Compliance May 3, 2004

Donaldson's Letter Discusses Hard Close Examination

May 3, 2004 (PLANSPONSOR.com)In light of comments received over the hardships the proposed 4pm hard close might bring to retirement plan investors, Securities and Exchange Commission (SEC) Chairman William Donaldson wrote a letter reinforcing that the Commission staff is reviewing all areas of concern raised during the proposal comment period.

Reported by

Alison Cooke

The letter was written was in response to the March 22 letter composed by a number of legislators – including pension champions Rob Portman (R-Ohio), Ben Cardin (D-Maryland), and Earl Pomeroy (D-North Dakota) – calling for some restraint in the proposed 4 p.m. “hard” close (see Legislators Lobby against Hard Close )

Donaldson said that the Commission is reviewing technological capabilities of retirement plan administrators and other service providers, to determine what issues there are, as well as what alternatives might be pursued. Additionally, the letter said the SEC is also examining the possibility of imposing procedures on the acceptance and cancellation of fund trades, as well as the use of independent annual procedural audits.

Enclosed with the letter was a copy of Donaldson’s most recent testimony to Congress regarding reforms in the mutual fund industry.

The SEC in late 2003 laid out a series of proposals designed to rein in the types of behaviors and activities that led to the recent mutual fund trading scandal, including the strict 4 p.m. close of delivery of trading instructions to the fund company itself, as well as changes in redemption fee practices on market-timers (see SEC Lays Down Mutual Fund Proposals ). Generally speaking, mutual fund firms seemed, at least initially, to favor the proposals, while recordkeepers and third party administrators, who could be disadvantaged by the requirement in terms of imposing participant trading cutoffs, have been opposed (see Industry Groups Unanimous in “Hard Close” Opposition , K Plan Participant, Recordkeeping Groups Fret Over ICI Proposals ).

The SEC’s initial proposals largely mirrored those touted by the Investment Company Institute (ICI), a mutual fund industry trade group (see Mutual Fund Proposal No “Treat” for Retirement Plans ). The ICI has subsequently asked the SEC to consider requiring financial intermediaries to receive trade orders by 4 p.m. rather than fund companies themselves (see ICI Eases “Hard Close” Lobbying Position ).

The SEC has more recently indicated that it is having second thoughts about the hard close, following the receipt of more than 800 comment letters on the proposal (see SEC Rethinking Hard Close Proposal ).