Securities and Exchange Commission Chairman William Donaldson said regulators are moving swiftly to curtail trading abuses in the mutual fund industry.
Speaking before the Securities Industry Association on Friday, Donaldson told members of the trade association that the SEC will convene in the coming weeks to discuss setting a firm 4 p.m. deadline for mutual fund trade orders. The cutoff would effectively put a stranglehold on illegal late trading, an abuse that infects more than 10% of all mutual funds, he said (see this weeks edition of Money Management Executive).
In order to deter market timing, Donaldson said the SEC is considering a rule that would require funds to impose a 2% redemption fee on all short-term trades and provide adequate disclosure about all timing arrangements. While the practice is not illegal, market timing can have an adverse effect on a funds overall performance.
"These occurrences represent a fundamental betrayal of our nations investors and are symptomatic of a disease that has afflicted far too many in the industry," Donaldson said. "[It] is critical that there be an industrywide mindset to do the right thing, and that this becomes part of the industrys DNA, from top to bottom.
The SEC is also considering requiring mutual funds designate a chief compliance officer to oversee late trading and market timing, along with the disclosure of revenue-sharing agreements. The proposals are the result of the aggressive investigative efforts of New York State Attorney General Eliot Spitzer and Massachusetts Secretary of the Commonwealth William Galvin, who discovered that some funds allowed late trading and market timing.
Another issue cited in his speech was the abuse of breakpoint discounts, where brokerage firms failed to give investors the discounts to which they were entitled. The SEC has issued Wells notices to a significant number of brokerage firms for their failure to do so.
See complete coverage of last weeks Congressional hearings in "Spitzers Saber Rattling Prompts Fund Reform Bill," in a special six-page "Fundgate" report in todays issue of Money Management Executive.