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SEC Proposes Rules To Fight Fund Abuses

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NU Online News Service, Dec. 4, 2003, 5:19 p.m. EST – The U.S. Securities and Exchange Commission took steps Wednesday to fight late trading, market timing and related abuses in the mutual fund industry.[@@]

Members of the commission voted Wednesday to propose a rule requiring that fund orders be received by 4 p.m.

The proposal would require that, to receive the current day’s price, an order to buy or sell mutual fund shares be received by the mutual fund, or its primary transfer agent or a registered securities clearing agency, by the time that the fund establishes for calculating its net asset value in order. The time is 4 p.m. for most funds, the SEC says.

The SEC says the timing rule would eliminate the potential for late trading through intermediaries that sell fund shares.

Commission members also voted to propose new disclosure rules.

The new rules would require funds to disclose market timing policies and procedures, practices regarding “fair valuation” of portfolio securities, and policies and procedures dealing with the disclosure of portfolio holdings. The new disclosures would shed light on market timing and selective disclosure of portfolio holdings, the SEC says.

Members of the public will have 45 days to comment on the proposed timing rule and the proposed disclosure requirements rule.

Commission members voted at the same meeting to adopt a compliance rule that will require funds and advisors to have compliance policies and procedures, review compliance policies annually, and designate a chief compliance officer. The fund compliance chief must report directly to the fund board, the SEC says.

The new fund compliance rule will take effect within 9 months after the rule is published in the Federal Register, the SEC says.

SEC Chairman William Donaldson says the commission will be considering more reforms at upcoming meetings.

In January, the commission will consider a proposal to require portfolio managers to report their personal trading in the mutual funds they manage. The commission also will consider a proposal for a new mutual fund confirmation statement that would spell out the sales loads and other charges that investors incur when they buy mutual funds, as well as the compensation and incentives of the selling brokers, according to a written version of remarks Donaldson made at Wednesday’s commission meeting.

In February, the commission will consider a proposal that would require mutual funds to impose a mandatory redemption fee on market timers, Donaldson said.

In related news, SEC Commissioner Harvey Goldschmid warned Thursday during a speech at a securities law conference in Washington that he believes investigators are dealing with more than isolated cases of wrongdoing by a few rotten apples.

“What has occurred has involved a grievous betrayal of trust,” Goldschmid said. “At this point it is clear that venal self-interest has been widespread…. We are now dealing with a significant number of senior fund employees and other members of the financial community. I expect the fund scandals to grow larger and more widespread as investigations continue.”

The SEC has posted the written version of Donaldson’s remarks at

Goldschmid’s speech is on the Web at


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