WealthManagement Magazine

OSC Slams Fund Dealers

The Ontario Securities Commission, Canada's largest provincial regulator, has uncovered numerous regulatory abuses by mutual fund dealers, including poor supervision of salespeople and improper commingling of client funds.According to an internal OSC report, firms have failed to keep client assets segregated, and improperly encouraged many investors to borrow money for further investment."I don' t

The Ontario Securities Commission, Canada's largest provincial regulator, has uncovered numerous regulatory abuses by mutual fund dealers, including poor supervision of salespeople and improper commingling of client funds.

According to an internal OSC report, firms have failed to keep client assets segregated, and improperly encouraged many investors to borrow money for further investment.

"I don' t think it would be an exaggeration to say we were shocked at what we found," says Toni Ferrari, manager of compliance in the OSC's division of market operations.

The findings are the result of a two-year investigation that audited the sales practices of 23 mutual fund distributors. The audit showed that 80% of the companies had not followed regulatory guidelines requiring that client funds be held in segregated trust accounts. Although the commingling of accounts, according to the OSC, didn't necessarily lead to any misuse of investor funds, it is by itself a serious offense.

"When you see any widespread disregard of accepted operating procedures, it makes you wonder about what else may be going on," says Ferrari.

What else is going on, according to the findings, is that many of these firms have not been properly supervising their salespeople. Sixty percent of the firms, the audit showed, were flagged for numerous sales violations, including a disregard of standard "know your client" rules, according to Ferrari.

Further, there were numerous instances in which clients were encouraged to leverage fund holdings.

"Leveraging is not appropriate for most investors. At the very least, clear written internal guidelines are supposed to be in place advising who should and should not be borrowing money," Ferrari says.

Canada's more than 200 mutual fund distributors are sales organizations that handle retail sales of a wide spectrum of outside funds. Many of the firms are not members of any SRO and are outside the grasp of regulators. According to Dax Sukhraj, chairman of the Investment Funds Institute of Canada, that country's primary fund trade group and regulator, the sales practice problems point out the need for greater supervision of these companies.

It was expected that the IFIC and the Investment Dealers Association of Canada would share some responsibility for oversight of these firms by the end of 1998.

But regulatory changes have been delayed by a tiff between the OSC and Ontario's Minister of Finance (see "Canadian Fund Reform Pits Regulator Against Government," Page 56). In the meantime, according to the OSC, the most serious offenses will be investigated by the commission's enforcement branch.

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