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Mutual fund officials criticize media and regulator

Market timing, red tape in spotlight


TORONTO -- The mutual fund industry went on the offensive yesterday, using a conference as a forum to attack media coverage of a trading probe by regulators.

"Our mutual fund industry is being sensationalized . . .," Ned Goodman, head of Dundee Wealth Management Inc., told the Investment Funds Institute of Canada's annual conference yesterday.

"It's a fine industry. I am passionate about it and I think it is terrible how we are being maligned," he said. Toronto-based Dundee's holdings include Dynamic Mutual Funds, manager of $9.8-billion in assets.

Last week, the Ontario Securities Commission said four mutual fund companies -- Investors Group Inc., CI Fund Management Inc., AIC Ltd. and AGF Funds Inc. -- may face potential enforcement proceedings for allegedly allowing rapid in and out trading, known as market timing, in some of their funds. As many as 20 firms could be part of the probe.

Market timing, trading that typically allows large traders to take advantage of discrepancies in stock prices in different time zones, is not illegal and the practice appears to have stopped, the OSC said.

But market timing raises costs for long-term investors and they lose out on a portion of profit skimmed off by short-term players. The commission found no evidence of late trading, the illegal practice of allowing investors to grab low-risk profits by exploiting after-hours news.

Mr. Goodman described the market timing allegations as "very serious" but said the amount of money involved is small compared with the "$300-billion-plus" in losses suffered by investors when telecommunications giant Nortel Networks Corp.'s stock collapsed in 2000.

"The sad part is that we don't hear anything about the people that have market timed. . . . We haven't heard of any of the advisers who were recommending it," said Mr. Goodman, a panelist at a round-table discussion at the IFIC event. "What we hear about are the innocent guys, like the guys who are on top of large mutual fund complexes who never get down to see what's going on in trading, day-to-day trading in their funds, being chastised as if they are common criminals. That erodes the trust."

Tom Hockin, IFIC's president and chief executive officer, said the sector has been hammered this year by a "perfect storm" of three elements: weak equity markets, the OSC's trading probe and reporting by the media.

Criticism in the press that IFIC has been unwilling to play a leadership role on the market timing issue is "ludicrously inaccurate," he said.

"You name the issue, IFIC is out front," Mr. Hockin said, adding that last month the industry association unveiled a set of voluntary, pick-and-choose guidelines for members to address the practice.

The panel of industry executives agreed that few mutual fund unitholders are calling with concerns about market-timing.

"I am told that it's the advisers that are being affected by what's out there, not the end consumer," said Robert Francis, president and chief executive officer of financial planning firm PEAK Financial Group of Montreal. "They are the ones who are out there looking at this saying: 'You know, we don't know if this is true or not, we don't know how it works, but it's too much trouble to have to explain it.' "

The fear is that financial advisers, planners and brokers, the sales force of about 35,000 responsible for more than 90 per cent of fund sales, may think twice about investing clients in the sector as a result of the trading allegations, said Bruce Gordon, senior executive vice-president and general manager for Canada at Manulife Financial Corp. in Toronto.

"With advisers, what we are concerned about is that we are an industry based on trust. If the spotlight erodes that trust, we all have a problem . . . we have to maintain that trust," Mr. Gordon said.

The media wasn't the only group to receive a brow-beating at the conference. A series of pending initiatives from the OSC and the umbrella group the Canadian Securities Administrators received a thumbs-down from panelists.

Mr. Hockin said the flood of proposed disclosure and governance rules have created "a perfect paper blizzard" that will increase costs.

Mr. Goodman said the OSC's proposed fair-dealing model to regulate the relationship between seller and buyer indicates regulators "don't trust us. . . . It's using a sledgehammer to kill a mosquito."

© 2007 The Globe and Mail. All rights reserved.

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