Pax World Management Corp.
February 5, 2004
Jonathan G. Katz, Secretary
File No. S7-26-03
Dear Secretary Katz:
Pax World Management Corp. is a registered investment company managing $1.3 billion through four mutual funds and a private account division. Beginning with our inception 32 years ago, all of our assets are invested using social as well as financial criteria. We appreciate the opportunity to comment on the proposed amendments regarding market timing and selective disclosure of portfolio holdings.
As noted in the Commission's release, market timing is not illegal, but churning large amounts of assets (relative to the fund's size) can be harmful to long-term shareholders. The best deterrent is to eliminate the environment that makes market timing so inviting. To that end, Pax World agrees with the Commission that fair value pricing should be used when a security's value is not readily available or is unreliable.
We have some concern about the consequences of an industry-wide, mandatory redemption fee for all short-term trades. Our experience leads us to believe such a fee will inadvertently catch many innocent shareholders in a net designed for market timers. Until the feasibility of a mandatory fee is studied and proven effective, we prefer that each fund be allowed to set its own policies with regard to the definition and ramifications of short-term trades. However, the policies must be written clearly and disclosed in the fund's prospectus. In addition, it is vitally important that all shareholders be treated equally. Waiver of a fund's stated rules for the benefit of a few shareholders is a violation of the prospectus, and also of the manager's fiduciary duty, and should be heavily penalized.
File S7-26-03 recommends identification of market timers in a fund's prospectus. We find this recommendation troubling for three reasons. First, privacy laws require that we take reasonable precautions to protect the identity of our shareholders, and such disclosure seems counter to our privacy mandate. Second is the problem of defining who should be identified. If a private shareholder places a few mid-to-small sized trades for his/her account, would their identity be disclosed? Are market timers defined by frequency of trade, size of trade, percentage of fund's assets being traded, or some combination thereof? Where is the cut-off? Third, market timers are short-term investors. Most funds issue their prospectus annually, and the information disclosed would be stale and not useful.
Finally, we would like to briefly comment on the commission's concern over Selective Disclosure of Portfolio Holdings. We share your concern, and believe that selective disclosure should be banned. In the rare instance that there is a legitimate reason for selective disclosure, the recipient must agree to an appropriate confidentiality agreement that prohibits the recipient from trading on the information. Any violations should be heavily penalized.
In closing, enhanced disclosure and stricter definitions would make it easier for the commission to discover violations of the regulations. In Pax World's letter regarding File No S7-27-03, we endorsed the appointment of a Chief Compliance Officer for each fund. This person would report directly to the independent members of the board of directors. The Chief Compliance Officer should also be charged with routine examination of internal operations with regard to market timing and selective disclosure of portfolios.
We thank you for the opportunity to submit our views, and would be pleased to answer any questions.