- The Washington Times - Wednesday, December 3, 2003


Federal regulators yesterday tentatively adopted new curbs on after-hours trading that brings profits to a favored few shareholders, in a bid to help restore investor confidence in mutual funds.

As the mutual-fund scandal widens, the Securities and Exchange Commission (SEC) voted 5-0 to propose and open to public comment new trading rules to stanch a tide of trading abuses as part of a planned overhaul of how the $7 trillion fund industry operates.

Treasury Secretary John W. Snow lauded the independent agency’s reform plan, saying the proposals “represent important progress in strengthening the governance and transparency of mutual funds, in preserving the critical role that these funds play in our financial system and in protecting investors.”

As the SEC and state authorities lodged new accusations of improper fund trading that cheated ordinary shareholders, Mr. Snow warned, “This administration will not tolerate wrongdoing by anyone who would abuse the trust of investors.”

At a public meeting, SEC Chairman William Donaldson said the proposed changes “will go a long way toward restoring investor confidence in these important investment vehicles.”

To stem illegal late trading, the new rules would impose a “hard cutoff” of 4 p.m. Eastern time for pricing of fund shares.

By going through brokerage firms and other third parties, some big investors such as hedge funds are able to cash in on after-hours news ahead of most shareholders, who at that hour would be forced to chance buying at the next day’s closing price.

Under the rules, mutual funds rather than third parties would have to receive trading orders by 4 p.m., before the funds price their shares for the day. So the order must be in by then for the investor to receive that day’s price.

That could mean that many investors in 401(k) and other retirement plans would be forced to make their fund trades hours before the 4 p.m. stock market close.

Trade groups representing investment plans are urging the SEC to instead consider as a solution requiring an automatic time stamp on each trade to verify that the proper price was in effect.

The proposals could be adopted formally by the SEC after the commission gathers public comment for 60 days.

The embattled mutual-fund industry has embraced the proposals, announced in October. But brokerage firms are opposed.

A recent SEC review found a quarter of the nation’s largest brokerage houses helped some clients illegally trade mutual funds after hours.

About 95 million Americans — half of all households — invest in mutual funds. For many, they are the principal vehicle for retirement savings and college funds. Before the scandal erupted in early September, they generally were regarded as safe investments.

The SEC move comes two weeks after the House overwhelmingly passed legislation requiring mutual-fund companies to disclose more information to investors about fees and operations, and making directors on fund company boards more independent from fund managers.

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