(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 Settles Market Timing Claims

The SEC recently settled two actions brought against mutual fund advisers and distributors based on alleged improper market timing transactions. In one action, Banc of America Capital Management, BACAP Distributors, LLC and Banc of America Securities, LLC agreed to pay $375 million, consisting of $250 million in disgorgement and $125 million in penalties. The money will be distributed to the mutual funds and their shareholders that were harmed as a result of the alleged market timing and late trading violations. In addition, the SEC censured the entities, ordered them to undertake certain remedial actions to improve compliance and ordered that they cease and desist from further violations. The settling entities neither admitted nor denied wrongdoing.

In a separate action, Columbia Management Advisors, Inc., Columbia Funds Distributor, Inc. and three former executives agreed to pay $140 million to settle claims based on undisclosed market timing arrangements. This amount will also be distributed to investors harmed by the conduct. The SEC also brought fraud charges against two additional former Columbia senior executives in the federal district court in Boston, Massachusetts.

In the Banc of America case, the SEC found that from July 2000 to July 2003, Banc of America Capital Management and BACAP Distributors entered into arrangements with two Banc of America Securities clients and allowed them to engage in frequent short-term trading in at least 13 mutual funds. In connection with one of these arrangements, Banc of America Capital Management and BACAP Distributors received so-called "sticky assets," or long-term investments that were to remain in place in return for allowing the client to engage in the market timing.

The SEC also found that in 2002, the fund board approved a redemption fee on short-term trades in certain funds susceptible to timing, but simultaneously approved an exemption for one of these entities from the redemption fee. According to the SEC, Banc of America Capital Management and BACAP Distributors did not disclose the existence of these approved timing relationships or the fact that one of these clients was being exempted from the redemption fee to shareholders and potential shareholders.

The SEC also found that Banc of America Securities, a registered broker-dealer, facilitated market timing and late trading by some introducing broker-dealers and a hedge fund at the expense of fund shareholders. These entities effected their late trading through a special mutual fund order entry system that allowed the entities to enter mutual fund trade orders as late as 7:00 p.m. eastern time, well after daily prices had been established. According to the SEC, Banc of America Securities either knew or recklessly disregarded that these entities were engaged in late trading through this system. The firm also allegedly provided its introducing broker-dealer clients with account management tools and other assistance that enabled the introducing broke- dealers to conceal the market timing activities of their clients from the funds.

In the Columbia case, the SEC found that the former national sales manager entered into several undisclosed timing arrangements that were inconsistent with the funds' prospectus disclosures, and that a former Columbia portfolio manager breached his fiduciary duty to the funds by approving four such arrangements. In addition, the SEC found that the third individual, the former chief operating officer of Columbia Advisors and chairman of the board of several Columbia funds, ignored indications of improper trading and failed to take appropriate action.

Columbia Advisor and Columbia Distributor agreed, without admitting or denying the SEC's findings, to pay $70 million in disgorgement and a civil penalty of $70 million. The entities also consented to orders censuring them, ordering them to cease and desist from future violations and requiring them to undertake certain compliance and mutual fund governance reforms to enhance internal protections for investors.

The settling individual defendants agreed to the entry of cease and desist orders, without admitting or denying wrongdoing. The former sales manager will pay $10,000 in disgorgement and a $50,000 penalty, and was suspended for a year from association with any broker-dealer, investment adviser or investment company. The former portfolio manager will pay a $100,000 penalty and will also be suspended for a year from association with any investment adviser or investment company, while the former chief operating officer will be suspended for six months from association with any investment adviser or investment company, followed by a 12-month suspension from serving as an officer or director of any investment adviser. The SEC order also barred the former chief operating officer from serving as a trustee, officer or director of any registered investment company and imposed a civil monetary penalty of $100,000.