January 27, 2004
Jonathan G. Katz, Secretary
Re: File No. S7-27-03
Dear Mr. Katz:
As independent directors/trustees of over sixty portfolios of the Oppenheimer Funds we submit these comments to the Securities and Exchange Commission regarding proposed amendments ("Proposed Amendments") to Rule 22c-1 under the Investment Company Act of 1940, as amended. The Proposed Amendments provide that an order to purchase or redeem fund shares will receive the current day's price only if it is received by the fund, its designated transfer agent, or a registered securities clearing agency by the time established by the fund for calculating its net asset value (normally 4 p.m.).
As independent directors responsible for representing the interests of all our funds' shareholders, we are concerned about the effect of the Proposed Amendments on certain of our individual shareholders. In particular we believe that many individual shareholders who invest through financial planners, or retirement plans with administrators, will be disadvantaged as compared to investors with the resources to develop or acquire sophisticated computer systems capable of processing batched trades in real time. In many cases a "hard" 4 p.m. cutoff will force the shareholders about whom we are concerned to enter orders earlier in the day, sometimes much earlier. Since the financial intermediaries handling their accounts must allow additional time for processing prior to submission of orders to a fund, transfer agency, or clearing agency, the individual shareholder may not even receive the same day's price. The Proposed Amendments will clearly disadvantage the shareholders described above, particularly those in retirement plans where they have no choice among financial intermediaries.
In its Proposing Release, the Commission acknowledged that one-third of the investing public purchases shares through financial intermediaries, and further acknowledged that such investors would not receive same day pricing, or would be required to submit orders prior to 1 p.m. in order to receive the current day's price. In fact, more than one-half of the shareholders we represent come into the funds through intermediaries who hold their shares in omnibus form.
The Commission states in its Proposing Release that the "burden on most fund investors will be small because most are not sensitive to the time at which their purchase or redemption orders are priced." The Commission further states that "[fund investors] make longer term investments, often as part of an automatic purchase program, and treat the time and date of the purchase order as a random event controlled by their employers' payroll processing protocol, or the delivery of the mail."
The Commission is correct that each original retirement plan investment may occur at a time beyond the participant's ability to control. But the Commission ignores the fact that most, if not all, participants may legitimately care about the price at which changes or reallocations occur among account options. In our view the Commission seriously underestimates the confusion and distress that would ensue if such investors were unable to effect transactions during periods of steeply rising or falling prices - when the opportunity cost of a day's delay could be substantial.
Each mutual fund investor should be entitled to a reasonable expectation of same day pricing regardless of where the relevant account is held, or the manner in which orders are processed.
We respectfully submit that the Commission's first line of attack in correcting abuses should be to corral the abusers. An almost equally important objective should be to avoid creating market impediments for legitimate investors, particularly small investors. In our opinion the Commission has identified three viable procedures (time stamping of orders, annual certification of the policies and procedures of financial intermediaries, and an annual audit of financial intermediaries) which, if implemented, could not only eliminate the identified abuses but would also preserve the equitable right of each investor to receive same day pricing.
These alternative approaches would impose an appropriate degree of regulation on potentially culpable parties - broker-dealers (who are already subject to SEC and NASD supervision), and financial intermediaries who execute transactions for plan participants but normally would not warrant the panoply of scrutiny provided broker-dealers. We recommend that the latter be required to register as transfer agents or clearing agencies, and that they be required to maintain appropriate policies, procedures, certifications, audits, etc.
In view of the inherent shortcomings of a hard cutoff, and the prospects of achieving an effective level of regulatory scrutiny through the alternative approaches outlined above, we urge the Commission to follow the latter course and to set aside consideration of a 4 pm cutoff unless alternative measures prove inadequate. The hard cutoff approach may be superficially appealing, but it will not be even-handed. We believe the Commission can derive as much or more success by attacking late trading abuses through policies and procedures that will simultaneously preserve equitable treatment among mutual fund investors.
We hope these independent director comments will be useful. Should they provoke questions or a desire for additional background please contact our counsel, Ronald M. Feiman, of the law firm Mayer, Brown, Rowe & Maw LLP, at (212) 506-2673 or via email at firstname.lastname@example.org.
Very truly yours,