“Every trading day after 4 p.m. Eastern time, a computer program pores over the prices of thousands of international stocks in portfolios managed by Putnam Investments, one of the nation’s largest mutual-fund companies,” writes John Hechinger in today’s Wall Street Journal.

“It isn’t scouring the globe for fresh investment ideas. Quite the opposite. The system is looking for so-called stale stock prices — primarily those on foreign markets in which trading was completed before some later developments that will likely affect prices the next day. When it finds big discrepancies between the current share prices and the expected new prices, the computer adjusts the stock values for the U.S. portfolios.”

“Why the fuss? Because quick-fingered traders, called timers, have long seen an opportunity to capitalize on stale prices of funds holding international securities. Timers simply buy the international fund shares before those shares are priced in the U.S. at 4 p.m. and sell them for a tidy profit the next day after the stocks react to the later developments. The losers: long-term fund shareholders.”

“At a time when mutual-fund companies are under fire for failing to root out timing trades, Putnam’s approach — called fair-value pricing — is key to the fund industry’s efforts to discourage the practice.”

“Last week, New York Attorney General Eliot Spitzer accused some fund companies of assuring investors they were fighting timing trades when, in fact, they were accepting the trades as a way to generate brokerage or money-management fees. In the wake of Mr. Spitzer’s investigation, some industry critics and regulators say the industry has been slow to adopt fair-value pricing, a systemic solution that would make such trading unprofitable in the first place.”

“In 2001, the Securities and Exchange Commission put the fund industry on notice that it must adopt fair-value pricing for ‘significant events’ in the market affecting stock values. Lori Richards, the SEC’s director of examinations, said the industry’s response to the agency’s letter requiring fair-value pricing has been ‘a mixed bag,’ with larger fund companies generally adopting fair-value policies. But she said many smaller companies have received deficiency letters, citing them for failing to adopt fair-value practices.”

“Some fund companies have resisted fair-value pricing because they are worried about departing from the objective standard of a closing share price. They see problems trying to figure out where a stock would be priced if it were currently trading. Putnam, the investment unit of insurance broker Marsh & McLennan Cos., arrives at its hypothetical prices by adjusting an international stock’s last price upward or downward by an amount that matches its historical moves relative to the U.S. market.”

“James Atkinson, chief executive of Guinness Atkinson Asset Management LLC, says the subjectivity of fair-value pricing ‘is fundamentally, diametrically opposed to everything the fund industry stands for.’ Instead, his firm gives investors only until 9:30 a.m. Eastern time to place orders to buy or sell Guinness Atkinson’s Asian-stock funds that day. The SEC accepts the early cutoff solution, but many big companies believe that approach can be confusing to investors.”