Congressmen Ask SEC to Rethink Late Trading Rule

A proposed rule to halt mutual fund trades after 4 p.m. may hurt investors more than help them, two congressmen told the Securities and Exchange Commission.

The SEC made the proposal in mid-December as a way to help clean up trading abuses in the mutual fund industry. But according to the Wall Street Journal, Reps. Michael Oxley, R-Ohio, and Richard Baker , R-La., said the rule "will actually confer additional harm upon innocent mutual fund investors."

The two top House Financial Services Committee members made that argument in a letter sent to SEC Chairman William Donaldson Wednesday.

Illegal late trading occurs when shares are traded after hours, when net asset values are set, and investors are given the same day's price instead of the next day's. Baker and Oxley, chairman of the House Financial Services Committee, said the 4 p.m. "hard close" proposal would shorten the trading day for some investors, as cut-off times could be as early as noon ET.

"By confining their trading period, this proposal would effectively relegate these investors to a second-class status," the letter said.

The congressmen emphasized the damage already done to investors by improper trading practices in their letter, but said they feel the 4 p.m. close "might actually have the unintended effect of reducing investor confidence."

Late trading is just one of the practices that has been under fire in the mutual fund scandal. More than 20 mutual fund companies are under investigation for allegedly allowing improper trading.