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Federal securities regulators are considering filing an enforcement action against

Franklin Resources

(BEN) - Get Free Report

over allegations it allowed improper trading in some of its mutual funds.

The California-based fund company revealed the possible

Securities and Exchange Commission

action in a corporate filing. The firm's disclosure comes just days after Massachusetts state regulators filed civil fraud charges against Franklin over the same allegations.

In the corporate filing, Franklin said it also expects the SEC's staff to recommend that regulators bring an enforcement action against two unnamed senior officers.

Last week, Massachusetts regulators charged the parent company of the Franklin/Templeton funds with fraud in a market-timing scheme involving Las Vegas investor Dan Calugar.

Calugar, a former tax attorney in Georgia and Florida, has become a prominent figure in the mutual fund trading scandal. In December, the SEC charged Calugar and his

Security Brokerage

outfit with generating $175 million in profits by timing the shares of

Alliance Capital

(AC) - Get Free Report

and Massachusetts Financial Services, a division of

Sun Life Financial

(SLF) - Get Free Report


Massachusetts regulators said Franklin executives, including William Post, and several mutual fund managers struck a deal with Calugar to let him frequently trade shares of the Templeton funds in return for investing $10 million in company hedge funds. Post, president of the Northern California offices of Templeton/Franklin Investment Services, was placed on administrative leave by the company late last year and has since left the firm.

Market-timing is the term for a legal but frowned-upon trading strategy in which mutual fund shares are bought and sold frequently in order to profit from price differences in different markets. It's harmful for the vast majority of mutual fund investors because it can dilute the value of a fund by driving up trading and administrative costs.

Most fund companies say they try to ferret out and stop market-timers. But investigators looking into improper trading practices in the $7 trillion mutual fund industry have found that many fund companies were willing to bend or ignore those rules when it came to a privileged group of hedge funds and their brokers.

Besides Massachusetts and the SEC, Franklin also is being investigated by federal prosecutors in Northern California and state regulators in New York, Florida and California.