MessageFrom: Sheffield Capital [gary@sheffieldfunds.com] Sent: Monday, May 10, 2004 2:54 PM To: rule-comments@sec.gov Subject: File No. S7-11-04 Mr. Jonathan G. Katz Secretary of the Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Re: File No. S7-11-04 Dear Representative Katz: I am writing to you on behalf of my partner, Gregory J. Adams and myself, general partners of an investment management company, in response to the proposed SEC Rule S7-11-04, considering the mandatory imposition of a 2% redemption fee for all mutual funds whose shares are held for less than five (5) days. We have strong objection to the SEC’s consideration of a 2% redemption fee on the sale of any mutual fund within five (5) days for the following reasons: (1) Redemption fees indiscriminately create problems for investors who have a genuine and expected need for their monies and would end up paying for a solution that was designed to punish abusive trading. (2) Redemption fees discourage investors from attempting to limit risk in their portfolios. In a study of the S&P 500 over the past 10 years, there have been 404 occurrences where an investor waiting five days to avoid a 2% redemption penalty would have experienced a greater than 2% loss. 46 occurrences would have resulted in losses from 5 to 10% while 5 of these instances would have resulted in a loss of greater than 10%. (3) Arbitrage opportunities can be resolved through fair value pricing. Fair value pricing builds-in expectations for how the overseas markets will react to the end of day pricing of the U.S. market to moderate or eliminate the catch-up gain or loss the next day when the overseas markets open. This is the solution recommended by academics and other authorities who have studied the problem. (4) A 2% redemption fee will most likely not eliminate short-term trading. At the point at which the discrepancy in pricing exceeds the penalty of a 2% redemption fee, investors will move to take advantage of the opportunity. 5) Long-term investors who make regular deposits to a mutual fund could find themselves liable for a redemption fee if they need to withdraw funds within five days of an automatic deposit or planned payment. (6) Mutual funds already possess the ability to impose redemption fees of up to 2% over a time period of their choosing. If a fund does not feel short-term trading is adversely impacting its shareholders, it should be up to the fund to set the policy, not a government agency. (7) Short-term trading, to this date, is not illegal. Short-term trading takes advantage of a temporary pricing imbalance and is broadly utilized in all financial markets. (8) Mandatory redemption fees will limit the ability of portfolio managers to effectively manage client accounts. In order to avoid incurring a redemption fee in a client's account through rebalancing or responding to changes in market condition, the advisor will have to track or limit when investments and withdrawals from the fund can be made. This will be prohibitively time consuming and costly for advisors to administer. On a philosophical basis, the redemption fee proposal appears to be a move by a government agency to give long-term shareholders greater rights than short-term investors by requiring one class to reimburse the other for the theoretical cost of short-term trading. It's similar to requiring that day-traders reimburse longer-term shareholders for undocumented costs. I urge you to consider the impact of this proposed ruling. Failure to consider the full impact of all of the effects that this ruling would have on the collective investment community will result in another piece of poorly crafted, damaging legislation. I thank you for your time and consideration. Respectfully, Gary R. Fletcher Managing Director Sheffield Capital Management, LLC ( Voice: 412-369-2245 7 Fax: 412-367-5916 * E-mail: gary@sheffieldfunds.com This information is personal and confidential. It is intended only for the recipient. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution, or copy of this information is strictly prohibited. If you have inadvertently received this communication, please notify us immediately by telephone. Information and numbers contained herein are believed to have been obtained from reliable sources. No guarantee can be made as to its accuracy. Nothing contained herein should be considered an offer or solicitation to purchase or buy securities.