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Answer: 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.
## Explanation **Correct Answer: B** Market timing is **NOT** illegal in fund management. Let's analyze each option: ### Option A: Late Trading - **True**: Late trading is indeed illegal. It occurs when investors place trades after 4 p.m. but receive the 4 p.m. price, allowing them to use post-market information to guide their trades. ### Option B: Market Timing - **NOT TRUE**: Market timing is **not illegal**. While it's considered undesirable and harmful to long-term investors, it's not against the law. Market timing involves exploiting stale prices in NAV calculations, but fund companies can implement policies to discourage it (like redemption fees) rather than it being outright illegal. ### Option C: Front Running - **True**: Front running is illegal. It involves trading with advance knowledge of a block transaction that will influence security prices. ### Option D: Directed Brokerage - **True**: Directed brokerage arrangements are problematic and have been subject to regulatory scrutiny as they can create conflicts of interest. **Key Distinction**: - **Late Trading**: Illegal - trades placed after market close at closing prices - **Market Timing**: Legal but undesirable - exploiting stale prices in NAV calculations - **Front Running**: Illegal - trading ahead of client orders - **Directed Brokerage**: Problematic but not necessarily illegal in all cases 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.