Re: Report On Trading Practices Involving Individual Variable Insurance Contracts – June 2005
June 20, 2005 – Recent investigations by regulators in the U.S. into the trading practices of mutual fund companies have uncovered a number of trading abuses, such as late trading, market timing and frequent trading, which benefit some investors at the expense of others. In response to the U.S. activity, the Ontario Securities Commission (OSC) undertook a review of the mutual fund industry in Ontario and in March 2005 they issued their final report.
Individual Variable Insurance Contracts (IVICs), also referred to as Segregated Funds, are similar to mutual funds except that they have an insurance component and are sold only by life insurance companies. In Canada, the regulation of insurance products, including IVICs, is governed by provincial insurance legislation.
Although the review by the U.S. regulators did not deal with IVICs, FSCO was concerned that the events there might impact investor confidence in IVICs and took action to ensure that similar abuses were not taking place in the industry in Ontario.
In 2000, a review by FSCO indicated that companies selling IVICs had implemented adequate internal controls and procedures to prevent trading abuses by their employees. At that time the companies had also reviewed their systems to determine whether there were opportunities for market timing or frequent trading. In 2004 and 2005, FSCO again addressed this issue by applying a risk-based market conduct approach which focussed on companies’ internal policies and controls to prevent trading abuses. FSCO’s examiners used a questionnaire to obtain information from companies and to review supporting documentation. This review was supplemented by an analysis of the underlying financial data.
FSCO’s review found no evidence of trading abuses and showed effective company controls are in place.
The attached Report On Trading Practices Involving Individual Variable Insurance Contracts – June 2005, summarizes the results and conclusions of FSCO’s review.
If you have any questions or require further information, please contact Anita Sastri, Senior Manager, at (416) 590 7245, e-mail: Asastri@fsco.gov.on.ca.
Bryan P. Davies
Chief Executive Officer and
Superintendent of Financial Services
Enclosure: Report On Trading Practices Involving Individual Variable Insurance Contracts – June 2005
Report On Trading Practices Involving Individual Variable Insurance Contracts – June 2005 (pdf, 22 pages)
A Comparative Study of Individual Variable Insurance Contracts (Segregated Funds) and Mutual Funds (pdf, 36 pages)
Final Report: Conflicts of Interest, Compliance and Governance in Financial Services, by RICHARD W. LEBLANC, (1 December, 2000, pdf, 26 pages)