- The Washington Times - Tuesday, April 13, 2004

ASSOCIATED PRESS

Federal regulators voted yesterday to force mutual fund companies to clearly disclose to shareholders their policies and procedures for market timing, a practice at the heart of many of the cases authorities have brought in the industrywide scandal.

The new rules, which the Securities and Exchange Commission proposed and opened to public comment last December, will take effect Dec. 5.

Market timing, which exploits short-term movements in stock prices with quick “in and out” trading of shares, is not illegal but violates the rules of most fund companies because it skims profits from long-term shareholders.

The failure of many funds to inform investors of their market-timing procedures, sometimes in violation of the funds’ own disclosure policies, “is central to the recent mutual fund abuses,” SEC Commissioner Paul Atkins said before the vote.



Big-fund company Putnam Investments last week agreed to pay $110 million to settle claims by the SEC and Massachusetts regulators of improper trading in the first big-market-timing case brought in the scandal.

In its settlement with the state, Putnam formally acknowledged for the first time that it had tolerated market timing by some managers and big-money-fund participants.

Other companies have settled for even larger amounts in market-timing cases. They include MFS Investment Management, which agreed to relinquish $350 million in penalties and fee reductions to resolve federal and state claims, and Alliance Capital Management, which agreed to relinquish $600 million in penalties and fee reductions.

The SEC’s inspections of fund companies found that nearly 70 percent of the firms canvassed reported being aware of market timing by their customers, while documents provided by some 30 percent of the firms “indicated that they may have assisted market timers in some way,” SEC Chairman William Donaldson has said.

Ordinary fund investors have lost billions of dollars from such special trading deals allowing favored customers and fund company insiders to benefit from frequent trades, regulators say.

Some 95 million Americans — half of all households — invest about $7 trillion in mutual funds, which are the primary vehicle for retirement and college savings.

The SEC move on disclosure of market-timing policies is the agency’s latest in a series of sweeping rule changes affecting how mutual funds operate.

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