SEC Goes "Public" with Redemption Proposal

February 25, 2004 (PLANSPONSOR.com) - As anticipated, the SEC has decided, by a 4-to-1 vote, to see what the public thinks about a mandatory redemption fee on quick, market-timing trades in mutual funds.

>If enacted, the SEC proposal would require that funds charge a 2% fee on shares sold within five days of purchase (see  SEC Ponders Five-Day Redemption Fee ).   Not that there isn't concern about the proposal, even among the SEC commissioners who agreed to put the idea out for public comment yesterday.   In fact, SEC commissioner Paul Atkins was so convinced the plan will hurt shareholders that he voted not to issue it for public comment, calling the 2% a "simplistic solution."   "The only winner here I see is the fund industry," Atkins complained.

Retirement Plan Impact

>What isn't totally clear at present is how such a redemption fee might be levied on retirement plan investors.   Frequently those trades are processed via an omnibus arrangement, obscuring the individual trading details from the fund company that would ostensibly be tracking and assessing the charges.   The SEC dealt with this possibility in the new proposal, noting that "Many funds today that impose redemption fees do not impose them on shareholders who hold their shares through financial intermediaries such as broker-dealers and retirement plans", the SEC said the proposed rule would "require that funds obtain the information they need to assess the redemption fee, and to oversee the efforts of intermediaries to assess those fees and remit them to the fund."  

>Perhaps more ominously for plan sponsors, the proposal might also mean that a plan participant's regular payroll contribution, if followed by a routine rebalancing transfer within five days, might trigger the redemption fee on the perceived "quick" liquidation of monies.

>According to Dow Jones, Atkins said it's no surprise that fund companies support redemption fees and predicted they will "laugh all the way to the bank" as mandatory fees boost fund assets and act as a disincentive for investors to leave a fund.   Indeed, the Investment Company Institute, a mutual fund trade industry group, was quick to lend its support to the proposal - which largely mirrored one the ICI put forth last Halloween (see  Mutual Fund Proposal No "Treat" for Retirement Plans ).    

>SEC commissioner Cynthia Glassman also raised reservations about the proposal, describing it as a "band-aid" that won't deter market timing trades that generate big profits, making the 2% penalty the cost of doing business.   Even SEC chief William Donaldson said he may have reservations as well, but wants the SEC to get comment on the plan before making any final decision.