A hearing panel of the Investment Dealers Association of Canada Thursday handed out penalties totalling more than $40 million to three investment dealers for executing market timing trades.
The IDA penalties came on the heels of the Ontario Securities Commission’s approval of settlements with four mutual fund companies concerning market timing trades.
The IDA panel approved settlement agreements with BMO Nesbitt Burns Inc., RBC Dominion Securities Inc., and TD Waterhouse Canada Inc. The three firms acknowledged that from Jan. 1, 2002 to Dec. 31, 2003, they engaged in potentially harmful practices by executing market timing trades for select clients.
In the settlements, the firm’s agreed they received numerous written warnings from mutual fund companies regarding frequent trading by the select clients.The warnings went unheeded or ignored by the investment dealers as they continued to execute the market timing activities of the clients.
The three firms also admitted they failed to implement supervisory systems to address red flags and detect and prevent market timing activities. In addition, they agree they had failed to adequately supervise the activities of its employees, and conduct adequate due diligence into the activities of its employees and clients in these circumstances.
RBC DS admitted that it failed to enforce, track and distribute written warnings from mutual fund companies, and that it failed to enforce its internal policy related to cut-off times for the acceptance and entering of mutual fund orders.
TD Waterhouse acknowledged it failed to review and approve the written special arrangements with certain clients regarding market timing; failed to enforce, track and distribute the written warnings from mutual fund companies; and failed to enforce its internal policy related to cut-off times for the acceptance and entering of mutual fund orders.
An internal report, dated Feb. 16, 2004, prepared by TD Waterhouse concluded that the firm had encouraged and promoted market timing by recruiting and hiring a broker that it knew had market timing clients. The report concluded that as a result, “TD may have assisted the clients to engage in market timing.”
The IDA fined TD Waterhouse $10,324,356.69 and ordered it to pay with costs to the association of $50,000. The firm must also disgorge gross market timing revenues of $10,324,356.69.
RBC DS was fined $8,462,651.04 and ordered to pay costs of $50,000. It must also disgorge market timing revenues of $8,462,651.04.
The IDA said mitigating factors in assessing the penalty included the fact that RBC DS directed that frequent trading in mutual funds by one of the market timing clients cease after the announcement of investigations in the United States and prior to any investigation into or inquiries of investment dealers in Canada with respect to market timing. Furthermore, the firm voluntarily disclosed to the IDA and to the OSC the existence of frequent trading by its clients.
BMO Nesbitt was fined $1,451,569.60 and ordered to pay investigation costs of $50,000. It must also disgorge market timing revenues of $2,191,569.60.
Mitigating factors in assessing the penalty included the fact that BMO Nesbitt voluntarily notified the OSC of the market timing activities in the proprietary account prior to the IDA investigation. It also repaid, on a voluntary basis and of its own volition, the gross trading revenues earned from the market timing activity in the proprietary account to the respective mutual funds. As well, all market timing activities ceased voluntarily prior to the investigation.