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Alliance Could Pay SEC Millions

Agreement expected this week in U.S. fund trading case

Dec 15, 2003 | Bloomberg News

Alliance Capital Management Holding LP may pay $250-million (U.S.) to settle U.S. Securities and Exchange Commission allegations that it favoured some clients by allowing them to trade mutual fund shares more often than other customers, said people familiar with the situation.

An agreement between New York-based Alliance, the biggest publicly traded U.S. asset management company, and the SEC may be announced this week, said the people, who declined to be identified. Alliance also is negotiating to reduce mutual fund fees by about 20 per cent as part of a settlement with New York State Attorney-General Eliot Spitzer, the people said.

The penalty, the biggest levied against a fund company, is a signal from regulators to the other 22 companies under investigation to settle or risk incurring even greater fines, securities lawyers said. The size of the sanction is 50 per cent more than the amount Alliance earned during all of last year.

"This settlement will be a concern for the rest of the industry because it sets a bar on fines for firms that allowed improper trading and creates competitive pressure to lower fees," said John Coffee, director of the Center for Corporate Governance at Columbia University Law School. The SEC has said it will impose fines against companies, including Boston-based Putnam Investments.

Regulators are focusing on frequent trading, or market timing, where a minority of investors are allowed to profit from the fact that mutual funds are valued once a day at 4 p.m. New York time, while the securities in the funds often trade throughout the day. Repeated buying and selling of the funds to take advantage of price discrepancies can increase transaction costs for all mutual fund owners, reducing longer-term returns.

The $250-million penalty equal to about 10 per cent of Alliance's market value would be used to compensate investors who lost money because of trading arrangements that Alliance made with preferred clients, the people said.

John Meyers, a spokesman for Alliance, declined to comment. Herb Perone, an SEC spokesman, didn't return a call for comment.

Alliance, controlled by France's Axa SA, would be the first fund company to be fined since Mr. Spitzer announced the probe of trading abuses in the $7.1-trillion industry on Sept. 3. While both sides have agreed to the size of the fine, other terms of the settlement, such as the size of the reduction in fees charged by Alliance, are still being discussed, the people said.

Mr. Spitzer is in settlement discussions with Alliance in collaboration with the SEC, said Darren Dopp, a spokesman in Mr. Spitzer's office. He declined further comment. Yesterday, the Los Angeles Times reported that Alliance offered $250-million to settle the probe with U.S. regulators.

Mr. Spitzer has said he wants to lower "inflated" fees through his probe of trading abuses. By contrast, SEC chairman William Donaldson has said fees shouldn't be linked to settlements for illegal trading. He favours better disclosure of costs to allow investors to make informed choices.

Alliance charges among the highest stock-fund fees in the industry, averaging about $20 per $1,000 invested, according to data compiled by Bloomberg. Vanguard Group's annual fees are about $2.55.

Alliance shares have fallen 3.8 per cent since Sept. 30, when the company said regulators were investigating possible trading abuses.

During two closed SEC meetings last week, the five commissioners debated approving the Alliance settlement with fee cuts and decided that it would be akin to government sanctioned price-fixing, said people familiar with the discussion.

The commissioners also said they wouldn't approve the settlement unless Alliance agreed to boost what was a $200-million fine by $50-million, which the firm agreed to Friday, the people said.


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