From: Warren Wall [warren@wallco.com]
Sent: Thursday, March 18, 2004 2:49 PM
To: rule-comments@sec.gov
Cc: wallco
Subject: S7-11-04:

Dear SEC,

I would like to voice the following concerns about the issues raised in
file no S7-11-04.

I am the President of W. Wall & Company, Inc., a small Registered
Investment Advisor firm located in Asheville, NC. We currently manage
about $40,000,000 for mainly smaller retired investors.  We primarily
use mutual funds as our preferred investment vehicle. In regards to File
No S7-11-04, I would like the following comments about the SEC proposal
to impose a mandatory 2% redemption fee on any withdrawals taking place
within 5 days of a mutual fund deposit. 

It is my understanding that this fee is meant to deter short-term
trading that takes advantage of stale prices, such as those occurring in
international funds. I believe that there are a number of problems,
however, inherent in the concept of a government agency imposing fees
upon investors. These include the following:


(1) Short-term trading is not illegal.  Short-term trading is designed
to take advantage of a temporary pricing imbalance and has widespread
application in all financial markets. The problem arises in
international mutual funds when shares at the close of an overseas
market, hours before the U.S. market.  Because international markets
tend to follow the overall trend of the U.S. market, an upward surge, or
vice versa, in the last few hours of the U.S. market can be expected to
be reflected in the opening of the foreign markets. 



Thus an investor who buys an international mutual fund in the last hour
of an up trading day can expect to see the value of that fund move up
the next day as foreign markets follow the U.S. trend. The investor may
chose to let that gain ride or quickly sell the position to lock in a
profit.




(2) A 2% redemption fee will not stop short-term trading. When the
discrepancy in pricing exceeds the penalty of a 2% redemption fee,
investors will move to take advantage of the opportunity.




(3)  Arbitrage opportunities can be resolved through fair value pricing.
Fair value pricing builds in expectations for how the overseas markets
will react into 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 redemption fee is a very blunt weapon.  It cannot discriminate
between short-term trading and genuine need.  Investors who have an
expected need for their monies will end up paying for a solution
designed to punish abusive trading.




(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)  Redemption fees discourage investors from limiting 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%.  



(7) Mandatory redemption fees will limit the ability of Registered
Investment Advisors to manage client accounts effectively. 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.



(8) Mutual funds already have the ability to impose redemption fees of
up to 2% for whatever time period they chose. If the fund does not feel
short-term trading is adversely impacting shareholders, it should be up
to the fund to set the policy, not a government agency.




On a philosophical basis, the redemption fee proposal is 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 somewhat akin to
declaring that day traders should reimburse longer-term shareholders for
undocumented costs.




I urge to NOT IMPOSE a 2% redemption fee has that ultimately has the
potential to do far more harm to investors than it will help. Feel free
to contact me with any questions at 828-651-9617. 


Sincerely, 


Warren W.Wall
President