SEC Adopts New Rules

To Counter Market Timing

By

Final adoption by the Securities and Exchange Commission on April 13 of regulatory requirements to counter market timing generally was greeted positively. There were, however, lingering concerns over points in the new rules, such as specific detailing of policies to counteract abuses.

In a 5-0 vote, the Commission adopted amendments to investment company registration forms that address disclosure regarding market timing, fair value pricing and selective disclosure of portfolio holdings. The requirements will become effective for registration statements filed on or after Dec. 5, 2004.

The American Council of Life Insurers and the Investment Company Institute, a mutual fund trade group, both in Washington, offered general support for the action.

A disclosure approach explaining the risk of a high transaction turnover is a constructive change, says Carl Wilkerson, ACLI vice president and chief counsel-securities litigation. Wilkerson says ACLI still needs to see the final regulations in order to comment fully on their details.

However, based on the proposals, he says, there are several concerns the ACLI has on the changes. A specific description of policies and procedures that are in place is “a snapshot” that does not reflect how they might change as companies adapt to new marketing timing action. “It retards the ability [to act],” says Wilkerson.

Also, it can create a “negative roadmap” that will enable market timers to circumvent efforts to stop them, he continues.

Further, he adds, it opens companies up to “opportunistic litigation.”

The action will provide investors with “additional information on an individual funds policies and procedures to protect the interest of long-term investors,” the Investment Company Institute said in a statement.

In a comment letter filed with the SEC in February, the trade group urged some changes. It recommended deleting the requirement to detail market timing activity, as well as permitting funds to impose greater restrictions on market timers than those in a funds stated policies, provided that there is greater disclosure and oversight.

Vanguard Group, Valley Forge, Pa., declined comment until it had a chance to review the final amendments that were voted on.

However, John Woerth, a Vanguard spokesperson, referred to comments Vanguard submitted on Feb. 6. That letter expressed concern that requiring a specific description of funds policies and procedures could hamstring funds from taking action to deter market timing. It also raised concern that the requirements would give market timers a “road map” for circumventing and thus, disabling any procedures put in place to avoid such actions.

Additionally, mutual fund companies and insurers offering products with separate accounts, such as variable annuities and variable life insurance, will be required to explain when they use fair value pricing, as well as the effects of using it.


Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.