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