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November 13, 2003
Socially Responsible Investments Remain Largely Untouched by Late Trading Scandals
    by William Baue

The SRI industry's long-term investment horizons and ethical underpinnings insulate it from the market timing debacle, though it may be impossible to escape all its effects.

Starting in early September, New York State Attorney General Eliot Spitzer exposed widespread "late trading" or "market timing" schemes in the mutual fund industry that harm long-term investors. Late trading, which Attorney General Spitzer likened to betting on a race after the horses cross the finish line, involves the trading of mutual fund shares after markets close at four o'clock in the afternoon Eastern Standard Time. This allows insiders to take advantage of events that happen after hours to shift the share price before the end of the next trading day. U.S. Securities and Exchange Commission (SEC) regulations prohibit late trading because it enhances the value of shares held by these privileged insiders while diluting the value of other shares.

Although many large firms that manage mutual funds, such Bank of America (ticker: BAC) and Prudential (PRU), have been implicated, the socially responsible investment (SRI) community has remained essentially untouched by the scandal.

"I am not aware of any SRI firms that have been implicated of late trading or market timing," Tim Smith, president of the Social Investment Forum (SIF), told

SRI mutual funds tend to take long positions through buy-and-hold strategies, which distances them from the vagaries of short-term trading schemes. Also, the SRI community's insulation from the scandal may stem in part from its ethical underpinnings.

"Our view has always been that socially responsible investments are integrity-driven investments," wrote Barbara Krumsiek, president and CEO of the Calvert Group, in a letter to shareholders today. "As we have stated before, Calvert does not and never has allowed market timing of its mutual funds."

"Similarly, Calvert never has and never will enter into any selective arrangements with clients for market timing or late trading purposes," she continued.

Other SRI firms, such as Citizens Funds, similarly practice zero tolerance of late trading.

"We have had procedures in place for five years to monitor accounts on a daily basis by following activity on all trades flagged as excessive," said Joanne Dowdell, Citizens' director of corporate responsibility. "Since 2000, Citizens has closed over 300 accounts due to market timing."

"In May 2002, we added a short-term redemption fee of 2 percent to the Citizens International Growth Fund and Global Equity Fund (WAGEX) that is imposed on all sales or exchanges made within 60 days of their original purchase," Ms. Dowdell told

Calvert implemented a similar redemption fee on the Calvert World Values International Equity Fund (CWVGX) a few years ago, according to Ms. Krumsiek's letter.

Ms. Krumsiek explained one circumstance involving intermediaries, such as brokers or retirement plan platforms, where Calvert will execute trades after the markets close.

"These intermediaries are authorized to transmit their customer orders for Calvert Funds at that day's closing price after 4:00 pm Eastern time only if the intermediary received the orders prior to that time," wrote Ms. Krumsiek. "Recently, Calvert also contacted many of the broker/dealers and 401 (k) platforms with whom we do business seeking their assurance that they do not accept orders for Calvert Funds at that day's closing price after 4:00 pm and to request that they review Calvert's clear policies prohibiting market timing, as disclosed in Fund prospectuses."

"We have also required each of our employees to sign a pledge stating that they will not engage in market timing of Calvert Funds," she continued.

Despite going to such lengths to discourage late trading, Calvert knows of no way to completely ensure that these intermediaries do not in fact conduct illegal late trading.

And although SRI firms avoid participation in late trading, insulating SRI shareowners from the effects of late trading altogether would prove difficult. For example, Bank of America is widely regarded as a socially and environmentally responsible company, and hence is held in many SRI funds. However, Bank of America was one of the first companies implicated in the scandal.

"Calvert holds Bank of America right now and is closely monitoring the facts, investigations, and allegations affecting it and all the financial services companies in our portfolios," said Elizabeth Laurienzo, Calvert's manager of corporate communications.

"We will take action after a thorough analysis," Ms. Laurienzo told

Citizens Funds does not hold Bank of America in any of its funds, according to Val Dingle, Citizens' vice president of marketing.


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