Delta Data Software, Inc.
Mr. Jonathan G. Katz, Secretary
Reference: Mandatory Fees for Redeemable Fund Securities
Dear Mr. Katz:
Our firm is reviewing the proposed rule for Mandatory Fees for Redeemable Fund Securities and will file our comments on several aspects of the proposal sometime prior to the May 10 cutoff date. Prior to filing our comments on specifics issues that you request comment on, we wanted to draw your attention to a couple of items pertaining to your Cost-Benefit Analysis for this rule change.
In reviewing the SEC proposed rule, it became apparent that there was an error in the calculation of the projected cost. The table below presents a recap of the initial year cost and the on-going costs as provided in paragraph IV. The weighted aggregate annual cost burden over a 3 year period as projected by the SEC is stated as $1,053,492,000. Using the SEC figures as detailed in the proposed rule, I arrive at a weighted average annual cost of $1,332,117,333. This is a one year difference of $278,625,333, which equates to a 3 year difference of $835,875,999 in additional costs. That is a number that I would consider material.
I addition to the mathematical error, I find it interesting that no costs have been estimated for intermediaries and funds using option (b)3 of the proposed rule. This option is where the intermediaries calculate the redemption fees and remit to the funds. This would require the intermediary to determine which transactions are subject to the fee, and assess the fee, then remit the fee to the various funds. This does alleviate the burden on intermediaries to transmit shareholder account and transactional information to the funds on a transaction-by-transaction basis, but it would cause considerable additional expense to the intermediary, as well as some expense to the funds for the accounting. This option would require that the intermediaries maintain the share lot accounting system required to age shares, systems to calculate the fee and then remit the fee along with supporting detail to the funds. The supporting detail would most likely require submitting account information and transactional information. You project that 50% of all funds would require intermediaries to assess the redemption fee using this approach. Most intermediaries do not have systems that maintain this type of information, in particular the retirement plan administrators and insurance unit investment trusts that are tax deferred and do not maintain tax lot accounting systems. In addition to the problem of performing the calculation, systems must be purchased or built to accumulate the calculations and remit the summary and detail information to the respective funds. I think that costs should have been allocated to the intermediaries and to the funds that use option (b)3.
Very truly yours,
L. Burton Keller, CPA
The closest I can get to how your $1,053,492,000 was derived, is to take the first year and second year cost only, then average by 3 years.
1st year cost 2,323,000,000
2nd year cost 836,676,000
3,159,676,000 divide by 3 yrs = $1,053,225,000