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Fund Protection Sought in Contingency Pool

toronto - An Investment Funds Institute of Canada committee is drafting recommendations for an industry- financed contingency fund that would provide limited protection to investors from manager wrongdoing.

The current thinking is that the fund would provide up to $670,000 ($1 million in Canadian currency) in protection per investor, said Peter Hendrick, a committee spokesperson, at the institute's annual convention held here late last month .

Hendrick, an executive vice president with Mackenzie Financial, a fund manager in Toronto, said the committee favors protecting investors against fraud, theft and self-dealing actions, but not losses arising from poorly-performing investments.

Perhaps the most controversial element is what the fund would cost, said Hendrick. The committee estimated that it could be financed with a levy of one basis point per year to participating firms, based on assets under administration, he said.

Based on total industry assets of nearly $300 billion reported by the institute at the end of August, this would translate into a fund of about $30 million. The committee consensus was that this relatively modest amount would be sufficient because there have been no situations in Canada where mutual fund investors have lost money as a result of the types of wrongdoing that would be covered by the fund.

Along with regular mutual funds, the contingency fund could cover other open-end securities, said Hendrick. In particular, exchange-traded funds, an expanding area of the Canadian retail marketplace, and venture capital funds, which are sponsored by labor unions and sold through brokers and dealers, would be covered, he said.

The committee's final report to the institute is expected to be complete within the next year. In an earlier speech to the convention,Tom Hockin, president of the Institute, said implementing a contingency fund would be a marketing advantage for the industry.


The Institute has released voluntary guidelines to its members on minimum standards for correcting pricing errors in mutual fund portfolios. Adopted this summer, the guidelines require action to be taken when any price discrepancy exceeds 50 basis points of a fund's net asset value.

Barry Myers, head of a committee that drew up the guidelines, said at the Institute convention that they provide for unit-holders to be reimbursed when an error occurs. Myers, a Toronto partner with PriceWaterhouseCoopers, said the guidelines call for unit-holders to be made whole, subject to a minimum payable amount of $50 in Canadian currency. The types of valuation errors covered by the guidelines are those arising from breaches in standards of care, as set out in securities legislation.

The Institute has also formed a working group, whose membership includes senior fund company executives and representatives of major accounting firms, to provide voluntary guidelines on how to value securities fairly.

Dorothy Sanford, a spokesperson for the group and the director of regulatory consulting at Deloitte & Touche in Toronto, said at the convention that the working group is hoping to complete its report by year-end.

The group is focusing on situations where market quotes are not readily available or in exceptional situations, such as a market crash, when quotes might not be reliable, Sanford said. The group will consider what processes and internal controls are necessary to value securities fairly.


The Institute has developed a new privacy code to help Canadian fund marketers meet new federal requirements that take effect Jan. 1. John Kruk, a partner with Smith Lyons in Toronto, said at the convention that the privacy code establishes procedures regarding the collection and use of personal information.

The general principle is that the firms seeking personal details from their clients must identify the purposes for which the information is being collected and obtain clients' consent to use the information for these purposes, said Kruk.

"This can have very significant implications for your marketing initiatives," said Kruk.


IFIC is continuing to lobby the federal government to raise the annual contribution limits for registered retirement savings plans, Hockin said. He told the annual Institute conference that the current limit of CAN$13,500 a year lags badly behind equivalent tax-deferred limits available to individuals in the U.S.

The Institute is asking for an immediate $4,000 increase in the limit to $17,500, and would like to see it ultimately doubled from current levels. Hockin said. The Institute has received "very respectful" hearings from members of Parliament and cabinet ministers' staff, but so far no action, he said.

The trade group is basing its suggestions for an increased limit on the assumption that, to maintain its pre-retirement standard of living, a family needs to replace about 70 per cent of its pre-retirement income. The Institute estimates that there are currently about 600,000 Canadians that are unable to achieve this 70 percent target, even if they save the maximum allowable contribution amount currently permitted by the Income Tax Act.