From: Paul Montgomery [paul@thetaresearch.com] Sent: Friday, May 07, 2004 11:37 AM To: rule-comments@sec.gov Subject: File No. S7-11-04 Comments May 7, 2004 Jonathan G. Katz Secretary, Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609. Dear Mr Katz: With regard to proposal S7-11-04 I am writing to encourage you not to adopt mandatory 2% redemption fees for short-term trades in mutual funds. As an investment manager at an independent advisory firm for more than ten years, I saw the effects any redemption fees had on the overall return to the investor. And make no mistake, it is the investor who pays the cost of the fee and not the manager or advisor who actually makes the investment decisions for his clients. Several points must be made to help you understand why mandatory fees are not a good idea. 1.. Mutual funds already have the option of imposing redemption fees on short-term trades as I indicated above. Fidelity, Vanguard and many other large fund families already do this. Imposing a mandatory fee is regulatory overkill which will not solve the problem you are trying to address, which is overnight international arbitrage (this is the practice which Mr. Spitzer has mis-labeled market timing). 2.. There is no study which indicates that there is an industry wide problem of abusive mutual fund trading resulting in higher costs which are passed on to other shareholders in the fund. 3.. There is no academic study which shows that an imposition of a mandatory redemption fee will curb abusive trading of mutual funds. 4.. Investors, especially small investors, need to be able to make their investment decisions based on their underlying investment objectives and not have their redemption and deposit decisions based upon whether or not an arbitrary time frame has been met to avoid certain fees. 5.. The proposed mandatory 2% redemption fee is for shares held less than 5 days. There is nothing in the proposal which would prohibit mutual funds from extending this time period to longer time frames such as 6 months or even a year in order to retain shareholders (thus increasing the underlying management fee payable to the fund advisor) or to increase their revenue through this levy. It should raise a red flag for you to know that all funds have the option of imposing redemption fees, but 90% of all funds choose not to do so. This has to mean that they do not find abusive trading to be a problem or they have found other ways of limiting trading without regulatory imposition of madatory holding periods and fees. The SEC has always been in favor or finding ways to reduce the costs of investing to the small investor. This proposed regulation is a complete turn away from that noble cause. I realize that you think you are looking out for the small investor, but the reality is, you will hurt the small investor if you implement this proposal. My father used to say, “When the only tool in your toolbag is a hammer, every problem looks like a nail.” I know that rules are the agency’s first tool to pull out of the bag to solve problems. I urge you to leave the hammer in the toolbag and do not implement this proposal. You would be hitting the thumb of the very person you seek to protect, the small investor. Paul Montgomery Theta Investment Research, LLC 518 Kimberton Road, #404 Phoenixville, PA 19460 Voice - 610.495.0180 Fax - 610.495.0930