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Asset Management

03:44 PM
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Mutual Fund Maintenance

The SEC has offered suggestions on how to tidy up the industry's mutual-fund mess.

In an effort to restore health to the mutual-fund industry, the Securities and Exchange Commission met yesterday to search for potential remedies.

The result of an open meeting were recommendations such as a "hard cutoff" of 4 p.m. EST for buy or sell orders to be received by a mutual fund's transfer agent or registered securities-clearing agency.

The proposed deadline would have a multitude of technological ramifications for the mutual-fund industry.

Kevin McGovern, vice president of the transfer agency operations for Rockville, Maryland-based Rydex Funds, says that he expects increased scrutiny on timestamps to ensure that trades do not arrive late. However, he adds that most transfer agencies already focus much attention on ensuring the accuracy of their timestamps.

While the deadline might not impact mutual-fund processing at the transfer agent due to its batch process that typically occurs overnight, other legs of the workflow may be more affected.

For example, third-party intermediaries might see increased back-office-processing pressures to ensure their orders arrive at the appropriate destination on time.

In addition, the National Securities Clearing Corporation has indicated that it may be able to offer assistance on its leg of the workflow. As a centralized counterparty for a large portion of the mutual-fund industry, the NSCC issued a statement saying it is examining processing solutions it "might be capable of offering through enhancements to our NSCC subsidiary's Fund/SERV processing system."

The statement suggests a possible timestamp-verification process that could indicate when the Fund/SERV system receives each file order. However, the NSCC adds that it is too premature to comment further on the issue.

In addition, the SEC proposed enhanced disclosure on market-timing policies, fair-valuation procedures and disclosure. Market timing " a strategy in which investors profit on short-term investing while the market moves up, and pull out of the market as it moves down " has also been widespread. While not illegal, most mutual funds frown upon the tactic, as it adds operational costs and skews cash positions, creating decreased returns for long-term investors.

Mutual funds could leverage technology such as fair-valuation models to assign prices for post-market-close movement, as well as surveillance systems to monitor how often shareholders moved in and out of mutual funds.

Finally, the SEC will require each mutual fund to implement compliance policies and procedures to be annually reviewed. These procedures will be overseen by a designated chief compliance officer, who will report to the fund's board of directors. Mutual funds have nine months to appoint the compliance officer.

Joanna Haigney, the vice president of compliance for Rydex Funds, explains that recent regulatory requirements have increased the interaction between the compliance officer and the technology department.

"In the past, my need (for technology) was pretty de minimis, but there is definitely increased involvement," she says. "Now firms are identifying where they have gaps and holes, and how they want to fill them through technology."

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