From: MaddenInv@aol.com
Sent: Friday, January 30, 2004 3:21 PM
To: rule-comments@sec.gov
Subject: S7-26-03 Comments

Joseph M. Madden
1010 Lake St. #604
Oak Park, IL 60301

January 30, 2004


RE: File No. S7-26-03

Dear Chairman Donaldson:

I am writing as a registered investment advisor about the proposed 
SEC rule S7-26-03, referring to the disclosure regarding market timing 
and selective disclosure of portfolio holdings.  

Our firm is a fee-only based investment advisory managing mainly 
retirement accounts for retirees and pre-retirees. I have managed 
retirement accounts for the past thirty-five years, always using some 
sort of active asset allocation for stock market risk management. 

We use an institutional brokerage platform using the brokerage firm’s 
own family of no-load funds as well as other funds in their fund 
supermarket. We use active allocation strategies with the firm family’s 
funds. Holding ranges from 60 days to a year. While we’re satisfied 
with our historical relationship, occasionally problems arise because 
of the lack of specificity on the broker’s and/or fund’s rules on 
trading. They choose to be deliberately elusive on this matter. 

Sample statements from prospectuses and other literature:

A fund may reject or cancel any purchase orders, including exchanges, 
for any reason. For example, the funds do not permit market timing 
because short-term or other excessive trading into and out of a fund 
may harm performance by disrupting portfolio management strategies and 
by increasing expenses. Accordingly, a fund may reject any purchase 
orders, including exchanges, from market timers or investors that, in 
[our] opinion, may be disruptive to that fund. For these purposes, [we] 
may consider an investor’s trading history in that fund or other funds, 
and accounts under common ownership or control.

... shareholders have the privilege of exchanging shares of one fund for 
shares of another. [Firm] reserves the right to modify or terminate the 
exchange privilege at any time.

Each fund may refuse any exchange purchase for any reason. For example, 
each fund may refuse exchange purchases by any person or group if, in 
[the firm’s] judgment, the fund would be unable to invest the money 
effectively in accordance with its investment objective and policies, 
or would otherwise potentially be adversely affected.

Each fund may temporarily or permanently terminate the exchange privilege 
of any investor who makes more than four exchanges out of the fund per 
calendar year. Accounts under common ownership or control (underline is 
ours) will be counted together for purposes of the four exchange limit.

These statements (other than ‘four exchanges out of the fund per calendar 
year’) have arbitrary language that fails to give clear trading parameters 
to investors, their advisors, and even creates confusion within the 
brokerage firm. What is ‘short-term or other excessive trading’? The 
other listed references are likewise unclear. Some of the firms staff 
say holding funds for a minimum of 60 days avoids ‘excessive trading’ 
standards, others have said 90 days, still others say it’s up to fund 
managers.

It’s impossible to communicate convincingly to our clients what our risk 
management strategy and system parameters are when we ourselves are unsure.

The SEC should require full disclosure of what each fund believes is 
‘excessive trading or adverse market timing. This disclosure should be 
specific and not open ended. It should be uniform for all investors and 
their advisors. Number of trades, percent of assets, and holding periods, 
should be clearly stated and published.

We hope reforms will be made regarding the disclosure of the mutual 
fund industry’s view of market timing. Thank you for taking the time 
to hear our point of view.

Joe Madden