Scandal: Late trading
What happened: Big-money investors were allowed by some mutual fund companies to make trades illegally, after the market closed.
IT response: Depending on decisions made by regulators, a range of solutions is possible, from upgrading existing systems to include an electronic audit trail to completely revamping how electronic transactions are processed.
Benefit: There are long-term efficiency benefits for companies that use an automated clearinghouse to process transactions. Estimated costs vary from a one-time expense of $300,000 to $4 million a year, according to Charles Schwab.
Scandal: Market timing
What happened: Favored investors were allowed to make frequent, short-term trades in some mutual funds to take advantage of the inefficiencies in once-a-day fund pricing. Though not strictly illegal, these trades violated fund companies’ policies for buying and selling the funds in question and hurt other investors by raising transaction costs. Now the SEC wants most mutual funds to impose fees on redemptions made within five days of purchase.
IT response: Fund companies and brokers must upgrade and integrate systems they use to keep trading and account records.
Benefit: Market timing becomes easier to spot and to prevent. Transfer agents gain business opportunities from fund companies that outsource recordkeeping.
Scandal: Excessive fees
What happened: Fund companies were accused of gouging investors on management fees and failing to explain their other operating expenses. These practices aren’t illegal, but consumer advocates contend that investors don’t understand how the fees affect fund performance. Now regulators want fund companies to improve disclosure.
IT response: Fund companies can deploy systems that automate more of their internal business processes.
Benefit: TIAA-CREF, a retirement plan manager that offers mutual funds, has cut its trading costs in half by aggregating and automating trades. TIAA-CREF predicts more efficient processes will attract customers.