Securities and Exchange Commission
, which critics have accused of looking the other way at mutual fund abuses, moved Wednesday to enact new rules to eliminate improper trading activities in the $7 trillion industry.
The proposals are designed to stamp out the two most insidious practices investigators have found in the fast-expanding mutual fund scandal: late trading and market-timing.
The biggest change is the proposal to enforce a strict 4 p.m. New York time deadline for submitting all orders to buy and sell mutual fund shares. The proposal would change the current practice, which permits brokers and other intermediaries to submit some orders to purchase mutual fund companies after the traditional 4 p.m. ET deadline.
Another SEC rule would make it harder for hedge funds to engage in market-timing by requiring mutual fund companies to impose a mandatory redemption fee on investors who make quick in-and-out trades.
The new rules, which won't be finally adopted until many months from now, are the first step in what SEC officials said will be a long campaign to clean up the tarnished mutual fund industry.
SEC Chairman William Donaldson, speaking at an agency meeting during which new rules were unveiled, said the SEC "will be undertaking a broad spectrum of regulatory actions to address other problems that have plagued the mutual funds and their shareholders.''
The coming weeks, Donaldson said will introduce proposals to strengthen the independence of the boards that oversee individual funds and force fund companies to provide shareholders with more information about hidden fees and discounts they are entitled to.
But the moves to eliminate late trading and market-timing may have the most sweeping ramifications. That's because it could put a crimp in the business of brokerages that place trades for hedge funds.
In recent weeks, a number of brokerages, including
, collectively have fired dozens of brokers as the scandal widened.
also has fired more than a dozen brokers, and civil fraud charges have been filed by regulators against five of them. Prudential is jointly owned by
Regulators consider late trading the more serious offense because it permits favored customers to buy -- or cancel an order to buy -- shares of mutual funds after the close of the trading day. The late trades enable customers to take advantage of late-breaking news because orders areprocessed at an old price, rather than the next day's closing price reflecting individual stocks' movement.
Market-timing, by contrast, is a legal trading strategy in which traders game the pricing system by moving quickly in and out of shares of international mutual funds, trying to anticipate the impact that late-breaking news will have on the stocks held.
In the weeks since New York Attorney General Eliot Spitzer fired the first salvo in the fast-expanding mutual fund investigation, its become apparent that late trading in mutual fund shares was more widespread than previously known. In fact a number of law firms even counseled hedge funds and brokers that some late trading might be acceptable given the way the old regulations were written.