Close on the heels of U.S. regulators' investigations of mutual fund trading abuses, the Ontario Securities Commission began probing the Canadian mutual fund industry in November 2003. But unlike the spate of scandals that surfaced in the U.S., only a handful of companies were found to have engaged in shady trading practices.

Speaking at the Economic Club of Toronto last Thursday, OSC Chairman David Brown remarked on the nature of the Canadian probe and its key findings. In conjunction, the commission also released its Report on Mutual Fund Trading Practices Probe.

Brown said the probe uncovered no instances of late trading and only five fund managers that allowed investors to rapidly trade in and out of funds. Under standard practice, mutual fund prospectuses in Canada state that funds don't allow market timing.

The OSC reached a settlement with the five managers under which they will pay affected investors a total of C$205 million ($170 million), by far the largest settlement in OSC history. In outlining the steps taken by the OSC to fish out perpetrators, Brown noted the vast differences between the American and Canadian probes.

While New York Attorney General Eliot Spitzer's job revolves more around finding and punishing offenders, the OSC's role is limited to preventing harm to Ontario's capital markets. In that respect, the approaches taken by the regulators in the two countries were also hugely different. Brown noted, for instance, that while the SEC subpoenaed only a select group of managers, the OSC wrote to all of the fund managers offering open-end retail mutual funds in Ontario, 105 in all.

The OSC found mixed results: Some managers had allowed market-timing activities, others had detected them and put measures in place to prevent a recurrence.

As far as late trading was concerned, the OSC's job was easier than that of its U.S. counterpart. In Canada, unlike in the U.S., mutual fund transactions are processed through the FundSERV system, in which orders received after the 4 p.m. close are automatically referred for processing at the next day's price. "This is the kind of standard that many in the U.S. are striving for. Our investigation enabled us to conclude that Canada's hard-close system was working. Late trading is not a problem in Canada," Brown said. The OSC chairman emphasized the duty that fund managers have to protect investors. "Some argue that this issue, and others like it involving the trust that investors place in market systems, is not all that important, that it is over-dramatized. One of the fund managers said that there was no reason to single some out because, according to him, everybody was doing it," Brown said. But everybody was not doing it, he added. "The probe was successful because it was quick, and it addressed the issue in its entirety. It brought together all relevant provincial regulators and the two affected self-regulatory organizations - the Investment Dealers Association and the Mutual Fund Dealers Association."

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