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WASHINGTON – Abuses in the nation’s $7 trillion mutual-fund industry are rampant especially involving trading of fund shares and violations of rules covering the sales of fund shares, federal regulators told members of Congress at a Nov. 4 hearing. The Capital Markets Subcommittee held a hearing to question Securities and Exchange Commission Enforcement Director Stephen Cutler, Massachusetts Secretary of the Commonwealth William Galvin and New York Attorney General Eliot Spitzer on the state of the mutual fund industry. Cutler said the SEC found that 25% of brokerage firms allowed clients to place illegal “late” orders for mutual-fund shares and that three fund companies appeared to have arrangements that allowed such late trading. Further, nearly 30% of the brokerage firms may have actively assisted some investors in conducting improper trading. Meanwhile, the National Association of Securities Dealers, in conjunction with the SEC, disclosed that mutual-fund investors failed to receive an estimated $86 million of discounts on fund commissions during 2001 and 2002. As a result, securities regulators are planning to bring enforcement actions against two dozen brokerage firms for overcharging customers who bought large amounts of mutual-fund shares. Among its recommendations, the SEC proposes requiring orders to buy and sell fund shares be received by fund companies by 4 p.m. EST. Later orders receive next day’s share price; require funds to clearly disclose their policies on “timing” trades of fund shares; ban selective disclosure of fund holdings to certain investors; push funds to use “fair value” estimates of fund holdings to curb stale pricing of fund shares and boost penalties for rapid trading above current ceiling of 2% of assets.

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