Mutual Funds
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SEC outlines fund reforms
Agency also sets up office to anticipate, and not just react to, problems like the fund scandal.
November 18, 2003: 6:51 PM EST

NEW YORK (CNN/Money) - SEC Chairman William Donaldson hit back at critics of the agency's settlement with Putnam Investments Tuesday and announced a new office of risk assessment to help the agency anticipate, and not just react to, problems like the mutual fund trading scandal.

The Securities and Exchange Commission also outlined reforms for the mutual fund industry as it fielded criticism over its handling of the growing scandal in the $7 trillion business.

SEC Chairman William Donaldson

At a congressional hearing, Donaldson told lawmakers the commission will create a new office of risk assessment to improve its ability to get early warning of market problems like the current funds trading scandal.

He also said the commission will meet on Dec. 3 to consider new fund trading rules, including one that would prohibit trades of fund shares after the shares are priced for the day, typically at 4 p.m.

"This 'hard' four o'clock cutoff would effectively eliminate the potential for 'late trading' through intermediaries that sell fund shares," Donaldson said in prepared testimony for a Senate Banking Committee hearing.

He said the commission will also consider requiring funds to have specific procedures for complying with their policies on "market timing" -- rapid trading in fund shares to profit from out-of-date prices.

If a fund publicly discourages market timing, it would have to spell out exactly how it excludes market timers, he said.

Congress is considering its own measures to beef up penalties for mutual fund fraud, amid concern the SEC was slow to act.

"Whether due to a lack of resources or other pressing priorities, mutual fund abuses simply did not receive adequate attention from the SEC," said Sen. Richard Shelby, the Alabama Republican who chairs the Senate Banking Committee.

Donaldson agreed the SEC could improve the quality of its mutual fund inspections. Historically the agency has not looked at funds for late trading or market timing, he said.

But asked by Maryland Democratic Sen. Paul Sarbanes about the performance of the SEC's enforcement, investment management and inspection teams, Donaldson said, "Those offices have not been sitting on their hands."

He defended the SEC's recent settlement with Putnam Investments over market timing, saying it gives existing Putnam fund holders quick protection and imposes immediate reforms.

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"The settlement is not the end of the commission's investigation of Putnam," he said. "We are also continuing to examine the firm's actions and to pursue additional remedies."

New York Attorney General Eliot Spitzer and Massachusetts securities regulator William Galvin are heading their own probes of the fund scandal and have criticized the speedy SEC settlement with Putnam, a unit of Marsh & McLennan Cos. (MMC: Research, Estimates).

"We can't have you and Mr. Spitzer and the guy in Massachusetts screaming at each other," Connecticut Democratic Sen. Chris Dodd told Donaldson.

Donaldson agreed: "That's very counterproductive. It's unfortunate. We're doing everything in our power ... to work with the state regulators."

The tension with Spitzer was further addressed by Donaldson in talking to reporters after the hearing. "When you're working on a team, public criticism of your teammate is not helpful," he said.

Donaldson said the SEC also is eyeing a possible mandatory redemption fee for short-term traders in mutual fund shares.

Echoing legislative proposals in Congress, the SEC chairman also suggested possible mutual fund governance reforms, including: requiring fund chairmen to be independent; requiring three-fourths of fund directors to be independent; and allowing fund directors to hire staff.

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"I anticipate that in January the commission will consider adopting rules that would require 'dollars and cents' fee disclosure to shareholders, coupled with more frequent disclosure of portfolio holdings information," Donaldson said.

The Investment Company Institute, a mutual fund industry trade group, told the hearing that it could support making more mutual fund board members independent and writing a tougher definition of independence.

But ICI President Matthew Fink said he was wary of requiring independent board chairmen and called a proposal to put fund management work out for competitive bids "weird."  Top of page

-- from staff and wire reports

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