Dec. 4–Federal regulators on Wednesday unveiled a broad package of steps to address the widening mutual fund scandal, including new disclosure of fees and rules designed to enhance the independenceof fund overseers.
In detailing the proposals, Securities and Exchange Commission Chairman William Donaldson said the SEC will consider them over the next two months. They could pre-empt many of the proposals being debated in Congress to head off abuses that have roiled the industry.
Some of the SEC’s measures are designed to address issues at the forefront of the recent scandals: late trading, in which some customers bought and sold after the closing price was set, and market timing, in which insiders and others profited from rapid-fire trading that raises costs for other fundholders.
But other elements are more far-reaching.
Among them are proposals that would require three-quarters of a fund’s board to be independent, including the chairman; mandate information on how boards evaluated fees paid to fund managers; disclose fund insiders’ trading; and enhance the disclosure of costs to investors, including the dollar amounts of fund fees and incentives paid to brokers to sell funds.
Reaction from those investigating the abuses was lukewarm.
“As far as it goes, it’s OK,” Massachusetts Secretary of the Commonwealth William Galvin said in an interview, calling it “well-intentioned.”
“It should not be a reason not to pursue the legislation,” he said.
Several of Donaldson’s proposals are included in a bill that overwhelmingly passed the House last month, including dollar disclosure of expenses.
But Galvin said the bill, which includes a ban on market timing by fund insiders and prohibits anyone from managing both a mutual fund and a hedge fund, is the “better approach.”
On Wednesday, Donaldson called the recent scandals “deeply disturbing” and “a betrayal of individual investors,” saying a range of steps are needed to protect fund shareholders.
“The protections embodied in the comprehensive package of reforms that the commission is set to consider will … go a long way toward restoring investor confidence in these important investment vehicles,” he said.
Donaldson’s plan comes after sharp criticism of the SEC for failing to uncover improper trading and claims that it has been slow to respond to the scandals.
New York Atty. Gen. Eliot Spitzer, another leader of the investigations, said new regulations are less important than pursuing violators.
“We don’t need a grand conclave of regulators to see how we rewrite the rules,” he said. “The rules are fine. We just need to enforce them.”
Although the details of Donaldson’s proposals will be important, the Investment Company Institute mutual fund trade group generally supports many elements, said spokesman Chris Wloszczyna, including dollar-based fee disclosure.
Although the group favors boards having at least two-thirds independent directors, he expressed concern about requiring independent chairmen.
“We feel it probably should be something for individual boards to decide,” he said.
On Wednesday, the SEC took steps to head off late trading, the most important element of the first piece of its overall plan to address the fund trading scandals. Late trading is illegal but has been alleged at several firms.
The plan would require investors’ trades to reach the fund firms themselves, rather than brokers and other intermediaries, before the day’s price is set, usually at 3 p.m. Central time.
Some have complained that such a “hard” close unfairly penalizes everyday investors, particularly 401(k) holders, by requiring earlier orders or pushing them back until the next day.
But Commissioner Harvey Goldschmid said such a strict deadline is “the only sensible, effective way to end these egregious practices” and would not hurt most investors.
In addition, the SEC gave final approval to a rule proposed earlier this year to require funds to adopt compliance procedures, including designating a chief compliance officer who reports directly to fund directors.
Commissioners also proposed a rule requiring funds to disclose policies on market timing, which is not illegal but which many funds say they prohibit.
That measure and the proposal for a “hard” deadline on fund trades now go to a 45-day public comment period.
In a stronger step to curb market timing, Donaldson said, the SEC will consider a plan in mid-February to impose added fees on shares that are quickly sold after they’re bought, perhaps within five days.
Bloomberg News contributed to this report.
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