A group of quebec industry professionals and academics are calling on the provincial government to open the border and allow investors to buy foreign mutual funds directly from U.S. and European companies.

The group’s proposal is aimed at lowering mutual fund fees, which a recent controversial study says are the highest in the developed world.

The open-borders proposal is one of a series of recommendations the group makes in a brief to a legislature committee studying the fund industry this fall in the wake of a major fraud scandal at Norbourg Asset Management Inc.

“The Norbourg affair has raised questions about much more than a scandal,” the brief states. “It has exposed a state of growing and generalized financial insecurity.”

The brief’s recommendations are aimed at improving investor choice, protection and education.

Jean-Luc Landry, a veteran Montreal money manager and member of the group, says allowing investors to purchase foreign funds would boost competition for domestic companies and lower fees.

Currently, U.S fund companies and sales representatives must meet provincial registration requirements. The same goes for Canadian fund companies in the U.S.

“There are some [foreign] companies, such as Fidelity, that have registered here and others that have purchased Canadian firms,” says Landry, a partner in the Montreal firm Landry Morin and former president of money-management firm Montrusco Bolton. “But there are actually few firms that have done it. The result is there is protection for those behind the regulatory barrier. And the other firms don’t want to bother because it’s too expensive for the size of the market.”

The Quebec group, composed of six academics and industry professionals, also believes unitholders should have the right to exit funds without paying back-end loads if the fund underperforms its benchmark index by five percentage points or more in a year.

“Why should I pay an exit fee if you guys have underperformed?” asks another member, Robert Pouliot, vice president of the Centre for Fiduciary Excellence. “What would the consequence of such a rule be? People may start pushing for performance.”

Investors should also be able to exit a fund for free in the case of a major change at the fund company, the group says.

A trio of British and American academics recently caused a stir in the Canadian fund industry with a draft study that found Canadian mutual funds charge the highest fees in the developed world. Ajay Khorana, Henri Servaes and Peter Tufano found Canadian funds charged an average management expense ratio of 2.68% a year, compared with 1.42% in the U.S., at the end of 2002. The Investment Funds Institute of Canada plans to reply to the study’s assertions.

The Quebec group also proposes measures for preventing malfeasance at mutual fund companies such as that which occurred at Norbourg. It recommends that the boards of directors of asset-management firms be given more fiduciary responsibility for the operation of funds and that boards have a majority of independent directors.

“In whose economic interest is it that the fund be in good health and growing? The manager,” Landry says. “Currently, we have a lot of players around the table at a mutual fund who are passive and not responsible. And there isn’t really one place where the buck stops.”

The group also wants to increase the responsibility of securities custodians for monitoring irregularities in the handling of funds by asset-management companies. Fund companies should also be required to have their fiduciary practices certified by an outside firm.

The Autorité des marches financiers, Quebec’s financial watchdog, has filed 51 charges against former Norbourg CEO Vincent Lacroix under the Securities Act. Lacroix is accused of misappropriating $84 million from his now-bankrupt firm’s mutual funds, including $18 million for his personal benefit.

As well, Lacroix and several other parties are named as defendants in a $130-million class-action lawsuit brought on behalf of investors who lost money in Norbourg mutual funds (see story, below).

In another brief to the legislature committee, National Bank of Canada, a major mutual fund player in Quebec, argues that investors are adequately protected currently and that regulations need to be adjusted, not overhauled.

Burdening fund managers with more regulations would unnecessarily drive up costs for investors, bank executives told a recent news conference.

“When we see how much money Canadians and Quebecers are entrusting to players in this industry, it’s certainly a strong testament to their confidence in the industry,” says Michel Tremblay, the bank’s senior vice president of personal banking and wealth management. “The industry has met the needs of savers and investors, and the regulatory framework has, in general, served the interests of investors very well in our opinion.”

@page_break@To improve investor protection, the bank recommends that:

> regulations be introduced to prevent an individual from holding multiple key roles at a fund company;

> the role of external auditors be strengthened. The bank proposes requiring a minimum of five years of relevant experience for the accountant in charge of an audit. A change of auditors should be required after a certain number of years and a change shouldn’t require a vote of unitholders;

> the AMF beef up its expertise by adding staff with knowledge of financial markets, products and distribution networks. The bank also recommends the AMF have the power to return misappropriated funds without going through the courts. It also wants tougher penalties for wrongdoing;

> whistle-blower protection be introduced and constraints on communications between auditors and the AMF be removed.

Charles Guay, the bank’s senior vice president of mutual funds, rejects suggestions that fund fees are too high in Canada.

“In the U.S., more than 60% of the market is investors who are not using financial advisors, whereas in Canada the proportion is much smaller,” Guay says. “This gives a false impression that fees in the U.S. are less expensive than in Canada,” where advisor compensation is included in the management expense ratio. “If you take funds in the U.S. sold by financial advisors, the fees are more or less equal to what they are in Canada.”

Tremblay says critics of the industry should compare “apples to apples.”

“In Canada, most people who buy mutual funds buy them through financial advisors because they want to be advised by someone,” he says. “Obviously, there are fees that go along with that.”

Tremblay says National Bank would go along with opening the border to allow foreign companies to sell funds directly to Canadians, as long as it is a two-way street.

“The Americans would have to open their borders to our products, which they aren’t disposed to do very often,” Tremblay says. “If they open both sides of the border, we are for that. We’re not for limiting competition — on the contrary.”

National Bank manages $11 billion in mutual fund assets in Canada, including $6 billion in Quebec. It also distributes about $10 billion in funds managed by other companies, principally through its National Bank Financial Ltd. brokerage arm. IE