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SEC Crackdown on MFs in US

In the past nine months, the US mutual fund industry has been in news for all the wrong reasons - mostly late trading and market-timing abuses. To clamp down the issue, the SEC has come up has come up with new set of rules recently.

In the past nine months, the world's largest mutual fund industry worth $7.4 trillion has been in news for all the wrong reasons - mostly late trading and market-timing abuses. To clamp down the issue, the Securities and Exchange Commission (SEC), the apex market regulator in United States, has come up with some new rules for the mutual fund industry.

The latest SEC rule, which is making headlines, is that the chairperson and 75 per cent of the directors of a mutual fund must be independent of the company that manages the fund, as compared to half of the directors now (SEC order dated June 23, 2004). This new rule will come into force in about 18 months from now and is likely to affect nearly 2,000 funds in the US. Interestingly, about 80 per cent of the funds don't have independent chairman (source: Investment Company Institute, an industry association in US).

The SEC has been trying very hard to limit the chances of scandals that rocked the US fund industry in 2003. It all stated when the New York Attorney General Eliot Spitzer launched investigations into the mutual fund trading abuses last year. Since then the SEC has brought out a series of legal actions in the form of rules for the US fund companies.

Some of these rules require fund companies to disclose clearly their policies on the rapid buying and selling of fund shares (or market timing), to hire compliance officers, and to have codes of ethics.

In addition, the SEC is scheduled to vote this month on a proposal to force funds to disclose their reasons for hiring portfolio advisors. Other proposals include to tell investors more about fees and brokerage-fund ties, to ban "directed brokerage", whereby funds reward brokers with brokerage business for marketing funds' products. And last but not the least, there are proposals to require funds to impose a mandatory 2 per cent fee on proceeds from fund shares sold within five days of purchase, and to accept no buy or sell orders after 4 pm to curb illegal late trading.

Whatever be the outcome of all these measures, one thing is sure that SEC is in the middle of a broad push reform, which would make millions of US mutual fund investors' money safer. But these could be at the expense of a higher cost to them. Complying with all these requirements may push up the cost of running the fund in US.