Ohio Public Employees Deferred Compensation Program
February 4, 2004
Mr. Jonathan G. Katz, Secretary
RE: File No. S7-27-03
Dear Mr. Katz:
We appreciate the opportunity to provide comments with respect to the proposal by the Securities and Exchange Commission to amend Rule 22c-1 under the Investment Company Act of 1940.
The Ohio Public Employees Deferred Compensation Program is a large self-administered supplemental retirement system. We developed the capability to perform all recordkeeping tasks in-house in order to provide our participants the ability to invest in retail name mutual funds from a variety of fund houses for the very least cost. We strongly believe that reform is needed to prevent abuses and restore our participant and all investor confidence in the mutual fund industry. However, the imposition of a "hard" 4:00 pm close for intermediaries would punish our participants for the abuses of others. Our participants would suffer not only from losing the ability to obtain same day pricing but would also be charged the full cost of updating our system to implement the new rule.
A more appropriate and much less burdensome approach would be to require all intermediaries to sign a detailed universal agreement with the funds that would spell out the accepted policies and procedures and require a time stamp all transactions, annual certification that they are following the policies and procedures and an annual compliance audit. This would be the most cost effective approach for our Program since we would have to make only minor changes to our current practices and, most importantly, it would allow our participants to maintain the same advantages as those who invest directly with a fund house.
Finally, we would like to point out that abuses only occur in situations where one party stands to gain something as a result of the abuse. As a public retirement fund that is also an intermediary, we can foresee absolutely nothing for us to gain and everything to lose by allowing late trades by one of our participants to occur in our system. Only the fund houses themselves or other for-profit intermediaries have incentives. Therefore, since we have no incentives to abuse the system, we feel we should be exempted from any burdensome and costly proposed rules.
The Ohio Public Employees Deferred Compensation Program (OPEDC) is an eligible deferred compensation plan administered in accordance with section 457 of the Internal Revenue Code. An independent public board created by the Ohio Legislature oversees the Program. Fourteen hundred public employers participate in the Program with more than 700,000 public employees eligible to participate. The Program has 170,000 accounts with 113,000 participants currently deferring.
The Program is self administered by the Board's staff. A current staff of 19 performs all recordkeeping and administrative services for the OPEDC using a proprietary system. The operating budget is $2.9 million. Deferrals are received from employers every business day and funds to be invested are wired to all investment providers each day.
The Program has approximately $4.9 billion in assets available for benefits invested in a stable value fund and 26 mutual funds from 14 fund houses. All investments are professionally managed by external managers using unallocated (omnibus) accounts. The participant level recordkeeping is all on the OPEDC system. Participants can change allocations and exchange among the funds daily. Participant accounts are valued daily and statements are prepared each quarter by staff. Upon retirement or termination, staff issues benefit payments to participants.
The Board has contracted with Nationwide Retirement Solutions (NRS) to be the exclusive education, enrollment and customer service agent for the Program. NRS also provides an automated voice response system (VRU) and web site which are integrated with the OPEDC's recordkeeping system.
We have policies, procedures, and systems in place to process transactions on a daily basis very similar to those outlined in the comment letter from the SPARK Institute. As mentioned in their letter, we process all participant transactions including deferrals, exchanges, and benefit payments. So that you can better understand our particular process and the impact to our participants of the proposed rule changes, we are providing some additional detail for your review. This includes an example processing timeline and additional information about the types of transactions that we perform.
Below is a timeline that illustrates our typical daily process flow.
10:00 AM - Daily deferral reconciliation completed.
04:00 PM - Exchange requests cutoff for the current day.
04:15 PM - Receive transactions from our website and Voice Response System. Any exchanges with a timestamp after 4:00 PM are rejected.
08:00 PM - All mutual fund pricing entered.
08:30 PM - Exchanges processed
10:30 PM - Deferrals processed
11:00 PM - Benefit payments processed
11:30 PM - Buy / Sell orders to Investment Provider
02:00 AM - Account values posted to the website
A brief description of the process and our performance standards for each of these transactions follows.
Deferrals - Deferrals are deducted from the participant's pay by the employer and are remitted to OPEDC based on the employer's own schedule. OPEDC will invest any deferrals that are received in good order by 10:00 AM the same day. Deferrals received after 10:00 AM will be invested the next business day using that day's pricing. Exceptions are communicated to the employer and are not invested until they are resolved.
Benefit Payments - regular benefit payments are processed once a month. Payments are available to the participant on the 20th of each month. Payments are made in one of two ways: check or direct deposit (ACH). The withdrawal is processed three business days prior to the pay date using the fund pricing for that day. This schedule is established in writing each year. The only exceptions to this schedule are payments made for unforeseeable emergencies (as provided for in section 457 of the IRS code) or payments made in error due to administrative errors. These payments are made weekly.
Exchanges - Participants have the option to request that their funds be moved from one investment option to another on a daily basis. This request can be made either on our website, by using our automated voice response system, or by talking to a customer service representative. All requests are entered into a database with a date - time stamp. Requests made prior to 4:00 PM are processed the same day using that day's pricing. Requests made after 4:00 PM are processed the next business day.
Impact of 4:00 PM "Hard" Close
As stated in the STARK Institute comment letter, the proposed 4:00 PM "hard" close would require a substantial amount of changes for OPEDC. The majority of the processing would need to be completed before the 4:00 PM deadline so that buy / sell orders can be communicated to the investment providers by the cutoff. We currently require a five hour batch processing window between the time we receive pricing and completion of the process. The 4:00 PM cutoff will require a system upgrade to reduce the batch window requirement. Because we consolidate the transaction amounts into a single buy or sell amount per fund, we will be required to cutoff exchanges by 1:00 PM. As you can see, a "hard" 4:00 PM cutoff will definitely require significant changes to our procedures, policies, and systems. Because we are completely funded by our participants, they will incur the related costs.
Some of the more significant changes and the related costs (if applicable) are outlined below.
Impact of Alternative Approach
OPEDC believes that it is extremely important to protect the investor from the unnecessary costs that result from market timing. But we feel that implementing the 4:00 PM cutoff will result in reduced services and increased costs to our participants. Instead of requiring a 4:00 PM "hard" close, we strongly urge you to implement the alternative approach mentioned in the proposed rules.
Implementation of a secure and unalterable time stamp for all orders would require only minor changes since we already have electronic systems in place to ensure that only transactions entered into the system prior to 4:00 PM each day are processed that day.
Submitting an annual certification that we have policies and procedures in place to prevent late trades and that no late trades have taken place would also not be a problem. We currently sign contracts with each fund house. In essence, these contracts make us a sub-transfer agent and require us to follow the policies and procedures set forth by the fund. Providing an annual certification that we are following the contract would not be an onerous requirement.
Along the same lines, it is not unusual to have contract language that calls for a compliance audit by the fund house or an independent auditor selected by the fund house. Making this a mandatory requirement would not only provide protection from abuses, but it would serve as a reassurance to our Board and our participants that we are doing our job in administering the Program for their benefit.
The implementation of an unalterable time stamp, annual certification of policies and procedures, and an annual audit are protections that we could implement quickly with a minimum impact to our participants.
As mentioned previously, we sign a contract or service agreement with the fund house to act as an intermediary. While somewhat similar in content, these agreements do differ in depth of detail and requirements. We would suggest that a universal agreement or a model agreement be developed that would be required to be signed by all fund houses and their intermediaries or sub-agents. In addition to standard policies and procedures, the requirement of an unalterable time stamp, annual certification of policies and procedures, and an annual audit could be mandatory language in this agreement.
We thank the Securities and Exchange Commission for its consideration of our views.
R. Keith Overly