new rules include penalising quick trades and keeping investor records
New rules to attack the abusive practices of market timing are to be introduced by the US Securities and Exchange Commission, in its bid to stamp out these kind of abuses in the fund industry.
Over the past year, mutual fund companies such as Putnam, Janus, Bank of America and Invesco have all come under investigation for their alleged involvement in activities - such as late trading and market timing - that benefited short-term traders at the expense of long-term investors.
This scandal has most been prevalent in the US mutual fund industry, but the European mutual fund industry has not escaped market-timing problems. For example, last year Schroders was forced to implement anti-arbitrage mechanisms to protect its ISF range which is domiciled in Luxembourg.
Market timing permits a trade to take advantage of market information that develops during the lag between the last quoted price for securities held by the mutual fund and the time the funds NAV is set. Permitting market timing is contrary to the interests of a fund's long-term investors as the gains are offset by losses to other investors in the fund.
New rules being proposed by SEC concern improvements to the disclosure. Funds will be required to provide information about their policies and procedures for addressing these problems.
The recommendations should help investors to assess funds' risks, policies, and procedures in the areas of market timing and selective disclosure, and to reinforce funds' and advisors' obligations to prevent abusive market timing and the misuse of funds' portfolio holdings information.
Since the allegations of marketing timing abuses the SEC has already proposed new rules to curtail these types of practices. Last December, the Commission adopted a new rule that requires every registered investment company and investment adviser to adopt strong compliance controls administered by a chief compliance officer. This emphasised that funds must adopt fair value pricing procedures designed to eliminate the arbitrage opportunities that have led to so much of the current problem with market timers.
Also, in February the Commission proposed a new rule that would require funds to impose a mandatory 2% redemption fee when investors redeem their shares within five business days. This allows funds to recoup the costs that frequent traders in fund shares impose on the fund, and to reduce - if not eliminate - the profits that market timers seek to extract from the fund. In addition, on at least a weekly basis, a financial intermediary must provide data to a mutual fund on all purchases, redemptions, or exchanges for each shareholder in an omnibus account. This information pass-through allows a fund to identify market timers so that it could restrict their trading activity.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation