DIRECT LINE: 202.383.0197

February 6, 2004

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Proposed Amendments to Rules Governing Pricing of
Mutual Fund Shares (File No. S7-27-03)___________

Dear Mr. Katz:

This letter is submitted on behalf of several clients that serve as administrators and record keepers to participant-directed, defined contribution retirement plans. Our clients are pleased to have the opportunity to offer their comments on the Securities and Exchange Commission's (the "Commission") recent proposal to amend the rule governing the purchase and sale of mutual fund shares under the Investment Company Act of 1940, as amended (the "1940 Act").1

As discussed in greater detail below, our clients are very concerned that the proposal set forth in the Release would greatly disadvantage retirement plan participants who invest in mutual funds through their retirement plan. Most participant-directed, defined contribution retirement plans, and similar "individual" retirement arrangements funded by salary reduction arrangements, rely on mutual funds as their principal investment vehicles.2 Participants in such plans ("Plan Participants") make up a significant portion all mutual fund investors.3

The General Effect of the Proposed Rule Amendment

The Commission proposes to amend Rule 22c-1 under the 1940 Act to require that all purchase and redemption orders be received by an open-end management investment company (a "mutual fund" or "fund"), a registered clearing agency or the mutual fund's designated transfer agent not later than the time as of which the fund's prospectus discloses that it values its portfolio securities and computes its net asset value4 (hereinafter, the "Order Deadline"). No exception from the Order Deadline is made for the receipt of orders by other intermediaries acting as agents of mutual funds or for any intermediary acting as agent for mutual fund shareholders. In particular, no exception from the Order Deadline is proposed for Plan service providers such as administrators, record keepers and other "third-party" administrators (together, "Plan Administrators"), or for other intermediaries such as broker/dealers and banks.

Currently, Plan Administrators typically process orders to purchase, redeem or exchange mutual fund shares they receive from Plan Participants before 4:00 p.m. Eastern time during the early evening hours and then submit an order for the purchase or redemption of mutual fund shares later in the evening or the following morning either directly to fund transfer agents or through a clearing agency such as National Securities Clearing Corporation's Fund/SERV system. As a result, and as the Commission acknowledges in the Release,5 the proposed Order Deadline would force most Plan Administrators to purchase or redeem mutual fund shares for Plan Participants on the day after receiving their orders. For other Plan Administrators that could process all of their daily participant transactions within a few hours, the proposed Order Deadline would force them to require Plan Participants to submit transaction requests at least several hours before the Order Deadline in order that orders for the purchase and redemption of mutual fund shares based thereon could be submitted by the Deadline.6 For the latter group, unless the total processing time could be reduced to two hours or less, the "cut-off" time for receipt of Plan Participant transaction orders by Plan Administrators (the "Artificial Transaction Deadline") in western time zones would be too early in the day to be useful for Participants.7

The Proposed Rule Amendment Would Disadvantage Plan Participants

Relegation to "Second Class" Status

The proposed Order Deadline and the resulting Artificial Transaction Deadline would relegate Plan Participants to second-class "trading" status. The Order Deadline proposal would have the perverse outcome of permitting investors who purchase and redeem mutual fund shares directly with a fund or through its designated transfer agent to do so based on important information that develops during the trading day while Plan Participants could not. Such investors would be able, in the words of the Release, to "buy on good news or sell on bad news, until the market closes". Such a result appears to undermine an important goal of "forward pricing," which is to eliminate or reduce as far as reasonably practicable results that are "unfair to the holders" of mutual fund shares.8 Our clients submit that this result is the very type of unfairness that Rule 22c-1, and the proposed Order Deadline, are intended to prevent.

Diminishes Liquidity

The proposed Order Deadline has the effect of delaying, and therefore diminishing, liquidity of Plan Participants' mutual fund shares. Thus it would serve to undermine the public policy purposes of Section 22(e) of the Act. Our clients take strong exception to the Commission's judgment that long-term investors such as Plan Participants are not sensitive to the price, and therefore the time, at which their orders to purchase, redeem or exchange mutual fund shares are executed.9 Likewise, our clients disagree with the Commission's generalization that Plan Participants treat the time and date of their mutual fund share purchase orders "as a random event controlled by their employer's payroll processing protocols, or the delivery of the mail."10 While there may be some truth to this with regard to purchases of mutual fund shares representing contributions to a Plan by a Participant, it is certainly not true for exchanges of shares of one fund for another resulting from a transfer by a Participant of accumulated Plan assets from one fund to another. There, Plan Participants respond to market events in the same ways as other investors and have just as strong a desire to have their transfers executed as soon after they place an order as any "retail" investor. Our clients report that transfers of accumulated Plan assets by Participants, though less frequent than share purchases arising from Plan contributions, often occur in far larger amounts and, therefore, Participants are much more sensitive to the timing of such transactions and price at which the orders are executed than they are to the timing of Plan contributions.

Along these same lines, the Release indicates that because long-term investors, such as Plan Participants, are likely to receive a better price as often as they receive a worse one and day-to-day changes in net asset values are generally small, the costs of the Artificial Transaction Deadline will be minimal and the effect on such investors is likely to be small.11 Consequently, the same delay that disadvantages a particular investor in March and May would likely benefit that same investor in April and June, resulting in something of a "wash." This hypothesis presumes a steady series of roughly equal transactions that can be averaged out over time and is certainly not true of transfers of accumulated Plan assets by Plan Participants. If the market turns against a Plan Participant after a significant transfer from one fund to another, that transaction cannot simply be "made up" on the next transaction, as the "next" transaction may not occur for some time.12

The Proposed Rule Amendment Would Disadvantage Plan Administrators

Foreclosing the Opportunity to Effect "Share-Based" Exchanges

Our clients strongly support the Commission's decision to facilitate "seamless" exchanges of shares of one mutual fund for another and prevent a second day's delay in an intermediary's execution of such transactions when the redemption side of an order is expressed in shares (rather than dollars) by proposing to define an "order" to include both "a direction to purchase redeemable securities of the fund using the proceeds of a contemporaneous order to redeem a specific number of shares of another."13 This proposal addresses a serious concern that most Plan Administrators would have with the Order Deadline idea.

Unfortunately, the proposed Order Deadline would create another similar, but seemingly unsolvable, problem for Plan Administrators arising from the process of netting numerous transaction requests from Plan Participants to arrive at a single order to purchase, redeem or exchange shares of each mutual fund they work with.14 This is because the Plan Administrator cannot net the redemption side of a Plan Participant's exchange order if it is expressed in numbers of shares against any purchase orders because it would not know the value of the redemption until after the Order Deadline for the fund from which the redemption would be made. To take advantage of the Commission's proposed definition of an "order" in the context of exchanges, the netting process would have to take place well before the Order Deadline for the fund whose shares are to be purchased in the exchange. Unless the Order Deadline for this second fund is considerably later in the day than the Plan Administrator's Artificial Transaction Deadline, the exchange could not be completed. Moreover, even if the second fund's Order Deadline was later in the day, the exchange could not be executed on a contemporaneous basis nor would a share exchange in the "other direction" be possible.

"Tilting the Playing Field"

Another likely and undesirable result of the Order Deadline proposal, would be the accrual of an unfair and undeserved competitive advantage to the largest organizations in the financial services industry, particularly those that can integrate the business of being a designated transfer agent for mutual funds with the business of being a Plan Administrator. Our clients believe that Plan Participants have a keen interest in "same-day" execution of their mutual fund share purchase and redemption orders, particularly in the context of share exchanges. So keen, in fact, that many Plan sponsors will change Plan Administrators to obtain this facility for their Plan Participants.15 Therefore, if the Order Deadline is adopted as proposed, organizations that can afford to invest substantial sums to redesign and overhaul their data processing systems to minimize the time between the Order Deadline and their Artificial Transaction Deadlines will have a significant competitive advantage over smaller organizations less able to afford such an undertaking. This will "tilt" the "playing field" steeply in favor of such organizations and the ones "highest up the slope," so to speak, will be the ones that are in both the mutual fund transfer agency and Plan Administration businesses. One long-term result would likely be a loss of competition in the Plan Administration industry. Another, driven in part by the need to recoup the large investments made in data processing systems, would undoubtedly be an increase in Plan Administrator fees and charges for Plans and Plan Participants.16

Another likely result of the proposed Order Deadline would be an increased interest in investment vehicles other than mutual funds for Plans. Our clients believe that the proposed Order Deadline would make alternative vehicles not subject to the Order Deadline substantially more attractive than mutual funds as Plan investment options. Bank collective trust funds and insurance company separate accounts that may rely on Section 3(c)(11) of the 1940 Act come to mind.17 Alternatively, mutual fund organizations may establish "clone" funds, or perhaps feeder funds (in a master-feeder structure), with late-evening Order Deadlines solely for use as investment vehicles for Plans. As with data processing system upgrades, the larger organizations with greater resources will have a distinct competitive advantage moving in these directions. Our clients urge the Commission to carefully consider whether this type of industry concentration is a favorable trend for investors generally and Plan Participants in particular.

Issues Arising Under the Employee Retirement Income Security Act of 1974

Another significant concern arising from the proposed Order Deadline would be its impact on section 404(c) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").18 Section 404(c) of ERISA generally provides a retirement plan fiduciary relief from liability for losses that result from participants' or beneficiaries' "exercise of control" over the assets in their individual retirement plan accounts in a 401(k) plan or other participant-directed defined contribution plan. If a plan complies with the conditions established in ERISA section 404(c), participants are responsible for directing the investment of their accounts among the plan's investment options and the plan's fiduciaries are protected from liability arising from poor asset allocation decisions by the participants. (Section 404(c) does not, however, relieve a fiduciary from responsibility for developing the plan's investment policy, for choosing the investment alternatives made available to participants under the plan or for determining whether to retain existing investment alternatives.)

In 1992, the Department of Labor issued regulations, codified at 29 C.F.R. § 2550.404c-1, to clarify the circumstances under which participants can exercise "control" of their accounts such that the fiduciary is relieved of responsibility with respect to losses resulting from that exercise of control. In general, a Plan meets the requirements of these regulations if it is an individual account Plan that provides an opportunity for a participant to exercise control over assets in his or her individual account and that provides a participant an opportunity to choose, from a broad range of investment alternatives, the manner in which any portion of the assets in his account is invested. The regulations also require that the Plan permit participants to "give investment instructions with a frequency which is appropriate in light of the market volatility to which the investment alternative may reasonably be expected to be subject. . . ." 29 C.F.R. § 2550.404c-1(b)(ii)(C).

Under the proposed Order Deadline, the relief provided by ERISA section 404(c) could be jeopardized because (as described above) the Artificial Transaction Deadline in many cases would prevent Plan Participants from being able to provide investment instructions in a manner "that is appropriate in light of market volatility." Our clients urge the Commission to consult with the Department of Labor and carefully consider the effect of the proposed Order Deadline on the obligations of Plan fiduciaries under ERISA.

Support for the Alternative Protections to Prevent Late Trading

Although the proposed amendments to Rule 22c-1 may deter late trading, our clients believe that the costs it would impose would be disproportionately and unfairly borne by Plan Participants. This outcome seems particularly unjust considering that each of the three alternative approaches outlined in the Release19 would achieve the same public policy objectives as the proposed application of the Order Deadline without disadvantaging the tens of millions of Americans who invest in mutual funds through retirement plans. Many of the systems currently in use by retirement plan intermediaries provide for the electronic time-stamping of participant orders and, except as discussed below, could be readily modified to meet the requirements discussed in the Release, at relatively little cost to Plans and Plan participants; similarly, our clients support the annual certification and audit requirements as providing valuable safeguards against late trading that can be adopted at reasonable cost and without sacrificing the rights of any particular group of investors.

Our clients have serious concerns, however, regarding the proposed alternative requirement that electronic time-stamping of orders be of a type that "cannot be altered or discarded once the order is entered into the trading system." This would appear to impose a non-rewritable, non-erasable standard for electronic documentation that goes beyond what the 1940 Act currently requires. Rule 31a-2(f) requires that procedures be in place to reasonably safeguard records from loss, alteration or destruction, and to limit access to such records to appropriately authorized personnel. Our clients believe that such standards are adequate to achieve all of the public policy goals identified in the Release and should apply to records of orders for the purchase and redemption mutual fund shares placed with Plan Administrators.

* * *

We and our clients appreciate the opportunity to provide our clients' views to the Commission. We and our clients also appreciate your consideration of our clients' comments and positions. Please do not hesitate to call the undersigned at the above number or David S. Goldstein at (202) 383-0606 if you or other members of the Commission staff have any questions about our comments or would like to discuss further any of the issues we have raised on behalf of our clients.


Susan S. Krawczyk

cc: David S. Goldstein

1 Inv. Co. Act Rel. No. 26288 (Dec. 11, 2003) (the "Release").
2 The former category includes qualified pension and retirement plans meeting the requirements of Section 401(k) of the Internal Revenue Code of 1986, as amended, (the "Code") and eligible Code Section 457(e)(1)(A) plans, while the latter category includes Code Section 403(b)(7) arrangements and certain types of Code Section 408 arrangements (collectively, the "Plans").
3 Release, note 8.
4 Typically, 4:00 pm Eastern time, the close of regular trading on the New York Stock Exchange.
5 Release, note 22 and accompanying text.
6 Most Plan Administrators that could process all of their transactions in a few hours would still have to make substantial changes to their order processing systems in order to do so. Making such changes would be extremely expensive.
7 For example, an Artificial Transaction Deadline of 2:00 p.m. Eastern time would be 11:00 a.m. Pacific time. As a practical matter, an Artificial Transaction Deadline earlier than 11:00 a.m. would be pointless for most investors.
8 See Inv. Co. Act Rel. No. 5519 (Oct. 16, 1968) (adopting Rule 22c-1).
9 Release, Part II, paragraph 7.
10 Release, Part II, paragraph 7.
11 Release, Part IV, B, paragraph 7.
12 The Release seems to contemplate some sort of "dollar-cost averaging" principal underlying mutual fund investments by Plan Participants.
13 Release, Part II, B, paragraph 2.
14 This problem would plague any intermediary that nets purchase and redemption orders from customers, not just Plan Administrators.
15 Many employers believe that offering a "top-drawer" retirement plan is essential to recruiting and retaining talented employees and will change their company's Plans and Plan Administrators to keep up with the "state of the art" in Plan design and operation.
16 It is possible, of course, that economies of scale would reduce costs enough that fees and charges for Plan administration would decrease from today's levels. However, our clients would urge the Commission to obtain evidence of the likelihood of such an outcome before drawing conclusions based on this possibility.
17 Section 3(c)(11) of the 1940 Act excludes many bank collective trust funds and insurance company separate accounts from the definition of an investment company. Of course, only managed separate accounts, and not those that invest in mutual funds, would become more attractive as Plan investment vehicles. Unregistered separate accounts that invest in mutual fund shares would, like Plan Administrators, be intermediaries subject to the Order Deadline.
18 ERISA section 404(c)(1) provides:

In the case of a pension plan which provides for individual accounts and permits a participant or beneficiary to exercise control over the assets in his account, if a participant or beneficiary exercises control over the assets in his account . . .

    (a) a participant or beneficiary shall not be deemed to be a fiduciary by reason of such exercise, and

    (b) no person who is otherwise a fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from such participant's or beneficiary's exercise of control.

19 Release, note 24 and accompanying text.