(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC Chair: Staff "Aggressively Investigating" Fund Abuses

SEC Chairman William Donaldson announced that the agency staff is "aggressively investigating" recent allegations of abuses in connection with late trading and market timing of mutual fund shares. He emphasized that the SEC is "committed to holding those responsible for violating the federal securities laws accountable and seeking restitution for mutual fund investors that have been harmed by these abuses."

In addition to investigative and enforcement actions, Mr. Donaldson stated that the SEC should consider new regulatory measures to eliminate or significantly curb late trading and market timing abuses. He has directed the agency staff to prepare rulemaking initiatives to address these issues by the end of November 2003.

Late Trading

Mr. Donaldson expects that the rulemaking proposals would be designed to prevent the circumvention of forward-pricing requirements for purchases and redemptions of fund shares. He stated that the staff is examining the feasibility of requiring the fund, rather than an intermediary such as a broker-dealer or other unregulated third party, to receive the order prior to the time the fund prices its shares for an investor to receive that day's price. According to the chairman, such a requirement would "effectively eliminate" the potential for late trading through intermediaries that sell fund shares. The amendments being considered by the staff will also require funds to have additional procedures and controls in place to prevent late trading and ensure compliance with the new pricing requirements.

Market Timing

Mr. Donaldson said that the staff is also considering new rules and form amendments that would curb market timing abuses. These measures would require explicit disclosure in fund offering documents of market timing policies and procedures and would require funds to have procedures to comply with any representations concerning these matters.

The measures under consideration would also emphasize the obligation of funds to fair value their securities under certain circumstances to minimize market timing arbitrage opportunities. Additionally, the initiatives would reinforce the obligation of fund directors to consider the adequacy and effectiveness of fund market timing practices and procedures.

"These are not the only measures under consideration," stated the chairman. He added that he has asked the staff to consider "whether funds should have additional tools to thwart market timing activity and whether additional requirements are necessary to reinforce funds' and advisers' obligations to comply with their fiduciary duties and to prevent the misuse of material, non-public information, including the selective disclosure of portfolio holdings information."