ICI Urges SEC to Modify Redemption Fee Rule

Washington, DC, May 9, 2005 - The Institute supports measures to curb harmful short-term trading, such as redemption fees, but has identified several problems with the mandatory redemption fee rule recently adopted by the SEC.

Background
In February 2004 the SEC proposed a mandatory two percent redemption fee on short-term trading in mutual funds. This step was intended to combat market-timing abuses, which occurs when certain investors take advantage of time zone differences among international stock markets, to exploit fund share prices that are based on closing prices of foreign securities established some time before the fund calculated its own share price. In March 2005 the SEC adopted the redemption fee rule.

ICI Position
While the Institute believes that imposing redemption fees on short-term mutual fund trades is an important way funds can help curb harmful short-term trading, it notes in a recent letter to the SEC that the rule has two fundamental flaws.

First, the rule fails to impose responsibilities equally on funds and intermediaries. While funds and their intermediaries serve investors in different capacities, they share the same strong commitment to protecting long-term investors against abusive short-term trading. The rule adopted by the SEC places all of the responsibility for imposing the redemption fees on mutual funds. ICI states that the better approach is for regulatory responsibilities to be appropriately shared by funds and intermediaries, and urges the SEC to carefully consider whether and how such an approach might be implemented.

Second, the rule contains a contract requirement that ICI believes is unworkable. The requires every fund to enter into a written agreement with each of its financial intermediaries (broadly defined) agreeing to provide the fund with information and executing instructions to restrict or prohibit purchases or exchanges by a shareholder who violates the fund's short-term trading limits. ICI believes that this provision will result in very significant costs for funds without introducing any significant investor protections. The Institute also notes that funds are not provided with any guidance as to how to enforce the provision.

The Institute strongly encourages the SEC to modify the rule as soon as possible, and recommends assembling a group of industry representatives to help address the issues raised by the rule.

Related Links
Additional information about market timing abuses is available on this website, as well as a chronology of ICI, legislative, and regulatory efforts to combat market timing.