February 6, 2004

Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609

Re: File No. S7-27-03: Proposed Rule: Amendments to Rule Governing Pricing of Mutual Fund Shares

Dear Mr. Katz:

Thank you for the opportunity to submit comments on the amendments to Rule 22c-1 under the Investment Company Act of 1940 (the "Investment Company Act") governing the pricing of mutual fund shares recently proposed (the "Proposing Release") by the Securities and Exchange Commission (the "Commission"). Pursuant to the changes to Rule 22c-1 in the Proposing Release, to obtain the current day's price all purchase and redemption orders must be received by a fund, a single transfer agent designated by the fund (a "designated transfer agent"), or a registered clearing agency no later than the time at which the fund prices its securities. This arrangement, which is known as a "hard close" at 4:00 p.m., would significantly alter the long-standing provisions that permit suitable market intermediaries to accept customer orders until 4:00 p.m., then process and transfer those orders to the fund companies sometime after 4:00 p.m. (the so-called "soft close"), and still receive same-day pricing.

Background

UBS Financial Services Inc. ("UBSFS") and UBS Global Asset Management (US) Inc. ("UBS Global AM") are affiliates of one of the largest integrated financial services companies in the United States. UBSFS, UBS Global AM and their affiliates include: (i) one of the nation's largest broker-dealers, which offers and sells approximately 3000 mutual funds representing over 150 fund families; (ii) a large transfer agent operation that services, among other things, the sale of mutual fund shares; (iii) a global asset management group that has approximately $434 billion in assets under management worldwide, including more than $58 billion in U.S. registered mutual fund assets; (iv) a large retirement account group; and (v) a full-service bank. Because of our extensive operations in all facets of the financial services industry that deal with mutual funds, and because we are directly affected by the Commission's proposal on both the intermediary side (through our broker-dealer) and on the fund company side (through our global asset management business group), we believe that we are well qualified to offer comments on the Commission's proposed amendments to Rule 22c-1.

Overview

Like the Commission, UBSFS and UBS Global AM are deeply concerned by recent events indicating that some market participants have engaged in late trading and market timing of fund shares. We agree with the Commission that significant steps must be taken to make certain that mutual fund investors' confidence in the industry is restored and that fund companies and their intermediaries are held to the highest ethical standards. The Commission is correct in pursuing an aggressive path to eliminate late trading and abusive market timing and implementing new safeguards surrounding the pricing of mutual fund shares.

We would differ with the Commission, however, in the precise solutions that have been proposed to address these issues. We believe that the Commission's hard close proposal is too drastic a measure to impose on the mutual fund industry. The 4:00 p.m. hard close will result in substantial costs, both to investors and to mutual fund intermediaries. Moreover, it is likely to result in a great deal of confusion among mutual fund investors in both retail and retirement accounts and to work to the detriment of certain classes of investors that we do not believe that the Commission intends to disadvantage.

UBSFS and UBS Global AM instead believe that additional significant protections should be added to the existing pricing procedures of Rule 22c-1. These safeguards would allow intermediaries, including broker-dealers, banks, and third-party administrators ("TPAs") for retirement accounts, to continue to accept trade orders until 4:00 p.m. and transmit those orders to the fund companies thereafter, while still obtaining same-day pricing for their customers. We note that this structure was proposed in legislation recently passed by the U.S. House of Representatives (H.R. 2420) (the "House Bill"). A companion measure has not yet been adopted by the U.S. Senate, although the Senate Banking, Housing, and Urban Affairs Committee is reviewing, through the hearing process, mutual fund industry practices. We discuss below both the disadvantages associated with a hard close at 4:00 p.m. and the additional protections that would be needed to ensure that a soft close continues to be viable.

For the past three decades, Rule 22c-1 has been interpreted by the Commission and by the industry in a manner that has promoted the sale of a maximum number of products in a free market to investors. The Commission staff has consistently taken the position during this period that under Rule 22c-1 orders can be considered "received" when they are received by intermediaries of the fund, including brokers and other agents. This interpretation has permitted "open architecture" - the ability of investors to purchase a multitude of mutual fund products from the same intermediary or from a wide variety of providers - to evolve in a manner that offers tremendous advantages to investors. Among other things, it has permitted both retail and retirement investors to obtain same-day investment and pricing and to enjoy certainty in exchanges among different fund groups. It also allows an investor to select a single trusted intermediary - a broker-dealer, investment adviser, etc. - from whom the investor can obtain integrated, consistent guidance and through whom the investor can purchase a wide range of products. These arrangements are commonplace today and allow the free flow of information and guidance. By encroaching on this open architecture, the Commission's proposed amendments to Rule 22c-1 would impose unnecessary restrictions on the ability of, and the manner in which, an investor may invest in mutual fund products. An unintended result of these barriers would be, among other things, an increase in the costs associated with mutual fund investment.

Because the Commission now doubts that its interpretation of Rule 22c-1, which permits intermediaries to process trades after 4:00 p.m., is sufficiently able to prevent late trading, it is now considering amending Rule 22c-1 to require that all purchase and redemption orders be received by the fund, its designated transfer agent, or a registered clearing agency no later than the time at which the fund prices its securities (e.g., 4:00 p.m.) to obtain the current day's price. As a result, fund intermediaries such as broker-dealers, banks, and TPAs of retirement plans, would have to submit orders to the fund well before 4:00 p.m. for their customers to receive the 4:00 p.m. price. Orders received later would receive the following day's price.

UBSFS and UBS Global AM believe that the "hard close" at 4:00 p.m. would impose costs on intermediaries and investors that are not justified by the benefits of the proposed amendments. The only benefit that we perceive will be derived by a hard close regime is greater certainty in policing late trading. While we would not minimize the importance of this goal, we also believe the Commission's proposed amendments would have significant adverse consequences for investors and market participants and would impose costs that could be reduced or eliminated by alternative approaches.

Below, we have tried to outline the costs associated with a 4:00 p.m. hard close. Following a discussion of the costs imposed by the proposed amendments, we discuss alternatives that we believe would be equally effective in deterring late trading while resulting in lower costs to the marketplace. These alternatives include substantial safeguards and protections designed to eliminate late trading.

Costs and Disadvantages Associated with the Commission's Proposed Amendments

1. Inequitable Treatment of Retail Investors Who Invest Through Intermediaries. Over the past thirty years, retail investors have come to rely on open architecture and the availability of a large number of choices among mutual funds. Just as important, investors are able to choose from among thousands of different mutual funds while relying on advice from qualified securities professionals. This structure gives UBSFS clients, and those of other financial intermediaries, the assurance that they can receive the guidance that they need while being treated fairly and equally with those investors who choose to invest directly through fund companies.

   The Commission's proposed amendments to Rule 22c-1 would reduce that equitable treatment. Broker-dealer order entry systems would need to suspend accepting orders for non-proprietary mutual fund products earlier in the afternoon than would be the case for the same trade executed directly at the fund. This earlier cutoff time is necessary to accommodate trading calculations, account editing and householding aggregations necessary to satisfy pricing and trade execution. This places a disproportionate burden on retail investors, on broker-dealers and other intermediaries that distribute mutual fund products, and on those mutual funds that rely on retail distribution due to the shortened daily investment opportunity.

   Consequently, a primary disadvantage of the proposed amendments is that they disproportionately affect precisely those mutual fund investors who most need assistance in making investments. Investors who rely on skilled financial professionals for advice and guidance in reaching investment decisions will be placed in a position of receiving less current pricing and, unavoidably, less information in making investment decisions, since they will not have access to market movements during the last several hours of the trading day. It is simply unfair to punish retail investors who need the help of financial advisers to the benefit of those investors who are sophisticated enough to purchase mutual fund shares directly from the fund companies. In addition, the proposed amendments to Rule 22c-1 are likely to confuse investors (retail and retirement) who believe that their trades were placed on Day 1 only to learn later that their orders were actually priced on Day 2 (or, in the case of exchanges, perhaps even Day 3 or Day 4). During periods of rapid market fluctuations, this confusion could result in mistrust by investors toward their investment professionals and funds.

2. Disparate Impact on Retirement Investors. Another significant drawback to the Commission's proposed amendments to Rule 22c-1 is the disparate impact that the amendments are likely to have on retirement investors. In comparison with other investment products, the percentage of investors who choose mutual funds as their retirement vehicle of choice is extraordinarily high. As a result, a very large percentage of mutual fund investors (at UBSFS and elsewhere) make their investments through retirement accounts (401(k) and 403(b) plans, Individual Retirement Accounts, etc.). The "open architecture" discussed above is equally available in retirement plans, and allows retirement investors to make integrated, long-range investment decisions within a single plan.

   However, as the Commission is well aware, retirement plan investments typically involve a layer of administrative and fiduciary complexity not found in retail accounts. Most retirement plans include plan sponsors and trustees, as well as TPAs who are responsible for recordkeeping and servicing for the retirement accounts. These TPAs generally aggregate and process orders for thousands of accounts on a daily basis, which requires a substantial amount of time to ensure that transactions satisfy plan rules and reconcile with the plan's records. For TPAs to deliver plan-level trade orders to meet a 4:00 p.m. "hard close" at the fund companies, participant-level transaction instructions through the plans would have to be received well in advance of a fund's 4:00 p.m. cut-off time. This would have one of two results: Either participants would be required to make investment decisions very early in the day (and thus potentially with less information to rely upon),¹ or plan participants would receive "next day" prices for many of their plan investment instructions. This places retirement investors at a significant disadvantage when compared with other investors.

3. Increased Costs to Retail and Retirement Plan Investors Through Systems Upgrades. Although difficult to quantify at this early stage, the changes to Rule 22c-1 proposed by the Commission are almost certain to result in dramatic cost increases to the systems that support retail and retirement plan investing in mutual funds. If orders for mutual fund investments must be provided to the fund or its transfer agent before 4:00 p.m. to obtain same-day pricing, these systems must be modified to accommodate and accelerate the aggregation processes to reduce, to the extent possible, the inequitable treatment between investors who use intermediaries and those who do not. In other words, UBSFS and other broker-dealer and TPA intermediaries will come under tremendous pressure from retail and retirement plan investors to give them as much time as possible to submit their orders during the trading day (i.e., as close to 4:00 p.m. as possible). We believe that the modifications to these systems will be both complex and expensive and will, in the end, result in higher costs both to intermediaries and to the investors that they serve.

Alternatives Other Than a "Hard Close" at 4:00 p.m.

UBSFS and UBS Global AM believe that the Commission, consistent with the goal of eliminating late trading, can still permit intermediaries to receive trade orders until 4:00 p.m. if adequate safeguards and protections are implemented. In the Proposing Release, the Commission offered an alternative arrangement for public comment that would allow intermediaries, with additional protections, to collect trade orders prior to 4:00 p.m. and transmit them to funds and their transfer agents after 4:00 p.m. We believe that this arrangement is in the best interests of investors and intermediaries because it would permit the elimination of late trading while avoiding the costs and disadvantages outlined above that would result from a "hard close" at 4:00 p.m.

We note that the House Bill is consistent with this alternative arrangement. The House Bill provides that trades collected by approved intermediaries (generally broker-dealers, retirement plan administrators, and other regulated entities) prior to 4:00 p.m. can be transmitted to the funds after 4:00 p.m., as long as such intermediaries are subject to: (1) procedures designed to prevent the acceptance of trades by such intermediaries after the time at which net asset value is calculated; and (2) an independent annual audit.

The Commission acknowledges a similar approach in the Proposing Release, which would be accompanied by additional safeguards. We discuss several of these protections in more detail below. With such safeguards in place, we believe that the Commission will have established an effective deterrent to late trading while significantly reducing the costs that would be imposed on mutual fund investors and market participants.

1. Improvements to Date-Time Stamp Requirements. We believe that the current processing and recordkeeping procedures associated with mutual fund trade orders and processing should be upgraded and made more resistant to error and manipulation. Under current requirements, intermediaries that offer and sell fund shares or that provide recordkeeping services for mutual funds must ensure that all mutual fund orders, regardless of method of receipt (electronic, paper or telephonic) are recorded with a date-time stamp. This date-time stamp process must not only include all orders, but also include all trade correction and cancellation activities.

   We believe that the date-time stamp procedures could be improved primarily by (a) ensuring that date-time stamps are applied, recorded and made available in a consistent manner that makes trades easier to track and audit by intermediaries, fund companies, and regulators, and (b) making certain that any trade corrections that are made by intermediaries (or fund companies, for that matter) are subjected to a sufficient level of scrutiny that eliminates the possibility of any improper alteration following the 4:00 p.m. close. We believe that these safeguards are realistic and achievable.

   Along these lines, we also support the proposal within the mutual fund industry to insist that all intermediaries and fund companies employ automatic and highly accurate clocks that govern the receipt of and any subsequent corrections to trade orders. One of the most troubling aspects of the recent late trading scandal has been the apparent ease with which certain market participants were able to circumvent the time cut-offs for entering and altering trade orders. We believe that all intermediaries should be required to upgrade their time-entry systems to effectively eliminate the ability to make late entries and alterations without detection.

2. Annual Independent Audit. As suggested by the Commission, we agree that any intermediary that distributes mutual fund shares and/or provides recordkeeping services for mutual funds and wishes to accept orders until 4:00 p.m. for same-day pricing should be required to submit to an annual audit of its controls by an independent public accountant. We would envision the independent public accountant working closely with management of the intermediary to identify and eliminate any weaknesses related to the trade processing and pricing functions.

3. Regulation/Registration of Third-Party Administrators. Most intermediaries involved in the trade order acceptance, processing and pricing system are subject to extensive regulation, either by the Commission and/or the National Association of Securities Dealers, Inc. (e.g., broker-dealers, investment advisers, and transfer agents) or by another federal or state regulator (e.g., federal- and state-chartered banks). The exception to this comprehensive oversight occurs in the case of certain TPAs, which, unless they are otherwise registered as broker-dealers, are not subject to federal or state regulation. The Commission may wish to consider requiring any TPA that is not otherwise subject to federal or state regulation, and that wishes to receive orders prior to 4:00 p.m. and process and transmit those trades after 4:00 p.m., to register with the Commission (or another appropriate regulator). UBSFS and UBS Global AM do not necessarily advocate such additional regulation of TPAs without further review and rulemaking procedures, but if the Commission is concerned that every entity in the mutual fund pricing chain be subject to oversight, adding TPAs to the regulatory mix seems worthy of consideration.

Conclusion

UBSFS and UBS Global AM would like to express their full support for the Commission's efforts to eliminate late trading and abusive market timing in mutual fund shares. We believe that it is vital to restoring investor confidence that all investors understand that a level playing field applies to all customers that decide to invest in mutual funds. The Commission's proposal to adopt a "hard close" at 4:00 p.m., however, would impose unnecessary costs and other burdens on investors and would create a system that discriminates against investors who need to avail themselves of the advice and guidance provided by intermediaries. We believe that the Commission can realize its goal of eliminating late trading in a less costly and intrusive manner by placing additional safeguards on existing arrangements that permit intermediaries as well as fund companies to accept trade orders until 4:00 p.m. and obtain same day pricing.

UBSFS and UBS Global AM thank the Commission for the opportunity to comment on the proposed amendments to Rule 22c-1, and we will continue to work with the Commission toward an effective resolution of these issues.

Very truly yours,

Mark S. Shelton General Counsel UBS Financial Services Inc.

Brian M. Storms President and CEO-Americas Region UBS Global Asset Management

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1	We also note that this problem would be exacerbated for retirement accounts on the West Coast if orders had to be received by fund companies by 4:00 p.m. Eastern Standard Time.