File No. S7-26-03 Disclosure Regarding Market Timing and Selective Disclosure of 
Portfolio HoldingsFrom: Brian Ternoey [bternoey@curciowebb.com]
Sent: Tuesday, April 06, 2004 8:27 PM
To: rule-comments@sec.gov
Subject: File No. S7-26-03 Disclosure Regarding Market Timing and Selective 
Disclosure of Portfolio Holdings 

These comments summarize our concerns about the decrease in information many 
institutional investors will experience since some mutual fund firms have 
already stated they will use these proposed rules to stop providing considerable 
detail on fund holdings.  This information is necessary to compare and evaluate 
mutual and commingled funds on the same basis as institutional investment 
management accounts (separate accounts).  The institutional investors are among 
the most diligent observers of manager performance and compliance.  They should 
not have to lower their standards of analysis as a result of this important 
reform.

Let me first say we are very sympathetic with the issue of fair disclosure and 
want to be supportive of the SEC’s and any firm’s efforts to improve in this 
area.  However, some fund firms are already using the proposed rules as an 
excuse to decrease the amount of information provided and their current stance 
is untenable for us as consultants to institutional clients.  Moreover, we (nor 
any consultants I’m aware of) are not the source of problems but rather 
advocates of even higher standards than reflected by SEC requirements.  We want 
to help the industry catch frontrunners, shorters, timers and criminals that 
hurt our clients but not at the cost of lowering our standards of evaluation and 
comparison.  We think investors are better served if fund managers make room for 
our higher standards and then concentrate on better policing to catch the 
crooks.

Our basic concern is that timely security holdings data is essential to diligent 
comparison and monitoring of investment managers.  My comments use equity 
statistics as examples.  Similar uses and issues apply to fixed income 
securities.  Institutional diligence needs a list of securities held by the fund 
at least on a calendar quarter-end basis (though monthly is our preferred 
standard).  That list needs to include an identifier (Ticker or CUSIP) of the 
security, the quantity (shares) held by the plan and the price or market value 
of the shares.  Some fund firms provide sufficient information on a timely basis 
(see www.onegroup.com for a good example; click on products, select any equity 
product, then click on schedule of portfolio holdings).  In this day and age, 
this is not an onerous service to provide investors.  Some situations 
legitimately deserve a delay in posting the data to stop shorting and 
front-running cheats but frankly, that is not hard to thwart.  

We use holdings as the common denominator to calculate portfolio level 
characteristics (we use about 40 different factors).  We do not really need to 
provide clients lists of securities themselves.  For pension plans, the sponsor 
may use a variety of separate accounts, commingled funds and mutual funds with a 
variety of styles.  A prime reason we use quarterly holdings is that we want to 
calculate all accounts for all clients on the same basis.  We can not rely on 
the investment firms to provide these statistics.  When we ask any investment 
manager to provide even simple statistics such as a fund P/E or Median 
Capitalization, we often get statistics calculated on different bases from one 
product to another or one time period to another even within the same firm.  We 
take holdings and calculate statistics based on definitions we can apply to all 
investment managers so we can produce numbers that are comparable across our 
entire universe of client funds (and all a manager’s products). 

This consistency is important for typical institutional clients (pension funds, 
endowments, etc) where the ability to combine all the equity managers in a 
plan’s allocations and come up with the combined characteristics produces plan 
level statistics that are comparable against all clients in our universe.  There 
is no way for us to accommodate fund firm positions that they will provide 
holdings or statistics on their terms and still be able to look at the client’s 
total portfolio as compared to all client portfolios.  Some of our calculations 
are proprietary and even if we could transfer the software and algebra for fund 
firms to perform the calculations, we would not accept their calculations as 
objective.  An important reason for clients to hire consultants is for third 
party verification.  Consequently, we have tried to keep our requests to the 
minimal requirements to conduct our analysis.  That requires the holdings, 
Tickers/CUSIPS/SEDOLS as unique identifiers, quantity of shares or bonds, the 
closing price (as a check) and/or the market value of the security holding (as 
an alternative check). 

Our next point is an important one but we do not want it perceived incorrectly.  
If we can’t get holdings information from a particular firm, how do we include 
that firm in any searches without lowering our standards?  When monitoring 
results, how do we recommend to a client that they ride through a rough spot 
with a manager when we don’t get the same level of detail that other managers 
provide?  This isn’t a “threat” but it’s the dilemma we are left with.  For us 
consultants, there are alternatives available that meet our standards so we 
don’t see the need to “lower” them.  Institutional money will migrate away from 
mutual funds if they do not supply their information on a par with other 
investment providers.  Clients would be less than prudent to accept lower 
standards when technology now allows separate accounts with all the 
functionality of mutual funds, even in a 401(k) plan.

While the abuses uncovered over the last few months have been horrendous and the 
dollar losses huge, they are, in fact, modest compared to the potential losses 
institutional clients face when we can not look at funds in detail and analyze 
performance closely.  A manager straying from his style can cost a client many 
times the losses in the worst cases to date.  A sponsor without sufficient data 
to justify sticking with a manger though a rough performance cycle may move to 
another manager prematurely. 

The events of the last few months have shook up institutional clients quite a 
bit and we’d prefer they’d calm down.  It is important for the mutual/commingled 
fund industry to find solutions to refurbish a tarnished image, especially firms 
not involved in the original misdeeds.  Less disclosure may seem to many firms 
as a reasonable, consistent response and a quick way to comply with SEC rules 
but many of our clients will come to see it as a lowering of standards and they 
will not accept that as the “reformed” industry.  Daily news accounts indicated 
some are already quite disillusioned or compelled to exit.  They won’t all leave 
suddenly but it could be a watershed event.

Our solution then is simple, make institutional quality information available to 
all investors.  Don’t let the new rules become excuses for fund firms to 
decrease the quality of information to the very group of investors that conduct 
the best policing of manager performance and provide large sources of investment 
dollars.

Brian Ternoey

Curcio Webb, LLC

609.737.4105