March 6, 2004
Dear Sirs:
Thank you for the opportunity to provide my input concerning this well-intentioned, but flawed rule. While I understand it is important to protect individual investors from the predatory practices of a few hedge funds, I hope that you will understand the importance that such rules not further cripple the already limited attempts of those same individual investors to secure their retirements in a very low interest-rate environment while managing the risk to those retirement assets.
By way of introduction, I am an anesthesiologist employed by the University of Colorado. For some years, I have managed a retirement nest egg using a 401A plan provided by my employer. My primary vehicle for retirement investing has been the sector funds provided by Fidelity Investments, that is the Fidelity Select Portfolios group of funds. I analyze these 41 funds on a daily basis using linear regression techniques combined with a measure of fit to said regression lines in order to quantitate the risk versus benefit for a sector fund at a given point in time. Once committed to a sector, I remain invested in the sector for 30 days unless a 4 percent trailing stop is taken out. When the 30 days is finished, or I am stropped out, I move to the highest ranked fund using my risk/benefit metric. The system works rather well, I have been essentially continually invested in the equity markets via this vehicle for years, with positive returns even during down market years. And for this reason, I feel secure even remaining invested no matter what the equity market environment. Of note, Fidelity has been extremely proactive in imposing penalties for short-term trading. At present, Fidelity imposes a 0.75 percent redemption fee whenever a select fund is held for less than 30 days. Even Fidelity realizes, however, that a single monolithic fee is not appropriate for all funds. For example, they impose a 1.5 percent fee for the Nordic fund when held less than 90 days. Perhaps, they have realized that sector funds can be more volatile than others and they therefore have chosen to impose a smaller fee and shorter holding period, so that those who might choose to rectify a mistake and manage risk might not suffer horribly from the penalty. To the best of my knowledge, the short-term penalty structure Fidelity imposes has been effective at controlling the sort of rapid-fire daytrading and arbitrage the SEC is attempting to limit with this rule. I have heard of no charges brought against Fidelity with respect to this, as with many other funds.
A short-term trade in a mutual fund may occur for a number of reasons, some of which have been exempted by the proposed rule e.g., hardship. However, another perfectly valid reason to remove assets from a fund typically used by a small investor such as myself is mitigation of risk. It is because of my activities in managing risk that I feel comfortable remaining in our equities markets through virtuallly all manner of investment climates. I would think the SEC has an interest in encouraging such behavior, as a mass exodus of retirement money from our financial markets may have rather severe repercussions. Furthermore, sector fund investing is one of very few avenues available to the small investor that even holds the potential for a positive return in an adverse market environment. The hedge funds will always be able to sell short or use various options strategies in those circumstances. The small investor trying to get to retirement does not have that luxury.
While I recognize you have attempted to be thoughtful in a measure to protect the small investor from the predatory activities of a few hedge funds, I encourage you not to crush the very people you are trying to help. I am frankly not smart enough to tell you what a good system of short-term trading penalties might be, but I am absolutely certain the dictatorial, one size fits all, cookie-cutter approach you have proposed is not the answer and will eviscerate the very investors you are trying to help.
Thank you for your time,
Aaron I. Cohn, M.D.
939 Jersey Street
Denver, CO 80220 USA.