WASHINGTON (AP) — Federal regulators are moving to stanch a tide of trading abuses in mutual funds with new curbs on after-hours trading which brings profits to a favored few fund investors.
As the mutual fund scandal widens, the Securities and Exchange Commission was tentatively adopting on Wednesday new trading rules to prevent future abuses in a planned overhaul of how the $7 trillion fund industry operates.
To stem illegal late trading, the SEC moved toward imposing a “hard cutoff” of 4 p.m. Eastern time (2100 GMT) for pricing of fund shares.
By going through brokerage firms and other third parties, some big investors such as hedge funds are able to cash in on after-hours news ahead of most shareholders, who at that hour would be forced to chance buying at the next day’s closing price.
Under the rules, mutual funds rather than third parties would have to receive trading orders by 4 p.m., before the funds price their shares for the day. So the order must be in by then for the investor to receive that day’s price.
The proposals could be formally adopted by the five-member SEC after the commission gathers public comment for several weeks. They are meant “to provide immediate reassurances and protection to mutual fund investors,” SEC Chairman William Donaldson said in Senate testimony last month.
The embattled mutual fund industry has embraced the proposals, announced in October. But brokerage firms, which sell some 80 percent of all mutual fund shares and collect billions in fees annually for those sales, are opposed.
A recent SEC review found a quarter of the nation’s largest brokerage houses helped some clients illegally trade mutual funds after hours.
Some 95 million Americans — half of all households — invest in mutual funds. Before the scandal erupted in early September, they generally were regarded as safe investments.
The SEC move comes two weeks after the House of Representatives overwhelmingly passed legislation requiring mutual fund companies to disclose more information to investors about fees and operations, and making directors on fund company boards more independent from fund managers.
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On the Net:
Securities and Exchange Commission: http://www.sec.gov
The House-passed bill, H.R. 2420, is available at http://thomas.loc.gov
