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OSC draws ire as fund probe seems set to end

Franklin expected to settle for $35-million but critics want other firms scrutinized


The Ontario Securities Commission's largest -- and perhaps most controversial -- investigation is expected to draw to a close Thursday when fund company Franklin Templeton Investments Corp. concludes a settlement over improper trading allegations.

Franklin, the Canadian arm of U.S. fund giant Franklin Resources Inc. of San Mateo, Calif., declined to comment yesterday. An industry source close to the investigation expects Franklin's settlement will be about $35-million.

In December, the OSC alleged Franklin allowed so-called "market timing" -- rapid, in-and-out trading by sophisticated investors -- in its mutual funds from 1999 through 2003. Franklin is a fund industry pioneer, with about $20.2-billion in retail assets under management. It markets funds under the Franklin, Templeton and Bissett brands.

It's likely Franklin will be the fifth and last mutual fund company in this country to agree it failed to protect the best interests of its unit holders when it permitted market timing in its funds. Market timing is not illegal but the practice hurts the funds by raising costs and reducing returns for long-term investors.

In a series of December settlements with the OSC, four fund companies -- AGF Funds Inc., AIC Ltd., CI Mutual Funds Inc. and Investors Group Inc. -- agreed to $156.5-million in restitution to investors hurt by market timing.

Several sources were critical of the OSC yesterday, claiming the market timing settlements and limited scope of the probe had eroded trust between the fund industry and regulators.

In September last year, OSC enforcement director Michael Watson said as many as 20 more companies may be targeted for in-depth review. During negotiations with the first four fund companies, fund lawyers and executives were told a settlement model was being built to be applied across the industry.

Deals were concluded, Toronto-based Franklin was put on notice and then, to the industry's surprise, the OSC ended the investigation, saying the message has been sent and there is no point in dedicating further resources to the probe.

Detailed settlement deals released by the OSC and the industry indicate as many as 20 fund companies permitted market timing. "We were assured they were going after everyone," one fund executive said. "The [OSC] line was we will get every single dollar back for every single investor . . . then we found out it was just a matter of making a point; we have made our point and we are finished."

Several sources said the OSC saw no further public relations upside in continuing the investigation. "I think they got their headlines and moved on," said one source close to the OSC. "But if you are one of the five that got nailed, is that fair? . . . If you are one of the 20 others, you are probably breathing a sigh of relief."

OSC officials declined to discuss the investigation yesterday. Its report, expected to include some detail on why enforcement proceedings were limited to five firms, will be released later this month.

Meanwhile, investors have largely ignored the fund trading scandal, said Windsor, Ont.-based fund analyst Dan Hallett. The flow of investment dollars to the five OSC-targeted fund companies have largely been unaffected by the scandal, he said. "People really just look at . . . performance. That, frankly, is the big motivator in terms of what decisions people make."

© 2007 The Globe and Mail. All rights reserved.

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