Canadian Fund Group Considering Redemption Fee Proposal

March 10, 2004 ( - The trade group representing Canada's CDN$450 billion dollar mutual fund industry is considering recommending a 2% charge on investors making rapid trades in and out of Canadian mutual funds.

The Investment Funds Institute of Canada (IFIC) may request the fine be levied when investors sell a mutual fund within five days of buying it, group president Thomas Hockin told the Globe and Mail.   Hocking expects the recommendation, which would not apply to the short-term sale of money market funds, to be made later this month.

“The fact that there is no penalty now has made it possible for some arbitragers to try this, although I don’t know to what extent they have,” Hockin told the Globe and Mail. “That’s what we are trying to find out along with the regulators.”

Such a proposal is not that far fetched for the Canadian mutual fund system.   The Canadian industry once had an automatic 2% penalty for short-term trading with five days.   However, regulators abandoned that rule in 1986 because the rule prevented some investors from getting access to money for emergency reasons.

IFIC’s recommendation on short-term trading fees would be similar to last month’s proposal by the United States Securities and Exchange Commission (SEC) to require fund firms to impose a 2% fee redemption for sales within five days.   To address concerns about such fees hurting small investors, the US proposal waives fees on the redemption of $2,500 or less in fund units, and up to $10,000 or more if investors could make a case in writing that they needed the cash for a financial emergency (See  SEC Goes “Public” with Redemption Proposal ).

Meanwhile, theOntario Securities Commission (OSC), Canada’s version of the US SEC, is reviewing the trading practices of 105 mutual fund companies to find out if they are allowing improper market timing and late trading transactions.   As of yet, the OSC says it has not determined if such abuses existed in the Canadian fund market, or the extent of the damage possible trading abuses may have caused.