January 16, 2004

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

Re: File No. S7-27-03 - Comment Letter on Proposed Rules: Governing Pricing of Mutual Fund Shares

Dear Mr. Katz:

The following represents my own personal views and are not necessarily those of my company or colleagues. It does, however, reflect the views of some other attorneys with significant experience in mutual funds.

I have been involved in the mutual fund industry in various capacities for over 45 years beginning as an attorney with the Securities and Exchange Commission (the "Commission") in an early scandal (Managed Funds) in the late 1950s. In proposing remedial rules, there are important, seminal principles that I believe should be followed, to the extent possible, to achieve a clear, positive compliance result. Remedial rules:

1. should adhere to and reflect existing statutory law - or be the subject of a necessary exemption following the statutory criteria;

2. should be clear and enforceable, which normally means having as few as possible compliance points of responsibility;

3. should be capable of being enforced equally with equal effect on the funds and their customers, thus avoiding discriminatory adverse effects; and

4. should (obviously) be pinpointed to undo or prevent the problems or abuse involved.

The "Hard" Closing Proposal

This proposal clearly meets all the criteria except for equal treatment. We are universally told that 70% to 80% of all fund transactions are made through intermediaries. These range from broker-dealers, which are subject to statutory self-regulatory bodies and the Commission to retirement plan administrators, which are without any regulation in this respect. There are thousands of these intermediaries, which often require somewhat lengthy and complex processing so that in many, if not most, cases this would result in the "hard" trade being effected the next day. This may be exacerbated by the needs of back offices of securities firms and the electronic transmission system (whether NSCC "Fund Serve" or other clearing firm systems). The Commission release and other press discussions recognize this problem.

It can be argued that fund investments should be "long term" and, therefore, to object to a day's delay is not a strong argument, especially for a retirement investment. Still, "why me" is a reasonable answer. Are those investors whose trades are treated differently in practice to be ignored? The aim here should be compliance coupled with equality of practical treatment.

The "Timing" Proposal

The "timing" matter I believe needs re-working. In my view, it has problems in important areas of compliance.

First, there is no way to ensure that timing does not occur in the hundreds or thousands of intermediaries. Even if there was a requirement for expensive audit review letters or SAS70 reports, these would not assure any fund that there was not some timing occurring somewhere in an omnibus account process. The concept of pinpointing the compliance and related responsibilities is clearly a problem here.

Second, the proposal requires each fund to disclose answers to several compliance questions such as: "How do you protect against intermediary timing?" This could end up with more or less meaningful boilerplate or require significant outlays of money by funds to make sure they have all up-to-date methods to cover timing reports. This could lead to either a race for costly "macho" disclosure and related procedures or some consistently followed boilerplate. It again misses the principle of pinpointing the problem with the remedy and leads to inequality and competition among funds. There should be a simple, pinpointed compliance. The alternatives being considered are:

1. Mandatory Redemption Fees. This is so complex. It requires that the intermediaries enforce the redemption and pay it over. It involves not only significant enforcement uncertainty, but also puts the funds in the collection business.

2. Fair Value Pricing. On the surface, fair value pricing seems to solve the problem of the information gap that invites timing abuse. However, it again does not fit certain important principles:

   1. Section 2(a)(41) provides that value is to be at a market quotation if readily available. Only if these are not "available" is fair value to be used. The statute does not provide for an added parenthetical ("or reliable"). If such parenthetical condition is necessary, a properly adopted exemption ought to be part of the rule (cf. the "interval" rules regarding the definition of Redeemable Security). Bonds (except U.S. Government) generally trade sporadically. This market requires fair pricing. International funds generally do not. Further, everyone can have their own brand of fair pricing - anything to avoid "market quotations" - some kind of computerized formula, handwritten guess work, use of ADRs or futures prices, etc. These are all guesstimates of tomorrow's market quotations. This not only adds complexity and avoids simplicity of compliance, it can be gamed. Possible timers (if any now exist) can probably figure the system and guess what the price could be. Further, it is to be noted that one of the fund groups alleged to have a serious problem was publicized previously by the Wall Street Journal as having a good computerized "fair value" automatic operating system.

So what is the answer to all of this? It is the time to think "outside the box." Fair value pricing is just an attempt to replicate tomorrow's quoted price. The Commission staff has previously granted no-action letters for the funds to do delayed second day or more exchanges (letter to ICI of November 13, 2002, though based on other grounds). Section 2(a)(41) gives the Commission the authority to determine the time of valuation, i.e. pricing.

If the Commission adopted mandatory, universal second day pricing, it would meet the requirements of principled compliance regulation:

1. It would comply with the statute.

2. It would be enforceable at the fund level with no need for any other.

3. It would apply equally to retirement administrators, dealers, individuals - everyone is treated equally. All trades that are today transmitted after NYSE close (and clearing prior receipt) will be priced the same as all other trades at the close the day after receipt by the fund. The funds are then able to truly be the focus of compliance.

4. It is pinpointed to solve both problems. No disclosure competition, no high cost compliance machinery, no ambiguous language in disclosures and, best of all, the true "fair value" not the ersatz replications of systems falling all over the map.

The Commission should reconsider and make compliance simpler, exacting and in strict accordance with the statutory requirements. It should mandate that all trades be priced at the close on the day after receipt. The change is as necessary to do a complete compliance job as forward pricing was to undo the problems and "games" of backward pricing.

Very truly yours,

Sheldon R. Stein