SEC plans new rules for funds

Curbs to target market timing, late trading, chairman says

By Andrew Caffrey, Globe Staff, 10/10/2003

The Securities and Exchange Commission will issue new rules to combat late trading and market timing of mutual funds, as federal and state regulators continue wide-ranging probes into abusive trading practices in the industry.

"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," SEC chairman William H. Donaldson said in a statement yesterday.

Late trading already is an illegal practice in which investors buy into mutual funds after the 4 p.m. market close sets that day's prices. Mutual funds sometimes receive batches of trades in the first few hours after the close, but sometimes rely on brokers and other industry intermediaries transmitting those orders to verify that their customers placed them before the market closed.

But in September, New York Attorney General Eliot Spitzer alleged that a New Jersey hedge fund was able to trade into mutual funds at that day's price as late as 8:30 p.m. with the help of several brokers and intermediaries.

Yesterday, Donaldson said the SEC will consider whether to require that funds must receive an order before 4 p.m. to receive that day's price. "This would effectively eliminate the potential for late trading through intermediaries that sell fund shares," he said.

Market timing involves the rapid trading in and out of funds to take advantage of market-moving news. While not illegal, it is discouraged by mutual fund companies because it raises expenses and disrupts investing strategies.

Yesterday, Donaldson said the SEC would consider requiring mutual funds to disclose their policies toward market timing and have enforcement procedures to back them up, as well as other tools to discourage the behavior.

Many mutual fund companies already have policies against market timing; indeed, Spitzer identified four mutual fund companies that allowed the New Jersey hedge fund, Canary Capital Partners, to market-time their funds despite posting explicit warnings against such trading. One of those four, Janus Capital Group, disclosed on Wednesday that investors had pulled $3.4 billion from its funds in September after Spitzer released damning evidence that showed Janus officials let Canary market time its funds.

Spitzer's office also has subpoenaed Fidelity Investments, among other mutual fund companies, in the investigation.

The SEC appears to be codifying the best practices of the industry into rules that all mutual fund companies would have to follow, said Marianne Smythe, an attorney in Washington, D.C., who used to head the SEC division that regulates mutual funds and investment managers. "There have been a lot of ad hoc solutions, a lot of ways of addressing this. Let's see if we can get something laid down that people can live with, that can actually protect investors where appropriate, but not otherwise interfere with" investors wanting to quickly get their money from mutual funds, she said.

Massachusetts Secretary of State William F. Galvin, whose office is investigating Boston-based Putnam Investments for suspected market timing, said new rules "are fine." But, "obviously there is a need for enforcement of the existing rules, the rules they've broken and the rules they've ignored. And until we start taking the existing rules seriously and enforcing them vigorously, then I think more rules aren't going to really solve the problem," he said.

Andrew Caffrey can be reached at caffrey@globe.com.