May 10, 2004
I believe the proposed change to require mandatory mutual fund redemption fees is a misguided attempt by the SEC to solve the recent problems in the mutual fund industry. Enacting this legislation will only serve to punish innocent individual investors without addressing the illegal activities that have occurred by a small minority of investors.
I am against this proposal because it harms individual investors who have done nothing wrong. No ordinary private investor has the ability to participate in illegal after-hours trading. Yet enacting this legislation will prevent these ordinary investors from managing risk in their portfolios, while it does not address such abuses as illegal after-hours trading.
The financial activities of individuals in the aggregate both buys and sells in multi million or multi billion dollar funds are negligible and self-canceling compared to the activities of hedge funds and large, very wealthy speculators. Most individual investors buy near the top the worst time for them the best time for the fund and sell near the bottom again the best time for the fund, the worst time for the individual.
There is no merit in mandating investors remain in a poorly performing fund. Locking Enron employees in their stock holdings while Enron executives bailed out was not beneficial to the employees.
A 2 percent early redemption fee is excessive. Many discount brokerages will allow the purchase of 5000 shares for 7 or less. If one purchases 5000 shares of SPY, the S P 500 ETF, if the price were 100, they could buy 500,000 worth for 7. However, some fund companies charge a 2 ERF if their SPY mutual fund is sold in less than 60 days. They collect 10,000500,000 X 2 for something that at the retail level costs only 7.
The SEC is giving a bonus to mutual funds at the expense of individual investors. Already some funds are using the proposed rule to extend the suggested 5 day market timing period to 30, 60, 90, 180, or 365 days. This proposal is giving fund companies the green light to lock investors into their funds. The investors may suffer substantial loss since the 2 percent ERF is extremely high, especially to a retiree whose sizeable fund holdings represent a lifetime of savings.
The cost is excessive compared to the effect of market timing and the cost of implementing it. The SEC says market timing causes a loss of 1 Billion. However, the mutual fund industrys assets are in the tens of trillions of dollars. If the fund industrys assets were 1 Trillion, the difference in a 15 return would be 15.00 versus 14.99: 0.01 Since the assets are in the tens of Trillions, the maximum loss is less than 0.001
Prudent money management requires periodic rebalancing either quarterly or in some cases when the investment climate changes. This proposal will effectively reduce an individual investors ability to rebalance their portfolios.
I sincerely hope that you will focus on the actual abuses that occurred and take the appropriate action to prosecute those responsible and prevent further illegal activities. This legislation will only serve to punish innocent individual investors without addressing the illegal activities that have occurred by a small minority of investors.