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Brokerages reach deal with watchdog over market timing

The brokerage arms of three of Canada's big banks have reached settlement agreements with the trade group that polices the industry for allegedly failing to detect and prevent "potentially harmful" market timing activities in mutual funds.

The Investment Dealers Association of Canada yesterday levelled the same allegation against RBC Dominion Securities Inc., TD Waterhouse (Canada) Inc. and BMO Nesbitt Burns Inc.

All three firms have reached a settlement with staff at the IDA, thereby avoiding regulatory hearings.

The settlement agreements, including proposed fines, will be presented to an IDA panel for approval at back-to-back hearings on Dec. 16.

The Mutual Fund Dealers Association of Canada, the group that supervises mutual fund dealers, also announced that it is in settlement talks with Winnipeg-based Investors Group Financial Services Inc.

The firm, a wholly owned subsidiary of Investors Group Inc., primarily sells mutual funds managed by its parent. The MFDA alleges that the dealer "permitted an institutional client to engage in market timing in specific Investors Group funds" over a two-year period beginning in October, 2000.

"We continue to be in discussions on a settlement agreement," said Investors Group spokesman Ron Arnst. A settlement hearing is also set for Dec. 16.

The brokerages are accused of violating IDA rules from January, 2002, to December, 2003, by "failing to implement supervisory systems to detect and prevent potentially harming market-timing activities," the IDA said in identical, tersely worded notices.

The IDA does not say whether the trading was done by clients or employees of the brokerages.

"We take this matter very seriously," said Bill Hatanaka, executive vice-president of wealth management at Toronto-Dominion Bank, parent of TD Waterhouse. "As a financial institution we realize that the most important asset we have is the trust of investors and customers."

He said TD Waterhouse does not condone market timing and that the firm has enhanced its practices and procedures.

RBC, a subsidiary of Royal Bank of Canada, said the settlement it has reached involved two clients of the firm. It declined further comment.

BMO, a subsidiary of Bank of Montreal, said the settlement will not have a material impact on the bank's results.

The Globe and Mail reported on Nov. 26 that the three brokerage firms are facing unprecedented fines totalling about $25-million.

The fines would set a new record for the IDA, which has come under fire for its overall policing of the industry and for imposing penalties on firms that are much more lenient than those imposed on their employees.

The largest penalty the IDA has ever levied was in 2002, when it fined now-defunct stock brokerage Rampart Securities Inc. $3-million. The fines are even more startling when compared with those handed down last year -- a total of $265,189 against firms compared with $3.2-million against individuals.

Investors Group's mutual fund dealer is also facing a fine of a similar size to those imposed against the brokerages, sources said yesterday. This is the first time the fledgling MFDA has taken enforcement action against a mutual fund dealer.

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.

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.

© 2007 The Globe and Mail. All rights reserved.

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