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January 1, 2005

Hard Close' a Step Closer in New Year?

By Gregory Bresiger

The Securities and Exchange Commission may finally come up with a plan in 2005 to curb the kind of trading abuses blamed for the U.S. mutual fund scandals, which rocked the industry more than a year ago. But the agency is having a tough time pleasing everyone.

Nevertheless, this year may see some proposals from the SEC for a "hard close" to clamp down on illegal after hours trading, and a mandatory two percent fee to discourage market timing. Progress has been slow because of a plethora of opposition and the practical implications of change. The original hard close proposal would put pressure on funds to complete a trade in the U.S. well in advance of the 4 p.m. close (Eastern Time) to obtain that day's price. Some critics were angry. For instance, there were fears that investors on the West Coast would have a nightmare trying to obtain the same-day closing price.

The SEC listened to the complaints and came back with a compromise arrangement. This might permit trades to be submitted by intermediaries after 4 p.m. but put the onus on administrators. They would have to develop a time stamp and maintain an audit trial. But this approach still needs some fine-tuning, according to people familiar with the plan.

More problematic is a proposed redemption fee of two percent on sales of shares held for five days or more. Critics said this would be an unnecessarily expensive burden on legitimate investors and inflate the costs of running funds.

Still, there are some signs that the SEC will come up with an acceptable plan for the two controversial abuses of the mutual fund scandal. Some, however, have speculated that watered down alternative proposals are the most likely outcome from the SEC.