WASHINGTON (Dow Jones)–The new head of a leading mutual fund trade group endorsed strong medicine for the industry’s trading scandals and said it should extend to brokers who sell mutual funds andhedge funds that profited from “predatory” mutual fund trading.
While the fund industry has been rocked since trading abuses were revealed last fall, “the scandal is not limited to mutual funds,” Investment Company Institute president Paul Schott Stevens said Tuesday in an address to the National Press Club.
Regulators have found widespread trading abuses in the $7.5 trillion mutual fund industry, including late trading and market timing, the frequent buying and selling of fund shares to capitalize on price discrepancies. Market timing isn’t illegal, but many mutual funds say they discourage it because it can raise costs and lower performance for long-term fund investors.
Stevens, an attorney who replaced former ICI President Matt Fink, said some hedge funds deliberately used market-timing strategies “to pick the pockets of long-term mutual fund investors,” using “stealth and deceit” to hide their identity from mutual fund firms.
Hedge funds, lightly regulated investments for wealthy investors, should be subject to greater scrutiny, Stevens asserted.
Securities and Exchange Commission Chairman William Donaldson has called for SEC registration of hedge fund advisers, a call Stevens said “should be heeded.” He said it would be ironic if the trading scandals imposed hefty new regulations on mutual funds while leaving hedge funds to conduct business as usual. And, he said, changes shouldn’t ignore brokers and other intermediaries who sell funds without providing customer information to the funds themselves.
Stevens said the fund industry is determined to win back investors’ trust and supports tough regulation, including an SEC plan to fight market timing by having funds levy a 2% fee on shares redeemed within five days, and to shut down late trading with a “hard close.”
The SEC proposal would require orders to buy and sell mutual funds be received by the fund company by 4 p.m. Eastern Time to obtain that day’s price, eliminating same-day pricing on orders sent after 4 p.m. by intermediaries, such as brokers and 401(k) retirement savings plan administrators.
An alternate approach to curb late trading likely would be supported by the fund industry, provided it can “make the nonsense stop,” Stevens added.
Stevens said the scandals “don’t suggest a rot that runs throughout the industry,” and he predicted that funds would continue to play an important role for U.S. investors as they save for college or retirement.
On costs, Stevens said fees are trending lower, in part because investors are favoring less costly funds, but he acknowledged that increased industry regulation ultimately will raise costs for fund investors, either directly or indirectly.
“Unfortunately, this is an area where this is no free lunch,” said Stevens.
– By Judith Burns
Dow Jones Newswires
202-862-6692
[email protected]
Copyright (c) 2004 Dow Jones and Company, Inc.
