Hard Close Proposal Gets Thumbs Down from Baker, Oxley

April 1, 2004 (PLANSPONSOR.com) Two key lawmakers have added their names to the list calling on the Securities and Exchange to exercise caution in implementing its proposed "hard close" solution to the mutual fund trading scandal.

“The commission’s proposal, while intended to stop illegal late trading, would significantly shorten the period in a day in which legal transactions can occur,” wrote Representatives Oxley (R-Ohio) and Richard Baker (R-Louisiana) in a letter to the SEC, according to Reuters.

>The call echoes that of several members of Congress last week, including Representatives Rob Portman (R-Ohio), Ben Cardin (D-Maryland), and Earl Pomeroy (D-North Dakota) (see  Legislators Lobby against Hard Close ).

>In the most recent communication, Oxley and Baker urged SEC Chairman William Donaldson “to consider the unintended consequences the hard 4:00 close rule will have on mutual fund consumers.”  

>Baker sponsored a mutual fund reform bill, the Mutual Funds Integrity and Fee Transparency Act of 2003, which passed the House last fall by an overwhelming margin.   That bill would establish a strict monitoring of 4 p.m. trading deadlines with an audit trail (see  Mutual Fund Reform Sails Through House ).   Oxley, of course, is the co-sponsor of the Sarbanes-Oxley Act,   


Also expressing concerns this week about the proposals impact on retirement plan participants were Senators Charles Grassley (R-Iowa) and Max Baucus (D-Montana).  “[I]nvestors who trade directly with mutual funds or the funds’ primary transfer agents will have a distinct advantage over retirement plan participants, whose trades are typically processed by plan administrators or other third-party intermediaries,” the senators said.  “At a minimum,” they continued, “retirement plan investors will face earlier trading deadlines in order that plan administrators may perform the various administrative and required compliance functions prior to submission of the orders to the fund by 4 p.m.”  The letter went on to note the especially disparate impact on West Coast residents, and that the “…effect will be the end of same-day execution of trades for many retirement plan investors, and more complex trading orders may stretch over several days.”    

Proposal Track

>The Securities and Exchange Commission (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 ).

The SEC’s initial proposals largely mirrored those touted by the Investment Company Institute, a mutual fund industry trade group (see  Mutual Fund Proposal No “Treat” for Retirement Plans ).   The ICI has subsequently asked the US Securities and Exchange Commission (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 ).   In fact, the response to the proposal has been so robust the SEC is reconsidering its original proposal (see SEC Rethinking Hard Close Proposal ).