From: Paul Schatz [paul@bcmoney.com] Sent: Monday, May 10, 2004 1:56 PM To: rule-comments@sec.gov Subject: File No. S7-11-04 May 10, 2004 Mr. Jonathan G. Katz Secretary, Securities and Exchange Commission 450 Fifth Street, NW Washington DC 20549 Dear Mr. Katz, I am writing as the President of a Registered Investment Adviser firm to comment on File No. S7-11-04, which includes new regulations on mandatory redemption fees for mutual fund holdings. As the mutual fund trading debacle unfolded, I kept believing that cooler heads would prevail and the powers that be would recognize that the issues uncovered were the result of a few bad apples, not a systemic disaster in the making. Comforted by a conference call I was asked to attend with several SEC staff from the Boston office regarding the international arbitrage problem, I never thought this situation would have taken on a life of its own. After explaining my thoughts and suggestions to eradicate the stale pricing issue, I presumed, wrongly so, that someone, somewhere, was going to adopt mandatory fair value pricing. And I do believe that it would have been steered that way, had Attorney General Spitzer not launched and gone public with his own, premature investigation and findings. I believed five years ago and I continue to believe today that fair value pricing is the most sensible solution for stale pricing, not mandatory holding periods or redemption fees. What really concerns me, as well as my clients, is that the proposals set forth by the SEC have unintended ramifications that would indeed hurt those that are trying to be protected. To begin with, I do not believe there has ever been empirical evidence showing a systemic problem exists causing increased costs to long-term investors. Nor have I seen an independent study concluding that mandatory holding periods and redemptions fees would solve the problem. If that was really the case, why have only a small fraction of mutual funds instituted these practices? As I mentioned already, I am very concerned that these proposals would actually hurt the people it is trying to protect while lining the pockets of the already prosperous mutual fund companies. As an adviser with several older clients on a fixed income, it would seem grossly unfair to penalize one of my clients for needing an emergency withdrawal from his or her mutual fund account, should this need cross with a fresh trade. Further, I have not seen any exceptions made to the rule for systematic withdrawals, which is absolutely necessary. Aside from being able to meet my clients’ immediate needs without additional hardship, I have not seen any provision made for “operator error”. How can the SEC doubly penalize advisers by forcing a 2% fee to correct an existing trading error? Should the adviser wait five full trading days, further exposing himself to market risk just to avoid the 2% fee? That is just not fair or prudent. Short-term trading is neither illegal nor unethical yet it is being treated as such with no anecdotal proof. If a mutual fund company wishes to impose a mandatory redemption fee, it is certainly their prerogative yet I hope the punishment fits the crime. Their policies regarding this should be prominently displayed in plain, bolded English in the prospectus, not hidden as a footnote buried in the back. Investors and advisers can then decide for themselves if they wish to patronize that firm. Should the SEC continue moving forward with this plan, I urge a “punishment” that suits the “crime”. A 2% redemption fee is several 100 to 1000s percent higher than what it may actually cost. I recall when Putnam saw massive redemptions in the latter half of 2003 and publicly commented that it had little impact on the day’s NAV. Surely, they must have seen one of the largest mass exoduses in history and yet it did not hurt their shareholders. If this is the case at Putnam, it must be the case elsewhere as well or Putnam can certainly teach other fund companies their “secrets”. Mandatory redemption fees and holding periods are a dramatic turn from previous SEC directions of free market thinking. Let’s keep investor choice a top priority and not line the mutual fund company’s coffers with “punitive fines” from those that are supposed to be protected. Thank you for giving me the forum to express my concerns. Sincerely, Paul Schatz