Insider Trading in Mutual Funds

The Securities and Exchange Commission has recently attempted to establish a new form of insider trading: the use of nonpublic information about mutual fund portfolio holdings to engage in fund arbitrage. In a series of settled cases, the SEC has alleged that fund managers violated rules requiring that they adopt procedures to prevent the selective disclosure of fund portfolio holdings to arbitrageurs. This article argues that these rules were not intended to require such procedures, as fund arbitrage based on fund portfolio holdings does not constitute insider trading. This article also discusses types of fund information that could be used for insider trading in mutual fund shares, such as information about how the funds are valued, as well as the SEC's new disclosure rules regarding the disclosure of portfolio disclosure policies. Finally, the article recommends that the Commission redirect its efforts toward detecting and deterring the violations of fund pricing and sales rules that are the direct causes of losses resulting from fund arbitrage