Mr. Jonathan G. Katz, Secretary United States Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 RE: File No. S7-11-04 Proposed Rule 22c-2 under the Investment Company Act of 1940 (Release No. IC-26375A) Dear Mr. Katz: Nationwide Financial Services, Inc. ("Nationwide")(1) is grateful for the opportunity to provide comment with respect to proposed Rule 22c-2 under the Investment Company Act of 1940. The proposed rule is intended to address the problem of excessive trading in mutual fund shares, frequently referred to as "market timing."(2) It is widely recognized that excessive trading or "market timing" may inflict various forms of economic harm on a fund and its shareholders; in certain cases, a small minority of fund shareholders engaged in excessive short-term trading may earn profits at the expense of all other shareholders. The proposed rule would require mutual funds (with certain exceptions) to impose a two percent redemption fee on the redemption of shares purchased within the previous five days. It is believed that redemption fees imposed in this manner will either deter excessive trading, or, in the alternative, compensate the fund (and therefore its shareholders) for the added expense and other adverse financial consequences the fund may experience, including the gradual dilution of share values, increased transaction and trading expense, and disruption of the orderly pursuit of investment objectives by fund managers. Nationwide commends the Commission for its efforts in addressing this complex issue. From the many pointed requests for comment in the proposing release, it is clear that the Commission is duly sensitive to the difficult balances that must be struck to make mandatory redemption fees a workable component of a comprehensive solution to the problem of "market timing." Nationwide agrees with the Commission that redemption fees should not be considered the exclusive remedy for the problem of "market timing." Fair value pricing, for example, has failed to produce results that match its theoretical promise. We support efforts to improve processes associated with fair value pricing to ____________________ (1) Nationwide Financial Services, Inc. is the holding company for Nationwide Life Insurance Company and other companies comprising the domestic life insurance and retirement and long-term savings operations of the Nationwide group of companies. (2) The umbrella term, "market timing," is often used to describe excessive trading, even though the strategies and motivations underlying what is considered to be excessive trading or "market timing" may differ substantially from one context to the next (e.g., systematic arbitrageurs seeking to exploit perceived pricing inefficiencies are often referred to as "market timers," as are practitioners of more benign strategies such as periodic reallocations to conform with asset allocation goals). eliminate perceptible gaps between the purchase/redemption price of mutual fund shares and their actual value, thereby eliminating any economic advantage sought by market timers. NATIONWIDE'S PERSPECTIVE Nationwide and its affiliated companies are, in many respects, a microcosm of the financial services industry, particularly with respect to commerce in mutual funds. Nationwide affiliates provide investment management services to, and operate, open-end management companies (mutual funds). Broker-dealer affiliates of Nationwide operate distribution facilities through which mutual funds and other investment products are offered on a wholesale and retail basis. In addition, Nationwide is a leading provider of public and private sector defined contribution retirement plans, providing access to mutual funds through unregistered separate accounts of its life insurance company affiliates, an affiliated federal savings bank, and other affiliated companies. Nationwide is also a long-term participant in the variable insurance (life and annuity) industry, as well as a recent entrant into the packaged advice or "wrap" business, which is also heavily reliant upon mutual funds as basic investment components.(3) Over two years ago, Nationwide implemented changes to its processing systems designed to support the inclusion of redemption fee share classes (of funds) within its variable annuity separate account-unit investment trust offerings. Working in concert with affiliated and unaffiliated fund companies, Nationwide added redemption fee share classes of certain international fund offerings in May 2002.(4) This, along with other measures, has proved to be effective in achieving its designed purpose of addressing challenges created by time zone arbitrageurs attempting to gain access to international fund offerings through Nationwide variable annuities. Nationwide understands, however, that its ability to implement redemption fees in the limited context of variable annuity offerings may have resulted from its direct participation in the development, and mechanics, of how the fees are applied. We are greatly concerned that Rule 22c-2 will be adopted without sufficient regard to the impact such fees may have on typical investors engaged in typical (non-timing) transactions, and without due regard for practical realities faced by all forms of fund intermediaries, particularly those servicing defined contribution retirement plans. Accordingly, Nationwide supports proposed Rule 22c-2, and believes it can represent one aspect of a multi-pronged regulatory solution to this problem. We believe, however, that ____________________ (3) From its various product platforms, Nationwide offers well in excess of 4,000 different mutual funds from approximately 200 different mutual fund families. (4) The funds have a 1% redemption fee, administered on a FIFO basis, with a 60-day holding period. Nationwide collects the fee on behalf of the fund and remits all fee proceeds to the funds. The process implemented by Nationwide is essentially identical to the third methodology (related to intermediaries) set forth by the Commission in the proposing release for proposed Rule 22c-2 (Section II. D. of proposing Release No. IC-26375A). The fee is imposed by the funds, similar to a 12b-1 fee or any other fund charge; like other fund fees, it is not contemplated within the insurance contract itself. the formulation of the rule should adhere to three overarching principles or considerations. First, the rule should be carefully crafted to target abusive practices, not ordinary transactions. Redeemability is a cornerstone principle underlying the Investment Company Act. The free movement of assets into and out of mutual funds is one of the core reasons mutual funds are the investment of choice for small investors, particularly retirement savers. A final rule that imposes penalties on non-abusive transactions will clearly not be in the best interests of investors. Therefore, the scope of exempted transactions must be broad enough to account for routine trading activities that can in no way be considered abusive. Second, all aspects of any mandated redemption fee - percentage amount, holding period, exceptions, etc. - must be uniform. A 401(k) plan, for example, may offer thirty different mutual funds from ten different fund families. This is not atypical. Most investors access mutual funds through some form of similar intermediary. It is unreasonable (and cost/resource prohibitive), in our view, to require any intermediary to administer multiple variations or applications of redemption fees. Moreover, it is equally unreasonable to assume typical investors will fully comprehend - or will be inclined to devote the necessary time to comprehend - a multiplicity of alternative redemption fee characteristics relative to the wide range of funds available to them. Increasing employee participation in defined contribution plans is a goal for everyone in the retirement plan industry. Simplicity in structure and restrictions is crucial to fostering understanding by participants of the benefits of these plans. Nationwide Retirement Solutions, the segment of Nationwide Financial that administers more than 8,200 public sector defined contribution plans, has received feedback from its plan sponsors regarding the redemption fee proposal and the response was uniformly on the side of simplicity in application of redemption fees. Finally, in keeping with the immediately preceding point, there should be no opportunity for funds or intermediaries to seek competitive advantage by virtue of either having or not having redemption fees in the first instance, or having redemption fees of a different character (e.g., with a different holding period) in comparison to other funds. Similarly situated investors should not be forced or encouraged to consider redemption fee characteristics in selecting or evaluating mutual funds or intermediaries. These principles (i.e., narrowing the impact of redemption fees to abusive trading behavior exclusively, uniformity, and competitive neutrality), we believe, should guide the final formulation of Rule 22c-2 in general and should be consulted as precepts when considering the various component of the proposed rule. TWO PERCENT REDEMPTION FEE/FIVE-DAY HOLDING PERIOD As proposed, Rule 22c-2 would require a mandatory (no variation) two percent redemption fee with a minimum holding period of five days. Nationwide applauds the Commission for recognizing that a mandatory redemption fee of indeterminate amount (either higher or lower than two percent) would be unworkable. We further appreciate the Commission's effort to strike an effective balance between the concept of free redeemability and the fundamental purpose of the rule - to deter or eliminate the ability of a few shareholders to earn profits at the expense of the majority of shareholders through excessive trading practices. We must point out, however, that the policy goals cited as the justifying rationale for setting the charge at precisely two percent are equally relevant with respect to the required holding period. In stating the Commission's purposes for permitting no variation in the two percent charge, the proposing release indicates that "...uniformity of the two percent fee is designed to simplify the implementation of the rule and better enable intermediaries that hold shares in omnibus accounts to establish and maintain systems to collect these fees." From the intermediary perspective, indeterminate holding periods are no less unmanageable than indeterminate fees. Whether the intermediary is a retail broker-dealer, a defined contribution retirement plan, or an insurance company separate account, the prospect of administratively supporting multiple holding periods is at least as daunting and practically unworkable as having multiple redemption fee amounts. In light of the expense and confusion that would accompany any variation in a mandated redemption fee amount or holding period, we question whether the benefits of a redemption fee rule with non-uniform characteristics can ever outweigh its cost to investors and industry participants. Therefore, as discussed previously, it is exceedingly important to make uniformity a hallmark of any final version of proposed Rule 22c-2. The actual fee amount and holding period are potentially less important in our view than the fact that they be required to be uniform. If the concept of uniformity is embraced, however, consideration should be given to a lower mandated fee and a longer holding period. An efficient time zone arbitrageur, for example, would be deterred, but not completely deterred, by a five-day holding period. Many market timers make their profits by accumulating many marginal increments (much less than 1% per transaction), not necessarily by executing trades under only the most optimal circumstances. Thus, a five-day holding period would deter some activity, but would still allow a timer to take free redemptions (and reinvest the proceeds in the same fund the next trading day) approximately forty times in a single year, enough potentially to earn profits at the expense of buy-and- hold investors with interests in the fund. SMALL INVESTORS/SHAREHOLDER ACCOUNTS AND INTERMEDIARIES In setting forth de minimus(5) and financial emergency exceptions, the Commission has made a good start at examining the impact of the proposed rule on ordinary investors ____________________ (5) Proposed Rule 22c-2 exempts from redemption fees all redemptions not in excess of $2,500. initiating ordinary transactions. Mostly in an intermediary capacity, Nationwide processes well in excess of 15,000 mutual fund transactions per day on behalf of individual investors. There are a multitude of circumstances requiring mutual fund redemptions for wholly benign purposes. As examples, an IRA investor over age 70 may take annual minimum distributions on a quarterly or monthly basis from an annuity or wrap account; a death benefit may be paid under a variable life insurance policy; a teacher under a 403(b) arrangement may reallocate or re-balance his/her account on a quarterly basis; annuitization payments or systematic withdrawals from a variable annuity may be taken; or a public sector 457 plan participant may separate from service and need to transfer (roll over) account values to an IRA. A 401(k) or 403(b) participant as well as a variable life insurance policy owner may receive a loan. These situations, and many others, could potentially give rise to the application of a redemption fee. The investors' situation and objectives, and the administrative realities associated therewith, may be materially different depending on whether the fund is purchased on a stand-alone basis directly, through a payroll deduction-based retirement plan, an IRA, a variable annuity, etc. A final rule that neglects or ignores the relevance of these distinctions (and the mundane transactions that characterize each) and instead attempts to articulate a single methodology in this multi-context environment, will fail its intended purpose, and may well harm investors rather than protect them. Rather than specific de minimus or financial emergency rules, broad categories of transactions, all of which are aimed at accounting for the small investor, should be pardoned from redemption fees. For example, the commencement of a holding period for purposes of determining the applicability of redemption fees, should never be triggered by automatic payroll deduction or rebalancing. A final rule that does not permit this type of regular, systematic transaction to escape redemption fees will fail, in our view, because it will inflict as much or more harm than trading practices the rule is intended to deter. We encourage the Commission to consult actively with the insurance and retirement savings industries, and others, to ensure that the breadth of any final redemption fee rule does not encompass the multitude of benign transactions that occur every day. We acknowledge the difficulty of this task, but believe it is necessary to truly act in the best interest of mutual fund investors. REPORTING The proposed rule would also require omnibus traders/financial intermediaries to provide fund companies, on no less than a weekly basis, with "the amount and dates of all purchases, redemptions, or exchanges for each shareholder within an omnibus account during the preceding week." The ostensible purpose of this requirement is to enable funds to confirm that redemption fees are properly being assessed and to permit funds to ensure that market timing practitioners who have been banned from the fund in question are not permitted to access the fund through another intermediary channel. This requirement, we believe, is unnecessary, and would produce minimal regulatory benefits while adding significantly to the cost of mutual fund processing, particularly with respect to insurance company separate accounts and retirement plan administrators. Nationwide, which is a large intermediary, but by no means unique, would be required to report over 150,000 transactions within over 4,000 different mutual funds on a weekly basis. Consumers will ultimately bear this considerable expense, and it is highly doubtful that they will enjoy a greater level of protection. With variable insurance products, for example, a typical insurance fund has perhaps ten or twelve separate account-omnibus shareholders. If all insurance companies are required to assist in the administration of a uniformly applied redemption fee, any residual problematic trading at the separate account shareholder level will become apparent to the fund based on remitted redemption fee proceeds and demonstrated trading patterns - fund management generally knows when it is being whipsawed by market timers. Weekly reporting would be unnecessary. And, if the fee were uniformly applied, the timer would gain no advantage by moving to another carrier, therefore the fund would have no need to know through which channel the timer gains access. Intermediaries interface with investors and perform all manner of services on behalf of funds. These activities are properly contemplated in bi-lateral contracts between the intermediary and the fund or its affiliates. Within the context of Rule 38a-1, a fund's chief compliance officer would clearly be expected to perform due diligence in connection with the obligations of the intermediary - including, potentially, the obligation to administer redemption fees appropriately. In the vast majority of circumstances, this process will be sufficient, and mandatory reporting would add nothing of consequence other than expense. CONCLUSION Nationwide reiterates its support for a mandatory redemption fee rule as one component of a comprehensive regulatory strategy aimed at addressing the problem of "market timing." When coupled with recently adopted rules regarding disclosure and compliance processes, as well as improved fair value pricing methodologies, a uniform redemption fee rule, uniformly applied, administratively workable and not subject to manipulation for competitive advantage, may be a useful regulatory mechanism for addressing the problem of market timing. Implementation of the final rule should include a reasonable phase-in period of at least one year or longer. Significant systems and processing changes will need to be defined and implemented. More importantly, the communication to and education of retirement plan participants will require significant time and effort. Changes may also require modifications to the governing documents of employer-provided retirement plans, such as investment policy statements, plan documents, and trust agreements. We encourage the Commission to proceed cautiously in promulgating a final rule, and to refrain from action that ignores the practical realities and complexities of the mutual fund marketplace. The risk of unintended, costly consequences in this regard is extremely high and could ultimately harm the investing public as much or more than it protects them. Sincerely yours, /s/ MARK R. THRESHER Mark R. Thresher President and Chief Operating Officer, Nationwide Financial Services, Inc. MRT/SRS/ka