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Boutique mutual fund RS Investment settles timing case for $30 million

ALBANY, N.Y. (AP) - RS Investment Management agreed to pay $30 million to settled allegations it allowed "excessive" market timing in its mutual funds, New York Attorney General Eliot Spitzer said last Wednesday.

Under the settlement reached jointly with the U.S. Securities and Exchange Commission, San Francisco-based RS Investments agreed to pay $11.5 million in restitution and disgorgement to investors shut out of what Spitzer called improper trading. The firm will also pay $13.5 million in civil penalties and $5 million in fee reductions to investors over five years to end the anti-fraud investigations, according to the settlement.

"RS managers and executives knew that arrangements with market timers were contrary to claims made in the company's prospectus and harmful to long-term investors," Spitzer said. "Despite this knowledge, company officials allowed and facilitated market timing of funds because it proved to be a lucrative source of fee revenues."

The SEC said RS used "secret agreements" that allowed certain investors to secure millions of dollars in trading profits, potentially at the expense of other shareholders. The secret agreements also resulted in "substantial advisory fees" for RS, according to the SEC.

The frequent short-term, in-and-out trades are legal but discouraged by many funds because they skim profits from longer-term shareholders.

"Today's action shows that the market timing abuses uncovered by regulators in recent months extend to relatively small boutique firms like RS," said Helane Morrison, SEC district administrator in San Francisco. RS has $6.7 billion in assets.

The company admits none of the regulators' findings and emphasized there were no allegations that employees engaged in market timing of RS funds or knew about it.

"In light of the industry and regulatory developments of the last year, we have re-examined all aspects of our business and compliance practices," chief executive Randy Hecht said. "We have strengthened our business with additional experienced professionals, more rigorous business practices, and a heightened compliance culture.

"These improvements, coupled with our sound investment process and boutique culture, will make us a better servant of our clients' interests," Hecht said Wednesday in a statement on the company's Web site.

Spitzer said RS agreed to several reforms including creating greater accountability and enhance compliance and ethical controls. A senior officer would also make sure the fees charged are negotiated "at arm's length and reasonable."

--- On the Net:

Spitzer http://www.oag.state.ny.us

RS http://www.rsim.com

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