SEC Rethinking Late Trade Crackdown

The Securities and Exchange Commission may offer alternatives to its plan to stop late trading in mutual funds.

While Chairman William Donaldson defended the 4 p.m. "hard close" proposal before the Senate Banking Committee Thursday, he acknowledged the concerns. The SEC has received almost 1,100 formal comments, mostly in opposition, the Chicago Tribune reported.

Many investors and retirement plan administrators oppose the plan, which would require all mutual fund trades to be placed with the fund firm — not just brokers — by 4 p.m. Eastern time to receive that day’s price. If shares are traded after net asset values are set, and investors are given the same day's price instead of the next day's, they can profit from after-hours developments.

Those who oppose the plan say it would hurt the majority of shareholders who invest in mutual funds through 401 (k) plans or through brokers. Because it takes time to process trades, the cut-off time would have to be hours before the close to receive that day’s price.

Also at the hearing, Donaldson vigorously defended the SEC proposal that would require independent chairmen of fund company boards and a preponderance of independent directors.

Some Republicans said that removing insiders from leadership positions could do more harm to the investor than good by undermining the boards’ effectiveness.

Donaldson responded, "I believe we're in a totally new environment" in the wake of the industrywide fund scandal. While fund managers could still have a say on the board, it would be a less dominant one under the SEC plan.

The Banking Committee is considering legislation to overhaul the mutual fund industry, but Donaldson told the panel that new laws aren’t needed and could even "impede" the reform effort.

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