From: Ben Buckner []
Sent: Wednesday, April 28, 2004 3:04 PM
Subject: S7-11-04:

To Whom It May Concern at the Securities and Exchange Commission

April 28, 2004

Re: Proposed Rule S7-11-04


As an individual investor in both mutual funds and variable annuities, I want to respond to the proposed rule on a mandatory 2%-5 day redemption fee, and related matters. We are in a time of reform and there is more reform needed than just protecting the fund companies from market timing activity. I do not feel that the problems are being adequately addressed in a way that fully considers the individual investor. In fact, the proposals I have seen thus far seem to be favoring the fund companies. For example, the proposals do not consider mutual fund holders who make occasional trades which are far less frequent than those associated with market timing. As I see the fund industry rapidly changing their fees and restrictions, essentially discouraging what I call "occasional trading", I can only assume that they have much reason to believe that the SEC will support their harsh rules. I also sense that some outdated ideas are driving and forming some of the proposed rules and fund company practices. There may be more myth than reality concerning how investors are being harmed by occasional trading. I believe that my views about mutual fund investing reflect and represent the opinions and needs of millions of other investors. I hope my observations and suggestions are helpful.

I became a mutual fund investor around 1990, just after mutual funds became very popular, and just before mutual funds brokerage companies began to offer funds from many companies in what many people call "mutual funds super markets". This was also just before the time that we could easily make trades using the internet, and had access to a lot of fund and market information. CNBC was practically an unknown television station. Activity in mutual funds was just beginning to accelerate. I believe that the last fifteen years of rapid growth in mutual funds forces us to take a fresh look at "interests" of investors versus those of fund companies. Addressing current problems using old assumptions is one main flaw in the proposed rules. Who are the investors and what are their needs and desires, really?

I have a mutual funds brokerage account (Fidelity). I assume that most people invest in mutual funds nowadays through brokers. I have freedom to trade within dozens of fund companies and have no loyalty to any given company, fund, or fund manager. The very nature of the brokerage system does not even encourage loyalty of this nature. I believe that the days are rapidly passing when a person holds funds within just one company. I, like many, are waking up to the fact that "buy-and-hold" is unwise and that loyalty to a particular fund or fund company is not something sacred. Very frequent trading ("timing") is also unwise, but funds can and should be traded occasionally. People are becoming more "savvy" and no longer need brokers or others managing their funds. I believe that some of the assumptions the SEC is using to justify advocating and supporting (if not encouraging) redemption fees covering periods far longer than the 5 days needed to curb market timing are rooted in the past.

Many of us simply do not "buy into" the notion that other shareholders are greatly harmed if I sell my shares of the fund. Everybody has the freedom to sell. None of us are "married" to the fund or the fund managers. That some do sell occasionally and some do not is unimportant. The fund managers have successfully "brain-washed" millions of people into the notion that the phrase "mutual funds are a long-term investment" means that this applies to their particular fund. Mutual funds are certainly a long-term investment, but I do not need to hold onto any one fund any longer than I feel it is working for me. In no other business are we expected to hold onto something forever. Collectively, people lost billions of dollars of their retirement money during 2000-2002 doing this. The whole thing is shameful. Nobody would "just hold on" to a sinking ship, if there was an escape, yet people were duped into thinking they should do so then, and they are still being told that selling a fund within several weeks or a few months after buying it is somehow "wrong". In fact, some fund companies are completely barring a person from ever buying any of their funds again if they sell one in as short a time as eight weeks. Some may be doing this for even longer holds -- this being the longest for which I have knowledge. And, there is generally nothing in a prospectus that warns about such a possibility, other than vague wording about "... investor demonstrating a pattern of market timing", etc. A person could have held that company's funds for years, even feeling a loyalty to them and never suspecting doing anything "wrong", yet one such sale is enough to "evict" him.

Your proposed rules are made using some assumptions that are either incomplete, outdated, or invalid. They do not consider what I will define as "occasional trading". Many fund companies, and the SEC seem to have it either "black or white" -- either a person is a "timer", or he is a buy-and-hold investor. The reality is that there is a huge "gray area" between a 5-day hold and a 5-year hold that is not being considered. Nor are the interests of ordinary investors that do happen to have a substantial amount of money in IRA mutual funds being addressed, the "small investor" being singled out as someone who may have special problems.

On Paragraph I. Background, Proposed Rule

The comments made by the SEC are only partially correct. They have obviously been formed and drafted by input from mutual fund companies, not individual investors, and I think they are rooted in the past when most people did, indeed, hold funds for years at a time. They are written as though they are truth, but I do not agree with some of the assumptions. It is true that mutual fund investors use mutual funds in order to have easy diversification and save time by hiring the services of a fund manager who selects stocks that might do well for the style of investing desired. But, they do not necessarily do this with the idea that they are getting much more "professional" management than they themselves could accomplish. Most of us simply do not want to take the time to do the required research to assemble a portfolio of stocks, so we choose a fund that seems close to what we want and are willing to pay the administrative fee for someone to manage it. Many of us do not feel we are "pooling our savings" with others, as though we are one "big happy family" with obligations to each other. That someone else also likes the fund is immaterial. We have no sense of a "collective" relationship. Each shareholder has freedom, in my opinion to buy or sell as he or she wishes. Funds are like any service or commodity. They are attractive as long as they are doing their job -- in this case making a profit at least as good as the market indexes. If not, there is no rational reason to hold onto the fund. It is being very naive to think that investors feel they owe other shareholders or the manager anything. The managers are highly paid. When it comes to money, few people treat it as though it is part of a cooperative relationship. That is unrealistic thinking. The actions of the mutual fund managers and company leaders have done far more to harm the shareholders of any particular fund than have the shareholders who occasionally trade.

I agree that investors who frequently "buy shares and soon afterwards sell them ... excessive trading ... dilute the value of the shares". I disagree that, in most cases, this is a violation of a "collective relationship" and that such a relationship is "taken advantage of". Each investor has free choice to hold funds for whatever length of time he deems desirable. There is no "advantage" being taken, in most cases. It depends on a lot of factors. The length of time, especially when it gets into several weeks or a few months of holding time, is being exaggerated in importance by the fund companies and the SEC seems to be allowing them to penalize where there is no "timing" involved, or "pattern of excessive trading".

It becomes less and less a violation of a supposed relationship, and less and less disruptive to the fund management, and has less and less effect on the share values as the holding periods increase. I fully agree that holding a fund 5 days or less is "market timing" and ought to be curbed. But, as you move to 1 month, 2 months, 3 months, 6 months, 1 year -- when does "timing" (as a bad thing) stop and logical and rational trading begin? The SEC has not addressed or defined anything beyond the rapid and frenetic in-and-out trades made within a day or two (or five) but is allowing high fees and severe restrictions for actions far less disruptive than what market timing does.

Also, in this paragraph is the statement that "... funds that impose a redemption fee often charge a 2% fee for redeeming fund securities that are held less than a certain amount of time...". I contend that the mere mention of 2% is an SEC endorsement of this fee. Has the SEC not noticed that many fund companies charge NO redemption fees, some charge 0.75% for a 30-day hold, others charge 1% for various time periods, and still others charge 1.5%? Those that charge less than 2% by far outnumber those that do.

In this paragraph, the SEC states that "The Investment Company Act was enacted to protect the interests of mutual fund investors". If this is true, then the SEC needs to be taking a different direction than the proposed rules point. Who are the "investors" being protected? It may appear to some that protecting the companies, not the investors, is what is being done. Those of us who want to occasionally trade, with no intention of "timing the market", and no real belief that we are violating some perceived, collective relationship with others, are not being considered. The SEC is assuming a homogeneous population of buy-and-hold investors that band together and silently vow to hold their shares for a long period of time. I contend that mutual fund investors are quite varied. The population is heterogeneous, with a lot of people who trade and would like to continue to trade without penalties. The group of investors the SEC is seemingly trying to protect are a minority, if they exist at all. I think there is more perception than truth behind some of those statements made in Paragraph 1, as to who is being protected.

On Paragraph II, Discussion -- A. Two Percent Redemption Fee

I believe it is a good rule as written, with the fee and the time period appropriate for helping considerably to stop market timing. However, I object to the following statement in your discussion:

"The rule would not preclude a fund from instituting a holding period longer than five days."

This negates the earlier statement that the "fee would therefore be both mandatory and uniform". It cannot be uniform if some companies have a holding period of 5 days, others 30 days, others 60 days, others 90 days, and other still more. By locking in the 2%, but opening the door to longer time periods, this does not even give the company the option of having a smaller fee if they prefer a longer time period. For example, some are now imposing a 0.75% fee for shares held less than 30 days. What happens to those fees? Others have a 1% fee for 180 days. Again, if they are happy that these fees and time period fulfill their needs, why let them change it to maybe a 2% for 180 days? That is NOT protecting individual investors, but is giving fund companies encouragement to gouge us with more fees!

Nearly everything I submit here regarding redemption fees would be irrelevant if the SEC would put a maximum on the time period the companies are allowed to charge this fee.

Combined Effect of the Two Shortcomings

The first main shortcoming of the proposed rule is to fix the redemption fee at 2% (the maximum charged by any company, to my knowledge). The second main shortcoming of the proposed rule is to allow companies to extend the holding period to longer than 5 days, allegedly to curb "timing". This considers that trades made after 5 days are about as serious an offense as those made in less than 5 days.

When you combine the two shortcomings, you have handed a lot to the fund companies, all to be felt by the ordinary trader who never gets into "timing". Neither aspect is serious, taken alone, especially the 2% fee. It is the combination that hurts. It doesn't matter if you suggest 2% or more, provided the time is fixed at 5 days. Likewise, longer holding periods are not so serious, as long as the fee becomes less and less the longer the fund is held.

Companies such as Fidelity that may have only a 1%-30 day redemption fee for some funds have been placed in a dilemma by the proposed SEC rules. If a 2%-5 day is mandatory, what do they do with their 1%-30 day rule? They have the choice of keeping it (thus having two redemption fees), or they can keep their 30-day holding requirement, but then comply with the 2% minimum required, thus doubling what they had previously. That would be simpler for them than to have to re-program their computers to deal with two fees and two time periods. Thus, whether it originates from the motive of convenience or greed, we see higher fees than we ought to be seeing to just curb "timing".

There should be some control over what the companies can charge us. As the rule is stated above, the SEC has left it open to more abuses and thus are contributing to the problems for individual investors. The rule favors the fund companies, not the investors. The rationale for my objection is contained in the following paragraphs.

For the reasons explained in the following, I urge the SEC to either put a maximum on this holding period, such as 10 days, or implement some of my later suggestions. My first choice would be a rule of a minimum of 5 days, and a maximum of 10 days for a 2% redemption fee. I have other suggestions later, if that cannot be done.

Market Timing Versus Legitimate Trading

Market timing, according to all that I have read these last several months is considered to be rapid in-and-out trading, all within a day or two. If that be the case, then 5 days holding period is more than enough to curb such activity. If the time period becomes much longer, then the fund companies are using the fee for other purposes, the main one being to try to pressure shareholders to hold onto the fund for much longer time periods than what is associated with "timing". This is not the same thing as discouraging timing. There is a difference between these motives. Discouraging timing or very short-term trading is a good thing for all of us. But, simply encouraging investors to hold onto funds for long periods of time is one-sided. It favors the interests of the fund companies, not the investors. I think the companies also use longer time periods to catch the unwary who do not read or remember all details of a prospectus and innocently sell a fund. It is another way to gouge the investors with more fees.

There is an obvious difference between the interests of investors and fund companies and their fund managers. Investors want to be free to trade, without penalties. Fund companies want us to buy and hold for very long periods of time. If they had their way, that would be forever. But, the reality is, we have no loyalty to any one fund or fund company, especially now that the brokerage system allows freely trading among thousands of funds.

Reasonable and rational investors DO NOT want to trade in and out of funds in the same week. That requires too much market watching and preoccupation with their funds. If we wanted to be preoccupied with markets, we would be stock traders, not mutual fund traders. Most of us, I believe, do not watch our funds daily, but we are aware of market changes and trends and want to be able to trade periodically, without penalties.

A major flaw in the proposed rule is that the SEC is apparently blind to the reality of modern-day mutual fund trading. As stated previously, investors are now traders and no longer buy the idea that they should hold onto funds forever. The SEC has considered no activity between what they themselves are telling us is "timing" and the old "buy-and-hold" concept.

In an attempt to put this into perspective, allow me to offer some definitions of my own. These are followed by additional discussion to support the concepts.

market timing = frenetic and irrational trading of funds, trades being made every one to four days (same week).

frequent trading = trading on emotion or reactions to news, trades being made every one to four weeks.

occasional trading = trading based on a number of variables, trades being made every one to six months.

Occasional sale of a fund is done for some of the following reasons, all legitimate, in my opinion:

a) poor performance over several months, in relation to similar funds or other markets

b) sound analysis of market trends or other technical criteria

c) portfolio rebalancing, including simply seeing a better asset allocation after months have passed, with new information

d) learning of a new fund that might better replace one that is being held

e) learning of illegal or unethical practices on the part of the company or manager

f) learning of a change in investment objectives and/or allocation of holdings and/or strategy

g) learning of a change in fund manager or some other change within the company that is bothersome

h) downgrading of the fund by Morningstar or others

i) making an honest mistake in a purchase and correcting it

j) advice of a professional advisor (including reputable mutual fund newsletter editors)

k) need for the money for living expenses, home improvements, medical, etc.

buy-and-hold = holding onto funds at least six months, and probably a year or more.

The fund companies have tried to persuade all of us to hold funds forever, even if we encounter one of the above reasons to sell. Anyone doing otherwise is considered to be acting in self interest and not in the interest of other shareholders, and that this is somehow bad. Isn't what we all do with our money "self interest"? The fund companies are certainly looking out for their interests! After many years of such "brain-washing", too many have accepted this as truth. But, most mutual fund holders are learning that buy-and-hold is simply not wise.

We now live in an era of fast changes and shifts in the markets, and instant information, with the ability to on-line trade. People are trading more frequently. The companies have made it easy to trade, using the internet, and especially with the mutual fund brokerage system. There is much inflow and outflow associated with funds. Much of it probably balances out. The new people buying a fund probably offset the sales made by the "occasional" trader. And, if outflows are greater than inflows, there are reasons, such as the fund manager making poor stock choices, overall market sentiment causing the majority of investors to sell funds, and learning of a fund being charged with illegal or unethical practices. It is in our interest that we be able to trade occasionally, without penalties. Unlike marriage, we have not made vows to hold on "till death do us part". If a fund is going "down hill", let it be so. We should all be able to bail out without penalty.

I do not believe that occasional trading (as I have defined it) hurts the other investors as much as many are led to believe. All investors are free to make choices. Trading exasperates the fund managers, but that is too bad. Like any other business, competition is resented, and they get their feelings hurt if someone "dumps" their fund. Would a wise person hold onto anything (personal relationship, job, etc.) if it was promising to hurt him? Do we all not change any service that is not performing to our expectations, whether it is an insurance agent, automobile mechanic, medical doctor, or financial advisor? Why is it not also wise to trade funds occasionally, in effect simply changing agents or service providers as with any other type of service? Do other services people provide penalties if you don't stay with them for a long time, or create bad names like "timer"? Other than the commitment of marriage, with its vows, is there really any loyalty, particularly in the business world?

There are numerous mutual fund analysts and advisors that recommend trading periodically. These are respected and reputable people, not irrational "timers". The holding periods are usually several months, but some may occasionally be only a month or two. Mark Hulbert's investment digest follows and ranks over 160 newsletters, all of which advocate occasional trading. Fidelity Insight and other such newsletters suggest trades, and rational-thinking companies such as Fidelity recognize that occasional trading will occur. They may not like it, but they accept it. Many companies cannot accept this 21st Century reality. The SEC should not be catering to their notions and selfish interests.

Trading stocks or exchange traded funds or those mutual funds that allow (or actually encourage) very frequent trading is a poor alternative to open end mutual funds. The choices of funds and fund styles are too narrow and these funds are often more volatile than open end mutual funds. Furthermore, they are mostly index funds and/or poorly managed. These do not provide the solution for those of us who want to buy the best, from a wide choice of funds and fund styles, and trade occasionally without penalties. With these, you no longer have a "super market", but just a small shop with a limited line of offerings.

Fees and Holding Periods

Why would the SEC permit mutual fund companies to charge us redemption fees beyond those clearly intended to curb market timing? Wouldn't a better way be to understand that people will occasionally trade, and just incorporate the costs into the fund expenses? I am not talking about "timing" here. Those who buy and sell within 5 (or even 10) days ought to be charged a fee, but not for trades made over longer time periods. If you allow the companies to extend the time period to more than 5 days, the fee is being misused and probably will extend into the "occasional trading" activity, which is a type of trading that seems to be perfectly legitimate and rational, and probably will become the norm.

Frankly, I think that if the majority of the fund companies do not add longer time periods for the redemption fee, those that do go beyond the 5 days holding period will eventually hurt themselves, as there is a lot of competition in the mutual fund industry. Long holding periods do not discourage selling a fund as much as it discourages buying it in the first place. But, my fear is that the SEC will be opening up, or be giving blanket permission for companies to start extending the holding period to periods such as 30, 60, or even 90 days. These company officers will see the permission to add more time, and I am afraid that many companies that did not have any redemption fees before, or had low ones, will "jump on the bandwagon" of opportunity. And, if the majority of the companies seize these opportunities, we won't have much choice left and we are the ones who will suffer at the hands of the companies AND the SEC who has opened the door for them to do this.

Many companies have started adding 2% fees for redemptions in less than 30 or 60 or even 90 days. Some of these are in addition to a fee of 1% if shares are sold in less than a year. Added to that is the possibility of being labeled a "timer" (even with one offense) and being barred from future purchases. Thus, a person could be charged as much as 3% for selling in 89 days, and also informed that his practice of selling the fund constitutes "timing" and he is forever barred from buying funds in that company. This is happening, and all it takes is one "offense".

Some Good Precedents by Some Fund Companies and Variable Annuities

Some fund companies seem to be handling the problem with much looser rules than charging redemption fees covering long holding periods. They do it by limiting trading in and out of the same fund too often, and redemption fees often do not even enter into the picture. Fidelity, for example, allows four "round trip" exchanges in a 12-month period for any given fund. Many of their funds have no redemption fees. Their diversified international funds have only a 1% fee for shares held less than 30 days. Many other companies have similar rules regarding trading in and out of the same funds, and few, if any rules on trading from one fund to another. Furthermore, these good companies have no rules about trading in and out of different funds -- only as regards a particular fund. I can trade fairly frequently among several funds, maybe a trade a month, and never be considered a "timer", as long as it is not the same fund.

The variable annuity companies have set an excellent precedent regarding frequent trading, timing, restrictions, etc. Fidelity Variable Annuity restricts exchanges among their funds to 18 in a 12-month period. Except for a few sector funds, they have no redemption fees -- only the limit on number of trades per year. VALIC has recently started restricting exchanges to 15 in a 12-month period, with no redemption fees. They stated that this new rule on exchanges is to curb market timing. Thus, a person could make exchanges every 3 to 4 weeks on the average, and even more frequently on occasion as long as he does not exceed the limit within the 12 months. This gets into the "frequent trading" as I have defined it, not just "occasional". So, why all the fuss among the mutual funds, charging redemption fees for holding periods of less than 30, 60, or 90 days? If trading is permitted every three or four weeks among annuity products without harming other share-holders, and with no redemption fees, why do the mutual funds claim they have a problem? And, why does the SEC seemingly accept the problem as real? If the SEC goes along with these fund company claims, they are promulgating an unfair practice.

Combining Concepts of Limiting Trading and Charging Redemption Fees

You state that:

"Companies have estimated their redemption-related costs... at least 2% of amounts redeemed".

The following relates only to funds held more than 5 days. The SEC should keep the rule on that intact, but with both the 2% and the 5-days fixed. This section is a remedy to the problem of what to do if a company wants to charge more fees beyond the 2%-5 day one. This should pay their estimated redemption-related costs for redemptions beyond the 5 day rule.

Logic says that a person will not buy a fund and hold it forever. It will be sold sometime. What is the difference whether it is sold after 5 days, or 30 or 60 or 90 days, or 365 days? It WILL be sold someday and the company's cost will be the same, regardless of time period held. Unless the trader buys it back, it makes no difference how long it is held. With this recognized, what is the logic in a company placing any time period on it? Why not just say "We are going to charge you 2% when you sell, whenever that is". You might as well take away the time period altogether, if the company is to lose 2% when a fund is sold.

The simplest solution is for the companies to expect occasional trading, assuming perhaps an average holding time of two months, and incorporate the costs into their fee structure. That gives them far more average minimum holding time than some of the annuity companies are using. If some people do not wish to trade, that is their prerogative.

This next idea is more complicated than that of the previous paragraph. But, if fairness to fund managers and all shareholders (those who trade occasionally and those that do not) is to be balanced, this suggestion would be the most fair. With this concept, there would be no redemption fee the first time a fund is sold. Then, if a person buys the same fund back, the company starts charging a fee when it is sold again, and this fee increases as exchanges increase. This concept is similar to the rule some companies have that they allow three or four "round-trip" exchanges involving the same fund, only here, there is a fee involved. This would work simplest when all shares of a fund are sold, but it can also work when there is any trading in and out of the same fund. Each time there is a purchase, fees are charged on any portion sold, after the first sale. After an initial purchase, if someone wanted to sell a percentage of a fund over time, there would be no fees unless there are purchases involved. That is, with my suggested rule, I could buy a fund and sell it in portions and not be charged. It would require in and out activity to start the count on fees.

Thus, my suggestion is to have NO redemption fees for the first in-and-out exchange of a particular fund, but then charge a redemption fee each time after that, "starting the clock" again at the beginning of each calendar year (or 12-month period). Speaking for myself, I seldom sell a fund and buy it again very soon, if ever. If I did, using my suggestion, I would have to be prepared to pay a fee if I sold it again. Give everybody ONE SELL of a fund forgiven -- no fee. You might then give permission for the fund manager to charge ever increasing fees if an investor continues to trade in and out of a fund -- say 0% the first time, 0.5% the second round trip, 1.0% the third round trip, 1.5% the fourth, continuing for the rest of the year. With the ever increasing redemption fees, a trader will certainly be discouraged to sell a fund.

This could easily be combined with the in-and-out rules, limiting trading of the same fund to perhaps four per year. Once a person reaches four, he cannot buy that fund for the rest of the year. An example of this combination of graduated fees and trading limits would be:

Buy fund 1/1/04
Sell fund 2/1/04, pay no fee
Buy fund 3/14/04
Sell fund 6/30/04, pay 0.5% fee
Buy fund 7/15/04
Sell fund 9/15/04, pay 1.0% fee
Buy fund 9/30/04
Sell fund 10/20/04, pay 1.5% fee

The total fees paid are 3%. The trader is now barred from buying that fund for the rest of the year (or, the next 12 months).

This should keep the fund managers happy. They have the best of all worlds. Once a person buys a fund back, he knows he will need to keep it at least the rest of the year, or else pay some fee. Each time it is bought back, there is more and more incentive to hold it. The ultimate incentive is that, if sold a fourth time, he cannot get back into the fund for a period of time. With modern technology, all of this would be easily tracked. The fund is not hurt as these traders who would go the maximum round-trips are paying more fees than would someone just buying and selling once (using the numbers I have). They are probably making up the difference between what would be a 2% fee for say 90 days, as they will accumulate more fees.

As stated previously, you should still have the 2% fee for shares held less than 5 days. This suggestion has to do with a way to pay the fund what they say is their average 2% redemption-related costs. For we occasional traders, it is a way to avoid having to pay high fees for those longer holding periods such as 60 and 90 days or more.

With these long holding periods, the fund managers are discouraging people from buying their funds in the first place, as we know we will probably be paying a fee. With my system, this would not be the case. I would like to have the fee waived the first time it is sold. Knowing that, I am more apt to buy the fund, which is what the fund manager wants (I assume), and not be trading in and out of it.

These suggestions also avoid the problem of causing what an investor does with one fund to affect future trading among other funds in that company. That is, it would eliminate the practices of come companies of barring purchase of other funds within their company just because an investor did a lot of trading with one.

My goals are to significantly reduce redemption fees for the occasional trader who does not keep going in and out of the same fund and to give all funds equal appeal as far as redemption fees go. If companies are allowed a 90-day holding period, many of us will be paying a lot of redemption fees, when we never intend to buy any particular fund back. Or, we will be dissuaded from buying the fund in the first place and shop elsewhere for funds with more reasonable rules.

The Proposed Rule of $2,500 Not Being Subject to Redemption Fees

An amount of $2,500 is ridiculously low. This proposal, along with that of the "hardship cases" will help most investors very little and appear to be just token efforts to persuade the investors that the SEC is looking out for their interests.

Some Things Not Covered in the Proposed Rule

a) Companies should not be allowed to charge "double redemption fees"; that is, 1%-1 year and also 2%-30 days (or 60, or 90). If they are allowed to extend the 2% fee to more than 5 days, then other redemption fees should be eliminated. If, however, the 2% fee is kept at 5 days then a 1% for some longer period is more acceptable for certain funds (such as internationals) since the 2%-5 days is to discourage timing.

b) There is a lot of misinformation. I have telephoned mutual fund companies many times in the last several months, inquiring about redemption fees and other rules. Very often, they do not know that the company has recently added a 2% fee and I have to educate them that I saw it announced on their website. I have made it a practice to telephone at least three times, hopefully getting a different person each time. It takes a lot of persistence and pressing them to eventually uncover all fees. I then use a consensus or preponderance of evidence, weighing what two or three people say, with the prospectus. One fund company, for example, says their new 2% fee applies to "A" and "Y" shares, with no mention of "C" class. Yet, a telephone representative says it applies to all classes. Then, when I call my mutual fund broker, I may get even different information. The only real way to determine a redemption fee in many cases, or determine a minimum holding period before having restrictions placed on an account is to sell the fund and see what happens. The SEC needs to emphasize the importance of employee training.

c) Related to the above is that a lot of information, even that in writing, is vague. I am not talking of uninformed company personnel, but the information given in prospectuses is often vague, and can rarely be clarified by the telephone representatives. The problems are different, but when combined, we have a lot of uncertainty as to what to do before buying a fund. Personally, I want to know the rules before I buy, not learn them later after I innocently make a trade. Like the father who punishes his child for going out into the street when the child could not have understood the rule beforehand, the fund companies are sometimes penalizing us for selling a fund when we would not have guessed there should be a penalty. Selling a fund and being told you can no longer buy that company's funds is the classic example of this. This problem is actually worse than the redemption fee problem in one sense. It may take some digging and a lot of telephone calling to determine a fee before I buy a fund. But, you rarely get straight answers on policies concerning what happens if I buy and sell it -- that is, how long must it be held before restrictions are placed on accounts.

d) Related to the above is what constitutes a "pattern of timing". I contend it should not mean selling a fund one time within 30, 60, 90, or 120 days. For example, one company bars future purchases of their funds if a person sells one in less than 120 days. With another company, I sold a fund 3 weeks after purchasing it, had never even held the fund before, but was told I demonstrated a pattern of timing and am forever barred from buying that company's funds. A one-time occurrence is not a "pattern", and that many days does not constitute timing. That sale was a mistake. It should not have happened. In baseball, you get three strikes before your are "out". Even people charged with DUI get more than one chance before even having their driver's license revoked. These rules are ridiculous. The SEC needs to get them relaxed, and uniform, if not eliminated completely. Both the time period they are using, and the "one-time offense" aspect needs to be addressed.

e) If a redemption fee is paid due to short term trading, the person should not be restricted from future purchases. If the fee is to pay for the activity and he is willing to pay it, he should not be restricted from continuing the activity.

f) Settlement periods should be addressed. Fund companies have from one to five days for what they call a "settlement" period. In the best case, it is one day. If I sell a fund on Monday, the money is not available in my mutual fund brokerage account to buy a fund in a different company until Tuesday. There is a lot of inconsistency among mutual fund brokerages on this. They say the time is set by the companies and the companies often say it is set by the brokers. We get a lot of "run-around" on this. Settlement time is a concern because we want to be able to buy ASAP after selling. With modern electronics, I see no reason why we even have to wait the one day! They are carrying over habits from the "old days", when information did not move so fast as it does now, and/or applying stock trading rules to mutual fund trading. If I sell fund ABCDX on a given day and instruct the brokerage company to deduct their flat fee for brokerage services and buy fund EFGHX the same day with the money left over, that would seem to be clear enough. They say they need to know how much money is available before the buy can be executed, so I have to wait a day to buy. But, once the market closes and the NAV of both the fund sold and the one designated to be bought are known (around 6:00 PM EST), the entire exchange can be calculated. Whether I have to wait until the next morning for the computers to complete the work is immaterial. If I do not care what the exact amount is, but simply say to buy as many shares as possible with whatever I have, isn't that clear and logical? I do not see why the buy cannot be made "same day", just as they are with variable annuities.


    a) There should be a maximum of 10 days on the mandatory 2% redemption fee.

    b) If the companies are permitted to go beyond 10 days, they should not be allowed to have "double" redemption fees.

    c) If the companies are permitted to go beyond 10 days, they should not restrict future trading if someone violates the rule.

    d) Prospectuses should be clear on redemption fees and restrictions, with telephone representatives being better trained.

    e) Any redemption fees for holding periods going beyond 10 days have nothing to do with market timing activity.

    f) Occasional trading (every one to six months) ought to be considered acceptable and normal practice.

    g) Any intelligent and rational person will "fire" someone who is not performing, fund managers included.

    h) Buy-and-hold is an obsolete concept as regards mutual funds. People do and will trade. It is as American as apple pie.

    i) The precedent set by the annuity companies (15 to 18 trades per year permitted, no redemption fees) ought to be the standard.

    j) There should be a system of graduated fees for in-and-out trading of the same fund, with no fee for the first sale.

    k) We should be able to trade between mutual funds in a mutual funds brokerage account "same day".

    l) Restrictions on future purchases of funds should not be imposed merely for buying and selling a fund once.

Finally, the main point is that fund companies and managers will discourage trading by any means, and will take advantage of any situation. If the SEC opens the door by establishing a mandatory 2% rule, with no cap on the time period, many companies who had no such fees previously will probably seize the opportunity to extend that time period for as much as 180 days, and if the majority do this, it will hurt all investors and the entire industry. Even 30 days is too long. The SEC should be looking out for the interests of all mutual fund investors. The SEC may be going too far in protecting companies from market timers, if it begins to hurt those who make occasional trades for rational reasons. The reputation and credibility of the SEC is on the line here.

To summarize, the SEC is not considering what I call "occasional trading", and/or you are considering it to also be within the category of "timing"; else you would not be permitting the companies to extend the 2% fee beyond the time period associated with "timing". The interests of a very large number of traders (perhaps the majority) are being overlooked. Millions of investors, I contend, want the freedom to do occasional trading without penalty. I feel that the alleged "protection of the interests of shareholders" has ignored the interests of most shareholders who are not "buy-and-hold" people. I feel that the fund companies have been very powerful in convincing the SEC that they will be protecting the interest of shareholders by permitting them to charge high redemption fees for long periods of time. A 2% fee is not high, if it is restricted to 5 or 10 days. It is high if the holding period becomes much longer. Fee and time period should be considered together.

Ben Buckner, PhD