February 6, 2004 The Honorable William H. Donaldson Dear Chairman Donaldson: Re: File No. S7-27-03-Amendments to Rules Governing Pricing of Mutual Fund Shares I am writing in response to the request by the Securities and Exchange Commission for comment on proposed amendments to Rule 22c-1 under the Investment Company Act designed to prevent illegal late trading in mutual funds. I appreciate the opportunity to express the views of Reserve Management Co., Inc. ("Reserve"). Reserve generally supports the SEC's proposed amendments and commends the Commission for undertaking this initiative to protect long-term investors in mutual funds from harm as a result of violations of Rule 22c-1. I urge the Commission to exclude all money-market mutual funds from any requirement for a fixed close, particularly the imposition of a hard close of 4:00 p.m. Eastern time, in any regulations eventually adopted to prevent late trading. The proposed amendments to the Rule would provide that an order to purchase or redeem fund shares would receive the current day's price only if the fund or its agent receives the order by the time established by the fund for calculating its net asset value. While the proposed regulations do not specifically call for a 4:00 p.m. Eastern time close for mutual funds, many in the industry are recommending that a 4:00 p.m. cut-off time be imposed.1 Most equity funds calculate their price at 4:00 p.m. Eastern Time, when the major U.S. stock exchanges close. Money-market mutual funds should be exempt from any rules requiring a 4:00 p.m. hard close for several reasons. First, portfolio managers for money-market mutual funds can buy or sell a portfolio's underlying securities, via the Fedwire system, until 6:00 p.m. Eastern Time, according to current industry practice. Second, money-market mutual funds maintain a constant $1 net asset value, thus any risk of abuse posed by the late trading of equity funds does not exist for money-market mutual funds. In fact, one of the distinguishing and innovative characteristics of the money-market mutual fund created by Reserve is its constant NAV, which offers operational convenience and financial reward to all investors, and negates any need for a fixed closing time which coincides with the close of the equity markets. Today, approximately one-third of the $2 trillion in total money-market mutual fund assets, or more than $700 billion, is invested in money-market mutual funds that accept orders after 4:00 p.m., as a service to all investors. The imposition of a 4:00 p.m. cut-off could potentially create a major inconvenience for institutional and retail investors. It would operate to impose a financial penalty by shutting money-market mutual fund investors out of the market, leaving their cash sitting idle overnight, rather than immediately investing it in an interest-bearing account. The impact of a hard 4:00 p.m. close is also of particular concern to the chief financial officers and treasurers of institutions with significant investable assets, who often don't determine their company's daily liquidity needs until after 4:00 p.m. This would impose a major financial burden on those companies and their shareholders. The opportunity cost of being forced to park cash in a potentially lower-yielding or non-interest bearing account, rather than an interest-earning money-market mutual fund, creates a significant financial problem for these investors. By way of background, I am the creator of the money-market fund concept, having founded the world's first money-market mutual fund, The Reserve Fund, in February 1970. Currently, I serve as Chairman and Chief Executive Officer of The Reserve Funds (the "Funds") and I am president of the investment adviser to the Funds, Reserve Management Company, Inc., a registered investment adviser which managed approximately $24 billion as of December 31, 2003. The Funds serve hundreds of institutional clients, such as brokerage firms and banks, and over one million individual accounts. In conclusion, Reserve supports the measures suggested by the Commission for its equity funds, but I urge that the Commission specifically exclude money-market mutual funds from any requirement of a 4 p.m. hard close. I appreciate your consideration of our recommendation, and would be pleased to discuss this matter further in person with you and other members of the Commission, or Commission staff. Very truly yours, Bruce R. Bent Endnotes
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