February 6, 2004
J.C. Penney Corporation, Inc. ("J.C. Penney"), submits this comment in response to proposed regulation "Amendments to Rules Governing Pricing of Mutual Fund Shares," File No. S7-27-03, published on December 11, 2003 ("Proposed Rules.").
Approximately 150,000 of J.C. Penney and its subsidiary, Eckerd Corporation, active and former employees participate in our company sponsored 401(k) plans, respectively the J.C. Penney Corporation, Inc. Savings, Profit Sharing and Stock Ownership Plan and the Eckerd Corporation 401(k) Savings Plan (collectively, the "Savings Plan"). Plan participants pay the majority of the expenses of operating the Savings Plan within the Department of Labor guidelines. To provide our nationwide employee population of Savings Plan participants the best services within a reasonable expense, the Savings Plan is an unbundled plan. In other words, the Savings Plan operates with a separate recordkeeper, trustee/custodian, and fund managers.
As a plan sponsor, J.C. Penney is very concerned that the proposed late-day trading regulations would place our active and former employees at an unfair disadvantage relative to other investors, effectively subjecting them to different trading rules and, ultimately, different trading prices than other investors. We strongly endorse measures to strengthen the regulation of mutual funds and repair the damaged image of the industry, as this will benefit our participants' confidence in investing. However, we are also concerned about potential unintended consequences of the Proposed Rules.
The Proposed Rules would require that all entities submit mutual fund trades to the mutual fund, or their authorized agent, by 4:00 p.m. Eastern Time. Because of the extensive processing and calculations required, the Proposed Rules would require an earlier cutoff time for 401(k) plan investors, requiring them to make their investment decisions hours earlier than 4:00 p.m. This limitation is an unfair restriction to place on plan participants and has the potential to severely impact the retirement distributions for investors.
Additionally, the Proposed Rules create inequities among 401(k) plans. The new rules provide unbalanced favoritism to a bundled provider. The Proposed Rules provide that the 4 p.m. deadline will be met only if received by the mutual fund itself, (2) the mutual fund's transfer agent, or (3) an SEC registered clearing house. There are several mutual fund companies that provide recordkeeping, fund management and/or trustee/custodial services. These companies would unfairly benefit from this Proposed Rule, and more plan sponsors may contract with bundled service providers so that their plan participants do not have to suffer delayed trading. This rule has an anti-competitive effect when compared to a 401(k) plan such as our Savings Plan which has unbundled service providers. The rules do not differentiate which branch of services must receive the trade in order for the trade to be considered timely under the Proposed Rules.
As an unbundled plan, the Savings Plan can better negotiate for each service, thereby minimizing expenses for our participants. The Savings Plan offers an array of institutional funds and retail funds. All of the retail funds are managed by the same mutual fund companies that provide "bundled" services. Those 401(k) plan participants that use the mutual fund company as a bundled provider would have the advantage of getting the same day pricing when trading among funds. However, in an unbundled environment, the same trade may take more time to process, resulting in different pricing on the "buy-side" of the trade. The unbundled recordkeeper has to take the trade, combine all trades for the day and then submit the entire trade to the trustee who then would have to forward the trade to the mutual fund company. The "unbundled" trade would be made at a different price than the "bundled" trade because of the Proposed Rules. Our participants should not be penalized with later trading to the unfair advantage of bundled plan participants.
In practical terms, the Proposed Rules would create the following scenario for Savings Plan participants residing in all time zones across the country. In order to meet the mutual fund's hard 4:00 p.m. Eastern Time deadline, the order deadline for Savings Plan participants may need to be moved to between 10:00 a.m. and 12:00 noon Eastern Time (7:00 a.m. to 9:00 a.m. Pacific Time). As an unbundled plan, the plan participant's order would not be executable for several days, particularly for a multiple trade transaction due to the net asset value of the various mutual funds involved in the trade.
Studies have shown that being out of the market for even a few days periodically can result in a decrease in returns. To address this exact issue, the SEC recently implemented proposed regulations related to 401(k) plan blackout periods to provide plan participant with advance notice of any absence or delay in market trades. Those who directly invest in mutual funds, the initial purveyors of the problem, would be at a greater advantage, while 401(k) plan participants would become the victims due to the prohibition from moving funds.
We know from experience that our Savings Plan participants will care deeply about this proposed change and will react negatively to having lesser trading rights than other investors. The Savings Plan offers our participants daily valuation and trading. Participants expect this service and believe that restricted trading for the same day's price could unnecessarily place them at greater financial risk. They will ultimately realize that the additional costs of shifting over to the proposed system will be borne by plan participants. Thus, we feel that the Proposed Rules will result in a step backward from the current environment of a participant's daily control of his or her retirement security and will be potentially detrimental to 401(k) plan participants.
Accordingly, J.C. Penney supports the alternative approach discussed in the Proposed Rules, which would permit us to continue to offer our associates the services they receive today but with specified enhancements to prevent late trading.
Specifically, J.C. Penney supports a combination of the alternatives outlined in the Proposed Rules:
Alternatively, J.C. Penney supports the solution proposed by the U.S. House of Representatives in the Mutual Funds Integrity and Fee Transparency Act of 2003 (H.R. 2420). This bill, which passed the House in November 2003 on a 418 to 2 vote, would address many of the mutual fund industry problems including late-trading issues. H.R. 2420 provides specific language directing the SEC to issue rules to prevent after-hours trading, but such rules would include an exception for broker-dealers, retirement plan administrators and other intermediaries if the trades are collected by the intermediaries through procedures such as those enumerated above.
J.C. Penney believes a rule embodying these or similar alternatives will be effective at stopping illegal late-day trading and would not adversely affect our Savings Plan participants. This would represent a more measured response to the recent scandals. Savings Plan participants are essentially small investors and are not engaged in late day trading. It would be overkill to restrict their trading rights and impose indeterminable new costs that will be borne by them when other alternatives exist.
In closing, J.C. Penney submits this comment in the best interest of our Savings Plan participants. We urge the SEC to give serious consideration to allowing company sponsored retirement (401(k)) plans practical alternatives to the hard 4:00 p.m. cutoff. J.C. Penney suggests that the SEC adopt the retirement plans administrator exceptions contained in H.R. 2420 or the alternatives outlined in the Proposed Rules. J.C. Penney is confident that these alternatives will fulfill the SEC's objective of drastically limiting the opportunity for illegal, late-day trading, while still preserving the right of all 401(k) plan participants to place trades up until the market close and get that same day's price.
Bruce A. Hill