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Hastings Law Journal

Authors

David Ward

Abstract

It has been the worst crisis in the eighty-year history of the mutual fund industry. Beginning with a probe by New York Attorney General Eliot Spitzer, investigators and securities regulators have uncovered widespread improprieties in the $7.5 trillion mutual fund business. In case after case, hedge fund managers, brokers and mutual fund executives conspired to allow favored investors to rapidly trade in and out of mutual funds, taking advantage of pricing inefficiencies to reap hundreds of millions of dollars in profits at the expense of long-term shareholders. This Note examines the recently uncovered abuses within the industry and the responses by Congress, investors and securities regulators, as well as state attorneys general. The Note then traces the history of one type of abuse known as market timing, and demonstrates how this abuse has recurred with frequency as mutual fund investments grew. This Note then addresses the primary regulatory response to past market timing abuses-a procedure known as "fair value pricing." The Note then surveys the academic research that has documented how "fair value pricing" has so far failed to stop the abusive trading strategies recently uncovered. The Note then proposes that the SEC expand the use of another type of mutual fund pricing procedure known as "forward pricing" and argues that this type of pricing mechanism could better eliminate market timing of many mutual funds.

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