“Top officials of the Securities and Exchange Commission said yesterday that they had sent a letter to big mutual fund companies asking for additional information about trading in their shares,” writes Landon Thomas in today’s New York Times.

“The enforcement division wants all documents regarding the companies’ policies on who can trade in their shares late in the day and who can jump in and out of their funds quickly.”

“It is also asking if there have been any changes made to these policies; the companies must respond by Sept. 15.”

“The action underscores the extent to which commission officials are moving to play regulatory catch-up after the announcement by Attorney General Eliot Spitzer of New York that mutual fund companies encouraged fraudulent trading activities.”

“The response, which will include sending investigators into the field, also demonstrates how seriously the allegations are viewed by the commission, the primary regulator for the mutual fund industry.”

“Class-action lawyers filed their first suit against fund companies named in the complaint, while Mr. Spitzer continued to process the information provided by hedge funds and mutual funds.”

“On Wednesday, Mr. Spitzer’s office reached a settlement with Edward J. Stern, saying that his hedge fund, Canary Capital Partners, traded in mutual fund shares after the markets closed and engaged in market timing through Bank of America, Janus and other fund companies.”

“According to state and federal securities laws, buying mutual fund shares after the market has closed, at that day’s price, and trading them for profit the next day is illegal.”

“For now, regulators and prosecutors do not have evidence that late-day trading is widespread.”

“Market timing, though, in which investors trade in and out of funds in a short period of time, can be a lucrative strategy. It is one followed by a number of prominent hedge funds. While the practice is not illegal, such trading is publicly discouraged by executives at many large mutual fund companies.”

“High levels of market timing can harm a fund’s performance in many ways, portfolio managers say.”

http://www.nytimes.com/2003/09/05/business/05FUND.html