April 20, 2004
The proposal to require and/or encourage mutual funds to require an early redemption fee is potentially harmful, mainly to small investors. The funds are taking this as a green light to impose those fees for redemptions as long as one year, not only five days.
Such early redemption fees should be disallowed entirely. The average mutual fund has a turnover of over 100 per cent, with some going to 300 per cent per year. Why shouldnt the average investor have the same right to turn over his/her portfolio? It is a fiction that mutual funds are only for the long term investor. The need to rebalance a portfolio varies with the outlook of the market by the investor, not a paternalistic government.
On a practical basis a large hedge fund could very easily circumvent the proposed five day rule. First of all, they could use multiple accounts and brokers. Secondly, they could easily purchase custom options from brokers which would lock in their gains or limit their losses and then sell the mutual fund past the five day fee penalty while closing out the option.
The SEC would better serve the small investor by ordering the elimination of the 12b-1 fees, by ordering the breakout of fees paid to brokers for transactions, and eliminating soft dollar rebates. The transparency of the true cost of owning a mutual fund would be revealed, enabling the investor to make helpful comparisons.
The SEC should further prevent the conflict of interest that brokerage houses have when they serve the small investor purchasing funds whom they charge a commission and at the same time receive fees from the fund itself. The brokerage houses often label a small investor a frequent trader for fund companies in which the investor has never invested. Personal experience plus discussions with other investors confirms their actions. That is a clear conflict of interest in revealing to a third party the trading history of an investor who is paying the brokerage house a commision. They are trying to serve two masters.
Thank you for your attention.