SAN MATEO, Calif. (HedgeWorld.com)–Franklin Templeton Investments’ Franklin Advisers Inc., which had been accused of allowing outsiders to market time its mutual funds, has reached a US$50 million settlement of those charges with the Securities and Exchange Commission.
In doing so, Franklin Advisers becomes the latest in a string of prominent mutual fund companies that have agreed to pay cash penalties and reform their compliance procedures following months of investigation by federal regulators and state law enforcement officials into improper trading relationships between mutual fund companies, broker-dealers and hedge funds.
SEC officials had accused Franklin Advisers of allowing various outside investors to freely market time some of its mutual funds, in violation of prospectuses that said market timing would be monitored and restricted, according to an SEC complaint.
Among those allowed to market time the funds was California attorney Daniel Calugar, who also owned a Las Vegas broker-dealer firm called Security Brokerage Inc. That firm also has been implicated in market timing at Alliance Capital Management LP, New York, and Massachusetts Financial Services Co., Boston.
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SEC officials claimed that between at least 1996 and 2001, Franklin Advisers OK’d market-timing arrangements under terms that were much different than those contained in the prospectuses of the funds involved. Those terms restricted the frequency and size of market-timing trades. However, according to the SEC, Franklin’s fund managers made decisions to allow market timing or not on a case-by-case basis and based their decisions on whether or not the timing would disrupt the fund.
“Contrary to what the public would have understood from reading the prospectuses, the prospectus guidelines were irrelevant to Franklin’s decisions,” SEC officials said in a statement.
Then, between 1998 and 2000, the SEC alleged that Franklin Advisers allowed a broker-dealer to market time a fund, the prospectus of which said that investments by market timers were prohibited.
Franklin Advisers also did not tell investors that as many as 30 market timers had been granted permission to freely market time Franklin mutual funds during part of 2000. The firm also continued to grant special market-timing permission to some investors even after Franklin Advisers cracked down on other market timers.