Timers' Trading Could be Cut Back under New Rule

March 3, 2005 (PLANSPONSOR.com) - Mutual fund intermediaries will have to name suspected market timers, supply their transaction information to fund companies, and possibly restrict their trading under a new rule adopted Thursday.

The rule, unanimously approved by the US Securities and Exchange Commission (SEC) requires fund companies to include such requirements in written agreements signed with brokerage houses and pension plan administrators, Reuters reported.

Even while instituting the new rule, the SEC backed away from an earlier suggestion that funds be required to penalize market timers. Thursday’s action now allows but doesn’t require such penalties.

The new required agreements between the funds and intermediaries now force the intermediaries to give up the market timers’ identity and details on their transactions on request. Funds officials could then order the intermediaries to cut back on the investors’ trading if they are suspected of being timers, according to the news report.

The rule does not apply to money market funds, exchange-traded funds or funds that explicitly allow timing and say so publicly.

The director of the SEC’s Division of Investment Management, Paul Roye, said the commission will seek further comment on steps it might take to “encourage intermediaries that sell fund shares to implement a fund’s redemption fee policies,”   Reuters reported.

Market timing has been a key focus on the ongoing federal-state probe into the US mutual fund industry, in addition to late trading and certain sales practices.