Franklin Resources Inc. the No. 4 U.S. mutual fund company, on Monday said it put two officers and a trader on administrative leave, the latest firm to be enmeshed in an industrywide scandal over improper trading.
The San Mateo, California-based company said in a filing with the U.S. Securities and Exchange Commission it found some instances of frequent trading of certain funds by a few current or former employees in their own 401(k) retirement accounts.
None of the names of the employees or the funds in which the frequent trading occurred were released, and an internal inquiry is ongoing, said Franklin spokeswoman Lisa Gallegos.
Pending completion of a fact-finding process, one officer of a subsidiary, and a trader and officer of Franklin's funds, have been placed on administrative leave, the company said. The officer involved in its funds has resigned, it said.
Though details were sparse, the magnitude of improper trading, which has roiled the $7 trillion industry since New York Attorney General Eliot Spitzer unveiled a sweeping probe of mutual funds in September, struck some analysts as minor.
No instances of improper trading by any portfolio manager, investment analyst or officer were found, the company said.
"One of the things Spitzer was hoping to accomplish was that companies would do this kind of house-cleaning themselves, and it sounds like this is a case where Franklin has dug out some dirt," said Roy Weitz, head of watchdog FundAlarm.com in Los Angeles.
"Maybe this is their second or third pass through, in terms of their own internal records, and they found something they missed on their first pass through," Weitz said. "It sounds pretty minor, but it also sounds like exactly what should be happening at this point."
In addition, the SEC filing and a statement on its Web site did not mention if hedge funds were given permission to "time" Franklin's funds, as occurred at Alliance Capital Management Holdings LP. Improper trading was so widespread and key to some of Alliance's funds, the company had a "market-timing supervisor" monitor that activity, the SEC said.
Market timing -- where investors try to take advantage of prices that do not reflect events that have occurred since underlying securities in a fund were last traded -- has been at the center of a sweeping industrywide probe. Market timing is not illegal, but many mutual fund prospectuses forbid it.
But the jury is still out, some analysts said, considering the limited scope of details Franklin released, and because other companies swept up in the mutual fund scandal at first made announcements that later clearly became more serious.
"Given the pattern at other fund companies, I'm reluctant to say anything is minor. We just don't know," said Dan Culloton, a fund analyst at mutual fund research company Morningstar Inc.
Culloton cited Putnam Investments, a unit of brokerage insurer Marsh & McLennan Co. In., which said members of a boilermakers union had been rapidly trading their retirement accounts, an apparent harmless act. It was later revealed some of Putnam's portfolio managers were engaged in market timing.
As for Alliance, at first it was believed market timing was limited to a tech fund, he said, but when the company settled last week with the SEC, there were a number of funds mentioned in which there were timing arrangements made with investors.
"It depends on what the fund company defines as harmful, and what the authorities define as harmful. We found it's not necessarily the same thing," Culloton said.
"A fund company comes out and says, 'Oh we didn't find any trading that violated our policies,' he said. "Well, someone from outside may look at the exact same evidence and say, 'You did violate your policies.'"