Securities and Exchange Commission
Chairman William Donaldson told the Senate Banking Committee Tuesday that criticism of a settlement with
was "misguided and misinformed," but vowed to do a better job of protecting investors in the future.
In testimony before the committee, Donaldson said the settlement serves as "an important first step," and announced the agency's plans to create a new office of risk assessment to improve its ability to analyze market data and anticipate potential problems.
Donaldson also said the SEC would meet on Dec. 3 to evaluate a raft of proposals that would eliminate late-trading and market-timing abuses, as well as fund governance and disclosure issues.
Late trading is an illegal practice in which certain large investors are permitted to purchase fund shares after the market's close, but at the 4 p.m. price. As with all aspects of the law, though, there are shades of gray -- particularly surrounding the issue of whether the fund company has a window of time in which it can still accept orders after the market's close.
(For more on the legal issues involved with late trading, see
Did Lawyers Sign Off on Late Trading?).
The SEC is considering requiring that a fund -- not an intermediary such as a broker-dealer -- actually receive all fund orders by 4 p.m.; otherwise they'll be processed at the next day's price.
As for funds that claim to discourage market-timing, the SEC also will consider requiring explicit disclosure of the exact measures used to do so. The SEC may opt to require certain measures as well, Donaldson said -- such as a mandatory redemption fee imposed on investors who are buying and selling a fund in less than three to five days.
Funds' compliance programs also will be discussed -- the SEC wants written polices and procedures designed to prevent and detect violations of securities law, as well as a regular review of these policies and a chief compliance officer who reports to the fund's board of directors.
"The areas Donaldson outlined are the key areas, and a lot stronger than anyone thought possible," says Roy Weitz, publisher of
FundAlarm.com, an industry watchdog site. "But his suggestions can still be beefed up."
Particularly lacking in Donaldson's plan, Weitz says, is any move to limit fund abuses of 12b-1 fees -- an initial marketing charge intended to disappear once a fund has established itself, but that really serves as little more than an additional expense that funds rarely eliminate.
(For more on 12b-1 fees, see
False Advertising: The Truth About 12b-1 Fees.)