Canadian regulators announced potential enforcement proceedings against four of the largest Canadian mutual fund companies last week, as the fund industry market-timing scandal expanded north of the border.
The Ontario Securities Commission announced the possible charges last week, but did not name the companies that were notified. Instead, the regulator urged them to come clean with the public on their own. The following day, Investors Group Inc. of Winnipeg, a unit of IGM Financial Inc., as well as CI Fund Management Inc. and AGF Management, both in Toronto, and AIC Ltd. of Burlington, Ontario, all issued statements indicating they had been notified of potential enforcement action from the OSC. The regulator also noted that it made the announcement about all four firms simultaneously so as not to unfairly single out, or bring undue infamy on, one particular shop.
The four are mainly top-tier companies, according to Mark McDonald, a Toronto-based client relationship manager with Dalbar "They're all major players up in the Canadian mutual fund industry. Back in the late 1990s and [into] the early 21st century, all four of them were right at the top of the food chain. Investors Group is the second-largest fund company here, so they're definitely comparable to Fidelity in Canadian terms," he said.
Investors Group and CI Fund Management are the real heavy-hitters, with AGF and AIC coming in a step behind. "Out of the four, AIC and AGF are the two that have been hit by net redemptions for the last couple of years. A couple of years ago, all four of them were right at the top of the ladder," McDonald said. He added that some would consider AIC to be straddling the line between top-tier and second-tier. Investors Group has about $33 billion in assets under management, while CI Fund Management, the fourth-largest Canadian complex, is right behind with about $31 billion. They are followed by eighth-ranked AGF, with $18 billion, and AIC, ranked 13th, with $9 billion, according to published reports.
The Canadian probe into trading activity, which began last November, did not turn up any instances of late trading. However, regulators did find harmful market-timing activity at the quartet and referred those cases to its enforcement division to finish the investigation and bring proceedings. The four firms will have a chance to respond to the charges, most likely within a period of two weeks. "As we near the end of our investigation into the four fund managers, we are following our routine of providing them with an opportunity to respond to our concerns and with any reasons why we should not initiate proceedings against them," Enforcement Director Michael Watson, said in a statement.
At this point, it is unclear how heavyhanded the OSC will be with these firms. "The OSC is now considering next steps, but has not given any indications as to possible outcomes. AGF will be discussing with the OSC over the next two weeks why no further steps are warranted," AGF wrote in a statement.
Despite the absence of a table-pounding regulator such as Eliot Spitzer in Canada, most firms north of the border got the message early on and decided to clean up their houses on their own before regulators came knocking. "Canadian companies see themselves very much as a slave to public perception," McDonald said. "Even though there was no investigation up here [in September 2003], they decided to get their act in gear, anyway."
However, the regulator found problems and passed along the cases to its enforcement division. But the traditionally limited power of the OSC could be a significant factor in any potential outcome. "If a company has been found to gain by [market timing], they can be forced to repay that amount, but in terms of unilateral fines, I don't know what we can expect," McDonald said. "It's pretty much uncharted territory. I think what a company does in response to these investigations is going to go a long ways to how they are treated by the OSC."
McDonald said the OSC is basically the equivalent of the SEC up in Canada, but that unlike the U.S., Canada does not have a federal securities regulator. Regulation is overseen by authorities in each province. But since the lion's share of fund firms are located in Toronto, there are many similarities between the regulators in both countries.
As for the companies involved, each released fairly similar statements last Tuesday noting that the OSC had found no instances of late trading. All pointed to various corporate governance initiatives they had undertaken to curb market timing either before the probe began or following its launch.
The four firms represent a fraction of the overall companies involved in the initial phase of the probe. The OSC began its investigation by examining 105 managers of publicly offered retail mutual funds. That number was whittled down to 31 during the second phase of the investigation, which started in February. From there, Canadian regulators focused on seven fund managers, which held approximately 40% of the industry's assets. The four currently under the gun are from that pool of seven. The regulator said it does not anticipate bringing charges against the other three firms.
However, the industry-wide investigation is expected to continue, with the OSC set to examine additional firms that possess another 40% of the industry's assets. That could involve up to 20 more firms, according to local reports.
The probe is coming at a bad time for the Canadian fund business, which totals about half a trillion dollars Canadian in assets, small comparatively to the $7.5 trillion U.S. mutual fund industry. And things could get worse, as investors may continue to pull dollars from scandal-plagued firms.
"It's very bad timing for companies like AGF and AIC because they've just had massive cash outflows for the last couple of years," McDonald noted. "The mutual fund industry in Canada in general has really been struggling since the turn of the century [and] the tech meltdown, and this doesn't come at a good time at all for the four companies named."