SEC Chairman Back-Tracks On Market Timing Rule

by Glen Shapiro, LawAndTax-News.com, New York

13 April 2004

In prepared testimony before the Senate Banking Committee last Thursday, SEC Chairman William Donaldson said that the Commission was far from making up its mind on banning late trading, while underlining his outrage at the practices that had been discovered in the mutual fund industry.

The SEC had proposed a new rule that would provide same day pricing only for mutual fund orders received by a fund by 4 pm Eastern Time, but amongst more than 1,000 responses to the plan, many had voiced concerns that investors who buy mutual funds through 401(k) retirement savings plans or brokers might be disadvantaged. Donaldson said the SEC's staff is considering whether there are effective alternatives to the proposal.

"More important than acting quickly, is making sure we get it right," Donaldson said.

The SEC's plan to combat market-timing by requiring funds to impose a mandatory 2% fee on fund investors who sell fund shares very soon after buying them has also proved controversial. Donaldson said if the SEC goes forward with that change, he believes it must provide exceptions for investors with financial hardships and for mutual funds that are open to market timers.

Donaldson also commented on the SEC's proposals to enforce registration by hedge funds: saying: 'We could consider both a form of registration for hedge fund managers and an oversight regime different from that which we use for other, more heavily regulated industries, like mutual funds. They could be specifically tailored to the unique dynamics of these types of managers. We could thus better target our inquiries on those hedge fund managers where there is some reasonable concern that they may be violating the securities laws.'

The Chairman also said that the substantial fines being levied on market operators who abused the rules would be used partially to compensate investors who had lost out through unfair behaviour.

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