SEC Addresses Late Trading, Market Timing and Related Abuses

At an open meeting today the Securities and Exchange Commission took action on three measures to address late trading, market timing and related abuses in the mutual fund industry.

The Commission voted to propose a rule requiring that fund orders be received by 4:00 p.m. Specifically, this proposal would require that an order to purchase or redeem mutual fund shares be received by the mutual fund — or its primary transfer agent or a registered securities clearing agency — by the time that the fund establishes for calculating its net asset value in order to receive that day's price (typically 4:00 p.m. for most funds). This rule would effectively eliminate the potential for late trading through intermediaries that sell fund shares. A public comment period concerning this proposal will run for 45 days following its publication in the Federal Register.

The Commission also voted to adopt a compliance rule that will require funds and advisers to (i) have compliance policies and procedures, (ii) annually review them and (iii) designate a chief compliance officer who, for funds, must report to the board of directors. Designated compliance officers and written policies and procedures will have several benefits, including having a designated person charged with fund compliance who must answer to, and be accountable to, the fund's board of directors, thereby enhancing compliance oversight by directors, as well as allowing the SEC's examination staff to review the reports made to the board. Compliance with this rule will be required no later than nine months after its publication in the Federal Register.

Finally, the Commission voted to propose enhanced disclosure requirements. These enhancements would require funds to disclose (i) market timing policies and procedures, (ii) practices regarding "fair valuation" of their portfolio securities and (iii) policies and procedures with respect to the disclosure of their portfolio holdings. This type of explicit disclosure would shed light on market timing and selective disclosure of portfolio holdings so that investors could better understand the fund's policies and how funds manage the risks in these areas. A public comment period concerning these proposals will run for 45 days following their publication in the Federal Register.


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