As regulators look to tighten up the mutual fund industry and instill greater investor confidence, they may have a difficult time proving that managers buying stocks to dress up a portfolio intend to deceive investors, Reuters reports

In window dressing, funds will drop losers from their portfolio at the end of a quarter, while adding others – all to look good in the quarterly report. The reason window dressing has become an issue is because by replacing losing stocks for cosmetic reasons at the end of a quarter, investors aren’t getting a true picture of the fund they are investing in.

Window dressing is difficult to prove since intent is not always clear cut and leaves little evidence. Even so, there is speculation at the end of nearly every quarter that window dressing plays a significant role in the movement of stocks at the end of the period.

The Securities and Exchange Commission proposed requiring fund companies to disclose their holdings every three months, as opposed to every six months, as a way to discourage window dressing. The commission is also expected to address "style drift" next month.

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