SEC Prepares to Battle Portfolio Pumping and Window Dressing

Editor's note: The author is the founder of Fund Democracy, a group that has petitioned the SEC to require greater disclosure of fund portfolio holdings.

In the wake of a Canadian settlement of a major portfolio fraud case, the U.S. Securities and Exchange Commission appears poised to send a message to fund managers who manipulate their funds' portfolios to mislead investors.

In July, the Royal Bank of Canada's investment management arm paid C$3 million to the Ontario Securities Commission to settle charges that it engaged in "high-closing trading." Known in the U.S. as portfolio pumping, high-closing trading is the purchasing of stocks that a fund already owns to give the fund a one-day performance boost at the end of a quarter. Extraordinary volume, particularly in a small-cap or thinly traded stock, can drive up the price of the stock and, in turn, boost the performance of the fund holding it. ...