Alert on 'window dressing'

THE securities watchdog has urged stockbrokers to be on the lookout for any signs of "window dressing" by fund managers that might be attempting to improve the value of their portfolio as they rule off their accounts at the end of the financial year.

By InvestSMART · 30 Jun 2011

By InvestSMART ·
30 Jun 2011

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Pushing up the value of portfolios can often inflate management fees for fund managers.

The Australian Securities and Investments Commission yesterday sent a notice to stockbrokers across the country saying window dressing was a form of market manipulation and offenders could be hit with a fine of up to $1 million.

Typical window dressing orders include a series of small share trades that have the effect of pushing up a share price. Rapid orders placed near the end of the day or fund managers placing orders that were out of step from their usual pattern of trading were also warning signs, ASIC said.

"The ASIC market surveillance unit is also paying particular attention to trading around the end of the financial year and will refer instances of possible window dressing for investigation where this is appropriate," said Jonathan Coultas, of ASIC's market surveillance unit.

ASIC last year took over the role of full market supervision from the Australian Securities Exchange.

Although there is no consensus about how much window dressing there is at the end of the financial year, its existence underscores the lack of disclosure by fund managers. In contrast to other countries, in Australia there is no requirement for fund managers to disclose on a regular basis the holdings of stocks and shares in their fund.

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Frequently Asked Questions about this Article…

What is window dressing by fund managers and why does it matter to investors?

Window dressing is when fund managers place trades near the end of an accounting period to make their portfolios look better than they really are. ASIC says this can artificially boost portfolio values and even inflate management fees, so it matters because it can mislead everyday investors about a fund’s true performance.

Why has ASIC warned stockbrokers to watch for window dressing at the end of the financial year?

ASIC has told stockbrokers to be alert because the regulator’s market surveillance unit is paying particular attention to trading around the end of the financial year and will refer possible window dressing for investigation. They view it as a form of market manipulation that can distort markets and investor information.

What trading patterns are common signs of window dressing to watch out for?

Typical warning signs include a series of small share trades that push up a price, rapid orders placed near the end of the trading day, and fund managers placing orders that are out of step with their usual trading patterns, according to ASIC.

Could window dressing affect the fees I pay as an investor?

Yes. The article notes that pushing up the reported value of portfolios can often inflate management fees for fund managers, which means investors could end up paying more if a fund’s reported performance is artificially improved.

What penalties can be imposed for window dressing in Australia?

ASIC has warned that because window dressing can be a form of market manipulation, offenders could face enforcement action and fines — the article cites fines of up to $1 million for those found to be manipulating the market.

When is ASIC most likely to investigate possible window dressing activity?

ASIC’s market surveillance unit is particularly focused on trading around the end of the financial year and will refer instances of possible window dressing for investigation where appropriate, as stated in the article.

Has responsibility for market supervision changed recently in Australia?

Yes. The article reports that ASIC took over the role of full market supervision from the Australian Securities Exchange last year, and that unit is now monitoring for practices like window dressing.

Why might window dressing be harder to detect in Australia compared with other countries?

The article points out there is no requirement in Australia for fund managers to disclose their holdings on a regular basis, unlike in some other countries, and that lack of regular disclosure can make window dressing harder to detect and underscores concerns about transparency.