RS Investments Settles Market-Timing Probes

Mutual fund manager RS Investments and two of its top executives agreed to pay more than $25 million and reduce management fees by $5 million to settle allegations of improper trading, regulators said Wednesday.

San Francisco-based RS Investments permitted investors including hedge fund firm Canary Capital Partners to make frequent mutual fund trades, generating $11.5 million in profit for traders and the firm, the Securities and Exchange Commission and New York Atty. Gen. Eliot Spitzer said in separate statements.

“Managers and executives knew that arrangements with market timers were contrary to claims made in the company’s prospectus and harmful to long-term investors,” Spitzer said in his statement.

“Despite this knowledge, company officials allowed and facilitated market timing of funds because it proved to be a lucrative source of fee revenues.”

Under its settlement with the SEC, RS Investments will pay a civil penalty of $13.5 million and restitution and disgorgement of $11.5 million in profit. In an accord with Spitzer, the company agreed to cut management fees by $5 million over five years.

Chief Executive G. Randall Hecht, 53, and former Chief Financial Officer Steven Cohen will each pay $150,000 in fines and face other SEC disciplinary action for secret arrangements that let investors trade in the RS Emerging Growth Fund.

Many of Hecht’s duties were transferred to Chief Operating Officer Terry Otton, RS Investments said in a statement. Cohen left the firm as part of the agreement.

The company plans to take steps “beyond those mandated by the SEC to protect and serve our investors’ interests,” Otton said in the statement.

RS Investments is a specialist in small and mid-size company stock investing, with $6.7 billion in assets. It first disclosed in March that the SEC might file a civil complaint against it and some officers.