US Chamber Chimes In to "Hard Close" Opposition

February 12, 2004 (—Last week the US Chamber of Commerce sent a letter to the US Securities and Exchange Commission (SEC) criticizing the proposed "hard close" change, saying it imposes "an undue and unnecessary hardship upon retirement plan participants and plan sponsors."

With the letter, the Chamber becomes yet another group to criticize the rules proposed by the SEC (see  Industry Groups Unanimous in “Hard Close” Opposition ), saying it “makes plan participants second-class investors, imposes unreasonable burdens on plan fiduciaries, and encourages a less competitive market.”

The Chamber pointed out other solutions, such as the House bill HR 2420 that eases the 4 p.m. deadline to include acceptance at intermediaries (see  Mutual Fund Reform Sails Through House ) as well as another idea called the “Smart 4,” which requires that the SEC, or its designee, enforce that certain technological and procedural processes are met by any entity that wishes to receive orders up until 4 p.m.

Since there has been abuse found within the mutual fund companies, the Chamber added that rules and restrictions must be also be applicable to those firms.   The Chamber also recommended that technology should be examined and used appropriately, since, they pointed out, the technology exists that would allow a tamper-proof timing system , one that would ensure trades comply with all regulations, not just the timing issues.

In the letter, the Chamber pointed out that with the hard close, because most plans use intermediaries in order to process their trades, the trade order would have to be with the intermediary early enough in the day so the intermediary would have enough time to process the trade.   This would give participants on the east coast a half-day to do their orders but those on the west-coast would have only an hour in the morning.   This would relegate most participants to next day trade status, the Chamber pointed out, and would mean that those participants in plans would not be treated the same as other investors.

Additionally, the proposal would put an unreasonable burden on plan fiduciaries, as well as encouraging an anti-competitive environment in the retirement plan investment market, the letter contends.   Plan fiduciaries will have to find a way to manage under the new system while still fulfilling their fiduciary diversification and prudence responsibilities.   The Chamber says that fiduciaries will have to choose whether to go with proprietary funds, allowing participants to avoid the restricted order requirements of non-proprietary funds, believing that is prudent, but by providing only proprietary funds, it might not provide enough diversification for participants.

The market has shown that participants are more interested in having access to open brokerage windows, giving them a wider variety of choices for investments.   But, the letter points out that with the “hard close,” the trend might shift away from that, and lead plan sponsors to choose bundled providers, leading to anti-competitiveness, and possibly driving unbundled providers out of the market-place, a claim similar to that make by the SPARK Institute (see  SPARK: ‘Hard Close’ Proposal Could Mean Millions for System Changes ).   Even within the bundled providers there would be decreased competition, since those providers could only offer trading until 4pm for those funds owned by the provider, limiting participant access still, contends the Chamber.

The letter was written by two people in the Chamber’s Labor, Immigration and Employee Benefits department, Randel Johnson, Vice President, and Aliya Wong, Director of Pension Policy and can be found  HERE .