The Ontario Securities Commission today announced that joint Compliance and Enforcement teams will begin Phase Three of a probe into potential market timing and late trading abuses by conducting on-site reviews of mutual fund managers identified in the second phase of the inquiry.

Late trading is illegal and 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.

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. Where it happens, market timing may be in violation of mutual fund policies and regulatory requirements.

The site reviews, which will take place over the next few months, follow an analysis of procedures and raw data requested by the Commission from 31 fund managers earlier this year. Based on the findings from the initial visits, teams could conduct site reviews of as many as half of the list of 31.

“Right now, we’re following up on preliminary indicators identified in the first two phases of our inquiry,” OSC Chair David Brown said in a news release. “We’re seeing things that may be explainable — but, obviously, we need to examine them closely to determine what they mean.

“We’ve said from the beginning that we intend to gather the facts – and then act upon those facts. That’s exactly what we are doing,” Brown said. “Once Phase Three is completed, we’ll take any regulatory action — including enforcement proceedings — that may be necessary to reaffirm investors’ trust in the mutual fund industry.”

Although the OSC will assume the lead role in the on-site visits, the regulator will continue to work cooperatively and share information with the Investment Dealers Association and Mutual Fund Dealers Association during this third and final phase of the inquiry. Both the IDA and MFDA will participate in this stage of the probe, including joining the on-site visits to lend their special expertise. The OSC will also coordinate with other regulators, including members of the Canadian Securities Administrators.

Each fund manager targeted in Phase Three will receive a letter from the OSC a couple of business days in advance of their visit. The letter will specify what additional information and documents the fund manager will be expected to provide.

In November, 2003, the OSC launched Phase One of the probe by sending a letter to 105 managers of publicly offered retail mutual funds that trade in Ontario. The letter required them to confirm that they have effective policies and procedures in place to detect and prevent trading abuses, such as late trading and market timing.

Following this, in February 2004, the OSC initiated Phase Two by requesting more detailed information from 31 of the 105 fund managers originally surveyed. These 31 fund managers were selected based on the information they provided in Phase One and also included a random sampling of fund managers.