February 5, 2004
Jonathan G. Katz, Secretary
RE: Comments on Proposed Amendments to Rules Governing Pricing of Mutual Fund Shares; File No. S7-27-03
Dear Mr. Katz
The Principal Financial Group (The Principal) is a diversified family of financial service companies with total assets under management of $144.9 billion, as of December 31, 2003. More employers choose The Principal for their 401(k) plans than any other bank, mutual fund or insurance company in the United States. A member of the Fortune 500, The Principal serves 15 million customers (businesses, individuals and their dependents) worldwide who rely on the member companies of the Principal Financial Group for their financial service needs. Principal Financial Group, Inc. is traded on the New York Stock Exchange under the ticker symbol PFG.
The Principal is very interested in the pricing of mutual fund shares both because of the large number of 401(k) plans we service and as a mutual fund complex. We commend the Commission for its efforts to protect mutual fund investors and to restore investor confidence in mutual funds.
The Securities and Exchange Commission has proposed amendments to Rule 22c-1 which would deem an order received only when it is received before 4 pm ET (or the fund's stated pricing time) by the (i) the fund itself, (ii) the fund's designated transfer agent, or (iii) a clearing agency registered with the Commission.
The Principal believes the proposed amendment (particularly the clearinghouse model) would accomplish your stated goals while minimizing the impact of the proposed changes on the millions of 401(k) participants throughout the United States. By providing for special treatment for exchanges in the proposed definition of "Order", the Commission has likely ensured that participants can continue to receive same day pricing for these types of transactions.
We would ask that the Commission consider an exception for 401(k) loans and partial withdrawals. Due to plan provisions specifying the hierarchy in which funds or other sources must be used to accommodate participant requests for loans or withdrawals, participant requests for these transactions may be subject to change after funds have calculated their NAVs. Please reference Appendix A for an example. While plans can be amended to allow for a prorata distribution methodology rather than a hierarchical approach, this would require plans to incur additional, unnecessary costs. We would recommend allowing trades resulting from these types of time stamped requests to be identified as such and sent to the NSCC post 4 pm ET. We suggest the following language be added as new exception 6 to proposed rule 22c-1:
6) Transactions related to loans and partial withdrawals from certain qualified plans. A fund may deem receipt of a redemption order to have occurred immediately before the applicable pricing time if the fund, its designated transfer agent, or a registered clearing agency receives the redemption order from a record keeper of a retirement plan qualified under Section 401 of the Internal Revenue Code, if such redemption is made in connection with a loan or partial surrender from such retirement plan, provided that:
Expansion of "Conduit Fund" Exception
Historically, many insurance companies issued variable annuity contracts registered under the Securities Act of 1933 through an insurance company separate account that was not an investment company under the Investment Company Act of 1940 in reliance on Section 3(c)(11) of the Act. Such contracts were sold to "Keogh" or HR-10 plans, which are plans qualified under Section 401 of the Internal Revenue Code. Our company no longer offers such contracts, but participants of plans that have invested in the contracts Principal issued previously may occasionally transfer values between separate account divisions or withdraw contract values. It would be appropriate to include such contracts within the "conduit fund" exception provided in the proposed rule. We suggest the following language be added at the end of proposed rule 22c-1(b)(2):
", or from an insurance company separate account that, but for section 3(c)(11) of the Act (15 U.S.C. 80a-3(c)(11)), would be an investment company and which issues a variable annuity contract registered under the Securities Act of 1933, the sole investment of which is shares of the fund or, a division of which separate account invests solely in shares of the fund."
Timing and Cost of Implementation
The Commission specifically asked for comment on the timing and cost of implementation of this proposal. We, at the Principal Financial Group, believe the twelve month window to implement the necessary changes is reasonable considering that changes will need to be made by not only the recordkeepers, but the clearinghouse (NSCC) as well. While there will be additional costs incurred as a result of this amendment, we believe the cost will not be prohibitive.
As a major participant in the retirement plan industry, The Principal supports remedies to mutual fund late trading abuses. We believe the clearinghouse option would prevent abuse and allow the SEC oversight of transactions. We also believe our suggested changes will help facilitate the efficient administration of 401(k) plans and registered variable annuity contracts where transactions are not subject to the abuses addressed by the proposed amendments to rule 22c-1.
Ralph C. Eucher
Participant requests a $50,000 loan at 9:00 am on 2/2/2004. The plan's provisions require that loan proceeds are to be withdrawn according to the following rules:
Fund A first
Account balances for the participant as of close of business on 1/29/04 were:
Fund A - $51,000
Based on these values using 1/29/04 NAV's, the order requested would be to redeem $50,000 from Fund A.
After NAV's are determined on 2/2/04, the account values are as follows:
Fund A - $49,000
The orders placed should actually be:
Fund A - $49,000