Subject: File No. 4-500
From: Peter Mauthe, Chief Operating Officer, Rhoads Lucca Capital Management
May 8, 2005
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street NW
Washington DC 2054900609
Delivered via e-mail to: Rulefirstname.lastname@example.org
re: comment letter regarding File No. S7-11-04
Dear Mr. Katz,
I am writing as COO and CCO of a Securities & Exchange Commission Registered Investment Adviser that manages over 600 client accounts invested in mutual funds. Our clients and we support the SEC's recent decision NOT to make redemption fees mandatory. While redemption fees are a tool in fighting abusive mutual fund redemption practices by some, we feel they are not the best way to avert such abuses. Our primary concern has been and will be the fact that redemption fees being implemented by most mutual funds are being applied to the accounts of the average, non-abusive investor more often than they are being applied to the accounts of true abusers.
We find it peculiar that the Commission would make it mandatory that investment management contracts be voidable without financial penalty if an investor changes their mind within five days, but a mutual fund decision if changed within five days to 2 years in some cases is allowed, if not encouraged, to carry with it a financial penalty of up to 2% of the value of the investment.
Our experience in dealing with mutual funds and redemption fees has been that investors who are paying them are most often investors whose investment profile or risk tolerance changes or whose financial needs change. With redemption fees frequently being imposed on redemptions within 3 to 6 months from the date of purchase, it has been our experience that of our clients who have had to pay redemption fees, NONE have been the targeted abusive investors. All of them have had legitimate financial need in making redemptions that have incurred the redemption penalty.
For this reason we feel that IF redemption penalties are going to be permitted, they should be required to carry with them the following characteristics:
Redemption fees should be tied to actual costs incurred by the fund.
Redemption fees should only be applied when an abuse of a clearly written (in the prospectus) exchange privilege occurs.
Redemption fees should all provide for a waiver for hardship withdrawals.
Redemption fees should all provide for a waiver for correction of an error.
Redemption fees should all provide for a waiver for payment of fees to a third party adviser working under a management agreement.
Redemption fees should all be required to be calculated on a FIFO accounting basis.
Redemption fees should provide for a de-minimus withdrawal up to 3-5% of the account balance per year.
If redemption fees are used and if they include these characteristics, such fees can still be used as a heavy handed way of dealing with abusers without meaningfully affecting the average investor who is currently the one most often paying such redemption fees.
Peter B. Mauthe
Chief Operating Officer
Rhoads Lucca Capital Management
14911 Quorum Dr. Ste. 380
Dallas, TX 75254
Ph: 214-373-9771 Fax: 214-373-9775
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