The following comment on Letter Type A,
or variations thereof, was submitted by
62 individuals or entities on S7-11-04.
Letter Type A:
Unfair, Bad Idea: Mandatory Redemption Fees for Mutual Funds
The proposed change is a very bad proposal. Not one average individual investor has ever been accused of any of the illegal activity incorrectly labeled as market timing.
Many investment professionals could not imagine a mutual fund would engage in such criminal, illegal, activity.
A better idea is mandatory prison terms for the activities that have occurred and not mandatory redemption fees.
I am against this proposal for the following reasons"
- It punishes the innocent. The guilty by and large have gotten off Scot-free paying only a fraction of their fraudulently and criminally derived gains. The guilty should have had mandatory prison sentences for their activity. Regulations with mandatory prison terms and no judicial discretion will stop this type of activity in its tracks. It will precisely target the individuals who caused the losses to individual investors.
- No ordinary private investor had the ability to participate in the fraudulent activities of either trading hours after the market closed, or getting two time-stamped tickets -either to buy or sell and then deciding which, if any, to use after they knew which would be profitable.
- The financial activities of individuals in the aggregate (both buys and sells) in multi million or multi billion dollar funds are negligible and self-canceling compared to the activities of hedge funds and large, very wealthy speculators. Most individual investors buy near the top (the worst time for them; the best time for the fund) and sell near the bottom (again the best time for the fund, the worst time for the individual).
- The SEC is misdefining market timing. Market timing is a form of risk management-a decision to limit one's loss of capital after a certain amount is lost. It is analogous to limiting one's speed if snow turns an Interstate highway into to a sheet of ice.
There is no merit in mandating investors to remain in a poorly performing fund. Locking Enron employees in their stock holdings while Enron executives bailed out was not beneficial to the employees. Neither is the SEC proposal to innocent individual investors.
- The very worst thing the SEC can do is to force omnibus accounts to disclose individual information to the fund companies. Several brokerages and the funds they market have shared the activity of an investor in a single fund with several other fund companies-blackballing an investor from purchases even if the investor had never sold a single share in the other fund companies. Some of the worst practitioners of this policy were the exact same funds engaging in criminal activity
- It will be impossible for the Omnibus accounts to accurately assess redemption fees. Investors will be charges fees that should not be imposed.
The programmers (who are not necessarily brokers or investors) lack the ability to program all the many applications and/or exemptions of redemption fees.
I have personally seen examples where the screen available to the individual user and also to the broker taking the order both showed a fund had no early redemption fee. However, both screens were wrong. The investor was charged a 2% fee that neither could see. This type of action will occur with increasing frequency if this spreads to the majority of mutual funds.
- A 2% early redemption fee is grossly unfair. Many discount brokerages will allow the purchase of 5000 shares for $7 or less. If one purchases 5000 shares of SPY, the S& P 500 ETF, if the price were $100, they could buy $500,000 worth for $7.
However, I have seen Invesco charge a 2% ERF if their SPY mutual fund is sold in less than 60 days. They collect $10,000($500,000 X 2%) for something that at the retail level costs only $7. Electronically the costs of trading are negligible to a fund in 2004. Why should they be allowed to punish an investor so severely?
- The SEC is giving an undeserved bonus for mutual funds for engaging in criminal behavior. Already some funds are using your proposed rule to institute for the first time to extend the suggested 5 day period to 30, 60, 90, 180, or 365 days as periods of "market timing. You are giving them the green light to lock investors into their funds. The investors may suffer substantial loss since the 2% ERF is grossly high, especially to a retiree whose sizeable fund holding represent a lifetime of savings.
- The cost is gross compared to effect of market timing and the cost of implementing it. The SEC says market timing causes a loss of $1Billion. However, the mutual fund industry's assets are in the tens of trillions of dollars. If the fund industry's assets were $1 Trillion, the difference in a 15% return would be 15.00 versus 14.99%:. 0.01% Since the assets are in the tens of Trillions, the maximum loss is less than 0.001%
- Intelligent investors will leave mutual funds for ETFs, Closed End funds. or stock baskets. Mutual funds, not investors, are aided by this ill-conceived proposal.
- Before this proposed SEC action, several fund companies (e.g., Fidelity and American Century) allowed investors to trade many of their funds 4 to 6 times per year without penalty (this was not day trading). They disclosed that to any investor who asked. A form of prudent money management suggests periodic rebalancing either quarterly or in some cases when the investment climate changes, for example, from declining interest rates to rising interest rates.
With some fund companies now mandating holding periods of up to a year, the innocent investor is punished. Only the fund benefits.
I sincerely hope that you will focus on the actual abuses that occurred and propose very stiff mandatory prison terms for recurrence of such abuses.
That would be legal justice. That would be economic justice.
Please do not punish the innocent who have done no wrong by their properly defined market timing activities.