WASHINGTON – The top U.S. securities regulator on Tuesday vowed to step up scrutiny of questionable market practices and said it was considering setting a daily deadline for trades of mutual fund shares.
The U.S. Securities and Exchange Commission (search) outlined reforms for the mutual fund industry as it fielded criticism from senators over its handling of the growing scandal in the $7 trillion business.
At a congressional hearing, SEC Chairman William Donaldson told lawmakers the commission will create a new office of risk assessment to improve its ability to get early warnings about market problems such as 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 4:00 p.m. EST.
"This 'hard' four o'clock cut-off 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specific procedures for complying with their policies on "market timing" — rapid trading in fund shares to profit from out-of-date prices.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.
The call for new regulations is expected to pick up steam as more funds lose large clients. Late Monday, the California Public Employees Retirement System, or Calpers, pulled out $1.2 billion in assets from Putnam Investments.
Another major investor, North Carolina Treasurer Richard Moore also urged reforms.
"We're looking for industry leadership here," Moore told reporters during a conference call. "We are looking for fund managers who have a desire to listen to their customers and set a higher standard."
Moore, responsible for North Carolina's $56 billion public pension system, the ninth largest in the nation, also oversees the state's $2.3 billion public employees 401(k) plan, which is the biggest of its kind in the United States.
Also, Janus Capital Group Inc., one of the first firms named in an investigation of mutual funds, said some employees involved in improper trading have gone and it has held settlement talks with regulators.
When 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.
"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 (search) 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)
"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."
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.
"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 (search), a mutual fund industry trade group, told the hearing 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."