010104

Church Alliance

Acting on Behalf of Church Benefits Programs

February 5, 2004

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

RE: File No. S7-27-03

PROPOSED RULE: AMENDMENTS TO RULES GOVERNING
PRICING OF MUTUAL FUND SHARES

Dear Mr. Katz:

The Church Alliance is submitting these comments to the UJ.S. Securities and Exchange Commission ("Commission" or "SEC") relating to its proposed amendments to Rule 22c-1 under the Investment Company Act of 1940 governing pricing of mutual fund shares.

Executive Summary

Church pension plans are requesting the Commission to consider certain changes in its proposed amendments to the rules governing mutual fund pricing:

• In the event that intermediaries (other than a fund's designated transfer agent or a registered clearing agency) are allowed to accept orders before 4:00 p.m. and submit them to a fund's transfer agent after 4:00 p.m., a church, convention or association of churches, or a church benefits board maintaining a church pension plan¹ should be permitted to act as such an intermediary.

• The final rule should recognize that any compliance costs, such as enhancing computer systems, by pension plans that are mutual fund intermediaries reduce pension plan participant returns.

Background

The Church Alliance is a coalition of the Chief Executive Officers of 32 denominational benefit programs, including most major religious denominations. These benefit programs provide pension and health care coverage to more than 1 million ministers, lay workers, and their dependents. Collectively, pension plans associated with members of the Church Alliance invest more than $60 billion of plan assets. These pension plans are often offered on a denominational-wide basis, with some denominations making minister participation mandatory, while other denominations do not (or cannot) mandate participation by their local church employers.

Pension plans represented by the Church Alliance include defined benefit plans and defined contribution plans organized under section 401 of the Internal Revenue Code, retirement income accounts established under section 403(b)(9) of the Internal Revenue Code, and other nonqualified retirement programs. As church plans (as defined under section 414(e) of the Internal Revenue Code) these retirement plans, and the interests in these plans, are exempt from securities registration under the federal securities laws, including the Securities Act of 1933 (section 3(a)(13)) and the Investment Company Act of 1940 (section 3(c)(14)). Additionally, investment advisers to such plans are exempt from registration under section 203(b)(5) of the Investment Advisers Act of 1940. A significant percentage of these church plans invest at least some of their assets in registered mutual funds. These mutual fund investments may be offered as participant directed account options, or they may be chosen by the plan as investment vehicles for some or a portion of the plan's assets.

The Church Alliance applauds the Commission's swift action in proposing amendments to strengthen the current rules governing mutual fund transactions. We applaud the Commission's objective of promoting ethical principles and appropriate legal standards necessary to ensure that all investors are treated fairly.

Equal Treatment for Church Pension Plans

We want to ensure that as the Commission considers any changes in finalizing its proposed amendment, that it not inadvertently disadvantage church pension plans. For example, you have invited specific comment on an alternative approach that would allow fund intermediaries wishing to submit orders to designated transfer agents after 4:00 p.m. if they comply with certain yet-to-be-determined protections to prevent late trading. To the extent that such an approach is adopted, such intermediaries should include entities maintaining church pension plans. Under section 414(e)(3)(A) of the Internal Revenue Code, these entities include churches, conventions or associations of churches, and organizations whose principal purpose or function is administering or funding a retirement program for church employees ("church pension boards"). In addition, any such rule should encompass not only 401(k) plans, but also any retirement plan established under section 401(a) or 403(b)(9) of the Internal Revenue Code.

Request of Comments on Potential Costs and Benefits

The Commission specifically requested comments on the potential costs and benefits of the proposed amendments. While we do not have any specific cost analysis to share, we believe that it is important for the Commission to recognize that the proposed rule could impose additional compliance costs on mutual fund intermediaries, such as pension plans, if computer system enhancements are required. In balancing the costs and benefits of a final rule, the Commission should recognize that for most pension programs the costs of administration, including system enhancements, reduce participant returns.

We appreciate the opportunity to provide our comments on the proposed amendment and would be willing to meet with the Commission staff to further discuss our concerns.

Sincerely,

David A. Starr
Counsel

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1

Under section 414(e)(3)(A) of the Internal Revenue Code a church plan can be maintained by a (1) church, (2) a convention or association of churches, or (3) an organization the principal purpose or function of which is administering or funding a retirement benefit program for employees of churches, or convention or association of churches, if such organization is controlled or associated with a church or convention or association of churches.