Sep. 11–The nation’s mutual fund companies are asking outside sales representatives for assurances that the funds’ bans on market timing are being honored.
The Securities and Exchange Commission is raising similar questions of brokerage firms, as the focus of the mutual fund probe disclosed last week is shifting to these sales intermediaries.
Brokerages and clearing houses helped a New Jersey hedge fund place illegal mutual-fund trades, according to a complaint filed last week by New York Attorney General Eliot Spitzer against Canary Capital Partners L.L.C.
Spitzer also named four mutual fund companies in an investigation scrutinizing arrangements in which institutional investors, such as hedge funds, steer business to investment companies in exchange for preferential trades.
In one such practice — late trading — a broker allows the investor to buy the mutual fund after the market closes but before its fund shares are repriced, exploiting late news that may push stock prices higher when the market reopens tomorrow.
“In light of these developments, which appear to be fraud, you have to amend your policies,” said Christopher Long, chief operating officer of Friess Associates, the Greenville, Del., manager of the Brandywine Funds.
Long said he spent the day in conference calls with fund intermediaries, weighing what additional measures may be taken. Funds also sell shares directly to investors, but intermediaries are “where the dollars are flowing in today,” Long said.
Friess has not been subpoenaed for information, Long said, and the company doesn’t know of any trading irregularities.
Vanguard Group also began a review of outside sales organizations “to ensure that they are complying with all relevant rules and regulations, as well as our policies and procedures,” the Malvern company said in a statement. It is the nation’s second-largest fund company.
Vanguard, which was subpoenaed by Spitzer, said it “had no reason to believe that there has been any effort to circumvent our stringent trading restrictions.”
Securities and Exchange Commission Chairman William H. Donaldson last week asked the fund industry to “seek assurances” from sales intermediaries that all rules were being followed.
The SEC also is asking brokerage firms for information on late trades and other abusive sales practices performed by their organizations.
Fidelity Investments, the nation’s biggest fund company, said yesterday it was performing a “general review,” while T. Rowe Price, the big Baltimore fund company, said it was still developing a response to the SEC request.
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