SEC Chief Announces Mutual Fund Reforms

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

05 December 2003

Speaking at a public meeting on Wednesday, chairman of the US Securities and Exchange Commission (SEC), William Donaldson unveiled proposed measures for clamping down on the widespread practices of late trading and market timing in the US mutual fund industry.

Under the proposals, which are set to be adopted by the SEC if the planned several weeks of public comment proves favourable, fund firms would be obliged to nominate a compliance officer, subscribe to a new code of ethics, and impose a mandatory fee on any investor redeeming their investment within five days.

However, and possibly most importantly, a "hard cutoff" time of 4pm Eastern time would be imposed for mutual funds to accept orders, in order to prevent late trading.

Although it is already illegal to accept such orders after 4pm, the recent investigations have found that many intermediaries, such as banks and brokerage firms, hand bundles of orders to funds after the cutoff period, allowing selected investors to take advantage of events which occur after the close of the market, profiting at the expense of other investors.

Mr Donaldson expressed the hope that the proposed measures will "provide immediate reassurances and protection to mutual fund investors", whom he suggested had been betrayed by the mutual fund industry.

Treasury Secretary, John Snow welcomed the SEC's plans, announcing on Wednesday that:

"The thoughtful reform proposals put forward by Chairman Donaldson today as part of his Mutual Fund Investors' Rights Agenda represent important progress in strengthening the governance and transparency of mutual funds, in preserving the critical role that these funds play in our financial system, and in protecting investors."

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