updated 4/13/2004 9:23:01 AM ET 2004-04-13T13:23:01

Federal regulators are moving to force mutual fund companies to clearly disclose to shareholders their policies and procedures for market timing, a practice at the heart of many of the cases that authorities have brought against funds in the industrywide scandal.

Market timing, which exploits short-term movements in stock prices with quick "in and out" trading of shares, is not illegal but violates the rules of most fund companies because it skims profits from long-term shareholders.

Big fund company Putnam Investments last week agreed to pay $110 million to settle allegations by the Securities and Exchange Commission and Massachusetts regulators of improper trading in the first big market-timing case brought in the scandal.

In its settlement with the state, Putnam formally acknowledged for the first time that it had tolerated market timing by some managers and big-money fund participants.

Other companies have settled for even larger amounts in market-timing cases. They include MFS Investment Management, which agreed to pay $350 million to resolve federal and state allegations, and Alliance Capital Management, which agreed to a $250 million fine.

The five SEC commissioners proposed in December and opened to public comment new rules requiring fund companies to disclose their market-timing policies in sales material. They were voting at a public meeting Tuesday to formally adopt the rules.

The SEC's inspections of fund companies found that nearly 70 percent of the firms canvassed reported being aware of market-timing by their customers, while documents provided by some 30 percent of the firms "indicated that they may have assisted market timers in some way," SEC Chairman William Donaldson has said.

Ordinary fund investors have lost billions of dollars from such special trading deals allowing favored customers and fund company insiders to benefit from frequent trades, regulators say. Some 95 million Americans _ half of all households _ invest about $7 trillion in mutual funds, which are the primary vehicle for retirement and college savings.

The SEC move on disclosure of market-timing policies is the agency's latest in a series of sweeping rule changes affecting how mutual funds operate.

Donaldson told a Senate panel Thursday that the SEC is leaning toward abandoning a plan designed to curb after-hours trading in mutual fund shares amid concern it could hurt investors in 401(k) and other retirement plans. But the SEC chairman, besieged by Republican senators, fiercely defended another agency proposal requiring fund company boards to have independent chairmen and a heavy preponderance of independent directors.

There is an innate conflict of interest in having fund directors with ties to the firms that manage the funds setting the fees paid to the management companies, Donaldson testified before the Senate Banking Committee.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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