From: jing-mei li [Jingmei.Li@Sun.COM] Sent: Friday, February 06, 2004 7:48 PM To: rule-comments@sec.gov Cc: Jingmei Li Subject: [Fwd: Comment on Hard 4:00 p.m Cutoff, File No. S7-27-03] February 6, 2004 Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Re: Comment on proposed amendment to rules governing pricing of mutual fund shares; File No. S7-27-03 Dear Mr. Katz: We respectfully submit this comment in response to proposed regulation "Amendments to Rules Governing Pricing of Mutual Fund Shares," File No. S7-27-03. Sun Microsystems, Inc. has more than 25,000 participants in the 401(k) plan. As a plan sponsor, we are very concerned that proposed late-day trading regulations would place our participants at an unfair disadvantage relative to other investors, effectively subjecting them to different trading rules and, ultimately, different trading prices than other investors. We strongly endorse measures to strengthen the mutual funds and repair the damaged image of the industry, as this will benefit our participants' confidence in investing. However, we are concerned about potential unintended consequences of the proposed regulations. Millions of retirement plan participants may be relegated to next day trading if transactions must be provided to the mutual fund itself (rather than a third-party intermediary) by 4 p.m. ET. Participants typically place their retirement plan trades through recordkeepers or third party administrators (TPAs) that perform significant administrative activity after trades are closed to participants. These recordkeepers and TPAs enter into agreements with various mutual fund companies, allowing the recordkeepers or TPAs to take trades from participants as the mutual funds' agent until the 4 p.m. deadline, and then provide trades to the mutual fund at a later deadline. Under the proposed rule, however, the best case scenario would result in a trading deadline for participants as early as 10 a.m. ET (or 7 a.m. PT) in order to meet a mutual fund's hard 4 p.m. ET deadline. Because qualified plans are subject to a myriad of statutory and regulatory requirements, the recordkeeper or TPA performs a variety of functions after the trades are closed to participants. These functions, which currently occur after the 4 p.m. close, include gathering transfer instructions from different sources such as participant web sites and service centers, and running various statutory and regulatory checks and edits on the information such as determining the validity of transfer requests, reviewing loan and distribution requests and verifying cash availability for contributions. Due to the open structure of the investments in many plans (participants can trade in and out of funds across several different mutual fund companies), the recordkeeper or TPA also needs the funds' calculated NAV to process a trade involving multiple mutual funds on the same day the participant trading instructions are received. Although the NAV is provided after the 4 p.m. close, recordkeepers and TPAs can make those calculations with the NAV post-4 p.m. under the present system as long as the trades have been submitted to them by 4 p.m. Some have argued that the trading delays for retirement plan participants caused by the hard 4 p.m. close do not significantly disadvantage these participants because their investments are long-term investments for retirement. However, long-term investors are not necessarily committed to a particular fund for the long term. Many investors, inside and outside of retirement plans, perform strategic asset reallocation periodically and those investors justifiably expect same day trading. The length of one's investment time horizon is not a valid reason to disadvantage that investor. Studies have shown that being out of the market for even a few days periodically can result in a decrease in returns. A major world event could significantly affect the market after trading is closed to plan participants under the proposed rule. These participants would be locked in the market for another day while those investing directly with the mutual fund would not. These adverse consequences are unnecessary and can be avoided while addressing the late-trading issues through a technological solution. Specifically, we support a combination of the alternatives outlined in the proposed rule: 1.Electronic time-stamping of orders in a manner that cannot be altered or discarded once the order is placed. 2.Annual certification that the 401(k) recordkeeper has policies and procedures in place to prevent late trades, and that no late trades were processed. 3.Annual audit of the 401(k) recordkeeper's controls conducted by an independent public accountant who would submit his report to the fund's chief compliance officer. Technology exists today that will time stamp trades placed with most recordkeepers and TPAs. These systems, which could be subjected to outside audit, could be modified quickly to provide the protections that investors and the SEC are seeking. We urge you to consider and adopt these technology solutions that would address the legitimate concerns surrounding late trading without relegating plan participants to second-class investor status. Sincerely, Jingmei Li 401(k) Program Manager Sun Microsystems, Inc. USCA12-101 4120 Network Circle Santa Clara CA 95054 Tel: 510.315.4983 Fax: 408.276.3370