Retire Rich

October 8, 2007

The Never-Ending Fund Trading Scandal

Fines, being barred from the industry and even facing years behind bars evidently won't deter some market timers looking for a quick, sure buck.

Sixty-nine percent of fund directors and 55% of fund executives say some investors will continue to market time funds, regardless of redemption fees on short-term trades. As PFPC Senior Vice President Peter Rigopoulos puts it, what's a 2% fee on a 10% or 12% profit?

This is according to a survey of 57 independent board members, 44 affiliated board members and 53 fund executives, commissioned by PFPC and PNC Financial Services Group and conducted by Artemis Strategy Group.

Of course, unlike the original market-timing and late-trading scandal in which scores of fund companies were found to have been in cahoots with market timers, those surveyed are putting the blame on unscrupulous people outside fund companies.

But it would be dreadful for the industry's reputation as a whole if a new spate of market timing is uncovered. Here we are four years later, and the Securities and Exchange Commission is still continuing to bring market-timing cases forward, mostly against individuals and hedge funds. Could we stand another four years of scandalous news?

Although the general press never picks up on these cases, and even the financial media appears to have become jaded and nonplussed about them, if it becomes apparent that market timing continued after 2003 when former New York Attorney General Eliot Spitzer unearthed this whole scandal, the mutual fund industry will appear grossly negligent at protecting its shareholders.

If as many as 69% of fund directors and a majority of fund execs believe market timing will continue, there's a danger that it may still be going on even right now.

Obviously, PFPC and PNC commissioned the study to prompt customers that aren't already up to speed on complying with Rule 22c-2 by the Oct. 16 deadline to do so. There's a vested interest here.

But it's a realistic warning over the bow that fund companies must be vigilant about market timing, late trading-or any new manipulation of the market yet to be invented.

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