Subject: File No. S7-11-04
From: Darrell D. W

April 2, 2004

So lets get some real examples of Time Zone Arbitrage, one of the main reasons for this proposed rule. Lets review: a US mkts go up the time zone arbitrage thesis says buy intl mutual funds b US mkts go down sell intl mutual funds. So, last week I was in Washington, DC visiting with legislative staffers on the Senate Banking committees to discuss the shortcomings of this rule and I decided to do a test of your thesis. Lets say on Thursday, March 25th, as a small investor, I had 10,000 to buy an intl fund. Lets take Artisan International ARTIX. I bought 10,000 @ 7.16 per share because the US markets were up strong SP500 from 1091 to 1109 and NDX from 1909 to 1967, a clear buy signal. The next day, I should expect a nice gain in the international mutual fund according to accepted time zone arbitrage theory. Oops, I lost money, the shares dropping to 7.12 per share, 9944.13. Now, after the big day on the 25th, the US market drops a small degree on the 26th, a sell signal particularly since I think I might have a gain in the intl shares since I do not know the ending nav yet. So now on the 29th I have 9944 in money market. Oops, the foreign markets and the US market surge in tandem no timing effect at all and the intl fund goes to 7.23 per share. This is a strong surge, with the NDX going from 1960 to 1992 and SP500 from 1108 to 1122, again a clear buy signal. My 9944 buys less shares at 7.23/share, 1375.399 shares. Now on the 30th I just know I am going to be rewarded, but oops again, the shares drop to 7.21 per share. What is wrong with this time zone arbitrage thesis I am wondering. Isnt the SEC convinced this is a sure thing? My money drops to 9916. On the 30th, the US markets gain a small amount, so I hold my shares. Wow, I get a small gain. Now it is really paying off. I go from 9916 to 9999, I am back to even. Alas, on the 31st of March, the US markets drop again, so I sell at the 7.27 per share with no gain or loss. Of course, as a predictor, the time zone arbitrage thesis screwed me again because the next day April 1st the international markets and the US markets go up big again in unison, with no time delay, and I missed out on the fund going from 7.27 to 7.35, which would have put me into a gain. But wait, I forgot, on my two sells according to the arbitrage thesis, I had to pay a 2 redemption fee. So my 9944 dropped to 9745. When I sold the second time I was left with 9603. Not only did your time zone arbitrage thesis not work, instead of breaking even, I am down 4. Gosh, for a small investor you have been a big help.
I would think that the reasons prompting this rule are weak. The remedy is extreme. Small investors are hurt, not the funds and big money that abused and caused the problem which has vanished anyway. In a time when the administration, as a policy, is stating that we should have no unnecessary regulation, and when your own Commissioner feels this will unjustly enrich the fund companies, I feel this rule should not be approved. I could go on and on.
I would appreciate the opportunity to meet with you and discuss this further. This is bad policy, bad politics and rewards the wrongdoers. What in the world is pushing you to propose this? Is it the fund companies, who can not and have not been able to regulate themselves? How is it that ETFs, which trade at anytime, just like stocks, can have annual expenses of approx .2, when the poor funds feel they can not control expenses? Or is it that this is another convenient excuse to line their pockets with the shareholders money in the form of inflated expenses, while they pile on ad expense, 12b-1 fees, and who knows what else. Please rethink this rule. Thank you. Darrell Wiard