Canadian Funds Chafe at Volcker Rule

Terry Flanagan

Mutual fund industry says Canadian banks are entitled to same exclusions as U.S. banks.

The investment industry in Canada is voicing concerns about restrictions on proprietary trading and investments in hedge funds, otherwise known as the Volcker Rule.

The industry says that the rule would be harmful for Canadian mutual funds and their customers, and that without further clarification, the rule as it stands could have dire consequences for the Canadian economy.

The Volcker Rule, as enacted, excludes funds registered for public sale in the U.S. under the Investment Company Act, but fails to provide a similar exclusion for Canadian public funds.

In the absence of such an exclusion, the Volcker Rule would have unintended extraterritorial effects that would seriously disrupt the market for Canadian public funds.

The Investment Funds Institute of Canada, which represents the Canadian mutual funds industry, has requested that Canadian mutual funds, whether sponsored by a Canadian bank or other Canadian investment fund manager, should be excluded from the proposed definition of “covered fund” contained in the Volcker Rule.

Further, U.S. registered investment companies as well as Canadian and other foreign mutual funds should be excluded from the definition of “affiliate” in order to clearly distinguish public mutual funds from hedge funds and private equity funds.

“These funds are not the same as hedge funds or private equity funds,” the Investment Funds Institute of Canada said.
Canadian mutual funds are tightly restricted in their investments: National Instrument 81-102 prohibits the use of risk or illiquid investments and derivatives for purposes other than hedging, such as short selling, and prohibits borrowing of cash for purposes of short term coverage of redemptions or trade settlement.

“Hedge funds are not subject to such regulatory restrictions,” the Institute noted.

The exemptions in the proposals for U.S. registered funds and for the asset management operations of U.S. banks and affiliates “make it abundantly clear” that the Volcker Rule was not at all intended to prohibit banks’ asset management operations, such as publicly-offered mutual funds,” said the Institute.

In any event, the Volcker Rule is unlikely to prevent banks from engaging in proprietary trading totally.

“I remain unconvinced that banks will shut down their proprietary trading completely in either the U.S. or Canada, or any other market subjected to the rule,” Renee Colyer, president of Forefactor, told Markets Media. “They will simply move the desks to a new company name and manage their portfolios from another country, if necessary.”

“Why shouldn’t a company put its profits into the market and try to increase its profitability and thereby its opportunity for growth and success which benefits all consumers?” Colyer said. “Trading on information that is not supposed to be available, I understand is a serious infraction. I don’t believe you can stop it, but I believe you may make it more difficult to do.”

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