Many clients have been receiving cheques from various mutual fund companies over the last month. As expected, I have received a flood of phone calls from clients asking about the money received.
The cheques were sent as part of a settlement between various Mutual Fund Companies and the Ontario Securities Commission for "Market Timing" issues that were discovered from an OSC investigation. The OSC defines Market Timing as follows:
Market timing involves short-term trading of mutual fund securities to take advantage of short term discrepancies between the "stale" values of securities within a mutual fund's portfolio and the current market value of those securities. Stale values can occur in mutual fund portfolios comprised, in whole or in part, of non-North American foreign equities. Stale values of those securities may result in stale values of the units of a mutual fund as a result of the way in which the net asset value of most mutual funds is calculated for the purpose of determining the price at which an investor may buy or sell a unit of the fund.
A market timer will attempt to take advantage of the difference between the "stale" value and an expected price movement of a fund the following day by trading in anticipation of those price movements.
The Harm Caused by Frequent Trading? When certain investors engage in frequent trading market timing in foreign funds, and when those investors are not required to pay a proportionate fee to the fund, the economic interest of long-term unitholders of these foreign funds is adversely affected. Significant harm may be incurred by a fund in which frequent trading market timing occurs. Any such harm would be borne by all investors in the fund. In addition to dilution, market timing in a fund also may result in certain inefficiencies in that fund. Those inefficiencies, which will vary depending upon the particular fund, may involve increased transaction costs and disruption of a fund's portfolio management strategy (including the maintenance of cash or cash equivalents and/or monetization of investments to meet redemption requirements) and may impair a fund's long-term performance.
If you would like to know more about the Market Timing investigation, please visit the following link:
http://www.osc.gov.on.ca/HotTopics/FundSettle/fs_backgrounder.jsp
If you have any further questions, please call me.
