Is Fund Market-timing a Serious Issue?

In December 2004 the press reported on regulatory action on market-timing.

Toronto, Dec 16, 2004 - A panel of Commissioners of the Ontario Securities Commission (OSC) approved four settlement agreements today that will result in $156.5 million being distributed to mutual fund unit holders who suffered harm from market timing activities in those funds. The settlement agreements, approved in the public interest, were reached earlier this week by OSC Staff with CI Mutual Funds Inc., AGF Funds Inc., I.G. Investment Management, Ltd. and AIC Limited. The text of the agreements is available on the OSC website.

Toronto, Dec 16, 2004 – The Mutual Fund Dealers Association announced a settlement agreement with Investors Group Financial Services regarding market timing. IG has agreed to compensate investors effected by their conduct by making a payment of $2.65 million, and will also pay a fine of $2.65 million to the MFDA as well as costs of the MFDA investigation of $50,000. The text of the settlement agreement is available on the MFDA website.

Toronto, Dec 16, 2004 – The Investment Dealers Association penalizes TD Waterhouse $20,698,713.38, RBC Dominion Securities $16,975,302.08 and BMO Nesbitt Burns $3,693,139.20 regarding market timing. The text of the settlement agreements is available on the IDA website.

The well coordinated news releases by the regulators exposed the involvement in market-timing of eight of Canada's largest investment firms, but did not expose other firms that were also involved. While the regulators justify closing their investigation saying the regulatory action should put a stop to the practice, they are covering up information that should be made available to the public.

How can investors do their due diligence when the regulators fail to disclose information regarding malfeasance?

The regulatory approach to providing investor protection that is preventative in nature is failing investors ... and that means most Canadians. The investment industry is continuing to develop new products and new initiatives that result in investors losing their savings when they place their trust in the industry. Unfortunately the regulators do not prevent wrongdoing from happening. They are aware of the dangers of new industry initiatives involving foreign exchange and futures products but can't prevent it from happening. They may hope to prevent it from continuing but meanwhile thousands of small investors are at risk of losing their savings.

Why don't the regulators focus on remedial regulation and make clients whole when they suffer loss due to wrongdoing? Why doesn't industry take iniatives to do what is right? Why does industry defend vigorously actions that from a moral and ethical point of view appear indefensible? How can they justify their actions when the result is major loss for widows and seniors? How can a government that represents the people stand idly by and allow this financial predation to continue?

The fund market-timing scandal exposed in December 2004 clearly illustrates

• the investment industry's cavalier attitude towards small investors
• wrongdoing permeates the investment industry and is indeed widespread

It's time that our government acts to provide investor protection by establishing an authority with responsibility for investor protection that is remedial. The regulatory approach that is preventative has failed investors.