From: Alan D. Weiss [aweiss@dynamicinvestmentstrategies.com] Sent: Monday, May 10, 2004 5:00 PM To: rule-comments@sec.gov Subject: File No. S7-11-04 Mr. Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth St. NW Washington, DC 20549-0609 RE: Mandatory Redemption Fees for Redeemable Fund Securities Dear Mr. Katz: Our overall view of the proposed mandatory 2% redemption fee is that it is excessive and unnecessary. The proposed rule addresses two problems that it intends to remedy, as discussed below. Use of Mutual Funds for “Time Zone Arbitrage” Time zone arbitrage is generally an issue in international funds with “stale” net asset values. Although a mandatory redemption fee imposed on all funds would likely inhibit this activity, the scope of the proposed rule is way out of proportion to the extent of the problem and only addresses this issue indirectly. A more practical solution, and one which really cuts to the heart of the matter, would require funds to implement “fair value pricing” policies to eliminate these arbitrage opportunities. There is no justification for imposing redemption fees that could potentially apply to virtually all mutual fund investors at one time or another in order to address a problem that is really quite specific and limited in scope. Costs of Short-Term Trading There is a perception that short-term traders of fund shares substantially increase the funds’ overall operating expenses. It is not clear, though, that this is a significant problem. Each day the markets are open some number of “long-term” fund shareholders will want to purchase or redeem shares. Short-term traders provide additional liquidity to facilitate these transactions. This should mitigate the transaction costs resulting from short-term trading and may, at times, actually reduce the costs of longer-term investors’ transactions. A 2% redemption fee would be punitive, since it must greatly exceed the actual cost of processing short-term trades. The Rydex Funds, which allow unlimited trading and therefore attract more short-term traders than many other funds, can manage their portfolios with expense ratios of less than 2% per year. This would be utterly impossible if the cost of processing short-term trades was anywhere near 2% per transaction, as suggested by the proposed rule. Redemption fees, as well as any direct restrictions on short-term trading activities, should be matters of fund governance and market-driven competition, not regulatory mandate. Each fund should have the latitude to set the policies its directors believe to be most appropriate. If all funds fully disclose their policies, and adhere to them, every investor will have the information needed to choose the funds that best suit their needs. The resultant flexibility should produce a wider range of choices, which would be beneficial to investors. Funds that Affirmatively Permit Short-Term Trading Notwithstanding the arguments to the contrary, in the event that the SEC does decide to impose a mandatory redemption fee, we strongly support the proposed exemption for funds that affirmatively permit short-term trading and disclose this in their prospectuses. This exemption is most vital to maintaining opportunities for the implementation of many innovative asset management strategies that ultimately serve to benefit investors. Thank you for considering our views. Sincerely, Alan D. Weiss Alan D. Weiss President 940 West Valley Road, Suite 1602 Wayne, PA 19087-1853 610∙902∙0061 ph 610∙902∙0084 fx aweiss@dynamicinvestmentstrategies.com www.dynamicinvestmentstrategies.com