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ICI Record in Addressing Abusive Short-Term Trading by Suspected Market Timers
As We Have Stated Publicly, ICI Was Entirely Unaware of
Agreements or Understandings That Allowed Abusive Market Timing
ICI Chairman Paul Haaga and ICI President Matthew Fink have both stated in testimony before the U.S. Congress that the Institute was entirely unaware that any mutual fund employees, let alone some senior executives, had agreements or understandings with hedge funds or any other clients that permitted abusive short-term trading in fund shares. This is the case whether or not the mutual fund had an express policy discouraging or restricting such practices.
As We Have Stated Publicly, ICI Was Aware of Research Indicating
That Abusive Short-Term Trading Was Occurring In Overseas Funds
The ICI was aware of research indicating that short-term market timing in overseas mutual funds was occurring, and was working actively with its members and the SEC to find ways to restrict such trading and deter those responsible for it. For example, this research was highlighted and discussed at an ICI-sponsored academic research conference in September 2000 that was led by ICI Chief Economist John Rea. Academic researchers who participated in the ICI conference included most of the authors of relevant studies on abusive short-term trading at that time, and the potential effectiveness of various possible responses was discussed extensively.
As We Have Stated Publicly, ICI Repeatedly Expressed
Concern About Abusive Short-Term Trading to the SEC
Over the last five years, the ICI has repeatedly called on the SEC to give mutual funds additional tools to restrict abusive short-term trading and thus protect long-term shareholders. These efforts are reflected in speeches by the ICI’s President and General Counsel, in meetings with SEC staff, in discussions held in ICI-sponsored legal and academic conferences, and in formal correspondence with the Commission. For example, in December 2001, ICI General Counsel Craig Tyle expressed his strong hope that the SEC staff would look at ways to restrict suspected market timers ”from the perspective of long-term shareholders and [allow] mutual funds to take prudent steps to safeguard their interests.”
As We Have Stated Publicly, ICI Formally Asked the SEC Give
Mutual Funds the Authority To Combat Market Timing More Effectively
In November 2002, after more than two years of discussions with the Institute, the SEC staff agreed with the ICI and decided that mutual funds should be allowed to “delay exchanges” to deter suspected market timers. The ICI had urged the SEC to recognize that the use of delayed exchanges could be a targeted and effective weapon in the effort to combat abusive short-term trading.
Chronology of ICI Activities and Statements Regarding
Abusive Short-Term Trading and Related Issues
Since at least 1995, the ICI has been addressing the valuation methods mutual funds use to price their shares each day. In addition to strengthening valuation procedures, the ICI advanced proposals to deter abusive short-term trading by asking the SEC (a) to permit fund to delay exchanges between funds and (b) to permit funds to impose short-term redemption fees exceeding two percent. As the list below demonstrates, the ICI discussed these issues on a frequent and ongoing basis with academics, practitioners, regulators and its members. Among the specific ICI actions that occurred during this time are the following.
ICI surveys members regarding valuation procedures used to meet legal pricing requirements for mutual funds’ portfolio securities.
ICI memo to members summarizes SEC guidance on statutory pricing requirements for mutual funds in light of emergencies that disrupted global markets and may have affected securities valuations.
ICI publishes and distributes 54-page mutual fund valuation, liquidity and pricing compliance paper.
ICI distributes memo prepared by outside counsel to its members summarizing SEC enforcement actions and court cases regarding mutual fund valuation issues.
Stock market crashes in the US and Asia, particularly in Hong Kong, raise valuation issues for mutual funds. Some market timers that sought to take advantage of sharp market movements subsequently complained to the SEC that mutual funds fair valued their portfolios.
At ICI securities law procedures conference, SEC Investment Management Director Barbash addresses mutual fund pricing duties and describes results of special SEC pricing inspections.
ICI proposes modification of SEC rule to provide for uniform mutual fund pricing standards in the event that trading markets close early.
SEC Chairman Levitt convenes Roundtable on Role of Independent Fund Directors, which includes a panel on mutual fund valuation and liquidity issues. ICI members participate.
Crisis in Malaysian financial markets leads ICI to convene series of conference calls and meetings with members regarding valuation of Malaysian securities in particular, and later, overseas valuation procedures generally. Group later organized formally as ICI Valuation Procedures Task Force.
SEC staff letter to ICI regarding mutual funds’ duties to value and price shares “during emergency and unusual situations.”
ICI forms the Foreign Securities Valuation Working Group to discuss the issues that arise in valuing foreign securities in mutual fund portfolios.
Major part of ICI conference for academics and practitioners focuses on identifying and remedying abusive short-term trading and fair valuation. Academic researchers who participated in the ICI conference included most of the authors of relevant studies on abusive short-term trading at that time (e.g., Gregory B. Kadlec, Virginia Tech; John Chalmers, University of Oregon; William Goetzmann and Geert Rouwenhorst, Yale University).
ICI staff and members meet with SEC to address valuation and abusive short term trading.
ICI conference call with members to discuss ways to restrict abusive short-term trading and suspected market timers, including by asking the SEC for authority to delay exchanges.
ICI conference call with members regarding abusive market timing. Group decides to have the ICI pursue efforts to secure authority from the SEC to delay exchanges.
ICI submits first draft of letter to the SEC requesting that, to help combat abusive short-term trading by market timers, mutual funds be permitted to delay exchanges in certain funds.
Second SEC staff letter is sent to the ICI providing further commentary and guidance on a mutual funds’ duties to value and price shares.
ICI reconvenes Foreign Securities Valuation Working Group to help prepare a supplement to the ICI’s 1997 white paper on the valuation of mutual fund portfolio securities.
ICI’s globalization conference includes a morning workshop on how and when to price an international fund portfolio.
SEC Investment Management Director Paul Roye, speaking at the ICI's annual meeting, states that the SEC "is very aware of the problems of arbitrageurs and market-timers" and is willing to consider innovative ideas to address the problem.
At an ICI conference, SEC Director of Inspections and Compliance Lori Richards gives speech addressing valuation, trading and disclosure issues.
SEC Investment Management Director Paul Roye addresses mutual fund pricing and valuation issues in an extensive interview in The Investment Lawyer.
ICI staff and members meet with SEC regarding valuation and abusive short term trading.
ICI distributes to its members a summary of a court decision dismissing a market timer’s lawsuit that a mutual fund had illegally restricted his attempt to make frequent exchanges between funds.
ICI General Counsel Craig Tyle’s opening speech at ICI’s securities law procedures conference asks the SEC to give mutual funds the authority to protect long-term shareholders by restricting abusive short-term trading.
ICI submits to the SEC a legal memo prepared by ICI’s outside counsel describing why the SEC should provide mutual funds with the authority to delay exchanges.
ICI completes and distributes 26-page supplement to its 1999 white paper on mutual fund valuation and pricing compliance issues.
In a speech at the ICI’s annual legal conference, ICI President Matthew Fink calls upon SEC to permit funds to impose additional restrictions on suspected market timers whose activities are harmful to long-term fund shareholders.
ICI’s globalization conference includes full panel discussion of valuation issues, including problems created by abusive short-term trading in international funds.
ICI submits to the SEC series of proposals to improve investment company regulation, including changes that would allow mutual funds to restrict market timers who make short-term exchanges between funds.
ICI publishes Frequently Asked Questions brochure about mutual fund pricing.
ICI formally asks the SEC to grant mutual funds the legal authority to delay exchanges between certain funds where abusive short-term trading is found or suspected.
SEC staff responds to the ICI, and says that mutual funds can delay exchanges.
SEC Investment Management Director Paul Roye acknowledges continuing problems caused by market timers, expressing hope that recent SEC response to ICI will provide funds with helpful tools.
In a published article reviewing mutual fund developments in 2002, ICI economist Brian Reid notes the continuing disruptive impact of market timers on mutual funds with a large concentration of overseas holdings.
SEC responds to congressional inquiries about a number of mutual fund issues, including pricing and valuation procedures.
ICI urges the SEC to impose a mandatory, minimum two percent redemption fee that applies to all non-money market mutual fund sales not held for at least five days.