The Securities and Exchange Commission this week announced that Franklin Advisers, Inc., an investment adviser firm in the fourth largest mutual fund complex in the U.S., has agreed to pay $50 million dollars and undergo compliance reforms to settle charges that it allowed rapid in-and-out trading, known as market timing, in mutual funds it managed, contrary to fund prospectus language.
Under the settlement, Franklin will pay $50 million, including disgorgement of $30 million and a civil penalty of $20 million. These amounts will be distributed to shareholders of mutual funds affected by the market timing.
Franklin will also undertake compliance measures designed to protect against future violations. These measures include establishing an enhanced compliance oversight and reporting structure and undergoing biannual compliance reviews conducted by an independent third-party.
The Commission's order finds that Franklin engaged in the following misconduct.
During at least 1996-2001, Franklin entertained requests to conduct market timing under a standard different from that expressed in the prospectuses for the mutual funds it managed. Although the prospectuses contained numerical guidelines regarding the frequency and dollar amounts of timing trades the funds might allow, Franklin actually decided whether to grant market timing requests based solely on whether its portfolio managers thought the proposed trading would be disruptive to the fund involved. Contrary to what the public would have understood from reading the prospectuses, the prospectus guidelines were irrelevant to Franklin's decisions.
During 1998-2000, Franklin allowed a representative of a broker-dealer to market time a fund that prohibited investments by market timers.
Franklin failed to disclose that over 30 identified market timers were allowed to freely market time for several months in 2000, contrary to prospectus language that indicated market timing would be monitored and restricted.
After other identified timers were told to stop their activities in September 2000, Franklin gave one favored timer permission to continue to time $75 million in assets with unlimited trades for several more months.
Also after September 2000, Franklin gave a known market timer permission to time a mutual fund that prohibited investments by market timers simultaneously with the timer making a $10 million investment in a new hedge fund.
"We are pleased to announce this settlement in which Franklin has agreed to undertake significant reforms and pay a total of $50 million. The money will be distributed to fund shareholders to compensate them for the market timing activities," said Linda Chatman Thomsen, Deputy Director of the Commission's Division of Enforcement.
"Franklin allowed known market timers to trade in and out of its funds in a manner contrary to the guidelines of the fund prospectuses. Franklin's actions warranted the serious sanctions included in today's settlement," added Helane Morrison, District Administrator of the Commission's San Francisco District Office.
The Commission's order finds that Franklin violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Section 34(b) of the Investment Company Act of 1940, and requires Franklin to cease and desist from violating these provisions. Franklin consented to entry of the order without admitting or denying the findings.
Headquartered in San Mateo, California, Franklin is an adviser for many funds in the Franklin Templeton Investments complex, the fourth largest mutual fund complex in the U.S.