SEC to propose rules barring abuses in mutual fund trades

After-hours dealings, `market timing' are focus

October 10, 2003|By BLOOMBERG NEWS

WASHINGTON - The Securities and Exchange Commission will propose rules as early as next month designed to block trading abuses in mutual funds, the agency's chairman, William H. Donaldson, said yesterday.

The SEC has been investigating trading practices at major mutual fund companies since early September, when New York Attorney General Eliot Spitzer revealed his investigation into illegal trading in the $7 trillion mutual fund industry.

The potential SEC rules would address after-hours trading and frequent trading, known as "market timing," Donaldson said. One possible change would be to end the practice of letting mutual fund companies price as same-day orders trades from brokers that come in after the 4 p.m. pricing close.

"It is clear from information developed thus far that there are additional regulatory actions that the commission should consider in seeking to eliminate or significantly curb late trading and market timing abuses in the future," Donaldson said in a statement.

Currently, brokers can turn in orders to mutual funds after the fund values its shares, usually at 4 p.m., and still get the previous price as long as they can show the orders were received before 4 p.m.

Donaldson said the SEC is considering requiring mutual funds to give all orders that come in after the closing deadline the next day's price.

"This would effectively eliminate the potential for late trading through intermediaries that sell fund shares," Donaldson said.

Other rules under consideration would require mutual funds to put additional compliance procedures in place to prevent both late trading and market timing, Donaldson said.

Burton J. Greenwald, a Philadelphia consultant for mutual fund companies, said the industry isn't likely to fight additional SEC regulation as it seeks to put the Spitzer and SEC investigations behind it.

"The industry is deeply concerned about its reputation and continuing to enjoy the confidence of investors," Greenwald said in an interview. "I think the industry will embrace any reasonable regulations coming out of the SEC."

Mutual fund trading abuses came to light Sept. 3 when Spitzer announced a $40 million settlement with hedge fund Canary Capital Partners LLC and its managing principal, Edward J. Stern, over late trading and market timing.

Spitzer, who also spearheaded the investigation into conflicts of interests among Wall Street analysts, said Bank of America Corp. allowed Canary to trade funds after markets closed at 4 p.m.

Spitzer also said Bank of America, Janus Capital Group Inc., Bank One Corp. and Strong Capital Management Inc. let Canary engage in short-term trading that let Canary make frequent trades, exploiting disparities in the price of a mutual fund and the value of its stocks. The four firms have said they are cooperating with Spitzer's probe.

Janus reported the biggest monthly withdrawals of any money manager in more than a year, as investors pulled a net $4.4 billion from Janus funds last month. The amount included $314 million that Janus returned to investors who had agreements with the company to market-time some trades, a spokeswoman said. Those agreements, with 12 investors, have ended, she said.

Last week, the Investment Company Institute, the industry's trade association, formed two task forces to recommend regulatory changes.

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