SEC poised to offer new rules on fund trading

By Robert Schmidt
Bloomberg News

The U.S. Securities and Exchange Commission is set to propose rule changes to curb trading abuses in the $7.1 trillion mutual fund industry, as the agency tries to stay ahead of competing plans from Congress and state regulators.

The five-member commission will vote on new regulations today in Washington. They include a recommendation for a "hard" 4 p.m. close in fund trading, eliminating the possibility of illegal late trades being submitted at that day's share price.

In congressional testimony last month, SEC Chairman William Donaldson sketched out 18 initiatives the SEC intended to undertake to thwart mutual fund trading abuses and promote fuller disclosures to fund investors. The proposals to be voted on today are the first batch of Donaldson's recommendations.

As the primary regulator of mutual funds, the SEC has been criticized by lawmakers for lagging behind New York Attorney General Eliot Spitzer, who filed the first case against improper fund trading.

Lawmakers and regulators are targeting two kinds of improper mutual fund trading: illegal late trading, which occurs after major U.S. stock exchanges close at 4 p.m. Eastern time, and "market timing," which involves frequent short-term trades to take advantage of price changes in a fund's underlying investments.