Lebenthal Asset Management,
February 6, 2004
Mr. Jonathan G. Katz, Secretary
Re: File No. S7-26-03
Dear Mr. Katz,
This e-mail letter is in response to your request for comments regarding proposed restrictions on the selective disclosure of mutual fund portfolio holdings. My perspective is based upon 30 plus years of experience in the municipal bond industry, both on the sell side and on the buy side. I currently serve as the portfolio manager to the Lebenthal Funds, Inc., a municipal bond fund managed by Boston Advisors, Inc. We manage both discretionary individual client portfolios as well as municipal bond mutual funds.
To begin, we applaud your efforts to reform the system and protect the public from those who wrongfully put their interests ahead of those of the public. Please do not stop now. Concerns raised by instances of selective disclosure are justified and I appreciate the desire to implement controls to prevent the possibility of select holders or prospective holders, armed with unique insights of portfolio, from gaining a special advantage over the public in the timing and placing of purchases or sales of a fund.
However, from the perspective of the portfolio manager to a fund, there are unintended consequences of total restriction on the dissemination of portfolio holdings, which if implemented, may actually cause harm to the public. Such unintended consequences include the lessening of competition and liquidity within the bond market - a result that is exactly antithetical to the proposal's stated intentions
Portfolio managers must be able to share the portfolio holdings with bond dealers on the "Street" who make markets in the securities that the manager owns or wishes to buy. Disclosure of portfolio holdings in these legitimate instances allow the bond dealers to make appropriate suggestions as to transactions, credit quality updates, maturity structures, prerefundings, and the like. If portfolio managers were limited to sharing with the dealer community, which, by the way, is highly unlikely to purchase the fund for inappropriate trading, only that information found in the annual or semiannual reports, the public shareholders would suffer a disservice. For instance, if a bond matching one of our existing holdings appeared in the market, and the dealer owning it had no knowledge of our holdings, the dealer might bid the bonds with a wider risk premium than would otherwise be the case. Market liquidity would suffer. If a portfolio manager wished to sell a specific position, the manager should be able to advertise it for competitive bids as widely as possible in order to attract the highest price possible for the benefit of the public shareholders.
Also worth noting is that limited disclosure may cause the formation of monopolies of information and the potential for abuse of inside information. For example, if only Dealer "A" is aware of a position in a certain bond because it had been purchased from him, then Dealer "B" would be at a competitive disadvantage to Dealer "A" with respect to that position. Dealer "A", in effect, has a monopoly over the available information regarding the position and other shareholders would suffer as a result, either through their attempts to corner a position without competition, or in selling out positions from only select customers.
Please insure that the final rule permits portfolio managers to share the portfolio, for trading and for liquidity, with the recognized bond dealers who are in the business of making markets and providing such liquidity for my shareholder clients.
Gregory W. Serbe