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SEC Is Scrutinizing Trading Practices Used by Wilshire

October 14, 2003|Josh Friedman | Times Staff Writer

Wilshire Associates said Monday that the Securities and Exchange Commission is examining a mutual fund short-term trading strategy used by the investment giant from 1993 until earlier this year.

Wilshire, which is best known as the keeper of the broad Wilshire 5,000 stock market index but also is one of the nation's biggest pension-consulting firms, has not been subpoenaed but is cooperating with a request from the SEC for five years worth of records, said company spokeswoman Kim Shepherd. The SEC probe was first reported by Bloomberg News.

Various trading practices in the $6.9-trillion mutual fund business have come under scrutiny since early September, when New York Atty. Gen. Eliot Spitzer and the SEC began parallel industrywide investigations.

The SEC has asked Santa Monica-based Wilshire for documents dating to Oct. 1, 1998, Shepherd said. The agency, whose offices were closed Monday, could not be reached for comment.

Frequent trading, also called "market timing," is not illegal but regulators say it can chip away at returns to long-term shareholders because it drives up transaction costs shared by all. Spitzer has said that timing and illegal after-the-bell fund trading at prices not available to most investors cost regular fund shareholders billions of dollars a year, but that some U.S. mutual fund companies have allowed the practices for certain well-heeled clients in exchange for parking fee-generating long-term assets at the firms.

Wilshire's complex "hedging" strategy sought to capitalize on inefficiencies in futures contract prices. When Wilshire believed that index futures were slightly overpriced, the firm would sell them "short" -- a bet that the price of the security would decline. That was a fairly safe bet, because eventually the price of a futures contract and the underlying index that it tracks should converge. To hedge its bet, Wilshire simultaneously would buy mutual funds tracking the underlying index.

Shepherd said the practice was "entirely lawful" but that Wilshire phased it out because it had become less lucrative in recent years.

Although market timing isn't illegal, it has drawn the interest of investigators because many mutual fund companies -- including those that allowed favored clients to market-time their funds -- discouraged their other investors from the practice.

Wilshire's 400-plus consulting clients worldwide have more than $2.5 trillion in total assets. In Nelson Information's 2001 survey of pension fund consulting firms, Wilshire ranked fourth in pension plan sponsor assets, at $622 billion, and eighth in number of pension clients that have more than $100 million in assets, with 73.

Although regulators have yet to comment on Wilshire's trading, some pension funds have expressed concern about the firm's former hedging strategy.

According to Bloomberg, the $29-billion Massachusetts state pension fund has postponed renewing Wilshire's contract as it researches the matter. State Treasurer Timothy Cahill said at an Oct. 7 meeting, "We want to be sure this isn't a bigger issue."

At the $129-billion California Public Employees' Retirement System, spokeswoman Patricia Macht said Monday that the nation's largest pension fund is "monitoring" the situation.

"The board has a lot of confidence in Wilshire. They've done an excellent job for us," Macht said. "At this point it would be unfair of us to take action. No one knows yet if Wilshire has done anything improper."

Wilshire has worked for CalPERS for about 15 years and is paid about $1.1 million a year, she said.

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