SEC votes to order firms to disclose market-timing policies
Companies must detail procedures for shareholders
WASHINGTON -- Mutual fund companies must disclose to shareholders their policies on the practice of market timing that is at the heart of many of the cases in the industrywide scandal, federal regulators decreed yesterday.
The five-member Securities and Exchange Commission voted to formally adopt rules requiring the fund companies to detail their market-timing policies in sales material and other documents given shareholders. The rules, which the SEC proposed and opened to public comment last December, will take effect Dec. 5.
Market timing, which exploits short-term movements in prices with quick ''in and out" trading of shares, is not illegal but violates the rules of most fund companies because it skims profits from long-term shareholders.
The failure of many funds to inform investors of their market-timing procedures, sometimes in violations of the funds' own policies, ''is central to the recent mutual fund abuses," SEC commissioner Paul Atkins said before the vote.
The new rules are the latest in a series of sweeping changes to mutual fund operations that are intended to bolster investor confidence.
In February, the commissioners voted 4-1 to propose that funds be forced to put a 2 percent fee on short-term transactions to discourage market timing.
Ordinary fund investors have lost billions of dollars from special trading deals allowing favored customers and fund company insiders to benefit from frequent trades, regulators say. Some 95 million Americans -- half of all households -- invest about $7 trillion in mutual funds, which are the primary vehicle for retirement and college savings.
The new rules also require fund companies to explain to investors the circumstances in which they use ''fair value pricing" of fund shares. Many fund prices are adjusted just once a day and may not reflect the true value of their underlying assets, which may be why market timing is a temptation.
To avoid stale prices, many fund companies now use fair value pricing. Instead of adding up the ever-changing values of the underlying assets, they make ''a good faith effort" to determine a fair price.
Putnam Investments agreed last week to pay $110 million to settle allegations by the SEC and Massachusetts regulators of improper trading in the first big market-timing case brought in the scandal.
In its settlement with Massachusetts, Putnam formally acknowledged for the first time that it had tolerated market timing by some managers and big-money fund participants.
Other companies have settled for even larger amounts in market-timing cases. They include MFS Investment Management, which agreed to relinquish $350 million in penalties and fee reductions to resolve federal and state allegations, and Alliance Capital Management, which agreed to relinquish $600 million in penalties and fee reductions.
The SEC's inspections of fund companies found that nearly 70 percent of the firms canvassed reported being aware of market timing by their customers, while documents provided by some 30 percent of the firms ''indicated that they may have assisted market timers in some way," SEC chairman William Donaldson has said.