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Portfolio > Mutual Funds

House, Senate to Hold Hearings on Mutual Funds and

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WASHINGTON (–In response to persistent reports of market timing and late trading at mutual fund companies, U.S. House and Senate subcommittees are planning separate hearings Nov. 3 and 4.

The Senate’s Financial Management subcommittee will hold a hearing Nov. 3 at 10:30 a.m. EST. Among the witnesses called to testify are New York State Attorney General Eliot Spitzer; Stephen M. Cutler, director of the Division of Enforcement for the U.S. Securities and Exchange Commission; and Rep. Richard H. Baker, R-La., chairman of the House Capital Markets subcommittee.

Mr. Baker and his House subcommittee will conduct their own hearing Nov. 4 at 10 a.m. Included on that list of witnesses are Mr. Spitzer, Mr. Cutler and William Galvin, Secretary of the Commonwealth of Massachusetts.

Both hearings are meant to delve more deeply into mutual fund trading practices to determine whether further industry regulation is needed to protect investors.

In a statement announcing the House hearing, Rep. Baker said that since July, when the House Financial Services Committee sent to the full House a bill designed to improve transparency of mutual fund fees and cost structures and increase corporate governance, “a number of extremely disturbing revelations” about mutual fund trading practices have come to light.

“Subcommittee members have a serious responsibility to get the facts about these particular incidents of late trading and market timing,” Rep. Baker said, and to then ask “whether our proposed legislative reforms for mutual funds go far enough.”

The Senate subcommittee’s hearing announcement notes that the purpose of the hearing is to “explore the extent and impact of alleged trading abuses … and consider regulatory reforms necessary to mitigate such practices in the future.”

Other witnesses who have been called to the Senate subcommittee’s hearing include Mary L. Schapiro, vice chairman and president of regulatory policy and oversight for the National Association of Securities Dealers, Washington; John C. Bogle, founder and former chief executive officer of The Vanguard Group, Malvern, Pa.; and Paul G. Haaga Jr., chairman of the Investment Company Institute, Washington.

The House subcommittee’s full witness list is expected to be released Friday or Monday, subcommittee spokeswoman Brookly McLaughlin said.

Mr. Spitzer is in demand as a witness largely because he and his office are credited with first peeking behind the curtain around mutual fund trading practices. In September, Mr. Spitzer announced that an investigation of the mutual fund industry by his office had uncovered “widespread illegal trading schemes” that potentially cost mutual fund investors billions of dollars a year.

At the same time, Mr. Spitzer said he had reached a US$40 million settlement with hedge fund Canary Capital Partners LLC, Secaucus, N.J., in connection with late trading and market timing of mutual fund shares Previous HedgeWorld Story.

Since then, the mutual fund industry has seen a parade of allegations, resignations and litigation related to late trading and market timing of mutual fund shares by large investors, including hedge funds, and in some cases mutual fund portfolio managers themselves.

Lawsuits filed against Putnam Investments, Boston, by the SEC, Massachusetts regulators and fund investors claim that some of Putnam’s own mutual fund portfolio managers used inside information to time personal trades of Putnam mutual fund shares–which ordinary fund investors could not do and which the fund’s prospectus said was an improper practice. Putnam has fired the managers and, in a statement, said it had done nothing fraudulent and was cooperating with federal and state regulators.

Meanwhile several large banks that offer mutual funds are dealing with fallout from Canary Capital’s mutual fund trading practices. Mr. Spitzer alleged that Canary Capital had special trading relationships with Bank of America Corp., Charlotte, N.C.; Janus Capital Group Inc., Denver; Bank One Corp., Chicago; and Strong Financial Corp., Menomonee Falls, Wis.

On Oct. 15, Mark A. Beeson, president of Bank One Group’s One Group mutual fund division, resigned. He had been named in Mr. Spitzer’s complaint against Canary Previous HedgeWorld Story. In mid-September, Mr. Spitzer and the SEC filed state criminal and federal civil charges against Theodore Sihpol III, who was responsible for executing trades at Bank of America’s Nations Funds. The charges alleged Mr. Sihpol helped Canary conduct after-hours trades of Nations Funds mutual fund shares Previous HedgeWorld Story.

Mr. Spitzer also has subpoenaed roughly a dozen additional hedge funds, as well as mutual fund companies Invesco Funds Group Inc., Denver, and The Vanguard Group, in connection with his probe Previous HedgeWorld Story. Additionally, the SEC officials have asked brokerage houses to provide the commission with documentation about the trades by their largest customers who trade mutual fund shares Previous HedgeWorld Story.

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