February 5, 2004
Jonathan G. Katz, Secretary
Re: File No. S7-27-03
Dear Mr. Katz:
I am grateful for the opportunity to provide my comments with respect to the proposal by the Securities and Exchange Commission Amendments on Rules Governing Pricing of Mutual Fund Shares (File S7-27-03). Specifically, I would like to address the "hard 4 pm close" proposal.
I am a registered investment advisor for a small firm. Our clients are mostly middle class working or retired individuals and rely on our expertise, especially in decreasing their risk in the investment process, to assist them in achieving their investment and retirement goals. The "hard 4 pm close" would make it more difficult for our clients and millions of individual investors like them to achieve those goals due to the problems and inequities it would create.
The investment landscape is growing increasingly varied and flexible with new innovations and products, some which allow for near-round-the-clock trading. The "hard 4 pm close" proposal is, in my opinion, a regressive idea that would decrease the flexibility for small investors. Currently, all of our firm's mutual fund transactions are placed through intermediaries. In that aspect, we are not unique. According to the Investment Company Institute, 85 to 90% of mutual fund trades are placed through intermediaries. If the "hard 4 pm close" were implemented, these financial intermediaries would not be able to accept orders up to 4 p.m. and still be able to get those orders to the fund companies by the 4 pm deadline. Thus, due to trade processing at the intermediaries, investors would be forced to make their order decisions hours, if not days, before the deadline to get that day's closing NAV on their funds. These delays in executing the orders could be very costly to small investors.
The "hard 4 pm close" proposal would render the investing playing field less level than it is already, further disadvantaging individual investors at the expense of large professional investors and traders. Most large professional investors directly place their orders with fund companies and would therefore still have until 4 p.m. to make their trading decisions. Since it is from among this pool of large professionals that many late-trade perpetrators (one of the parties responsible for the mutual fund scandal) functioned, it seems to me that any reform should be directed at this group. Yet, the "hard 4 pm close" proposal would do little to impact the practices of the large professional investors, while hampering the smaller investor's ability to fairly compete.
In order for smaller investors to be able to trade up to the 4 pm deadline, they will need to move their assets to mutual fund companies themselves (also severely decreasing their mutual fund options.) Who benefits by this? The other guilty party involved in the scandal does - the mutual fund company. Why reward the law-breakers and punish the small investors and intermediaries?
I certainly welcome the Securities and Exchange Commission's attempts at reform in the mutual fund industry. However, regarding the late trading concerns, the reforms should be in the area of better enforcement. If my firm attempted to electronically enter a mutual fund order after the current cutoff time, it would automatically be either rejected or executed at the close of the next day. It is not a difficult proposition to require all firms and intermediaries to adhere to this standard. With some additional and reliable method, perhaps a universal time-stamping mechanism, along with stricter auditing of mutual fund companies and intermediaries, the industry would provide all investors the opportunity to operate on a level playing field, allowing mutual fund transactions to continue to be entered up to the 4 pm close regardless of where the assets reside.
Thank you for permitting me to submit my opinions for review.
Very truly yours,