The collapse of the North American bull market could not have come at a better time for Canada's mutual fund industry. Although it will certainly make portfolio returns tougher to achieve, at least there may now be an audience for that performance. Over the past few years, dazzled by new online trading technology and the prospect of easy remrns in a rising market, vast numbers of retail investors steadily drifted away from funds, direcdy trading equities on their own. But, as the wags of Bay Street say, never confuse brains with a bull market. And thanks to recent bouts of extreme market volatility, the battered amateurs are flocking back.
December figures from the Investment Funds Institute of Canada indicate net sales of $ 1.4 billion for the month, a gain of 87 per cent over the same period a year earlier. And for 2000, sales were up 28 per cent from 1999 levels—the first year-over-year increase since 1997. “Market jitters are definitely reversing the trend of the past few years,” says fund industry analyst and author Ranga Chand. “People didn’t abandon funds, but did direct much less capital towards them. This RRSP season, we’re just seeing the start of renewed interest.” At least some of that interest has been kindled by a slow and steady campaign to toughen the rules and overhaul the practices governing mutual funds. Although the Ontario Securities Commission, under maverick chairman David Brown, has been making splashy headlines over the past year with its hard line on everything from stock-price manipulation at RT Capital and corporate financial disclosure to international money laundering and Internet fraud, it has also paid close attention to less swashbuckling issues. And despite its many high-profile cases, Brown insists that “the mutual fund industry is one of the principal focuses these days at the OSC.”
To help investors—experienced and otherwise—understand the increasingly complex and fragmented fund market, the OSC now requires, for example, that prospectus documents be prepared using plain language. There is also a push under way to introduce simplified, standardized prospectus formats, not only to make it easier to comprehend the data, but to compare them from fund to fund.
As part of that initiative, the commission has worked with Industry Canada to develop an online “fee impact calculator.” This program has been designed as a tool to help investors to readily contrast the various management expense ratios and other costs charged by funds.
But most important of all, the OSC has been the driving force behind a new self-regulatory, self-funding national body, the Mutual Fund Dealers Association, which is expected to be
up and running by the end of March. After three years of wrangling and delays, key securities commissions and industry associations across the country are just now voting on acceptance of the MF DA and its guidelines for Canada’s 60,000 fund sales representatives.
Among the many start-up “challenges” Brown acknowledges is the struggle to co-ordinate the agendas of massive bank-owned funds with those of smaller, independent operations. But other interprovincial and intra-industry hurdles have proven formidable as well.
For example, there has also been the daunting task of balancing the roles of IFIC, the fund industry’s trade organization, and the Investment Dealers Association of Canada, which represents brokers and securities dealers. Since both have members directly affected by the MFDA and its rules, the two bodies have batded for equal representation on the board of the MFDA. Several outside directors have been named to act as a buffer between them.
But the issue of which association has jurisdiction over which areas remains touchy, especially where fund industry sales agents sell other products as well. Financial planners and insurance agents, a large number of whom are now licensed to sell fund products, have balked at some of the proposed new rules. Specifically, they objected to the dictate that they no longer funnel their commissions through unregistered personal corporations, which made them less accountable legally. In a compromise, the MFDA will allow them to continue that practice for a three-year transition period.
But even as the MFDA takes shape, Brown is already planning his next initiative. Based on the recommendations of the 1995 report filed by former OSC commissioner Glorianne Stromberg and another filed last summer by securities lawyer Stephen Erlichman, he is determined to address yet another issue he has flagged as urgent: a clearer delineation between professional money managers and the fund companies that market their funds. “As public companies, the funds want to attract investors with performance and the sale of units in their fund,” explains Brown. “But that can lead to potential conflicts of interest as well. And we want to ensure a measure of independence for money managers.”
Brown is contemplating adoption of a U.S. code dictating that at least 50 per cent of a fund company’s board be composed of outside directors. Brown also intends to push for easier-to-understand financial information from fund companies, issued quarterly instead of half-yearly.
Still, whether a wounded bull or an all-out bear market is in the cards for 2001, mutual fund investors can be certain of at least one thing: they’ve got a tiger working on their behalf at the OSC.
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