(January 15) – “The Securities and Exchange Commission is examining trading at dozens of U.S. mutual funds to determine if any are engaging in ‘portfolio pumping,’ a senior SEC official said,” writes Judith Burns in today’s Wall Street Journal.

“Portfolio pumping refers to end-of-quarter trading designed to lift a fund’s quarterly performance results. By buying additional shares of small stocks already held in the fund’s portfolio, the trading can drive up the share price, enhancing the end-of-quarter value of the stock holding and the portfolio as a whole.”

“A special SEC task force investigating the issue has found 30 to 40 mutual funds whose performance rose sharply on the last day of the quarter, posting one-day gains of three to five percentage points, according to Lori Richards, director of the SEC’s office of compliance, inspections and examinations.”

” ‘We’ve seen this happen with some funds every single quarter,’ Ms. Richards said Friday, referring to fund performance jumps. ‘It may involve market manipulation. It’s too preliminary for us to tell, but it’s possible,’ she said.”

“Ms. Richards, addressing the Mutual Fund Directors Council, didn’t name any of the funds under examination or provide any identifying details. She gave a customary disclaimer by SEC officials that her remarks reflect her views, not those of the agency.”

“Fund managers have clear incentives to turn in strong end-of-quarter results, since performance is measured in a ‘snapshot’ view that values holdings on the final day of the quarter. Some funds also award bonuses to portfolio managers if the fund’s quarterly results meet or exceed a preset target.”

“Ms. Richards stressed the SEC is still in a ‘fact-finding stage’ and hasn’t determined if any funds are manipulating quarterly results through portfolio pumping. The reported gains typically evaporate early in the next quarter when the fund unwinds the trades that bolstered the net asset value.”