From: Sam Jones [Sam@rejones.com] Sent: Wednesday, April 21, 2004 12:21 PM To: rule-comments@sec.gov Cc: Susan Truesdale Subject: File No. S7-11-04 Jonathan G. Katz, Secretary, Securities and Exchange Commission Dear Mr. Katz, I am writing to express my concern and strong objection to the SEC’s consideration of a 2% redemption fee on the sale of any mutual fund within 5 days. I am a fee-only professional money manager with a history of trading mutual funds and exchange traded funds for 250 clients with over $100M in assets. While I applaud your efforts and attempts to make mutual fund investing safe for the general public, I fail to see the logic behind the proposed 2% redemption fee. Here’s how I see the issue from my perspective, again as a legitimate and intermediate trader of mutual funds. I understand that the 2% fee is designed to both compensate long term share holders for their supposed losses as well as discourage short term trading. Most if not all studies on the impact of short term trading, conducted by independent 3rd parties, show an incredibly small impact on long term shareholders. The evidence seems very clear that there is a negligible impact yet we are about to reward the fund complexes with a 2% redemption fee on short term trades? A copy of the 3rd party audit on the impact of short term trading of the Janus funds is attached. Please enlighten me if you have evidence to the contrary. In terms of discouraging short term trading, I assure you that the only people to be impacted by the rule will be those who you do not intend. One very obvious group of victims will be the growing number of retirees who are receiving regular monthly withdrawals on their accounts. Many are regularly rebalancing their accounts to maintain asset allocation percentages or simply doing their best to stay invested in the right funds at the right time. Undoubtedly, this group (which includes a number of my clients) will periodically pay the 2% redemption fee on their monthly withdrawals for newly established mutual fund positions. The new fee does nothing in this case to discourage the inevitable short term trading that must happen to meet the withdrawal. Furthermore, a 2% fee on funds held less than 5 days is simply overkill in an industry where the majority of actively managed funds have already imposed their own redemption fees for sales within 30, 60 or 90 days. I believe your intentions are good but you are also not giving enough credit to the ability of private enterprise to self regulate on this matter. Actively managed mutual funds for years have objected to short term trading on the basis that it creates complexity for the fund managers in meeting sizeable and unforeseen redemptions. In addition to imposing their own redemption fees, they have also limited the size and frequency of trading activity from money managers who typically create the problems. Active money managers who use mutual funds in their investment strategies have been subsequently adjusting to the more restrictive landscape for years. Personally, I have reduced my own trading frequency to the point where my average hold on mutual funds for my clients is now in excess of 120 days and I have very good relationships with a broad number of fund families. Alternatively, I am also employing hedging strategies to reduce market risk (instead of selling mutual fund shares) when necessary and expanding my use of exchange traded funds. The industry does a very good job of self regulating in this regard and I simply do not see the need or expect additional redemption fees to have the desired effect on the intended target. The problem areas in short term trading are of course in the international arena as well as other illiquid markets like micro cap or high yield bond funds. Stale pricing is admittedly a problem and one that can be taken advantage of. I would strongly encourage you to considering regulation on fair value pricing as an alternative to additional redemption fees and close this very obvious loop hole to those that choose to exploit it. Thank you for your time and consideration, Samuel F. Jones, MSIT Registered Investment Advisor R.E.Jones & Associates, Inc. The J-Group Advisors p1 303 837 1187 p2 800 748 2893 Fax 303 837 1723