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WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission (News - Websites) moved on Wednesday to slam the door on a mutual fund industry practice that has allowed illegal late trading to flourish, cheating investors who play by the rules.
The SEC voted 5-0 to propose that fund companies no longer accept buy and sell orders after markets close, usually at 4 p.m. EST, for trades to occur at that day's price.
If formally adopted, the proposal would end a practice in the $7 trillion mutual fund industry in which funds have accepted same-day orders after the market close from intermediaries, such as brokerages, which are supposed to ensure that the orders were placed with them before the close.
The SEC's action, accompanied by other steps to combat fund trading abuses, met a mixed reception on Capitol Hill, where the SEC has been criticized for failing to detect and prevent the misconduct now shaking public confidence in mutual funds.
"These new rules represent a good start toward cleaning up the mutual fund industry, but even more needs to be done," Maine Republican Sen. Susan Collins said in a statement.
Intermediaries handle about 87 percent of the order flow in mutual fund shares. Government probes show that late traders have been inserting after-hours orders into batches of on-time orders sent by intermediaries to funds. It is illegal to trade fund shares at the pre-close price after the market closes, and trades placed after the close are supposed to occur at the next day's price.
"This rule would effectively eliminate the potential for late trading through intermediaries that sell fund shares," the SEC said in a statement.
The proposal must undergo a public-comment period and a subsequent final vote.
SENATOR SEEKS SEC RECORDS
"The SEC is responsible for overseeing the mutual fund industry. Yet it appears that the commission has not responded quickly and decisively to allegations of unscrupulous industry practices," said Collins, who added that she is seeking SEC records on its past oversight and audits of mutual funds.
At an open meeting, the SEC also voted to order funds to appoint "chief compliance officers," or internal watchdogs who would work for fund managers but report to fund boards.
In addition, the SEC proposed forcing funds to disclose more about their policies on market timing -- another abuse, along with late trading, shown to be rampant by SEC studies.
After months of scandals involving dozens of fund companies, brokerages and hedge funds, it remains to be seen whether the SEC's latest steps will be enough to restore the confidence of roughly 91.2 million U.S. fund investors.
"The SEC proposal is a small first step toward limiting mutual fund abuses. However, this action will not restore investor confidence in mutual funds and will not make up for the hands-off approach that the SEC and Bush administration have taken to regulating financial markets," said Massachusetts Democratic Sen. John Kerry, who is running for president.
Saying the Bush administration will not tolerate abuses of investors' trust, U.S. Treasury Secretary John Snow said in a statement, "I am pleased by the action the SEC took today."
SEC Chairman William Donaldson said the agency will consider other mutual fund reforms over the next three months.
Later this month, he said, it will look at measures to improve fund disclosure of transaction costs and "breakpoint" discounts offered to some large fund share purchasers.
FUND BOARD INDEPENDENCE ON AGENDA
In January, the SEC will evaluate requiring that three-fourths of all fund board members -- and a board's chairman -- be independent of the fund management company.
In February, the commission will consider a "mandatory redemption fee," or charge against investors who jump in and out of funds. The fee would target market-timing abuses.
About half of all U.S. households have money in mutual funds. These investment pools, once seen as squeaky-clean, have been under a cloud since the Sept. 3 public launch of a wave of government probes into market timing and late trading.
Both practices became widespread in recent years, an SEC study has shown, with market timing the more common of the two. It involves rapid trading of fund shares and is illegal if done in violation of publicly stated fund policies, as investigators say was the case at some funds. |
