From the Regulators

Regulator mulling over requiring funds to receive orders before pricing shares

By IE Staff |

The Securities and Exchange Commission has unveiled plans to combat late trading and market timing of mutual funds.

The regulator is considering new rules and rule amendments designed to prevent late trading abuses. It is examining the feasibility of requiring that the fund (rather than an intermediary such as a broker-dealer or other unregulated third party) must receive the order prior to the time the fund prices its shares for an investor to receive that day's price.

For most funds, this would mean that the fund would have to receive the order by approximately 16:00 for the investor to receive that day's price. This would effectively eliminate the potential for late trading through intermediaries that sell fund shares.

The amendments being considered would also require funds to have additional procedures and controls in place to prevent late trading and ensure compliance with the new pricing requirements.

The SEC is also considering new rules that would require explicit disclosure in fund offering documents of market timing policies and procedures and reinforce the obligation of fund directors to consider the adequacy and effectiveness of fund market timing practices and procedures.

"Recent allegations regarding the sale of mutual fund shares point to abuses in connection with late trading and market timing of fund shares. Our staff is aggressively investigating these allegations and is committed to holding those responsible for violating the federal securities laws accountable and seeking restitution for mutual fund investors that have been harmed by these abuses," said SEC chairman William Donaldson, in a news release.

Donaldson said that these are not the only measures under consideration. "I have asked the staff to consider whether funds should have additional tools to thwart market timing activity and whether additional requirements are necessary to reinforce funds' and advisers' obligations to comply with their fiduciary duties and to prevent the misuse of material, non-public information, including the selective disclosure of portfolio holdings information."

The Securities Industry Association said it welcomes the SEC's swift response to late trading and supports the regulator's efforts.