Regulators have proposed or adopted a number
of new rules to discourage market timing, prevent late trading, and
better protect long-term shareholders.
Redemption fees
In 2005, the
SEC
adopted a new rule allowing mutual funds to charge a redemption
fee of up to 2% on shares that are sold within seven days of purchase,
to discourage short-term trading and offset the portfolio costs they
generate. Although money market funds are not allowed to charge
the fees, the rule requires the boards of other mutual funds either
to impose a redemption fee or to determine that it's unnecessary
or inappropriate to the fund. Since some funds already charged
redemption fees, the ruling, which mutual funds must comply with
by late 2006, is expected to have limited effect on investors.
Market timing disclosure
The SEC is also requiring funds to disclose in their prospectuses
their market timing policies and the risks that market timing by some
fund investors poses to other shareholders.
Hard close
To combat late trading, regulators are considering mandating a hard
4 PM order close, so that only orders that reach mutual fund companies
by 4 PM will be executed at that day's
NAV.
Because such a rule might penalize investors on the West Coast
as well as investors who purchase shares through an intermediary,
such as a brokerage firm, industry groups are proposing that the
hard 4 PM deadline apply at the intermediary level rather than the
fund level. The SEC is also considering technological alternatives
to hard close, such as electronic time-stamping of orders.
Fair valuation pricing
The SEC is also looking at ways to compel funds to comply more stringently
with fair valuation pricing, which is designed to ensure that fund NAVs
reflect as accurately as possible the actual prices of their underlying
securities. For instance, funds holding international stocks and bonds would
be expected to update closing prices based on the latest market information
available for those securities. By more aggressively using fair valuation
pricing mechanisms, funds would limit the opportunity for market timers to
profit from out-of-date or stale prices.
