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OSC wants funds to make restitution

Four firms targeted for potential action over alleged market timing violations

The Ontario Securities Commission wants the four mutual fund companies targeted for potential enforcement action over alleged market timing violations to make restitution to investors, industry sources say.

"There's going to be some form of restitution," said a source close to the situation. "The issue is how much, what were the damages."

The four fund companies -- Investors Group Inc., CI Fund Management Inc., AGF Funds Inc. and AIC Ltd. -- are "very much interested" in settling with the regulator, said another industry source. Part of that settlement "is going to involve some payments," he said. "The logical result of those payments is that it goes to investors somehow."

Michael Watson, head of enforcement at the OSC, declined to comment yesterday beyond saying the regulator is having positive discussions with the companies.

"It's entirely inappropriate to discuss the details until you've got some form of resolution," he said. "We're having discussions on a number of issues, and those discussions appear to be heading positively towards a resolution of the issues."

The commission said in a statement yesterday that it hopes to resolve the matter as expeditiously as possible. The regulator also stressed that its staff had not found any evidence of market timing by any insiders of the four fund managers.

Officials at the four companies either declined to comment or did not return telephone messages.

"We are currently in discussion with the regulators, but not able to comment further," said Investors Group spokeswoman Debbie Young.

"We're working with the OSC, as are the other fund companies," said AIC spokeswoman Ann Curran.

Last week, the OSC said the four mutual fund giants could face enforcement action but did not level specific allegations of wrongdoing against them. The regulator initially gave the companies 10 days to explain alleged abusive trading violations in their funds. But Mr. Watson suggested yesterday the deadline is no longer necessary because talks are under way.

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differences in international funds, where events, after overseas markets close, often make stock prices in the funds out of date.

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 Globe found 16 fund companies with tell-tale signs of market timing in their international funds.

The four companies targeted by the OSC had more funds than any other companies on the Globe's list. The OSC has said up to another 20 companies could be swept up in the probe.

The OSC said yesterday it found no evidence of market timing activity in the period since it launched its review last November -- two months after a crackdown on the practice in the United States.

While market timing is not illegal, a fund manager who allows it can breach his fiduciary duty to act in the best interests of all investors. That is because the market timers can hurt a mutual fund's long-term investors by siphoning off a fund's returns.

Investor advocates have said that any fund manager who allowed market pros to scoop up quick profits by zipping in and out of their funds should compensate long-term unitholders for their losses.

In the United States, settlements with mutual fund companies have resulted in nearly $3-billion (U.S.) in fines, restitution to investors and a lower fees charged to investors.

© 2007 The Globe and Mail. All rights reserved.

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