Conventional wisdom holds that technology makes business operate faster and faster is invariably better.
But a well-known consultant to the mutual fund industry says that may not always be the case - particularly when it comes to the industry's bid to settle trades the day after they are filed. The faster system, which could be implemented by 2004, is known as T+1. The industry's current system settles trades within three days of filing, or T+3.
However, Geoffrey Bobroff, president of Bobroff Consulting of East Greenwich, R.I., said faster settlement cycles may, at least during initial implementation, expose fund groups to increased risk of violating SEC rules.
The issue involves what are known as look-back systems, the infrastructure the industry has set up to check a trade after it is filed to ensure that it is legal. With the longer settlement cycle currently in place, those look-back systems have time to check for any improprieties, Bobroff said.
He cited the example of an industry convention discouraging any single mutual fund from holding more than three percent of a company. Should a trade violate that convention, a look-back system will likely catch it. Custodians and advisors can then resolve the issue before they have violated the convention, Bobroff said.
But a faster settlement cycle, like T+1, may short-circuit that process by not providing enough time to ensure a trade follows standard procedure before it settles, Bobroff said.
"There is, I think, a real benefit to having a window of delay that I think gets complicated by T+1 ... I would suggest that, as the industry starts to figure out how it's going to contend with T+1, [there is] going to be a significant change," he said.
The Securities Industry Association will examine issues like the one Bobroff raises and work to resolve them, said John Panchery, vice president and managing director of the organization. The association is helping to coordinate the industry's move toward T+1 and Panchery said he is the project manager for that effort.
Before the industry reaches its T+1 goal, nearly all aspects of the trade day will be analyzed and streamlined, Panchery said. He did not specifically address the issue Bobroff raised.