Fund Reforms That Hit The Mark

The Securities & Exchange Commission is moving rapidly to put into place new rules to stop mutual-fund abuses. Most of them are appropriate and will end practices that work against small investors. But a number of proposals may well do the opposite. Despite good intentions, individual investors could lose out if they are approved. While some penalize big players, such as hedge funds, they could raise the cost and reduce the flexibility of investing for average people.

The SEC should rethink three proposals. To curtail market timing, it wants funds to impose mandatory redemption fees on investments held less than five days. A levy of 2% or more will lock money into funds and that makes the industry happy. But small investors who need money for emergencies will get hurt and so will 401(k) participants who sell within five days of automatic payroll contributions. Better to require funds to do daily fair-value pricing.

To stop illegal after-hours trading, the SEC is requiring funds to have all orders in hand before setting prices at 4 p.m. But West Coast employees with 401(k)s must then place their orders very early in the morning. Encrypted digital time stamps, backed by an outside audit, are a better solution.

To increase disclosure, the SEC is proposing that funds tell investors what they would have paid on a $10,000 investment. Better to order funds to tell each investor what he or she actually paid in dollars and cents on quarterly statements.

The SEC is on target in demanding that chief compliance officers report directly to each fund board. It is right to order that boards be led by chairs who are independent of the fund management company. And it is right again to propose that 75% of each mutual fund's board of directors be independent. But the SEC should reconsider its approaches to market timing, late trading, and fee disclosure.

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