Yesterday, the Wall Street Journal carried this report: “Mutual Funds Vow To Fix Their Clocks: Earlier Deadlines Are Proposed For Investors to Place Orders; Will New Fees Frustrate ‘Timers’?” Reuters also reports via Yahoo! News: “Mutual Fund Reform Proposals Draw Fire.” Both articles discuss changes to share-trading practices endorsed by the Investment Company Institute as reported here at their website. Under the proposal, fund orders would have to be in the hands of the fund companies themselves by 4 p.m. — a move that would require deadlines several hours earlier at intermediaries such as brokerage firms and 401(k) plans. Apparently, the ICI’s proposal is an endorsement of the late trading action plan laid out by SEC Chairman Donaldson a few weeks ago. Quote of Note:
Institute Chairman Paul Haaga said the ICI Executive Committee “was aware that this decision, if embraced by the SEC, would substantially alter longstanding business practices. We also recognize that it will affect millions of fund shareholders, thousands of intermediaries, and hundreds of fund companies.” Haaga said the ICI would nevertheless urge the SEC to move as rapidly as possible given the practical challenges associated with implementation. “The ICI Executive Committee was presented with a range of policy options. We considered but rejected exceptions to the deadline for entities subject to full SEC regulation. We considered but rejected several procedural options that would have closed the late trading window substantially, but not all the way. Finally, we considered but rejected reliance on accelerated technological developments.”
The Wall Street Journal article notes:
The change could be most dramatic for participants in 401(k) plans. Currently, some orders placed by retirement-plan participants don’t make their way to the fund companies for processing until early the next morning, but still get the price the day the order was placed. With a firm 4 p.m. order deadline, by contrast, many 401(k) orders might have to be executed at the next day’s price and not the current day’s price, ICI president Matthew Fink said in a conference call Thursday.
The Society of Professional Administrators and Recordkeepers (“SPARK”) Institute, a 401(k) industry trade organization, had this to say:
We stressed the adverse implications of a proposed 4:00 PM deadline for placement and processing of orders, making it clear that imposing such a deadline would not only be unworkable, but also would have a negative effect on participant investment accounts in the nearly 400,000 U.S. 401(k) plans
In this press release, you can read about how members of SPARK were invited to meet with the SEC on Tuesday to discuss proposed rulemaking initiatives dealing with late trading and market timing in mutual funds.
You can read the Profit Sharing/401(k) Council of America’s thoughts on the issue here.
The 401khelpcenter.com has this to say in a press release via Benefitslink.com entitled–“A Strictly Enforced Trading Deadline Will Not Threaten Retirement Plans“:
Already industry lobbying groups have begun to cry that such a requirement on retirement plan trades will create additional costs which may have the unintended consequence of actually lowering retirement savings and will cause other undesirable consequences to plan participants. . . This simply is not true. Many of the nation’s 401k plans operate in just such an environment today with no “adverse implications” for plan participants. Further, these late trade submission arrangements that intermediaries have with the mutual fund companies only became common in the 1990’s. 401k retirement plans operated perfectly well long before there advent. Making an easily enforceable absolute 4:00 pm deadline is the right thing to do. The retirement industry should put aside their own self interest in order to help rebuild investor confidence in the mutual fund industry.
UPDATE on 11/2: The Philadelphia Inquirer today has a great article by Jeff Brown which discusses in detail why the SEC should adopt the ICI’s proposals: “Changes would end unfair fund trading.”