Investing is legal, and short term investing is legal. Performing trades that are profitable is legal. But if a fund does not prohibit market timing, then it is permissible, and legal. If market timing is done to a significant degree in a fund where other investors are long term holds, the frequent trading can hurt the fund itself. Before I am misunderstood, I am not advocating market timing in mutual funds. Someone is going to read this and say OK Mark, if timing is not illegal, then what is the big to-do about? Interesting question, and since I posed it, I will answer it. We can leave that argument for another day, and stick to mutual fund timing. There are good arguments that certain forms of late trading are legal, but this is an admitted gray area, and not as clear as the issue with mutual fund timing. A truism, at best, but late trading is not automatically illegal. Spitzer stated it is like betting on a horse race after the race has been run.
Late trading is buying or selling a fund after 4:00 based on the 4:00 price. While the media consistently confuses late trading and market timing, they are two very different practices. Market timing is not illegal, it is not a fraud, and is a proper investment strategy. However, today, the press has turned the term into a bad thing, by draping the term the words “mutual fund scandal”. Market timing services- companies that analyze particular markets and make suggestions as to what security or mutual fund to purchase, have been around for decades. Market timing is a strategy where an investor attempts to “time” the market by buying, or selling, a mutual fund, or other investment, to take advantage of perceive market moves. There is nothing illegal about market timing. The big bogey man today is market timing. There is clearly a problem in the mutual fund industry, and we are now painting the entire industry with the same broad brush, we are destroying mutual funds, hedge funds, mutual fund executives, brokers, and hedge fund managers who have done nothing wrong, and we are contemplating new rules, new regulations, and ultimately additional costs to funds and investors, all in the name of catching fraud, and grabbing headlines. These individuals, and their firms are being smeared in the press and being threatened with lawsuits, for legal and accepted business practices. We need to focus on the limited amount of prosecutions, since a very serious problem that is arising is that brokers and mutual fund employees are being investigated and losing their jobs for engaging in legal behavior that is being painted as illegal. The only brokers who have run into trouble with regulators over market-timing is the group from Prudential, which allegedly used a deceptive scheme to help its customers place market-timing trades. To date, most of the prosecutions over market-timing have been aimed at fund managers who violated their company’s policies and their fiduciary obligation to their investors by permitting big clients to engage in abusive trading. Trading on inside information is illegal. Lying to investors and to regulators is illegal. Yes, market timing is legal, permissible, and engaged in by investors of every walk of life.
And what this recent scandal is about is not market timing, but lying, cheating and stealing money. Short term trading of mutual funds is not illegal. The issue in the mutual fund scandal is not market timing, it is lying to investors – stating one thing in a prospectus, and doing another. It is a perfectly legal trading strategy, which has been in existence for years, with the knowledge and consent of not only mutual fund companies, but virtually every securities regulator in the country. While you would never know it from the press reports, and some pretty irresponsible statements from some regulators, market timing is not illegal. Facebook Twitter LinkedIn Messenger Email Lying to Investors Is Not.
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