Regulators Reconsider New Trading Rule to Avoid Harming Retirement Plan Investors

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Regulators Reconsider New Trading Rule to Avoid Harming Retirement Plan Investors

By Marcy Gordon, The Associated Press

March 10, 2004

Federal regulators investigating mutual fund abuses are considering alternatives to a proposal designed to curb after-hours trading because that restriction could hurt investors in retirement plans, an official told Congress on Wednesday.

At the same time, the Securities and Exchange Commission is widening its inspections of mutual fund companies and trading, the head of the agency's inspections office said.

"Our goal is to improve examiners' ability to identify and scrutinize transactions and arrangements that place the interests of fund shareholders at risk," Lori Richards said at a Senate Banking Committee hearing. "Today, examiners are increasing the frequency and depth of ... reviews for high-risk firms."

Ordinary fund investors have lost billions of dollars from special trading deals for big-money customers and fund company insiders, regulators say. Some 95 million Americans – half of all households – invest about $7 trillion in mutual funds, which are the primary vehicle for retirement savings and college funds.

The committee is considering legislation to overhaul the fund industry while the SEC has been making a series of rule changes affecting fund operations.

The SEC and state regulators have charged or are investigating dozens of fund companies.

Mary Schapiro, the top enforcement official of the National Association of Securities Dealers, told the committee that the industry's self-policing organization is investigating 50 brokerage firms that received "very, very large payments" or additional business from mutual fund companies for steering clients toward certain funds.

The long-standing practice of fund companies making such special, often undisclosed, payments to brokers creates conflicts of interest and drives up costs to investors, critics say. The SEC last month proposed to ban such incentive payments altogether.

The agency also has proposed to crack down on illegal after-hours trading in mutual funds by imposing a "hard cutoff" of 4 p.m. Eastern time for the 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.

Under the proposed new rule, 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, for an order to receive the day's price.

SEC officials acknowledge that could mean that investors in and managers of 401(k) and other retirement plans, with slower order processing systems than other market participants, would be forced to make their fund trades several hours before the 4 p.m. stock market close. West Coast investors also could be disadvantaged, regulators say.

So the agency is studying other approaches, such as requiring an electronic time stamp on each trade to verify that the proper price was in effect, said Paul Roye, who heads the SEC's mutual fund division.

The time-stamp solution has been urged by trade groups representing investment plans. But Roye acknowledged that late-trading abuses have occurred at some fund companies that use such a system.