US, state broaden inquiry of funds
More firms get notes seeking information
Federal and state regulators yesterday stepped up their scrutiny of the mutual fund industry, requesting additional information about how money managers limit questionable or illegal trading practices by the brokers who buy and sell their funds.
The Massachusetts Securities Division, which issued subpoenas Thursday to the Boston office of Prudential Securities Inc., went a step further yesterday by sending letters to five mutual fund companies, including Boston-based Eaton Vance Corp., requesting details about specific Prudential brokers and how frequently they engaged in or attempted to engage in so-called market timing and late trading.
Both practices moved into the spotlight this week after New York Attorney General Eliot Spitzer unveiled a probe of improprieties in the fund industry. Canary Capital Partners LLC, a New Jersey hedge fund, on Wednesday agreed to return $30 million in profits and pay a $10 million fine to settle allegations of illegal mutual-fund trading made by Spitzer's office.
"At this point, we are simply collecting information from various mutual fund companies in relation to the Prudential investigation," said Matthew Nestor, chief of the Bay State's securities division.
Fund companies yesterday also began to receive letters from the Securities and Exchange Commission, requesting information on policies related to end-of-the-day trading and fund pricing.
Fidelity Investments, the industry's biggest firm, confirmed it received the SEC request late yesterday, although other Boston-based fund providers said they had not yet seen the letters. Fidelity, though, said it had not received a subpoena from Spitzer, unlike its closest industry rival, Vanguard Group of Valley Forge, Pa.
The SEC had indicated this week that all big mutual fund companies would be asked to provide information about their policies and procedures as part of a broad look into late trading and market timing.
Fidelity spokeswoman Anne Crowley said most fund investors don't appear to share regulators' sudden interest in what has been a long-term battle for the industry. Even so, she said Fidelity welcomes the attention and will help regulators wherever possible.
"We talk to our customers all the time about all kinds of things," Crowley said. "I checked the phone sites, and we haven't really received that many inquiries yet. Not from shareholders."
Clearly, the same cannot be said for government officials. Since Spitzer announced his probe Wednesday, federal and state regulators have been papering the fund industry with subpoenas and requests for information.
Market timing, although not illegal, is discouraged or prohibited by most in the mutual fund world because it raises costs for small investors to benefit bigger traders who move quickly into and out of specific funds. Most fund groups have rules prohibiting or limiting the practice, because it tends to increase trading costs for the funds and force managers to deal with large amounts of short-term cash, which can inhibit the strategies they would use otherwise.
Late trading, on the other hand, is illegal. It occurs when brokers allow investors to buy mutual fund shares after the 4 p.m. market close at the previous day's closing price.
Boston-based Putnam Investments said yesterday that it had been in contact with Spitzer's office about market timing and late trading in the industry, and had cooperated fully. A company spokeswoman said Putnam closely monitors people who attempt to move money in and out of its funds quickly, and revokes trading privileges for those who do.
Eaton Vance Corp., likewise, was openly critical of the brokers who engage in questionable practices. Chief executive James Hawkes issued an internal memo about the practices this week and yesterday put a statement on the company website addressing the issue.
"We are dismayed that some fund complexes have apparently violated the trust that investors have rightly placed in the mutual fund industry," Hawkes said.
A spokesman for MFS Investment Management declined to say whether the Boston fund company has received any subpoenas, citing a company policy against discussing corporate legal documents in general. Both State Street Global Advisors and Pioneer Funds said they had not received subpoenas or requests for information from the SEC or either of the attorneys general.
"That doesn't mean we won't, of course," said State Street spokeswoman Hannah Grove. "But I don't think anybody has any sense of whether they will or they won't at this point. We'll just have to see what comes next week."
Scott Bernard Nelson can be reached at nelson@globe.com. Material from Bloomberg News was used in this report.
