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Dealers slapped with close to $50-million in penalties

Failed to detect and prevent mutual fund market timing by some of their clients


Investment dealers were slapped with close to $50-million in penalties yesterday for failing to detect and prevent systemic market timing in mutual funds by some of their clients.

The fines, stiffer than expected by the fund industry, are meant to penalize the financial institutions that ignored their obligations to the investing public, regulators said.

"This was conduct that should not have been countenanced by the firms, that it was serious conduct and that we are treating it seriously and we have imposed a serious penalty," said Paul Bourque, senior vice-president of member regulation at the Investment Dealers Association of Canada.

RBC Dominion Securities Inc., BMO Nesbitt Burns Inc. and TD Waterhouse (Canada) Inc., all of Toronto, were fined a combined total of about $42-million. The brokerages arms of the three big banks had a series of written agreements with clients that allowed them to rapidly trade in and out of mutual funds in 2002 and 2003.

Investors Group Financial Services Inc., meanwhile, will pay a $5.35-million penalty for allowing an institutional client to engage in market timing of up to $70-million held in mutual funds from 2000 through 2002.

The IDA and Mutual Fund Dealers Association settlement agreements call for penalties based on revenue derived from market timing, a fine equal to market timing revenue, and the costs of the action.

Market timing involves the rapid, in-and-out trading in a fund by hedge funds and other market professionals. While the practice is not illegal, market timing goes against procedures many fund companies have in place to shield their unit holders from added costs and volatility.

The detailed settlement agreements paint a damning picture of the dealers' activities. Through a complex series of relationships, select clients were allowed to engage in marking timing involving millions of dollars and dozens of funds, including round trip trades that would see cash move from one fund to another and back again. Written and verbal agreements to market time were common and repeated written warnings from fund companies were ignored.

RBC Dominion

The trading arm of Royal Bank of Canada, the country's largest bank, has agreed to pay $17-million in fines. The bank received at least seven written warnings from six fund companies regarding the trading activities of two sophisticated offshore investors, identified in the settlement only as Client A and Client B.

The two clients held positions in dozens of funds for less than five days, making transactions valued from $500,000 to $54.8-million, including trades in Royal Mutual Funds Inc.

TD Waterhouse

Toronto-Dominion Bank's trading arm was fined $20.7-million for an environment that "actively encouraged and promoted market timing activities," the IDA's settlement agreement says. The bank executed 5,830 fund trades of behalf of five clients in funds operated by 20 fund companies.

In one instance, TD Mutual Funds Inc. rejected the brokerage's desire to market time in the bank's own funds, citing analysis that rapid trading would have "a significant negative impact on the performance of the funds involved."

BMO Nesbitt Burns

Bank of Montreal's investment arm was fined $3.7-million. The brokerage executed thousands of round trip trades in about 15 fund companies. In addition, the bank allowed market timing in 25 mutual funds, including bank funds, and more than 200 market timing round trip trades in a proprietary account.

Investors Group

Between October, 2000, and November, 2002, the Winnipeg mutual fund giant allowed a client to market time in 12 funds. Under the terms of its agreement, Investors Group allowed the client to maintain minimum and maximum investments in each fund and waived many trading fees. Its estimated the client made a total profit of $36-million during the two-year period.

Investors Group Financial Services

Firm earned $2.65-million by arranging 'frequent' trades in 12 affiliated funds by 1 unnamed client. It will make restitution of $2.65-million to fund investors and pay a further fine of $2.65-million plus investigation costs of $50,000.

BMO Nesbitt Burns

Firm earned $2.19-million executing 400 trades for its own account and more than 7,000 for 4 unnamed clients. It will make restitution of $2.19-million to fund investors and pay a fine of $1.45-million plus investigation costs of $50,000.

RBC Dominion Securities

Firm earned $8.46-million executing more than 4,160 trades for 2 unnamed clients. It will make restitution of $8.46-million to fund investors and pay a further fine of $8.46-million plus investigation costs of $50,000.

TD Waterhouse

Firm earned $10.32-million executing more than 5,380 trades for 5 unnamed clients. It will make restitution of $10.32-million to fund investors and pay a further fine of $10.32-million plus investigation costs of $50,000.


© 2007 The Globe and Mail. All rights reserved.

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