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SEC Said to Target Fund Managers

September 29, 2004|From Reuters

U.S. regulators are combing through the personal financial records of mutual fund managers in search of potential abuses, such as insider trading, people familiar with the matter said Tuesday.

In a sweep that has hit some of the $7.4-trillion fund industry's biggest groups, the Securities and Exchange Commission is also examining fund policies that are supposed to ensure that employees follow the rules, the people said, speaking on condition of confidentiality.

The latest sweep would be a logical development after the scandals that hit the fund industry last year involving improper market timing and illegal late trading, said Mercer Bullard, a professor at the University of Mississippi School of Law.

An SEC spokesman declined to comment.

Market timers and late traders both exploit funds' once-daily pricing convention. By rapidly trading in and out of funds, timers carve profits away from normal investors who buy for the long term, while late traders deal illegally after hours.

The latest SEC sweep goes beyond these practices, however, to look for possible insider trading, front running and other forms of manipulation by fund managers, the sources said.

Front running involves a broker or manager placing personal trades ahead of orders from his or her clients in the knowledge that the clients' orders will move a security's price up or down.

"That would be an expected follow-on to the fund scandal where the primary emphasis was abuse by outsiders," said Bullard, a former SEC official who founded Fund Democracy, a mutual fund investors' advocacy group. "It wouldn't surprise me now if they're turning to abuses by insiders."

The SEC's sweep has been going on for several weeks, the sources said. The identities of the fund companies being targeted were not immediately available.

Settlements with the SEC over market timing and late trading in recent months have cost mutual fund companies about $1.5 billion in penalties and disgorgement of ill-gotten gains.

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