Sent via Electronic Mail
February 6, 2004
Jonathan G. Katz
Re: Request for Comments on Proposed Rule Amendments to Rule 22c-1 Relating to Pricing
Dear Mr. Katz:
We are writing on behalf of the T. Rowe Price family of mutual funds and its affiliated service providers ("T. Rowe Price") to offer our views on the above referenced Proposed Amendment ("Proposed Amendment"). The family of T. Rowe Price mutual funds comprises over 100 funds with over $110 billion in assets as of December 31, 2003. As such, the Proposed Amendment is of great interest to us. We commend the Commission and its staff for their expeditious response to the recent trading scandals and support the Commission's proposal to tighten existing regulations governing fund trading. In general, we support the comments of the Investment Company Institute in their letter of February 5, 2004. However, we also offer the specific comments set forth.
I. AFFILIATED SERVICE PROVIDERS
The Proposed Amendment permits a fund to deem an order that is received by the fund's designated transfer agent ("DTA") or a registered clearing agency by 4:00 p.m. as received by the fund. Each fund could have only one DTA, which would be identified in the fund's registration statement and required by written contract to (1) receive order information on behalf of the fund and (2) maintain a record of the date and time it receives the trade information. T. Rowe Price supports including a DTA in the Proposed Amendment's limited list of entities eligible to receive fund orders. However, we believe the Proposed Amendment should be revised to permit orders to be received by service providers that are part of the fund complex and under common control with the DTA ("Affiliated Service Providers" or "ASPs"), provided these ASPs are registered with the Commission (e.g., transfer agents and broker dealers) and meet the qualifications set forth in the Proposed Amendment for the DTA (i.e., identified in the fund's registration statement, have entered into a contract with the fund to receive orders on behalf of the fund and maintain records of the date and time they receive the trade information). The inclusion of these ASPs is necessary to accommodate funds that have more than one transfer agent to receive orders for the fund1 or that receive orders through their fund underwriter or an affiliated broker-dealer within the fund complex. Fund shareholders submitting orders directly to the fund will likely be unaware of any technical or legal distinction between these ASPs and will expect that their order receive the closing price of the fund if it is placed with the fund complex by 4:00 p.m., regardless of the entity that receives it. We believe that the protection sought by the Commission to prevent late trading would not be diminished if ASPs were permitted to receive orders for the fund. As the Commission points out in its Release, new SEC rules will require that funds have policies and procedures in place designed to prevent late trading facilitated by fund personnel. Such policies and procedures would encompass the orders received by these ASPs. In addition, unlike unaffiliated intermediaries, with whom the fund may not be able to enforce the late trading deadline, the fund would have ready access to ASPs' records to enforce its policies. Finally, fund complexes with multiple ASPs could consolidate them into a single DTA in order to comply with the rule. Single or multiple corporate structures under common control should not determine whether a fund order is properly received by 4:00 p.m. The Commission should focus on control of the service provider and allow ASPs under common control and subject to the order requirements for a DTA to be treated equally for purposes of the Amendment.
II. FUND OF FUNDS
The Proposed Amendment provides an exception from the forward pricing requirements of paragraph 22c-1(a) for transactions through conduit funds. There appear to be two factual bases for this exception. First, the conduit fund invests all its assets in another fund and, second, the conduit fund is a registered investment company and thus subject to oversight by the Commission. We believe the Commission should extend this exception to two other situations involving situations very similar to conduit funds.
T. Rowe Price offers a number of fund-of-funds in reliance on section 12(d)(1)(G) of the 1940 Act. By contrast, the conduit transaction exception is based on funds that rely on 12(d)(1)(E). All of the T. Rowe Price funds-of-funds invest all of their assets in underlying T. Rowe Price funds. In a very real sense, the funds-of-funds are conduits to the underlying funds. In order for shareholders in our funds-of-funds to have investment returns that are as close as possible to the returns they would have if they invested directly in the underlying funds at the same time and in the same proportion as the fund-of-funds invest in those funds, it has been our practice to effect transactions by shareholders in the funds-of-funds on the same day as transactions are effected by the funds-of-funds in the underlying funds.
For example, if shareholders make net purchases into the funds-of-funds with an effective date of Monday at 4:00 p.m., the funds-of-funds make purchases into the underlying funds for the same amount for an effective date of Monday at 4:00 p.m. The underlying funds would then have the invested money available to invest the next day, just like any other purchase order from a shareholder investing directly in the underlying funds. If we were to effect the purchases by the funds-of-funds into the underlying funds one day later, the underlying funds would not have the monies available to invest until one day later which would be two days after the initial investment by shareholders in the funds-of-funds.
The same factual basis exists with respect to the T. Rowe Price funds-of-funds as with the conduit funds described in the Proposal. All of the funds involved are registered as investment companies under the 1940 Act. While the funds-of-funds do not invest all of their assets in a single underlying fund, all of the funds they invest in are part of the T. Rowe Price family of funds. There should be no difference in how the conduit fund under 12(d)(1)(E) and the fund-of-funds under 12(d)(1)(G) are treated. In the context of funds-of-funds, where all the funds are part of the same investment company family, Congress and the Commission have determined that greater flexibility is warranted than for funds-of-funds investing in unrelated underlying funds. This same flexibility should be extended to rule 22c-1. There is no reason to believe that funds-of-funds and underlying funds of the same family complex managed by the same investment adviser (or an affiliate under common control) would enter into arrangements with one another or any outside party to permit illegal late trading or market timing in order to advantage one fund over another fund in the same family. The same safeguards in place for managing the various issues that currently exist with respect to funds-of-funds of the same family would extend to any issues presented by late trading or market timing. Amendment of the Proposed Amendment in the manner requested will be fully protective and in the best interests of shareholders of funds-of-funds and underlying funds. We urge the Commission to make this requested change.
529 Plans and Charitable Trusts
The same reasoning that should persuade the Commission to extend the Proposed Amendment to funds-of-funds relying on section 12(d)(1)(G) of the Act supports extending the Proposed Amendment to 529 Plans and 501(c)(3) Charitable Programs where all the investment options under the 529 Plan or Programs are funds of the same investment company family and the investment adviser (or an affiliate under common control) of the funds is responsible for managing the Plan or Program. The entity responsible for investing monies of the Plan or Program in the underlying funds is the same one (or an affiliate under common control) responsible for managing the investments of the underlying funds. For example, T. Rowe Price is the plan manager of several directly marketed 529 Plans that provide a number of portfolios targeted to when an investor would need monies for college. T. Rowe Price is responsible for managing the portfolios as well as the underlying funds in which the portfolios invest. T. Rowe Price has also established a 501(c)(3) organization, the T. Rowe Price Program for Charitable Giving. The Program has several portfolios which invest in underlying T. Rowe Price funds. T. Rowe Price is responsible for managing the portfolios as well as the underlying funds in which they invest. All of these situations are analogous to the funds-of-funds structure and we believe they should be treated in the same manner for purposes of 22c-1 and the 4:00 p.m. close.
III. Retirement Plan Orders
It is common for large mutual fund complexes to have affiliated entities that provide a variety of transfer agent and recordkeeping services for 401(k) and other retirement plans. These plans commonly invest in the mutual funds of the complex as well as unaffiliated outside funds. Orders from plan participants to invest in the funds are technically orders to purchase or sell interests in the retirement plan and the retirement plan itself is the registered shareholder of the fund. Under current procedures, plan participant instructions are first reconciled to plan level requirements and passed on to the fund in the form of an order by the plan. The fund does not technically receive the plan order until after 4:00 p.m.
We ask that the Commission clarify that instructions received by the DTA (or Affiliated Service Provider, if permitted) by 4:00 p.m. for a retirement plan invested in the fund be considered orders for the fund for purposes of the Proposed Amendment. We believe this clarification is necessary for the reasons stated above. In addition, instructions received from retirement plan participants or their plan sponsors may not include the specific number of shares or specific value of the fund as currently required by the Proposed Amendment. This information is maintained by the DTA and reconciled with each instruction before the specific order information is determined. As noted, this reconciliation process may not be completed until after 4:00 p.m.
For example, a plan sponsor may submit to the DTA a roster with payroll deductions amounts for each of its plan participants or may submit a direction to distribute a participant's entire retirement account due to termination. These instructions would be received by 4:00 p.m. but may not include the fund name or the dollar, share or percentages amounts allocated to a fund. The instruction would be reconciled with the information kept on file by the DTA for each participant, which could take several hours to complete.
Where a single DTA is the transfer agent recordkeeper for the fund and plan, it is truly a technicality that the participant's instructions are received by 4:00 p.m. but the fund order after 4:00 p.m. (The same is true where there is one DTA for the fund and a second ASP, under common control, for the plan.) All of the protections cited by the Commission in the Proposed Amendment as necessary to protect the integrity of the pricing process will be available if plan participants' instructions are treated as the equivalent of fund orders under the circumstances outlined above.
Participant instructions for mutual funds that are not affiliated with a DTA (or ASP) would not receive the same day price under the provisions of the Proposed Amendment unless the DTA (or ASP) were able to transmit the plan's order for fund shares to the unaffiliated fund or its DTA by 4:00 p.m. Thus, for example, where the ABC fund complex uses the ABC DTA for ABC funds as well as for retirement plans investing in the ABC Funds, plan participant instructions received by the ABC DTA for ABC funds by 4:00 p.m. would receive that day's price even if the plan order for ABC funds was not received until after 4:00 p.m. Plan participant instructions for the unaffiliated XYZ funds received by the ABC DTA by 4:00 p.m. would only receive that day's price if the XYZ funds or XYZ DTA received the plan's order by 4:00 p.m.
We believe the Commission intended these instructions to be included as orders for the fund but ask that the Commission clarify this intent in the adopting Release.
We appreciate the opportunity to comment on the proposed Amendment. Should you have any questions about our comments, please call Laura Chasney at 410-345-4882 or Forrest Foss at 410-345-6601.
Henry H. Hopkins
Forrest R. Foss