Association for Investment Management and Research ®


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23 February 2004

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20459

Re: Amendments to Rules Governing Pricing of Mutual Fund Shares (File No. S7-27-03)

Dear Mr. Katz:

The U.S. Advocacy Committee (USAC) of the Association for Investment Management and Research (AIMR)1 appreciates the opportunity to comment on proposed rule amendments requiring that, in order to receive the current day's price, an order to purchase or redeem mutual fund shares would have to be placed with the fund, its designated transfer agent or a registered securities clearing agency by the time that the fund has established for calculating net asset value.

The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets.

Summary Position

We strongly support the SEC's efforts, through this proposal, to address the illegal and damaging practice of late trading. Not only does this practice undermine fundamental notions of fairness and equitable treatment which erodes the confidence of investors, but it also specifically harms long-term shareholders in the funds where late trading occurs. In general, we believe that the proposed rule amendments would effectively stop late trading practices. However, as an alternative, we favor the approach considered in the proposal that would allow certain intermediaries to submit orders after the time established for calculating NAV, upon meeting certain conditions. We believe that this alternative to universal application of a strict cutoff time creates the necessary safeguards against manipulations that could lead to late trading without disrupting important processes of certain intermediaries that require some flexibility.

We discuss our position in more detail below.


We agree that the approach taken by the SEC in this proposal to establish a firm cut-off time for the pricing of mutual fund shares prevents easy evasion or manipulation of this rule by those seeking to take advantage of the market through illegal late trading. We also appreciate the SEC's recognition that the proposed amendments will cause intermediaries and others to make changes to the current order-processing system, and will increase correlated costs.

For any new regulation or change in requirements, we think it is important to seriously weigh the costs to market participants against the expected benefits. Moreover, in many situations we believe the remedy may lie in better disclosure or additional guidance, rather than the promulgation of new regulations. In this case, however, a surprising number of people have circumvented the law to effectively manipulate a system designed to prevent this illegal practice. Thus, we believe that in most cases the related processing and system costs that will be needed to implement the system are warranted.

We are concerned, however, that a cost implicit in the proposal would be elimination of the role of intermediaries in most circumstances. We believe it is important that this cost be balanced against the benefits of intermediaries to the current system, and ask the SEC to consider whether the basic role of the intermediaries can be maintained without diluting the effectiveness of the rule amendments. We believe that the safeguards contemplated in the approach being considered by the SEC with respect to intermediaries would effectively mitigate the current abuses involving late trading. We therefore support this alternative approach.

Transition Period

Given the processing and systems changes that will be required, we support the proposed one-year transition period for implementing the rule amendments. We believe that this will allow intermediaries and other affected parties a reasonable time to fully effect the necessary changes without substantial disruption or unnecessary cost.

Exchange Orders

We agree with the approach taken in the proposal to allow a special provision for exchange orders between funds even when the shares are not in the same family of funds. We believe the fact that the order would be deemed irrevocable, when combined with the requirement that the exchange be for a specific number of shares provides adequate safeguards against manipulation of the system.

Suggested Approach

We strongly encourage the SEC to include in the final rulemaking the alternative approach whereby fund intermediaries could submit orders after the established time if they meet certain conditions, including

  • Electronic or physical time-stamping of the orders in such a way that they cannot be altered or discarded once they are entered into the trading system;
  • Annual certification by the intermediary that it has the appropriate policies and procedures in place to prevent late trades, and that no late trades were submitted to the fund or its designated transfer agent during the period; and
  • Annual audits of the intermediary's controls conducted by an independent public accountant who then submits the report to the fund's chief compliance officer.

We believe that taken together, these conditions would create an environment that would effectively prevent parties from circumventing the system and engaging in late trading. While this approach will involve added costs, we believe that the flexibility afforded intermediaries is warranted if their basic role is to be maintained.


We fully support the provisions in this proposal that seek to end illegal late trading. We believe that they are reasonable and effective attempts to end the exploitation of the current system to the detriment of long-term shareholders.

If we can provide additional information, please do not hesitate to contact James W. Vitalone at 704.553.0455, or Linda Rittenhouse at 434.951.5333,


/s/ James W. Vitalone, CFA

James W. Vitalone, CFA
Chair, U.S. Advocacy Committee

/s/ Linda L. Rittenhouse

Linda L. Rittenhouse
AIMR Advocacy

cc: U.S. Advocacy Committee
     Rebecca T. McEnally, Ph.D., CFA - Vice President, AIMR Advocacy