FPA Government Relations Office
February 6, 2004
Mr. Jonathan G. Katz
Re: Release No. IC-26288, File No. S7-27-03; Amendments to Rules Governing Pricing of Mutual Fund Shares
Dear Mr. Katz:
The Financial Planning Association ("FPA™") is pleased to submit comments to the Securities and Exchange Commission ("SEC" or "Commission") regarding its rule proposal that would require that all purchase and redemption orders be received by a mutual fund company before the time at which the fund prices its shares (hereafter referred to as 4 p.m. Eastern Time).
FPA members personally manage, on behalf of their 7.8 million clients, more than $1 trillion in equities, the majority of which are in mutual fund shares. Mutual funds are a common investment vehicle used by planners in their retirement and education planning recommendations, as well as a significant part of investment management strategies. Modern portfolio theory, as subscribed to by the financial planning profession, stresses the importance of sound allocation strategies and discourages frequent trading based on daily pricing fluctuations. Nonetheless, FPA is extremely concerned about the current allegations of illegal late trading and other abusive practices in the mutual fund industry that dilute the value of investors' shares.
Late trading abuses must be addressed by the Commission in order to restore financial planner and investor confidence in the fairness of mutual fund operations and practices. Accordingly, FPA is encouraged by the Commission's efforts to eliminate late trading abuses and to assure fund investors that the value of their investments will not be diluted through this odious practice. We also applaud the SEC for bringing enforcement actions and promulgating the regulation that is the subject of this comment.
The Commission has proposed that an order to purchase or redeem fund shares could receive same-day pricing only if the fund, its transfer agent, or a registered securities clearing agency receives the order by 4 p.m. Eastern time. This proposal has the virtue of simplicity and would allow easy verification of compliance. It would undoubtedly be effective in eliminating unlawful late trading of mutual fund shares.
We are, nonetheless, concerned about certain unintended consequences of this proposal. According to the Investment Company Institute ("ICI"), approximately 85 to 90 percent of mutual fund purchases are made through financial intermediaries, including both financial advisers and employer-sponsored retirement plans . Currently, these investors obtain same day pricing provided their orders are received by the intermediary before 4 p.m., even if the intermediary does not aggregate and forward all trades to the mutual fund for execution until after 4 p.m. This would no longer be permitted under the SEC proposal.
According to ICI President Matthew Fink, "[a] 4:00 p.m. cut-off time at the fund will require intermediaries to apply an earlier cut-off time to the mutual fund orders they receive…. In many cases, investors [conducting fund transactions through intermediaries] may no longer have the ability to obtain same-day prices."
The SEC proposal would, in effect, create two classes of investors - the first comprised of investors who directly place their orders with fund companies and who would obtain the benefit of same-pricing and the second comprised of investors who place their orders through intermediaries and who would be unable to obtain same-day pricing. Large professional investors would have until 4 p.m. to make decisions based on current efforts and market activity in sharp contrast to smaller investors who rely on intermediaries.
Due to these concerns, FPA urges the SEC to consider an alternative approach to eliminating unlawful late trading. Specifically, we suggest that the SEC permit trading by an intermediary after 4 p.m. provided the intermediary agrees to an independent annual audit and uses electronic dating and time stamping systems that would leave an audit trail allowing verification of the exact time every order was received.
While we recognize that many intermediaries fall outside SEC jurisdiction, these intermediaries could - as a condition of being permitted to trade after 4 p.m. - voluntarily enter into agreements with the SEC and/or fund companies under which they could be subjected to an SEC audit. Further, mutual fund companies could be required to attest that they have verified that those intermediaries from whom they accept orders after 4 p.m. have policies and procedures in place to prevent unlawful late-trading.
FPA believes that it is incumbent upon the SEC to preserve a level playing field for all investors, whether large professional investors or participants in employer-sponsored retirement plans. We believe that verifiable time and date stamp technology, coupled with an independent audit process, SEC inspection and stiff fines and penalties, should be effective in preventing circumvention of the forward pricing requirements by fund intermediaries and allow equal treatment of all investors.
FPA appreciates this opportunity to comment on the SEC proposal. Please do not hesitate to contact the undersigned if you have any questions.
Neil A. Simon, Esq.