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Mutual Fund News

Three major brokerages face unprecedented fines

RBC, TD, BMO units could see $25-million levy in mutual fund probe, sources say

With files from reporter Sinclair Stewart

The brokerage arms of three of Canada's big banks are facing unprecedented fines totalling about $25-million for their alleged role in helping investors engage in questionable market timing activities in mutual funds, industry sources say.

The Investment Dealers Association of Canada, the trade group that polices the industry, wants to levy the fines against the brokerage subsidiaries of Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal, the sources said.

The fines, the largest ever contemplated by the IDA, would set a new record. The largest fine it has ever levied was in 2002, when it fined now-defunct brokerage firm Rampart Securities Inc. $3-million.

"The aggressiveness of their position has basically taken people by surprise," said an industry source close to the talks. "They're breaking new ground here for sure."

The brokerages have become swept up in a probe into questionable trading practices over allegations that brokers at the firms helped clients make market timing trades in international funds managed by Canadian companies.

Four of the country's biggest fund companies are under regulatory scrutiny for alleged abusive trading violations in their funds. The Globe and Mail reported last week that the companies have agreed to pay about $200-million in restitution to investors in a proposed settlement with the Ontario Securities Commission.

The four companies -- Investors Group Inc., CI Fund Management Inc., AGF Management Ltd. and AIC Ltd. -- have been in talks with the OSC for the past few weeks aimed at reaching a group settlement.

The Globe reported last week that enforcement staff at the OSC are working together with the IDA and the Mutual Fund Dealers Association of Canada.

They are working to publish allegations at the same time against the four fund companies as well as three bank-owned brokerages and Investors Group's in-house sales arm.

An announcement could come as early as next week.

Officials at the IDA would not comment yesterday. The banks also declined to comment.

"I am not addressing the question because we don't discuss matters that we have with the regulators," said Graeme Harris, a spokesman at RBC.

Kelly Hechler, a spokeswoman at TD, echoed that sentiment. "We don't talk about matters pertaining to regulators," she said.

TD took a contingent litigation reserve of $37-million (after tax) in its year-end financial results, announced this week. TD chief executive officer Ed Clark said during a conference call with analysts that the reserve was for a variety of issues, noting the environment has become more litigious. Industry observers speculated that some of that reserve was for the mutual fund probe.

In the United States, the National Association of Securities Dealers, or NASD, a self-regulatory body for brokerage firms, has levied fines against several firms relating to market timing and late trading.

Market timing involves rapid in-and-out trading in a mutual fund by hedge fund players and other sophisticated 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.

While the practice is not illegal, it hurts ordinary investors because the fund's returns are siphoned off by the market pros.

A Globe investigation published in June found that rapid, in-and-out trading in mutual funds totalled more than $220-billion between 2000 and 2003.

Late trading, which is illegal, involves processing trades after hours using the 4 p.m. price.

In one instance, NASD banned National Securities Corp., a Seattle brokerage firm, from opening mutual fund accounts for new clients for 30 days and fined it $300,000 (U.S.) for failing to have an adequate supervisory system to prevent "deceptive" market timing and late trading. The firm's president and former chief operating officer were also fined $25,000 each.

"This is an example of a firm whose management totally ignored repeated red flags that its brokers were facilitating deceptive and improper market timing in mutual funds by hedge fund clients," NASD vice-chairman Mary Shapiro said in a statement.

© 2007 The Globe and Mail. All rights reserved.

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