The Securities and Exchange Commission yesterday announced a US$50 million settlement with Franklin Advisers Inc., concerning market-timing allegations.

Under the settlement, Franklin will pay $50 million, including disgorgement of $30 million and a civil penalty of $20 million. These amounts will be distributed to shareholders of mutual funds affected by the market timing, the SEC says.

Franklin will also undertake compliance measures designed to protect against future violations. These measures include establishing an enhanced compliance oversight and reporting structure and undergoing biannual compliance reviews conducted by an independent third-party.

The commission’s order found that:

  • from at least 1996-2001, Franklin entertained requests to conduct market timing under a standard different from that expressed in the prospectuses for the mutual funds it managed;
  • between 1998-2000, Franklin allowed a representative of a broker-dealer to market time a fund that prohibited investments by market timers;
  • Franklin failed to disclose that over 30 identified market timers were allowed to freely market time for several months in 2000, contrary to prospectus language;
  • after other identified timers were told to stop their activities in September 2000, Franklin gave one favored timer permission to continue to time $75 million in assets with unlimited trades for several more months; and
  • after September 2000, Franklin gave a known market timer permission to time a mutual fund that prohibited investments by market timers simultaneously with the timer making a $10 million investment in a new hedge fund.

Franklin consented to entry of the order without admitting or denying the SEC’s findings. Franklin is an advisor for many funds in the Franklin Templeton Investments complex, which is the fourth largest mutual fund complex in the U.S.

“We are pleased to announce this settlement in which Franklin has agreed to undertake significant reforms and pay a total of $50 million. The money will be distributed to fund shareholders to compensate them for the market timing activities,” said Linda Chatman Thomsen, deputy director of the SEC’s Division of Enforcement, in a news release.

In Canada, the mutual fund market timing investigations are ongoing, and no allegations have been brought. However, regulatory sources have suggested that one enforcement route regulators may pursue is sanctioning firms for allowing market timing that’s contrary to their funds’ prospectuses. Market timing itself isn’t illegal, however some market timing practices could hurt the interests of long-term investors.