The Securities and Exchange Commission said yesterday that it has approved long-awaited rules that tighten oversight of personal trading by portfolio managers and other employees of mutual-fund companies.
The rule changes require greater oversight of personal trading practices by fund boards, more complete reporting of employee trades, and clearance of stock purchases involving initial public offerings and private placement deals.
Several fund managers have been accused of conflict-of-interest violations in recent years for failure to disclose personal trades in securities being bought and sold by their funds. The rule changes grew from a proposal the SEC issued in 1995.
"These amendments will help ensure that the personal trading of mutual-fund insiders does not compromise the interests of mutual-fund shareholders," said Paul Roye, the SEC's director of investment management. "If we nonetheless discover abusive trading, it can be expected that the commission will take enforcement action where necessary to protect investors."
The SEC said it is demanding clearance for IPOs and private placement transactions because those deals present the greatest risk for abuse by fund employees.
The rule changes, which are to go into effect Oct. 29, won't be enforced until March 1, to make sure companies dealing with year 2000 computer issues have time to make computer switches needed to meet the new requirements, the SEC said.
The changes will require mutual funds to disclose their policies on personal trading by their employees and the funds' ethics codes, the SEC said. A fund's board--including a majority of independent directors--will have to approve the fund's code of ethics and the codes of any investment adviser or principal underwriter of the fund.
Additionally, certain fund personnel will have to report initially and annually on their personal securities holdings, and those reports will have to be reviewed by compliance personnel at fund companies, the SEC said.
The commission said enhanced reporting requirements will make it easier for the SEC's inspections staff to spot conflicts of interest and potential fraud related to personal trading by personnel at fund companies.
The changes would affect the hundreds of companies, led by Fidelity Investments and the Vanguard Group, that run the nearly 7,500 mutual funds. As of the end of June, fund companies had $6.1 trillion under management.
The Investment Company Institute, the fund industry's main trade group, endorsed the proposal and said personal investing by investment-company personnel has been the source of relatively few enforcement actions because the industry has placed a high priority on developing effective codes of ethics.
Roye has said one of the main SEC concerns about personal trading involves "front-running"--when a fund manager makes a personal trade before buying a large amount of that same stock for the fund. The fund trade can influence the stock price in a way that benefits the manager's portfolio.