The Ontario Securities Commission has asked mutual fund managers to confirm that the funds have effective policies and procedures in place to detect and prevent trading abuses such as late trading and market timing.

Based on the responses received and on a sampling of the industry, the OSC says it will follow up on the industry’s specific practices. In some cases, the OSC may examine funds’ internal policies and procedures, as well as examine trading data or request the results of internal tests conducted by funds.

“We are requesting information from the industry about late trading and market timing issues,” said OSC Chairman David Brown, in a news release.

“There is no indication at this time that the scale of problems being experienced in the United States is replicated here, possibly because of a different market structure and of more effective controls on our industry. We are working cooperatively with the mutual fund industry to address these issues to ensure that mutual fund investors can have confidence in the industry.”

Late trading occurs when purchase or redemption orders are received after the close of business, but are filled at that day’s price rather than the next day’s price. The OSC says late trading is a violation of National Instrument 81-102, a nationally-adopted instrument that regulates mutual funds.

Market timing involves short-term trading of mutual fund securities to take advantage of short-term discrepancies between the price of a mutual fund’s securities and the stale values of the securities within the fund’s portfolio.

International funds are most vulnerable to this type of trading abuse, as traders can exploit differences between time zones. Where it happens, market timing may be in violation of mutual fund policies. Further, the heavy trading creates transaction costs, which reduces returns of other longer term investors. As such, the OSC says market timing arrangements may be in violation of a fund manager’s fiduciary duty under section 116 of the Ontario Securities Act.

“We are concerned that these recent events in the U.S. may have impacted investor confidence in the Canadian mutual fund industry,” Brown said in a letter sent to fund managers. “We have been assured that many mutual fund organizations are already reviewing their trading practices and internal policies and procedures in order to ensure that improper trading practices are not occurring within their organization. If you haven’t already done so, we expect that you will immediately take steps to make sure that you have effective controls in place to safeguard against these trading abuses.”