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Franklin settlement caps OSC market-timing probe

Fund firm to pay back $49.1-million

MUTUAL FUNDS REPORTER

Franklin Templeton Investments Corp. agreed yesterday to reimburse unitholders $49.1-million for permitting improper trading in its mutual funds.

The settlement with the Ontario Securities Commission ends the regulator's sweeping 15-month probe of the fund industry's trading practices, an investigation that saw eight companies agree to pay penalties and reimbursement of more than $250-million.

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

According to the terms of the OSC settlement, the fund company allowed three unidentified institutional investors to use so-called market-timing strategies in its funds from February, 1999, through February, 2003. Market timing is not illegal but the practice hurts funds by raising costs and reducing returns for long-term investors.

The three market timers made a total profit of $120.8-million from Franklin funds, the OSC said. In November, 2002, Franklin advised the investors to stop their frequent trading activities by Jan. 31, 2003. No short-term trading fees were charged to the timers by Franklin.

The three traders "achieved a return on their overall investment in the relevant funds that was significantly higher than the return that long-term investors would have achieved," the commission said.

Management of Franklin declined to comment yesterday.

Franklin, the Canadian arm of U.S. financial services giant Franklin Resources Inc., with about $21-billion in retail assets under management, is the fifth mutual fund company in this country to agree it failed to protect the best interests of its unitholders when it permitted market timing in its funds.

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.

Separately, three bank-owned brokerages, along with Investors Group Financial Services Inc., were fined more than $47-million by the Investment Dealers Association of Canada and the Mutual Fund Dealers Association for allowing clients to market-time in mutual funds.

Despite the steep financial penalties, many on Bay Street have viewed the regulatory probe with some cynicism.

Market timing is widely considered a problem of the past as the bulk of the fund industry took steps in 2003 to curb the practice. The five OSC-targeted fund companies have received few inquiries from unitholders on the issue and the flow of investment dollars have been unaffected by the scandal.

There's some sentiment the probe may have soured relations between the OSC and the industry. Sources within the five firms say the regulator planned on taking action against an additional 20 fund companies. To the surprise of many, the commission ended its investigation in December.

"If the universe was greater than five [fund companies] . . . why are those unitholders lesser beings?" Michael Lee-Chin, the billionaire president, chief executive officer and controlling shareholder of AIC, said in a recent interview. "If you open a can of worms, finish it."

Later this month, the OSC is expected to release a report on its market-timing investigation. It is expected to include some detail as to why additional firms were not targeted and lay the groundwork for future fund regulatory policy.

David Brown, the OSC's chairman, said yesterday that the report will bring "closure" to the investigation and will specifically address "a lot of misinformation out there" regarding the probe.

The OSC settlement marks the second time in less than a year that the Franklin empire has agreed to pay fines to settle allegations of improper trading. In August, a U.S. unit of Franklin Resources paid $50-million (U.S.) in reimbursement and penalties for permitting market timing in U.S. funds.

© 2007 The Globe and Mail. All rights reserved.

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