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Portfolio > Mutual Funds

SEC Demands Late Trading Information from Brokerag

By Staff Writer

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NEW YORK (HedgeWorld.com)–The Securities and Exchange Commission opened another front in the investigation into trading of mutual fund stocks by asking broker/dealers and the 80 largest mutual fund companies to provide documentation of such trades.

New York State Attorney General Eliot Spitzer started this line of inquiry, announcing last week a complaint against hedge fund manager Edward Stern, whose Canary fund specialized in timing mutual fund shares Previous HedgeWorld Story.

The SEC’s entry into the foray with a broad inquiry of its own is consistent with Chairman William Donaldson’s complaint that some state attorney generals did not keep federal regulators apprised of their probes into irregularities in the financial arena.

“We wish that he’d talked to us about it,” Mr. Donaldson said of Mr. Spitzer’s investigation, speaking at a Senate Banking Committee hearing on Tuesday.

The SEC wants brokerage houses to provide information about trades by their largest customers who do mutual fund trading. It also is asking about brokerages’ most lucrative customers. Brokers may have received higher than usual commissions in exchange for facilitating trading in mutual fund shares after 4 PM, a practice banned by regulations.

Whether a trading order was received before or after 4 PM and what was done with it if it came in after that deadline is among the key questions of interest to SEC staff.

In the meantime Mr. Spitzer has subpoenaed a number of hedge fund firms, apparently seeking evidence of special arrangements between them and mutual fund companies that allowed after-hours trading. Another prong of the New York investigation is focused on short-term trading of mutual fund shares–a violation of some funds’ prospectuses but not the law.

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