fight. He is an outspoken defender of AGF's corporate values and if he perceives the OSC is in the wrong, the sparks may fly, sources said. AGF officials, including Mr. Goldring, did not return calls yesterday.

Keith Damsell

Churn rates raise questions of market timing

The OSC warned four mutual fund companies they could face regulatory proceedings as part of its probe into potential trading abuses. The OSC said it found evidence of alleged market timing, but not late trading, in its probe. The OSC did not name the companies, although they went public themselves yesterday. The regulator also did not level allegations or cite specific instances or funds. But a Report on Business investigation, published in June, found tell-tale signs of market timing in funds managed by several companies, including the four targeted by the OSC. Below are the ROB findings that relate to those four companies. Rapid in-and-out trading in mutual funds is a pattern highly suggestive of market timing. A churn rate of 100 per cent means the equivalent of every unit in the fund changed hands during the course of a year.

.................................................................................................Estimated

.......................................Assets...------------....Churn rate (%)...-------......value lost

Fund company.....................(000's).......2000........2001......2002......2003......to fund (%)

AGF Funds

Aggressive Japan Class...........3,400..........-...........291.......178.......-............2.0-2.4

Aggressive Global Stock.......102,700.........-...........258.......286........-............1.4-1.6

Asian Growth Class..............80,900.........383........1,165......599........364........7.0-8.1

European Equity Class.........542,200.........-............235......189......142...........1.3-1.5

Global Technology Cl............15,700..........-.........341......164.......128..........1.5-1.8

International Stock Cl..........813,400.........-............182.......536.......177..........2.3-2.7

Japan Class.......................72,700..........277...........692......413........282... .....3.7-4.3

RSP Int'l Equity Alloc..........242,900............-..........150......370........-............1.3-1.5

RSP Japan........................46,300.........261..............-......157.......182..........1.4-1.6

World Equity.. ....................77,200............-.........336.......894........-.............3.4-4.0

Global Strategy World..........311,400............-.........255.......649........-............2.5-2.9

China Focus Series...............17,800.............-.........404.......100........-............1.1-1.3

AIC

Global Advantage............126,300.............908..........1,627.....1,046.......431..........11.5-13.4

Global Diversified.............38,500..............898..........1,619.....900.........270.........10.5-12.2

RSP Global Advantage......64,500.............-............-..........-...........143..........0.3-0.3

RSP World Advantage......62,900.............-............-..........123..........-...........0.2-0.3

World Advantage...........148,000.............794.........1,171.......444.........-...........8.1-9.5

World Equity................293,900............675.........922.........713.........299.........7.3-8.5

CI Mutual Funds

BPI Global Equity ...........597,000.............213.........311..........896........563..........5.4-6.3

BPI Int'l Equity..............125,400.............-............247......... 801........432.........4.0-4.7

BPI Int'l Equity RSP.........6,000...............-............-............216........281..........1.2-1.4

BPI Int'l Eq. Sector...........6,400............... -............-............244........446.........1.7-2.0

Asian Dynasty................21,300...............-............-.............-..........115.........0.2-0.2

European Fund...............35,000...............-............127..........582.........160.........2.2-2.5

Emerging Markets..........166,900..............-............-..............302.........89..........0.9-1.1

European Growth............87,100..............-.............101...........139.........127.........0.7-0.8

European Growth RSP.......8,200...............-.............-.............-............175........0.4-0.5

European Sector Shares....12,000.............-.............182...........202..........98.........1.1-1.2

Global Boomeronics........504,600............-..............-.............473..........-...........1.3-1.5

Global Equity RSP..........617,200............120............153...........-............-..........0.5-0.6

Global Fin. Service ........113,400.............-..............151...........312..........151....... 1.5-1.7

Global Fund................1,235,500............202............283...........967..........554.......5.4-6.4

Global Small Co............107,200..............156.............245...........683.......197......3.3-3.8

Global Value................120,600..............-...............117..........502........257......2.2-2.6

Int'l Balanced.............466,400.............292.............-............1,300.........764......6.6-7.7

Int'l Balanced Sector.....13,500...............-..............-............121............-........0.2-0.3

Int'l Fund..................42,900...............-...............137..........436..........653......3.3-3.8

InT'l Value.................33,900...............-...............-............294..........136.......1.2-1.6

Int'l RSP ..................11,300..............-................227..........894..........-.........3.1-3.6

Japanese RSP..............4,000...............-.................-.............314..........474......2.1-2.5

Japanese Sector Shares..12,700..............523...............341........... 560..........590.....5.5-6.4

Pacific ...................115,800..............165................342..........1,138.........208.....5.0-5.8

Pacific RSP...............3,700...............431................306............469...........-.......3.2-3.8

Pacific Sector Shares...22,500.............444.................554............528..........345.....5.0-5.9

Sector Emer. Mkt Shares..23,800...........-....................-..............147..........-........3.1-3.6

Sector Global Shares....261,600.............106................-...............157..........-.......0.3-0.4

Investors Group

IG AGF Asian Growth...30,000.............-...................202............357..........104......1.6-1.9

IG AGF Int'l Equity.....192,000............-....................150.............248..........-.........0.9-1.1

Scudder European Gr...138000............140...................-...............-............-.........0.3-0.3

Templeton Int'l Equity..122,800...........-....................125.............139..........-..........0.5-0.6

Templeton World Alloc..66,000...........-.....................-...............177..........-..........0.4-0.5

Investors Europ. Grth ..1,204,000........117..................200.............-.............-.........0.7-0.8

Inves.European Mid Cap...287,700......-....................-................167.........-..........0.4-0.4

Investors Global..........662,200..........-....................166.............310..........-..........1.2-1.4

Investors Japanese Gr...78,800..........-.....................358.............468..........-..........2.3-2.7

Inves. Pacific Int'l Cl S A..2,500.........-......................-..............-............290.......0.7-0.9

Investors Pacific Int'l...161,300.........-.....................254.............336..........94.........0.8-0.9

Inves. Pan Asian Growth..11,300........-......................-..............-............160.........0.3-0.4

Inves. World Growth Port..236,500......-.....................-...............179..........-..........0.4-0.5

Assets are as of Dec. 31, 2003, with the exception of those funds that were no longer

in existence that year. Some smaller funds that had churn rates exceeding 100 per cent

in only one year are excluded from the list of funds with a pattern of trading that indicated

signs of market timing.

© 2007 The Globe and Mail. All rights reserved.

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