Market-timing and late-trading abuses are rare in the European fund industry, according to a recently published report from a group of regulators in Europe.

The Committee of European Securities Regulators (CESR), set out to examine whether the shady practices that have rocked the U.S. fund industry since September 2003, were prevalent in Europe’s backyard, as well. "The report finds that abusive business practices which exploit the mutual funds for the benefit of some privileged investors (such as late trading or market timing) are rare in Europe," said Lamberto Cardia, CESR’s expert group chairman. Each state in the EU has one member on the committee.

The group looked at how the subscription and redemption orders of investment funds are processed, as well as how they calculated the NAV. They looked at whether funds were at risk of market timing or late traders by examining the preventative controls the firms put in place as well as their consciousness of the threat. The group also explored whether any groups allowed this activity to take place.

Despite the study showing that groups were not in cahoots with timers, it did find some shortcomings in the industry. Some shops maintained such poor records that it was impossible to verify the cut-off time for redemptions. And funds are at risk of timers because of lax controls.

"There is evidence of efforts by some investors also in Europe to get involved in the same kind of activities as discovered by the U.S. authorities in the U.S. mutual fund market," the report states. "Some fund managers indicated that they had been approached by entities managing hedge funds requesting a facility to engage in the practice of market timing and late trading. In general, these efforts have been denied by the fund managers."

As a result, CESR has asked mutual fund companies in Europe to tighten internal controls and provide fair-value and forward pricing. It also has started to develop supervisory programs and tools to monitor potential misdeeds.

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