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U.S. Securities and Exchange Commission

Statement by SEC Chairman:
Mandatory Redemption Fees —
Opening Statement at February 25, 2004, Open Meeting


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

Washington, D.C.
February 25, 2004

This is an open meeting of the Securities and Exchange Commission. It is the fifth in a series of meetings in which the Commission is considering critical initiatives aimed at protecting mutual fund investors.

Last November, I outlined a vision of “Mutual Fund Investors Rights” that included:

  • A right to an investment industry that is committed to the highest ethical standards and that places investor interests first;
  • A right to equal and fair treatment by mutual funds and brokers;
  • A right to expect fund managers and broker-dealers to honor their obligations to investors in managing and selling funds;
  • A right to assurance that fund assets are being used for the benefit of investors;
  • A right to clear disclosure of fees, expenses, conflicts, and other important information;
  • A right to independent, effective boards of directors who are committed to protecting investor interests;

  • A right to effective and comprehensive mutual fund and broker compliance programs; and
  • A right to aggressive enforcement action when there have been violations of the federal securities laws.

Over the past three months my colleagues on the Commission and the staff have worked ceaselessly to make that vision real.

On December 3, we approved a package of rules and rule proposals to combat late trading, market timing, and selective disclosure abuses, as well as requirements that all funds and advisers have comprehensive compliance policies and procedures and chief compliance officers.

On December 17, we approved rule proposals and a concept release that were directed toward providing mutual fund investors with more information about mutual fund sales load breakpoints and fund transaction costs.

On January 14, we approved a proposal under the Investment Advisers Act to require investment advisers to adopt codes of ethics, proposals under the Investment Company Act to enhance fund governance, and a proposal for point-of-sale disclosure and a new confirmation statement for brokers to use when selling fund shares.

On February 11, we approved final rule and form amendments requiring fund shareholder reports to disclose, in dollar terms, the amount of fees and expenses their shareholders pay, and to provide more frequent disclosure about fund portfolio investments. We also proposed to prohibit funds from using brokerage commissions to pay broker-dealers for selling fund shares, and to require funds’ shareholder reports to discuss the reasoning supporting the board of directors’ approval of the fund’s advisory contract and fees.

Today we will consider whether to propose a new rule to require mutual funds to impose a mandatory redemption fee on short-term trades, and on March 10, we will consider a proposal to improve disclosure to fund shareholders about their portfolio manager’s relationship with the fund.

To date, we have voted to issue nine proposing releases, two adopting releases, and a concept release. We have received over 1600 comment letters on the proposals that are outstanding, and I expect we will receive many more before we are finished. I welcome the public’s interest in our rulemaking process and encourage fund shareholders, as well as industry participants, to remain engaged in this process, as we move forward with our proposals.

Redemption Fee Proposal

Now, turning to this morning’s agenda — we are considering a recommendation from the Division of Investment Management that we propose to require mutual funds to impose standardized redemption fees on short-term trades.

Redemption fees can be an effective deterrent to abusive short-term trades that impose unnecessary costs on long-term fund shareholders, such as the market timing trading in the Boilermaker’s union retirement account that led to the first whistleblower complaint about market timing in the Putnam funds. But funds that impose these fees find that there are practical impediments to enforcing them. Today, the vast majority of mutual fund shares are held through financial intermediaries such as broker-dealers, banks, insurance companies, and retirement savings plans. Thus, funds that impose redemption fees must turn to the intermediaries for assistance in implementing them. These intermediaries may be reluctant to undertake this burden on behalf of the funds, particularly when confronted with a hodge-podge of fees and conditions that differ from fund to fund and complex to complex.

The proposal before the Commission would resolve this impasse by requiring funds to impose redemption fees in a consistent, standardized way, and financial intermediaries to assist funds in their efforts to collect them. Significantly, by standardizing the parameters of the redemption fees, and requiring financial intermediaries to participate in their implementation, the rule would facilitate a new level of cooperation between funds and financial intermediaries that has never been seen before.

This proposal is clearly only one piece of a much larger regulatory response to short-term trading and market-timing and I anticipate that there will be significant comment and debate about the proposal, particularly in light of its potential impact on smaller investors. I look forward to hearing the views of my colleagues this morning, and the views of the public in the coming days.



Modified: 02/25/2004