From: Ed765@aol.com Sent: Tuesday, January 13, 2004 8:31 PM To: rule-comments@sec.gov Cc: emmef@uno.edu; jeanmurray@comcast.net Subject: S7-26-03: Comments on Proposed SEC Rule on Market Timing (File No. S7-26-03) From Edward Miller I am both an investor and a Professor of Economics and Finance at the University of New Orleans who teaches investments, and is extensively published in finance, including research related to market timing. As written the proposed rule to reveal identities of those entitled to make frequent trades would require making public the names of all shareholders and policyholders for many mutual funds, retirement plans, variable annuities etc. The reason is that many funds grant such privileges to all their share holders, policyholders, members of retirement plans etc. A requirement to identify "any arrangements with any person" and to reveal "the identity of the persons permitted to engage in frequent transfers pursuant to such arrangements" would require listing the individual contract holders. Such a requirement wastes paper and violates many people's privacy. It should be adequate to reveal the nature of the trading privileges provided to various groups and to state any exceptions to the rules. Where all share holders, contract holders etc. have frequent trading privileges, it should be adequate to state this, referring potential investors to the sections of the prospectus where these are described. The regulation appears to make sense where there is a large hedge fund or similar entity with special privileges. However, where there is a single individual or group of individuals who has privileges not available to others for some historical reason, it may be a violation of privacy to publish his identity. Where the "individual" with privileges is a hedge fund, corporation, or trust, privacy is less of an issue. However, it is likely that there are many mutual funds and variable accounts whose contracts and policies permit all investors to make frequent transfer. For instance, the Nationwide Best of "America" Futures annuity contract I hold states that "you have the right to transfer variable assets among the various funds without a charge". Elsewhere it state transfers may be made each day. The prospectus under which this was sold, dated May 1, 2001 stated in italics (drawing attention to the promise) "The exchange and transfer rights of individual contract owners will not be modified in any way when instructions are submitted directly by the contract owner, or by the contract owner's representative (as authorized by the execution of a valid Nationwide Limited Power of Attorney Form)." I assume there are a large number of contracts outstanding with similar terms. I am currently engaged in litigation to enforce these rights and am preparing an Appeal in Miller vs. Nationwide dealing with this issue. The contract of the Lousiana Optional Retirement plan (serving La. professors) with certain firms provide for unrestricted free transfers. There would no purpose served in listing the identities of the very large number of professors and other higher education employees who participate in plans with these companies. It would clearly violate their privacy. I know I would prefer not to have my choice of retirement arrangement made public knowledge. I believe there are various laws and regulations designed to insure that personal information is kept private. Lists of policy holders, mutual fund investor's etc. might be might be used by salesmen as a prospecting list. Making such information public could even defeat the goal of revealing special arrangements. Suppose, for instance, the individuals with frequent trading privileges were listed in alphabetic order. There would be a long list of names which no potential investor would bother to wade through. In the middle of the list might be the "Skelton in the Closet Hedge Fund" that had been granted special privileges. The typical investor would be much less likely to become aware of the hedge's funds arrangement this way then if the fund was allowed to merely say "All investors have frequent trading privileges within the limit of xxxxxx as described below in section xxx. However, pursuant to special contracts, the following entities (or types of entities) have been exempted from these general rules (or subjected to stricter rules). Again, it might be wise to list the nature of the parties without giving names. For instance, a particular retirement plan might have a contract that permitted frequent exchanges by its members. For instance, a brief mention that the contract between ING and the state of La. provided for participants to exchange at will between investment options should be sufficient. There would be little to be gained from listing each individual who participated in the plans. All the potential investor needs to know is if there are any investors who are permitted frequent trading privileges, and roughly how important they are. In many cases it may be sufficient to state that all investors in the fund or insurance policy have frequent trading privileges (perhaps specifying just what, if any restrictions, they are subject to). In other cases, a fund complex, a fund, or an annuity company may have certain contracts outstanding that have clauses permitting frequent trading, but intends to insert clauses in new contracts that restrict trading. In such cases those considering purchasing new contracts should at most be told the older contracts exist, and approximately how many they are and what the dollar value is. For instance, a possible statement might be "contracts issued before January, 2002 pursuant to a Prospectus dated before the year 2002" will typically permit frequent trading. These frequent trading privileges are (to be followed by a description). It is believed there are about X thousand contracts outstanding with a total dollar value of $XXXXXXX. If investors are allowed to add to the dollar values of the contracts, this might be stated along with any limitations. For mutual funds, the phrase might be any person "having exchange privilege not available to other holders of shares of the same class" or "having been promised waiver of any exchange restrictions." If the fund (or insurance company) has any information on the actual frequency with which investors exercise their contractual rights, it may be useful to provide it, where material. For instance, a fund complex supporting retirement plans might say that most of these policies were issued for retirement programs, and X% makes less than X exchanges per year. It might be very useful to potential investors to know the largest movement of funds made during a previous year. It might be stated for instance that the busiest day was x during the period so and so, and on that day 6% of the value of the fund was redeemed. The largest day for fund inflows was X when 10% of the fund value was received. Any known qualifying information might be provided. For instance, it might be stated the large inflow on x date was primarily because that was the last day of the year, and many investors were making investments to bring their totals to the maximum amount allowed. The latter case might concern potential investors less than a statement that on x date 10% inflows were experienced, and that on the following day the fund net asset value increased by 5%. The latter might indicate activity that new money was coming in at a time when the fund could not invest it. Two numbers that could probably be readily provided by funds would help investors know if a fund was impacted by market timing. One would be the highest inflow during the reporting period, and the date it occurred. Another would be the highest outflow and when occurred. If these were large relative to the size of the fund it might be a sign of market timing impacts, especially if they occurred on days when market timers following particular strategies might have been expected to buy shares or to sell shares. The fund would be free to provide another explanation, if they applied (such as that being the date when funds from certain company sponsored plans arrived), or a single large transaction occurred (especially if the inflow and out flows were by different entities). This data could probably be provided easily by funds (since they would be a byproduct of the type of monitoring they should be doing). I would again repeat that an actual list of investors with exchange privileges would be useless and would violate many investors' privacy. The goal of not having to list every investor might be handled by adding after "any Person" a phrase such as "other than those holding standard contracts" where "standard contracts" are those offered to the public via prospectus and anticipated to be purchased by more than X people. Of course, if actual lists of investors are to be provided and they are long, they should be put in the supplemental information to save paper. The description states "We are also proposing to require a mutual fund to describe in its prospectus any arrangements with any person to permit frequent purchases and redemptions of fund shares." And later " We are proposing to require similar disclosure in Forms N-3,38 N-4,39 and N-6,40 the registration forms for insurance company separate accounts that issue variable annuity and variable life insurance contracts, with respect to both the risks of frequent transfers of contract value among sub-accounts, and the separate account's policies and procedures with respect to such frequent transfers." The key amendment for mutual funds seems to be "(5) Describe any arrangements with any person to permit frequent purchases and redemptions of Fund shares, including the identity of the persons permitted to engage in frequent purchases and redemptions pursuant to such arrangements, and any compensation or other consideration received by the Fund, its investment adviser, or any other party pursuant to such arrangements." For annuities it also includes "(v) Describe any arrangements with any person to permit frequent transfers of contract value among sub-accounts of the Registrant, including the identity of the persons permitted to engage in frequent transfers pursuant to such arrangements, and any compensation or other consideration received by the Registrant, its investment adviser, the Insurance Company, or any other party pursuant to such arrangements. All of these proposals appear to involve unnecessary violations of investor's privacy. If I can be of any further help feel free to contact me at Ed765@aol.com, or at 504-283-3536.