May 10, 2004
The proposed change to require mutual funds to charge a mandatory redemption fee on purchases is, in my opinion, a misguided attempt by the SEC in response to recent activities in the industry.
There are four main problems that the SEC and Mr. Spitzer have uncovered--illegal trading after hours, stale pricing of international stock funds, quid pro quo deals between hedge fund advisors and mutual fund companies and improper disclosure or lack thereof in mutual fund prospectuses regarding such deals in regards to the exchange policy of a particular mutual fund.
None of these four problems have anything to do with legitimate market timing, which is a form of risk management designed to protect ones capital against serious market declinesno matter the asset class. Yet, the SEC and the fund industry are now proposing solutions that will harm 99.7 of investors and their advisors, just so they can so they are doing something about the 3/10 of 1 who cheated.
To my knowledge, I have yet to see the SEC or the industry define market timing, yet many mutual funds have already instituted holding periods and redemption fees ranging from 30 to 180 days with a fee of 2. There is no evidence that investors or advisors selling fund shares is costing the fund 2. If I can buy or sell a mutual fund at Fidelity for 35 on a 100,000 purchaseor more for that matter, how is it that the SEC is allowing funds to charge 2 penalities?
Fair value pricing is another mistake. There is a lot of evidence that fair value pricing is flat out faulty, yet the SEC has encouraged funds to use this method for international funds. Frankly, this is the one area where a short term redemption fee of 2 with a 30 day hold makes sense, because international securities tend to be less liquid than U.S. securities.
The 4 pm hard close is another example of punishing 99.8 of the innocent investors. It is virtually impossible for major intermediaries such as Fidelity, Schwab or major brokerage houses to have all their orders in to the respective fund companies until a few hours after 4 pm. Yet most of these companies have policies in place and honest people who follow the rules. Instead of forcing the entire industry, and 50 million retirement investors to alter a system that has worked just fine for many years, why doesnt the SEC enforce the laws which have been on the books for many years. Why is it that no one to my knowledge who was involved in late trading has been sent to prison?
All in all, it seems the SEC is playing right into the industrys hands. The mutual fund industry would love nothing more than for investors to put their money in and forget about it--the old buy and hold myth. According to research conducted by Mark Hulbert, investors need at LEAST 20 years in the market in order for a buy and hold strategy to workeven then, there are no guarantees--see Japan.
The SEC should also consider a study conducted by Sanford Bernstein and Co. which says that the typical holding period for a investor buying stock in 1975 was 10 years. Today, the average holding period for a typical investor is 10 months. Like it or not, there are many invesotrs whose time horizon is shorter today than many years ago.
All in all, it seems the SEC is mandating that mutual funds are long term investments. That only works for investors if markets go basically straight up, like from 1982 to 1999. The truth is, markets go down about 1/3 of the time, and risk management for anyone over about 40 years old is critical if one cares about their capital.
I sincerely hope the SEC reconsiders it stance on all of the pending legislation that will affect the mutual fund industry. I believe that a majority of the proposals will only benefit and enrich the funds themselves, yet will significantly harm individual investors and advisors. Please do not punish the innocent and enact legislation which stoops to the lowest common denominator.