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Monday, March 22, 2004

New Market Timing Disclaimers

by: Caitlin  Pickall

FleetBoston’s Columbia Funds recently filed changes to its official market timing policy. The Boston Globe reported today that the policy now includes the language: “There is no guarantee that the Fund or its agents will be able to detect frequent trading activity or the shareholders engaged in such activity, or, if it is detected, to prevent its recurrence.”

Fund firms say that new disclosures like Columbia’s are a recognition of the reality that efforts to prevent market timers can never be 100 percent effective, especially in large omnibus accounts. Critics claim that the industry is trying to avoid taking full responsibility for discovering and stopping timers and to protect itself from legal liability in the future.

However, if a proposed SEC rule requiring disclosure of market timing risk and details of a firm’s policies for managing it is put into effect, such language is likely to become the norm.

One thing that could change that would be an inexpensive and reliable way of tracking market timers. With the constant attention to rapid trading problems since investigations began, firms that provide monitoring technology are increasing in number and prominence.

Whether funds adopt disclosure, tracking technology or both as a defense against liability, no combination of the two will protect firms that engage in fraudulent practices. For firms that act in their shareholders’ best interests, the right balance should be relatively easy to strike.  

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