From: Linda Ferentchak - FCAI [fcai@effectivewords.com] Sent: Monday, May 10, 2004 12:38 PM To: rule-comments@sec.gov Subject: File No. S7-11-04 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, NW, Washington, DC 20549-0609 Re: File No. S7-1104 This letter is written in opposition of the SEC's proposal to impose a mandatory 2% redemption fee on mutual fund trades taking place within a minimum of 5 days of purchase. I very much believe the SEC's proposal: (1) is massive overkill. In response to a problem that has apparently resulted in a fraction of a cent per share based on Janus Funds' findings the SEC is proposing a massive 2% penalty on EVERYONE who might want to reverse a transaction for any reason. This akin to punishing the innocent along with the guilty because as regulators you lack the ability or desire to enforce existing laws. (2) is the wrong solution. The problem seems quite clear. Funds that said they did not allow market timing in fact helped preferred investors violate their rules. Some investors traded illegally after hours. International time differences gave investors a clear advantage in anticipating short-term price changes in international funds. To solve the problem, all the SEC seems to need to do is: a. Require funds to clearly state their short-term trading policies and require that those policies be enforced uniformly or else clearly stated penalties will be imposed against the funds and the fund executives. b. Enforce existing laws. After hours trading is already illegal. If you can prove it, go after the violators and go after them hard. c. Enforce your already existing requirement that funds use fair value pricing when events clearly indicate that fund prices will be impacted upon next day opening. (3) legitimizes investor price gouging. The idea of a 5-day redemption period is a joke. Mutual funds already have the ability to impose redemption fees of up to 2% on whatever time period they choose. Those who choose to do so typically have time periods of 30 days to a year and even three years. Even the intermediaries have gotten into the act. Are you aware that Schwab already charges a redemption fee on fund transactions of less than 180 days, as does Waterhouse and other financial companies? Needless to say those fees don't go back to fund investors but right to the bottom line. With your proposed regulation, every fund purchase made through Schwab could be subject to two layers of early redemption fees. This does not sound like the way to protect investors from excessive fees. (4) sets a government preference for long-term investors versus short-term. If flipping mutual funds to take advantage of short-term price opportunities is inappropriate, I suppose the SEC will next decide flipping stocks is bad as well. After all short-term traders could be driving down the return of longer-term investors. Perhaps there should be a redemption fee on short-term stock trades as well. Once you get into this type of protectionism cycle, where does it end? The fund companies should decide what makes sense based on their operations and investment styles, not regulators. Your job is not to protect one class of shareholders against another but rather to assure an open market place. (5) is based on inappropriate terminology and assumptions. There is a difference between betting at the start of the race or after the race ends. The mutual fund violations that are clearly intolerable have involved betting after the race is run when the winner is known. That's a big difference from guessing which way a trend will play out over the short and long term -- the traditional meaning of market timing. For years, the financial pundits and vast majority of academics have maintained market timing doesn't work. If that is true then any time a market timer fails, the non-timers gain. All of the proposed rules seem to have concluded that timers always win to the detriment of other investors. That's only true when betting after the race is run. Any way, I think you are erring to continue forward with a redemption fee. Ultimately, I believe it will hurt the average investor far more than the status quo and I would urge you to look very carefully at who this regulation truly benefits. It's not the average mutual fund investor. Sincerely, Linda B. Ferentchak Linda Ferentchak is President of Financial Communications Associates, Inc., an investor relations, financial pr and financial marketing firm based in Denver, Colorado. Financial Communications Associates, Inc. 3567 S. Pennsylvania Street Englewood, CO 80113-3733 TEL: (303) 989-5656 FAX: (303) 783-8848 fcai@effectivewords.com www.effectivewords.com