

	October 3, 2007

Fees Draw Skepticism as Answer to Timing

Fund Officials Say Penalty
Won't Be Enough to Halt
Rapid Moves by Investors

By DAISY MAXEY
October 3, 2007; Page C13

Mutual-fund executives and board members aren't optimistic that short-term redemption fees, encouraged by a new federal rule, will put an end to "market timing," according to a new survey.

Some 84% of fund board members and executives said they believe imposing short-term redemption fees -- penalties on early redemptions -- is an effective way to deter some short-term trading. But 69% of board members and 55% of fund-company executives said they believe some investors will time the market regardless of the fees, the survey found.

Rapid Repulse

Market timing, which entails rapid in-and-out trading of fund shares, can be harmful to long-term shareholders, but it isn't illegal unless a fund explicitly says it doesn't permit such behavior. After an investigation disclosed in 2003 market timing at some fund groups, a number of fund companies paid fines and some fund executives lost their jobs.

The Securities and Exchange Commission's "redemption fee" rule, or Rule 22c-2, was meant to help deter the practice and goes into effect Oct. 16. The rule doesn't require that fund companies impose redemption fees, but it does mandate that fund boards consider whether redemption fees should be imposed.

In addition, it requires that the intermediaries distributing funds -- such as broker-dealers or 401(k) plan administrators -- disclose to fund companies the information necessary to help them enforce trading restrictions, such as individual identity and transaction data. Previously, fund firms sometimes couldn't obtain such information because intermediaries traded on behalf of individuals through multiparty, or omnibus, accounts.

Behind the Study

The study, completed in July, was based on 154 telephone interviews with 57 independent board members, 44 interested board members and 53 fund executives, including presidents, chief compliance officers, chief executives and chief financial officers.

The survey was commissioned by PFPC Inc., a fund transfer agent and member of PNC Financial Services Group Inc. It was conducted by independent research firm Artemis Strategy Group.

Of those that responded to the survey, 78% of larger fund companies, those with more than $10 billion in assets, and 62% of smaller fund companies said they will impose a 2% redemption fee on market timers. But "If market timers are making 10% or 12%," said Peter Rigopoulos, senior vice president at PFPC, "they're willing to eat that 2% redemption fee."

Focus on Fair Value

Susan Sterne, an independent director for Vermont-based Sentinel Funds, said although market timers "will always search for a way" to trade, "that doesn't mean you can't try to stop it." In addition to redemption fees, Sentinel and other fund groups have put measures in place that attempt to ensure that stocks are fairly valued, which makes timing difficult, she said. Market timers often try to capitalize on discrepancies in prices after mutual-fund net asset values are calculated; fair-value pricing seeks to reduce those discrepancies.

Many respondents felt the new rule puts the onus on fund companies to police their intermediaries.

The relationship between the intermediary distributing the product and the fund company is very much like the relationship between a fund company and a subadviser, said Ms. Sterne. "You better make sure you are watching what the intermediaries are doing," she said. "They're responsible, but you're responsible for making sure they're responsible."