J Lyons Fund Management, Inc.

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Dear Mr. Katz:

I am writing this letter on behalf of my investment adviser firm, a Registered Investment Advisers, who distinguish ourselves by the fact that we are active managers or risk managers rather than passive, buy-and hold managers. This month marks my 35th year as an investment professional. Having this experience myself as well as being quite familiar with many of my peers through professional trade associations, etc., I feel that perhaps I can articulate at least some concerns that many of us currently have regarding the legislation and rule changes that are being proposed to put a halt to some of the misdeeds that have characterized the mutual fund industry.

By way of defining who we are and where we are coming from with our comments, I would like to offer the following. Many of us evolved to our current style of money management (which pre-Spitzer was, without reservation, called market timing) due to disillusionment with guidance that we were receiving either as employees of the main stream Wall Street establishment or as clients of it. I, for example, started in this business in 1969 as a broker with Merrill Lynch. After suffering through the bear markets of 1970 and 1973-74 without any real money management tutelage from my employer, I realized that were I to have a meaningful, fulfilling career assisting people with their investments, I would have to learn to defend against adverse market conditions. The instructions I received from management to simply trust in the company's security analysts and to sell enough secondary issues of utility stocks in order to win a trip to Bermuda failed to accomplish my anticipated fiduciary responsibilities.

As a result, I began to research on my own methods of determining when the risks of equity investing were high and when they were low. My quest, quite simply, was to accumulate tools to determine when to be out of equities in the former environment and when to be in them in the latter. The true definition of market timing, if indeed, it is to be equated with risk or active management as it conventionally has been, would simply be - "to avoid risk in declining markets and to be invested in rising markets", a goal shared by any objective, serious investor. It need not involve frequent trading and, indeed, our own methodology is not that active.

Without such guidance, one is subject to the fear and greed characteristics that motivate most investor and adviser alike or to the self-serving, gather-assets-at-any-cost approach of much of the Wall Street establishment. The fact that a record $94 billion was put into equity funds during the buying frenzy of January and February of 2000, the precise top of the recent stock market bubble, is but one bit of evidence that investors buy high and sell low thus subverting any chance of implementing a successful buy-and-hold investment program. That $94 billion eclipsed the previous January and February's total of somewhere around $18 billion, by the way.

I have taken the time to give you this background for the following reasons:

  1. At no time in my 35 years of being a pioneer and an active industry participant in the investment methodology just described did I, even once, hear the technique chastised by Attorney General Spitzer referred to as "market timing". That technique should correctly be labeled "arbitrage of stale priced mutual funds" and while we have never practiced it, is perfectly legal. The incorrect usage of that term is both causing the mutual funds to attempt to divert attention from their own misdeeds as well as confusing those who are simply unfamiliar with the term. The result is that we find ourselves in the sights of rule changes and new legislation while the mutual funds urge reform that will actually benefit themselves.

  2. If the arbitrage I refer to, or in fact any short term trading of mutual funds is to be blamed for increasing costs in a mutual fund to its longer term holders, certainly some proof of these damaging costs should be required before rule changes and legislation are rushed through. The available studies when examined do not indicate that such fees cause anything but inconsequential costs to other shareholders and those costs only arise in international funds and perhaps high yield bond funds. In domestic funds, the effect of such trading is shown to actually have a positive effect. The imposition of any redemption fee to curtail short term trading, even the currently allowed 2% fee, but especially in excess of 2% would

    1. result in a vast overkill (penalties vs. damages),

    2. fly in the face of the liquidity feature of open end funds which has been stated by the SEC to be of paramount importance to investors and

    3. reward the very parties who have been guilty of shabby and vacillating oversight and vague prospectus guidelines. I refer here to the mutual fund companies because the fees would accrue to their funds thus increasing their performance and making them a bit more attractive plus giving them more assets on which to draw management fees. Do you really want to allow mutual funds to control such an eventuality?

  3. There is no justification for the SEC or Congress to enact rule or legislative changes that would discriminate against any form of prudent, legal investment methodology without tangible evidence of such methodology causing tangential damages, let alone when the evidence indicates otherwise. Basically that is what some of the proposed changes will do. Discerning the facts rather than accepting the mutual funds' contentions about costly trading is what is called for. Yet that does not appear to be what the House of Representatives did by voting for excessive redemption fees. The current climate is now inspiring many funds to impose redemption fees for periods of up to 90 days - and this to combat short term trading that has so far been proven to add return rather than penalize!! I think someone has shouted "fire" in a crowded theater.

In closing, I will say that reform is certainly appropriate and I am for it. The ambiguous requirements and the arbitrary enforcement and alterations to such fund rules make dealing with them very difficult. However, without benefit of the facts, the government will once again simply be guilty of burdensome, costly over-regulation. Moreover, without the true facts, your guidance to the many legislators who will vote for anything that gives the appearance of championing the cause of their constituency will fall far short of being objectively beneficial. Let's hope that the small investor, whether they be our clients or independent investors is not disadvantaged further.


John S. Lyons, President
J Lyons Fund Management, Inc.