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Principal Financial Finds Market-Timing

Dec 23, 2003 | AP

Principal Financial Group Inc. said Tuesday that the company's review of employee trading records found that some of them engaged in market timing.

Principal Financial, a Des Moines, Iowa, insurance company, said in a Securities and Exchange Commission filing that the "vast majority" of the market-timing trades occurred between 1998 and 2000. They took place "predominantly" in the company's 401(k) accounts, the filing said.

The majority of those employees are no longer with the company, Principal Financial said in an investment alert attached to the SEC filing.

Market timing is rapid trading of fund shares designed to take advantage of short-term discrepancies between a fund's share price and its underlying holdings. Such trading isn't necessarily illegal, but regulators say that if mutual-fund companies with states policies against timing permitted such trades while profiting from them, that could be a violation of securities laws.

Principal Financial said two former portfolio managers engaged in market-timing in their personal accounts within the funds they managed. The filing said it didn't uncover any market-timing activities by portfolio managers since 2000.

Employees gained $175,000 through market timing of 401(k) separate accounts and $4,600 through market timing in mutual funds, Principal Financial said. The company said it would pay restitution to all impacted funds.

Principal Financial said its internal review concluded that the company hasn't allowed any late trading or entered into any special arrangements to permit certain investors to engage in market timing.

Nor has Principal Financial engaged in "portfolio peeking," in which select investors get access to portfolio information that isn't available to the investing public.

The SEC filing said that starting in 2000, Principal Financial "imposed progressively more robust standards and protections to further prevent improper market timing."

The company said those standards applied to employees as well as customers.

Principal Financial said its findings were based on an "extensive voluntary review" of its trading practices dating back to October 1996.

In an effort to crack down on improper trading activities, Principal Financial will implement a new valuation service for global equities in the first quarter of 2004. The company said it's designed to "further reduce the arbitrage opportunity for market timers."

Principal Financial also will start educating its employees about market timing and may increase redemption fees on mutual funds, the filing said.

The Securities and Exchange Commission and state prosecutors are investigating late trading and market timing at several mutual fund companies.


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