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Friday, October 03, 2003

ICI Creates Task Forces In Response to Spitzer Allegations

by: Sean Hanna, Editor in Chief

The Investment Company Institute (ICI) has created two task force's to respond to allegations that hedge funds have systematically defrauded mutual fund investors. One task force will look at ways to respond to problems with late trading. The other will deal with market timing issues.

The ICI did not immediately release the identity of the members of the task forces or whether they had yet been staffed.

The task forces will work to swiftly identify specific options -- whether through government regulation, industry best practices, or both -- that will forcefully and effectively address the issues of late trading and abusive short-term trading involving mutual fund shares and how to make sure the interests of fund shareholders always come first, said ICI officials.

They will also work with the SEC, NASD and other regulators to determine how best to implement the five-part regulatory action plan SEC Chairman Donaldson outlined in Congressional testimony on September 30. ICI Chairman Paul G. Haaga, Jr will relay these findings to regulators and government officials.

"The Board is committed to ensuring that mutual fund shareholders always come first," said Haaga in a statement on Friday. "The Board recognizes that new regulatory requirements must be considered, and pledges to work constructively and expeditiously with regulators in any manner they deem useful. Everything is on the table to protect mutual fund shareholders."

All possible solutions are "on the table," according to the ICI. That may include enacting rules that would require all trades received by a fund company after 4 p.m. to receive the current day's NAV. Such a rule would play havoc with retirement plan systems, say industry sources.

A less drastic solution would be for ICI members to institute procedural and technological requirements that provide greater assurance that the mutual fund trades reported by broker-dealers and other intermediaries were all placed by fund investors before 4 p.m.

Meanwhile, the task force on abusive short-term trading will consider the recommendations SEC Chairman Donaldson specified in his Senate testimony last week.

Those solutions include mandating that all mutual funds establish clearly written policies and procedures approved by the fund's independent directors.

The task force will also consider whether to seek permission from the Securities and Exchange Commission for immediate authority to impose redemption fees greater than 2 percent (as long as the fees collected are returned to the fund) and to permit "split exchanges" if excessive short-term trading is suspected.  

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