PricewaterhouseCoopers LLP

February 6, 2004

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

Re: File No. S7-27-03

Dear Mr. Katz:

PricewaterhouseCoopers LLP appreciates the opportunity to comment on the Commission's Proposed Rule: Amendments to Rules Governing Pricing of Mutual Fund Shares (the "proposal" or the "proposed rule").

We support the proposed rule's objective to prevent late trading in mutual fund shares. We also believe that alternatives that may substantially achieve the regulatory objective should be thoroughly investigated.

Any evaluation of the proposed rule must begin with the recognition that late trading is illegal. Based on our reading of the enforcement actions brought by the Commission and other public reports, the alleged instances of late trading involved either collaboration or management override of standard operating procedures for processing of mutual fund share trade orders principally by third-party intermediaries. Also, in many instances, it is alleged that the late trading was performed directly by the intermediaries without the consent, or even the knowledge, of affected mutual fund organizations or their transfer agents.

We share the Commission's concern that, particularly because of this lack of knowledge, such schemes appear to have been able to avoid detection. This is largely because fund managers and their transfer agents currently have no practical way to identify late trades transmitted to them from intermediaries. Therefore they are unable to enforce the contractual obligation of intermediaries to segregate orders submitted before 4:00 pm from those submitted later. It should be noted in this regard that many fund organizations had not previously considered establishing such procedures on the basis of their understanding and belief that the intermediaries, virtually all of which were regulated entities, would maintain adequate compliance control procedures and did not envision the possibility that operators would systematically override them.

We believe the Commission should, in conjunction with management and directors of mutual funds, as well as fund intermediaries, consider requiring the development and adoption of procedures to combat this illegal activity. A combination of control and certification procedures should be considered, including those related to (1) better training of those responsible for processing mutual fund trade orders on the criticality of timely order processing and "knowing your customer" requirements, (2) more robust controls over the processing of orders to discourage collaboration or management overrides, (3) remediation of processes to provide better identification of the time of the orders received from intermediaries, and (4) more robust contractual provisions, including monitoring and certification requirements, between funds and various intermediaries, including transfer agents, to provide more transparency and accountability.

In this spirit, we support the approach described in the Commission's proposal that would require third-party intermediaries to have adopted certain protections designed to prevent late trading in order to be eligible to submit orders to designated transfer agents or Fund/SERV after 4:00 pm. Below are observations concerning specific protections identified in the proposal.

Summary of Proposed Protections and related PwC's Observations:

    1) Electronic or physical time-stamping of orders in a manner that cannot be altered or discarded once the order is entered into a trading system.

    1. We believe that technology can be an enabler to achieve this. However, there also needs to be more robust monitoring controls established to ensure the quality control of the day-to-day processes and that follow up on exceptions is timely and equitable.

    2) Annual certification that the intermediary has policies and procedures in place designed to prevent late trades, and that no late trades were submitted to the fund or its designated transfer agent during the period.

    1. Such policies and procedures need to address not only direct processing controls, but the training and self policing functions. Ideally, certifications should be provided semi-annually, analogous to the control certifications required of a mutual fund's chief executive and chief financial officers on Form N-CSR. This intermediary certification should be prepared in accordance with rules established by the Commission. Such certification would place accountability with the processing agent consistent with the accountability that Form N-CSR certification places on the mutual fund chief executives and chief financial officers.

    3) Submission of the intermediary to an annual audit of its controls conducted by an independent public accountant who would submit his report to the fund's chief compliance officer.

    1. A more practical approach may be for the Commission to require that management's assertions contained in the certification (described in item #2 above) be examined and reported upon by an external auditor pursuant to the reporting requirements contained in the AICPA Attestation Standards which have been adopted on a transitional basis by the Public Companies Accounting Oversight Board. This report would be filed with the Commission and would be available to all of the intermediaries' mutual fund clients rather than separate reports submitted to each fund's compliance officer. Since there are inherent limitations in internal controls and, although this report may provide assurance or findings regarding management's assertions covering those specific controls surrounding compliance with the trade order process, it should not be considered as a substitute for certification from the intermediaries' management as discussed above.

In closing, we think it is important to note that it is management's primary responsibility to deter and detect fraud, and to have in place a process to assess the risk that the attributes, motivation, opportunity and availability of concealment techniques that can lead to fraud may exist. We believe that more robust trade order processing controls and stronger management accountability at third-party intermediaries in combination with new certification requirements developed by the Commission would best serve to meet the objectives of the Commission's proposed Rule.

We appreciate the opportunity to express our views and would be pleased to discuss our comments or answer any questions that the staff may have. Please do not hesitate to contact Chip Voneiff (312-298-4815) or Barry Benjamin (410-783-7623) regarding our submission.


PricewaterhouseCoopers LLP