SEC Chairman Donaldson Releases Statement Regarding Initiatives to Combat Late Trading and Market Timing of Mutual Funds


Washington, D.C., October 9, 2003 -- Securities and Exchange Commission Chairman William H. Donaldson issued the following statement today:

Recent allegations regarding the sale of mutual fund shares point to abuses in connection with late trading and market timing of fund shares. Our staff is aggressively investigating these allegations and is committed to holding those responsible for violating the federal securities laws accountable and seeking restitution for mutual fund investors that have been harmed by these abuses.

It is clear from information developed thus far that there are additional regulatory actions that the Commission should consider in seeking to eliminate or significantly curb late trading and market timing abuses in the future. Consequently, I have asked our staff to prepare rulemaking initiatives to address these issues for Commission consideration no later than next month. Specifically, these initiatives include the following:

Late trading. The staff is considering new rules and rule amendments designed to prevent late trading abuses.

  • These amendments would be designed to prevent the circumvention of forward-pricing requirements for purchases and redemptions of fund shares. In preparing one possible amendment, the staff is examining the feasibility of requiring that the fund (rather than an intermediary such as a broker-dealer or other unregulated third party) must receive the order prior to the time the fund prices its shares for an investor to receive that day's price. For most funds, this would mean that the fund would have to receive the order by approximately 4:00 p.m. for the investor to receive that day's price. This would effectively eliminate the potential for late trading through intermediaries that sell fund shares.
  • The amendments being considered by the staff also would require funds to have additional procedures and controls in place to prevent late trading and ensure compliance with the new pricing requirements.

Market Timing. The staff also is considering new rules and form amendments that would curb market timing abuses, including rules and form amendments that would:

  • require explicit disclosure in fund offering documents of market timing policies and procedures;
  • require funds to have procedures to comply with representations regarding market timing policies and procedures;
  • emphasize the obligation of funds to fair value their securities under certain circumstances to minimize market timing arbitrage opportunities; and
  • reinforce the obligation of fund directors to consider the adequacy and effectiveness of fund market timing practices and procedures.

These are not the only measures under consideration. I have asked the staff to consider whether funds should have additional tools to thwart market timing activity and whether additional requirements are necessary to reinforce funds' and advisers' obligations to comply with their fiduciary duties and to prevent the misuse of material, non-public information, including the selective disclosure of portfolio holdings information. As is the SEC's traditional practice, the staff's recommendations will be presented to the Commission and, if approved, will be published for public comment.

The regulatory measures our staff is developing are designed to eliminate or minimize the possibility of these types of abuses occurring in the future. Additional reforms for the mutual fund industry are being studied, and I will not hesitate to call for other regulatory measures, if we discover additional information in the course of our investigation that merits regulatory action. I am committed, as are my fellow Commissioners, to the Commission's moving swiftly and aggressively to take all necessary steps to protect mutual fund investors from abusive and harmful activity.

Last modified: 10/9/2003