The mutual fund industry should reaffirm that the interests of investors are paramount, instead of attacking the regulators and the media over the scrutiny it is facing into alleged market timing violations, says an Ontario Securities Commission official.
Susan Silma, director of investment funds at the OSC and a scheduled speaker at an industry conference yesterday, used the opportunity to criticize executives who had lashed out at the regulator and the media the previous day.
"I believe the challenge for industry is to take a long, hard look at itself and learn some lessons, possibly difficult ones," Ms. Silma said.
While the OSC's probe into market timing "may be drawing media attention that the industry does not welcome, it is at the same time an opportunity for the industry to take these matters seriously and to use the heightened interest to reaffirm its commitment to investors," she said.
Thomas Hockin, president of the Investment Funds Institute of Canada, was one of more than 200 industry officials in the audience yesterday at the Metro Toronto Convention Centre.
During the first day of IFIC's annual conference, Mr. Hockin said the combination of five years of poor markets, regulatory scrutiny and "hostile" media coverage has resulted in a "perfect storm" for the industry.
He was not the only one who lashed out at the media. Ned Goodman, chairman of Dynamic Mutual Funds Ltd., said negative media reports are driving away mutual fund investors.
"It's a fine industry. I am passionate about it and I think it is terrible how we are being maligned," he said.
Last week, the OSC targeted four of the country's largest mutual fund companies for potential enforcement action over alleged market-timing violations in their funds, and warned that more firms may be on the hook.
The OSC has given Investors Group Inc., CI Fund Management Inc., AGF Funds Inc. and AIC Ltd. 10 days to explain alleged abusive trading violations in their funds.
The commission did not level specific allegations of wrongdoing against the companies and also said it had not uncovered any late trading, a practice that is clearly illegal.
Market timing involves the rapid, in-and-out trading in a fund by hedge funds and other market professionals who generally take advantage of time-zone differences in international funds, where events after overseas markets close often make stock prices in the funds out of date.
Market timing can hurt a fund's long-term investors because their returns are siphoned off by the market pros. While the practice is not illegal, a fund manager who allows it can breach his fiduciary duty to act in the best interests of all investors.
A Globe and Mail investigation published in June found that rapid in and out trading in mutual funds totalled more than $220-billion between 2000 and 2003. The practice stopped in September, 2003, the same month U.S. regulators cracked down on market timing and late trading.
Ms. Silma began her remarks yesterday by joking that her boss, Charlie Macfarlane, executive director of the OSC and a military buff, has a full suit of armour propped up in the corner of his office along with other battle memorabilia.
"I contemplated borrowing his suit of armour for today's presentation but I thought it would be too obvious," she said. "Instead, I came armed with some messages."
On a more serious note, she said that while this is without a doubt a difficult time for the industry, it also presents a number of opportunities. "The opportunity and challenge for the industry is to reaffirm that the interests of mutual fund investors are paramount," she said.
She said the commission also has an opportunity to support the industry. "If industry and the regulators do all of this well, we will at the end of the day provide a significant opportunity for investors to better understand the mutual funds they're buying, to better understand the fees that they're paying and to . . . ultimately feel confident that the people entrusted to manage their funds are treating them fairly." She declined to comment on the status of the regulatory probe.
© 2007 The Globe and Mail. All rights reserved.
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