SEC Slammed For Failure To Uncover Market Timing Abuses

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

26 April 2005

In a report examining the market-timing abuses uncovered by New York Attorney General, Eliot Spitzer in 2003, the Congressional Government Accountability Office on Friday criticised the Securities and Exchange Commission for its failure to pick up on the practice sooner.

Rapid in-and-out trading in mutual funds by large shareholders (often to the detriment of their smaller counterparts) was found to be widespread when the SEC investigated the phenomenon, leading to an industry-wide crackdown.

According to the GAO report, prior to Mr Spitzer's initial exposure of improper share trading carried out by a hedge fund acting in consort with four major mutual fund companies, the securities regulator "did not examine (mutual funds) for market-timing abuses because agency officials viewed other activities as representing higher risks".

The report went on to note that the abuses had also slipped under the radar of the National Association of Securities Dealers (NASD).

In a statement released following publication of the GAO report, chairman of the House Judiciary Committee, Rep. James Sensenbrenner (R-Wisconsin) observed that:

"The SEC was years late in uncovering these massive abuses that are nothing short of theft. The SEC must take a stronger position on finding, preventing and punishing abuses by insiders, or Congress will be forced to take another look at how mutual funds are examined and regulated."

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