To Whom It May Concern,
I am an Investment Professional and an advocate of market timing as a viable and valuable strategy for long-term investors who are seeking to reduce risk of exposure to adverse market conditions. I wish to make a few comments on one issue in general and several in particular.
Early and often in the explanatory text of proposed rule 22c-2, (Sec. 1 Background, paragraph 3), the SEC staff has chosen to use the words "abuse" and "abusive" in association with short-term market timing methodologies of asset management. "Abuse" implies illegal or unethical activity and intent to do wrong, as in drug abuse, child abuse, and spousal abuse. It is unfortunate that the SEC staff has chosen to use the word "abuse" in the text, as henceforth it is used as an assumptive descriptor of all market-timing activities. How can anything be good about an "abuse?"
1. 2% Assumed as Cost of Redemption From Mutual Funds.
Sec. I Background, paragraph 4, "funds that impose a redemption fee often charge a two percent fee...funds therefore have generally estimated their redemption-related costs to be at least two percent of amounts redeemed." The assumption is made that funds charge 2% and therefore their costs must be 2%, when in reality, the maximum allowable redemption fee is 2% and they charge the maximum, because they can.
Footnote #3 "quantifying the costs of liquidity in mutual funds as $0.017 to 0.022 per dollar of liquidity-motivated trading." This figure must refer to the aggregate cost of a multitude of trades per annum, (see "trading" plural above,) within a heavily traded "timed" mutual fund account. No way does it cost 2%, even if it is necessary to liquidate equities, unless it is a foreign equity traded in some archaic, third world exchange, to meet a single redemption request. If investment companies are constrained to charge either actual, quantifiable costs for redemptions or 2%, whichever is lower, I suggest the SEC staff investigate these expense estimates, rather than assume they are accurate before imposi ng a fee for a single redemption based upon such assumptions.
2. Redemption Fee To Be Mandatory and Uniform
Sec. II Discussion, Two Percent Redemption Fee, paragraph 2, "small funds may feel competitive pressures not to impose redemption fees, which could impose costs on their long-term investors and attract market timers to their funds." If the SEC staff's assumption above is accurate, re: 2% cost per redemption, why would a small fund allow frequent trading to be more "competitive" and "attract market timers," to their own demise? 50 trades at 2% would equal the principal value of a timed mutual fund account. In other words, 50 trades by every shareholder would wipe out the total net assets of the entire fund. One cannot have their cake and eat it too , it makes no sense.
Sec. II Request for Comment: "Should the rule permit, rather than require, funds to charge a two percent redemption fee on the redemption of all securities held five days or less?" Are funds not already permitted to charge redemption fees and therefore the permission is already existent? In the interest of full disclosure and transparency, funds that allow short term trading should disclose the ramifications at the point of sale via prominent disclosure within their prospectus and sales literrature.
3. Emergency Exceptions for Unanticipated Financial Emergency
Sec. V. B. "We estimate that each fund would receive ten waiver requests on an annual basis. Therefore the aggregate number would be 31,000." This is incredible. There are 10's of millions of shareholders invested in 3,100 different mutual funds under this proposed ruling. Does the staff truly expect only 10 Emergency Exception requests per fund, per year? I would expect that many requests per hour if the market declines precipitously immediately after an investor makes an initial investment, (investor remorse.) How will anyo ne establish the validity of such requests, as it must be anticipated that fictitious requests will occur under such circumstances? Also, there is the very serious issue concerning the responsibility of fiduciaries to take appropriate action to protect principal in times of crisis. How can this rule deny immediate and free liquidity with the very real possibility of terrorist acts, assassinations, sudden acts of war, or natural disaster apt to happen at any given time? Just one unforeseen calamity is all it takes. Any prudent man would be held responsible for losses incurred, if immediate action is not taken to exit a fund, even though recently purchased, if such a circumstance were to occur. If enacted, this rule only adds a 2% insult to the injury.
Many points are made within the explanation of the ruling that are not market timing issues, but instead tie in grievous, but extraneous issues. Issues such as: arbitrage opportunities created by inefficient pricing of mutual fund shares, funds allowing trades after market hours, self-dealing and short-term trading by advisor employees, and selective application of prospectus trading limitations in violation of stated fund policies. None of these issues are timing issues. These are illegal activities and/or they are abuses of existing rules and regulations of the securities industry or the funds themselves. These issues should not even be a part of the discussion on market timing of mutual funds.
I am thankful the SEC staff has recognized the existence of the Rydex Funds and ProFunds of the world and has made provision for allowing an exemption to this proposed rule for fund families who understand why investments should be timed. (I use these funds exclusively, as do most legal and legitimate market timers and dynamic asset allocation specialists.) Perhaps someday the SEC staff will undertake a study of the long term success, reduced volatility, and peace of mind these timed investors enjoy; verses the pitiable investor stuck in a fund that discourages switching, even when it would be clearly in the investors best interests to have done so early and often.
There are many good reasons for timing mutual funds that better serve the long term interests of investors, such as reduced volatility, verses the far less conservative "buy and hold." Unfortunately, this seems to be the only acceptable strategy espoused by the SEC staff for mutual fund investors. Trillions of dollars were lost between March of 2000 and October of 2002 in mutual funds. Do we care? These losses occurred chiefly because funds stay fully invested, at all times, regardless of the immediate prospects for the equity market. The average holding period for "long-term" shareholders in mutual funds is 30 months. Why do they leave? I'll share the obvious; they stay just long enough to experience a major market correction and then bail out.
The crux of the situation is this and I agree with the one dissenting Commissioner who made this point by voting "No" when this ruling was proposed to The Commission:
Investment Companies are and have always been well able to establish their own policies regarding short term trading by imposing redemption fees, minimum holding periods, and maximum allowable annual trade limits. Passage of this rule is therefore unnecessary and with the projected cost at over $1 trillion dollars in the first 3 years, this ruling opens a very real can of worms, is poorly structured, ill advised, unnecessary, expensive, and completely redundant.