SEC Weighs Alternatives to Fund-Order Deadline
The Securities and Exchange Commission may back away from its plan to require investors’ orders to be at a mutual fund by the 4 p.m. market close, SEC Chairman William H. Donaldson said Thursday.
The proposal, an effort to combat illegal after-hours trading in the $7.6-trillion mutual fund industry, has drawn complaints from retirement plan administrators and brokers such as Charles Schwab Corp. and Fidelity Investments. They say it would force investors to trade long before the deadline.
The SEC staff is trying to “determine whether there is an effective alternative to the hard 4 o’clock rule proposal that does not disadvantage certain investors and does not distort competition in the marketplace,” Donaldson said in a speech in Palm Beach, Fla.
The SEC and state regulators say some funds let favored investors place orders after markets closed and still receive that day’s price, allowing them to profit on market-moving news after the close. More than 20 companies have come under investigation for possible late trading and other abuses.
The SEC, which held seven meetings to tighten fund regulation since the scandal erupted in September, gave preliminary approval in December to the so-called hard-close proposal. Under the plan, orders must be at the mutual fund or be in the pipeline at an SEC-supervised trade processor by the deadline.
The rule would replace a system in which brokers can turn in orders after the market close if they can show that the orders arrived before 4 p.m. New York time. Most mutual funds are priced once a day at the market close.
Brokers also contend that the hard close would favor investors who purchase mutual funds directly from fund companies because they could place orders until the deadline.
Donaldson said the SEC’s mutual fund division was studying alternatives to the mandatory close that included requiring brokers and funds to use more sophisticated technology that could put a tamper-proof time stamp on orders. Another possible change would be to order firms to have safeguards for detecting illegal trading.
“It may very well turn out that we adopt a combination of some of the alternatives,” Donaldson said.
The Investment Company Institute, the mutual fund industry trade association in Washington, said last year that it would support a hard close. On Thursday, institute spokesman John Collins said the group was less interested in the details than in restoring investor confidence and eliminating improper trading.
The hard-close plan also has been criticized by investors and members of Congress from states in earlier time zones.
“The effect will be the end of same-day execution of trades from many retirement plan investors,” Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and Sen. Max Baucus (D-Mont.) wrote to the SEC last month.
