The Securities and Exchange Commission on Monday tightened rules for personal trading by mutual fund insiders.
The amendments to Rule 17j-1 of the Investment Company Act of 1940 require greater oversight by mutual fund boards of directors, more complete reporting by fund employees, and clearance before certain fund insiders can participate in initial public offerings and private placements.
The amendments, effective Oct. 29, also require funds to disclose their policies on personal trading by employees and their codes of ethics. Personal trading by fund managers has been called into question in at least two instances in recent years. Last year Dreyfus Corp., the New York asset management subsidiary of Mellon Bank Corp. of Pittsburgh, put Michael L. Schonberg, who managed two aggressive growth funds, on administrative leave after allegations of improper trading. The incident echoed a 1994 inquiry that led Invesco Funds to dismiss a star manager.
Richard M. Phillips, a partner in the Washington law firm Kirkpatrick & Lockhart, who represents major mutual fund companies, said that though the new rules add a layer of enforcement most fund companies had adopted "stringent" policies on personal trading in the wake of Investment Company Institute recommendations.
In some cases, the industry has set stricter standards for itself than the SEC does in its new rules. For example the 1994 report by the Investment Company Institute recommended an absolute ban on fund insiders' participating in initial public offerings, though the SEC only requires advance approval for such participation by portfolio managers and others who participate in a fund's investment decisions.
A spokesman for the mutual fund trade group suggested that the SEC may have wanted to offer flexibility, despite clamping down on potential abuses.
Separately, the regulatory arm of the National Association of Securities Dealers Inc. has filed with the SEC proposed rules that would explicitly require firms that promote day trading to determine that intraday trading is appropriate for a customer before approving an account. The NASD would also require the firms to disclose the high risks of such activity. The proposals incorporate feedback the association received after it requested comments from members in April.