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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Open Commission Meeting: Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings


Paul F. Roye

Director, Division of Investment Management
U.S. Securities and Exchange Commission

Washington, D.C.
April 13, 2004

Thank you Mr. Chairman and good morning Commissioners.

The abusive practices of market timing and selective disclosure of portfolio holdings represent a fundamental betrayal of American investors. The rules we recommend today are one step in an aggressive rulemaking agenda that is designed to root out these practices, and promote a culture of integrity, responsibility, and accountability in the fund industry.

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. In adopting this rule, the Commission emphasized 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. The Commission also made clear that selectively divulging information about the fund's portfolio - except under circumstances where that information is protected against misuse - can facilitate insider trading, and that funds must have policies and procedures to guard against it.

In addition, in February the Commission proposed a new rule that would require funds to impose a mandatory two percent redemption fee when investors redeem their shares within five business days. This proposed rule is designed to require that funds 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, the proposed rule includes a requirement that, on at least a weekly basis, a financial intermediary provide data to a mutual fund on all purchases, redemptions, or exchanges for each shareholder in an omnibus account. This information pass-through would allow a fund to identify market timers so that it could restrict their trading activity.

This morning we are recommending that the Commission take the next step in attacking the abuses of market timing and selective disclosure of portfolio holdings, through improvements to the disclosure that funds are required to provide about their policies and procedures for addressing these problems. The amendments we are recommending are designed to enable investors to assess funds' risks, policies, and procedures in the areas of market timing and selective disclosure, and to reinforce funds' and advisers' obligations to prevent abusive market timing and the misuse of funds' portfolio holdings information.


Modified: 04/14/2004