(March 3, 2005) Franklin Templeton Investments, the fifth Canadian mutual fund company to settle with the Ontario Securities Commission over market timing allegations, has agreed to the third highest settlement since the regulator began its year-long probe of mutual fund trading practices.

The agreement, approved on Thursday at an OSC hearing, will result in Templeton paying out $49.1 million to mutual fund investors who suffered harm from market timing activities in funds managed by the company.

Templeton is the last company to be taken to task by the OSC. In total, five fund companies, including AIC, CI Mutual Funds, AGF Funds, and IG Investment Management have agreed to pay out $205.6 million to investors. A full report from OSC staff on market timing is due out by the end of the month.

In December, OSC chair David Brown said the investigation was over and that letters had been sent to other fund companies confirming that the regulator was not contemplating proceedings against them. The inquiry involved 105 Canadian mutual fund companies.

The Franklin Templeton investigation identified three institutional investors who, between February 1999 and February 2003, profited as a result of frequent trading and market timing strategies. The company agreed that it did not put limits on the activity and failed to disclose that the company allowed certain investors to conduct frequent trading in some of its funds.

The total profit realized by the market timing traders was approximately $120.8 million. Although not all of the profits were the result of market timing, the company and the OSC say profits realized do not necessarily mean harm to other investors, overall returns for market timing traders were significantly higher than the return long term investors would have achieved on their investments.

In the agreement, the company and the OSC say although the company prohibited others from conducting frequent trading market timing activity, “in allowing the market timing traders to engage in frequent trading market timing, Franklin Templeton failed to protect fully the best interests of the relevant funds.”

OSC staff found no evidence of late trading in any Templeton funds and no evidence of market timing by any insiders at the company.

It will likely be at least a year until clients see the money. Going forward, the company needs to pay the $49.1 million to the OSC for safekeeping, prepare a distribution plan by December 31, 2005 and hire an independent consultant to oversee the process. Once drafted, the plan needs approval from OSC staff. Brown or his successor (Brown is leaving the OSC later this year) and the vice chair of the commission. Under the terms of the settlement, the company will absorb the costs of preparing and executing the plan.

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    • “Our next steps will be to follow through and consider appropriate policy changes to ensure that the activity we have stopped, stays stopped,” says Brown. “As well, we need to consider a broader governance framework that will prevent or detect future abuses and continue to protect mutual fund investors.”

    Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com

    (03/03/05)