From: John Balevic [mailto:firstname.lastname@example.org]
Millennium Trust Company, LLC
April 8, 2004
Mr. William H. Donaldson
Re: File No. S7-11-04 - Mandatory Redemption Fees for Redeemable Fund Securities
Dear Chairman Donaldson:
Our company provides investment custody service for more than 8,700 clients and numerous institutional firms, such as banks, small brokerage companies, and registered investment advisors. We have a long history of excelling in our professional services, most notably because we take particular care in understanding the needs of our clients not only in technical and professional terms, but also in understanding their own investment goals and objectives. I have been in the mutual fund industry for more than 20 years, and Millennium’s executives in combination far longer; our experience maintains that mandatory redemption fees will constitute a singular disservice to the typical mutual fund investor.
In November of last year, Alan Greenspan commented on the proposed usage of mandatory redemption fees in the funds industry by saying, “Information and disclosure requirements should be designed to provide investors with real value rather than [mandatory redemption fees] serve mainly to increase costs and decrease returns”. The proposed usage of mandatory redemption fees will do precisely this: increase the costs of managing and administering a mutual fund and conceivably reducing the funds’ longer-term returns. It will also do something even more damaging by taking away the individual investors’ control of their own financial assets, making their investment decisions cumbersome in certain cases and needlessly expensive in others.
Mutual fund complexes today have some of the most advanced and all-inclusive computer systems in American industry and employ, at the Top 50 fund complexes, more than twice the typical number of information technologists found in the average Fortune 500 Company. They readily have the manpower and technological resources to identify that miniature minority of fund buyers/sellers who trade funds for purposes of arbitrage. While the application of Fair Value fund valuation was clearly urged by the SEC (Douglas Scheidt, Chief Counsel of the SEC's Funds Division) in April of 2001, a 2004 survey by the SEC found that nearly one-third of fund complexes had not used Fair Pricing valuations in almost two years; during this same period, half of the fund companies contacted by the SEC acknowledged to using this valuation method five or fewer times in the same period.
Considering this, and the fact that the mutual fund industry has grown from the reasonably small and systematic contributions of the average U.S. household, it surely is perverse to financially penalize these same investors; the Investment Company Act was intended to protect these investors, not to add impediments to the managing of one’s own assets and financial well-being. Today’s $7.6 trillion fund industry has an average middle class household mutual fund holding assets of $79,000. These households, according to current ICI statistics, have roughly one-third of their financial assets in mutual funds. Since the end of last summer, the phrase “market timing” has perversely evolved into something that conjures up images of unscrupulous shareholders taking advantage of fund or market pricing information known only to a select few, and then making fund trades that disadvantage their fellow shareholders. My (our) experience certainly shows no evidence of these shareholders “timing” either their purchases or redemptions. Redemptions are made to either raise cash for an intended need or in many cases in an attempt to protect household assets in a market decline.
The SEC's proposal commentary (File No. S7-11-04 – paragraph C, Smaller Investors) declares that investors could be spared these additional fees when the redemption amounts were less than $10,000, or possibly spared the redemption fee with an approved written exemption if the redemption exceeds $10,000. Who approves the investor’s written request? Does every fund company have a new committee meeting monthly to approve these withdrawals? Who defines the investors’ “emergency circumstances”? Is there an appeal process? How are the exemption rules standardized across the fund industry-at-large? Who will administer and control this new adjunctive bureaucracy? Is the SEC the Court of Last Resort?
As Mercer Bullard, a former Assistant Chief Counsel at the Securities and Exchange Commission stated, “The industry may see the light once the SEC requires fair value pricing. When the SEC issues a clear mandate, purportedly insurmountable technical problems often have a way of suddenly becoming solvable.” Clearly, the means are available to address arbitrage issues on a technological level with Fair Value pricing, as opposed to the imposition of extra and unreasonable fees to fund shareholders.
John F. Balevic