SEC Lays Down Mutual Fund Proposals

December 3, 2003 ( - A strict 4 p.m. close on mutual fund trading and enhanced disclosure requirement are what the US Securities and Exchange Commission (SEC) thinks it is going to take to straightened out the mutual fund industry's late trading debacle.

As expected (See  SEC Expected to Propose Hard Fund Close ), the five-member SEC voted unanimously to propose aat 4 p.m. Eastern Time “hard close” for most mutual fund companies.   This is in an attempt to “eliminate the potential for late trading through intermediaries that sell fund shares,” the SEC said in a statement.

A hard close proposal came in addition to the SEC’s proposal to enhance disclosure requirements.   This would be done through:

  • market timing policies and procedures
  • practices regarding “fair valuation” of their portfolio securities
  • policies and procedures with respect to the disclosure of their portfolio holdings.

The problem as the SEC sees it is widespread.   Last month the agency projected as many as a quarter of all mutual fund brokers allowed late trading in and out of mutual fund shares (See  SEC: One Quarter of All Mutual Funds Allowed Late Trading ).

In a separate  statement , Secretary of the Treasury John Snow said he was pleased with SEC’s action, calling the proposals 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. “

Industry Reaction

Most mutual funds support the hard 4 p.m. close idea, while banks, brokers and retirement plan administrators oppose it, saying it will confuse investors and hurt those who don’t access funds directly.   Opponents say that will punish investors who use intermediaries, especially those who live on the West coast or hold mutual funds in retirement savings plans such as 401(k) plans, which take more time to process (See K Plan Participant, Recordkeeping Groups Fret Over ICI Proposals ).

As an alternative, some opponents of the SEC’s plan prefer the approach taken by the US House of Representatives, which approved a bill last month that would allow mutual funds to accept orders after 4 p.m., provided intermediaries use time-stamp technology and undergo rigorous audits to detect late trading (See Mutual Fund Reform Sails Through House ).

Before the SEC’s regulations could take effect, they will undergo a public comment period that will run for 45 days following their publication in the Federal Register.   A copy of the SEC’s announcement can be found at .