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Franklin Advisers Settles SEC Market-Timing Charges

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SAN MATEO, Calif. (–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.

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.

“Franklin allowed known market timers to trade in and out of its funds in a manner contrary to the guidelines of the fund prospectuses,” said Helane Morrison, district administrator for the SEC’s San Francisco District Office, in a statement. “Franklin’s actions warranted the serious sanctions included in today’s settlement.”

Among the remedies Franklin Advisers agreed to–without admitting or denying the SEC’s findings–were to pay US$30 million in fines and a US$20 million civil penalty. All of that money will be given back to shareholders in funds that were timed.

Additionally, Franklin Advisers agreed to establish an enhanced compliance oversight and reporting structure and undergo biannual compliance reviews by an independent third party, according to SEC officials.

Franklin Advisers executives said the settlement resolves the SEC’s inquiry. They also said that an internal investigation turned up no evidence of late trading, another practice under scrutiny by the SEC and state law enforcement.

“These provisions will be incorporated along with other steps we have already taken to address these issues,” said Martin L. Flanagan, co-chief executive of Franklin Resources Inc. “Protecting the best interests of our shareholders and clients has always been our first priority ?? 1/2 [w]e are fully committed to making any necessary policy changes that will help us better serve our shareholders and clients.”

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Contact Robert F. Keane with questions or comments at [email protected].


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