SEC Weighs Penalizing Fund Market Timers

U.S. regulators are considering giving mutual fund companies the green light to kick out investors who dart in and out of their funds, a Securities and Exchange Commission spokesman said Wednesday.

Fund firms such as Fidelity Investments and Vanguard Group already are slapping fees on investors who use short-term trading strategies to try to capitalize on market rallies and avoid sharp downturns. The fees, as high as 2% of fund shares redeemed, have proved a deterrent for many would-be market timers.

But until now, Vanguard, for instance, has not taken the extreme step of forcing shareholders who engage in excessive market timing to redeem their shares, spokesman Brian Mattes said. That could change with the SEC’s blessing.

“Having this tool on the shelf would be a very powerful deterrent,” Mattes said. “The fact that it’s out there would keep investors in line.”

The SEC might just accommodate Vanguard through a “no-action” letter. That means the SEC would not penalize companies for forcing redemptions.

The SEC is discussing the issue, said spokesman John Nester.