WASHINGTON – The Securities and Exchange Commission will consider new curbs on mutual fund trading to prevent abuses as it continues to investigate a widening fund scandal, the regulatory agency’shead said Thursday.
The surprise announcement by SEC Chairman William Donaldson came after three investment companies – including Janus Capital Group and Bank of America Corp. – pledged to make restitution to investors in mutual funds who lost money because of alleged improper trading.
Evidence has surfaced in the SEC’s investigation that has convinced officials that new rules and restrictions should be considered on so-called late trading and market timing of mutual fund shares, Donaldson said in a statement.
The SEC is “aggressively” investigating the recent allegations of abuse and “is committed to holding those responsible for violating the federal securities laws accountable and seeking restitution for mutual fund investors [who] have been harmed by these abuses,” he said.
Donaldson said last month that the agency was investigating alleged abuses in the mutual fund industry, after New York Attorney General Eliot Spitzer charged that illegal trading arrangements between mutual funds and hedge funds could be widespread and might be costing investors billions of dollars.
But by taking up new rules for mutual fund trading, the SEC would go beyond punishing violators to changing the laws governing the system.
Donaldson said he and the four other SEC members would consider new rules no later than next month.
Among the changes the SEC is considering is a requirement that mutual funds, rather than third parties such as brokers, receive trading orders before the funds price their shares for the day. That would mean that most mutual funds would have to get the orders by around 4 p.m. in order for the investor to receive that day’s price.
In the Bank of America case, for example, a trader at the bank had an agreement with hedge fund Canary Capital Management to trade funds at the 4 o’clock prices hours after the market closed. That allowed Canary to cash in on after-hours news ahead of other investors, who at that hour would be forced to chance buying at the next day’s closing price.
Market timing, which aims to take advantage of short-term movements in stock prices with quick “in and out” trading of shares, violates the rules of most mutual funds. It can have a detrimental effect on the long-term shareholders for whom mutual funds are designed. New rules being weighed include requiring mutual funds to clearly disclose their market-timing policies and procedures in sales material.
