Explanation:
Correct Answer: B
Market timing is NOT illegal in fund management. Let's analyze each option:
Key Distinction:
The question asks for the statement that is "not true," and Option B incorrectly states that market timing is illegal when it is actually legal (though discouraged).
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In the U.S., mutual funds and ETFs are heavily regulated by the SEC. Complete and accurate financial information must be provided to prospective investors. There are also rules to prevent conflicts of interest and fraud. Despite these safeguards, there have been instances of undesirable behavior. Which of the following statements is not true about the undesirable behavior?
A
Late trading of mutual fund shares is an illegal practice occurs when investors placing trades after 4 p.m. receive the 4 p.m. price. These late traders can use the information revealed after 4 p.m. to guide their trades. In fact, there have been several prosecutions leading to large fines and the involved employees losing their jobs.
B
Market timing is illegal in fund management which involves an open-end mutual fund investor embarking on large trades motivated by the fact that some of the security prices used to calculate an NAV are stale.
C
Front running is the illegal practice of trading with advance knowledge of a block transaction that will influence the price of the underlying security.
D
Directed brokerage is an informal arrangement between a mutual fund and a broker where the mutual fund will use the broker for its trades if the broker recommends the mutual fund to its clients.
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