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SEC Remains Empty-Handed on New Trading Regs Timing, Late-Trading Solutions Still Up in the Air

Although the Securities and Exchange Commission had indicated it would have solutions to eradicate market timing and late trading before the year is up, the Commission is still looking at alternatives to the hard 4 p.m. close and 2% redemption fees on shares redeemed within five days. The SEC is also still looking at how to improve point-of-sale disclosure on commissions and other fees on broker-sold funds, as well as curbing soft-dollar arrangements. SEC Chairman William Donaldson made these revelations at a Securities Industry Association meeting in Boca Raton, Fla., earlier this month.

Critics of the hard close, which is meant to prevent late trading, say it would disadvantage investors on the West Coast and those who place orders through brokers or 401(k) plans, by requiring them to place their orders hours ahead of other investors. Those opposed to the 2% redemption fee, designed to prevent market timing, say it would unfairly harm long-term investors who have no intention of timing a fund but who have simply changed their mind.

One alternative the SEC is considering to the hard close, Donaldson said, is the use of new technologies. Specifically, the industry is considering timestamps to prove that orders come in by 4 p.m., even if they are processed at a later time. An alternative to a 2% redemption fee that the SEC is mulling is to require funds to do a better job of fair-value pricing to keep fund net asset values more in line, Donaldson said. As far as point-of-sale disclosure is concerned, the SEC is grappling with presenting this information in the simplest and most meaningful form for investors, he said.

"I'm not going to promise that we're going to have [solutions] by year end, because [these are all] very complex subject[s], but we're moving toward what I think will be better solutions," Donaldson said.

The SEC is also readying its report on soft dollars, the SEC Chairman added. Because soft dollars are not illegal, it is widely expected the Commission will more succinctly define what constitutes research.