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Regulation and Compliance > Federal Regulation > SEC

ACLI Objects To Hard Close Proposal

By Steven Brostoff

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NU Online News Service, Feb. 12, 2004, 1:38 p.m. EST, Washington – The American Council of Life Insurers, Washington, is opposing proposed mutual fund pricing rules.[@@]

The U.S. Securities and Exchange Commission came up with the rules in an effort to prevent illegal late trading, but the ACLI says the rules might create competitive imbalances between mutual funds and variable annuities offered in the pension market.

In a letter to the SEC, Carl Wilkerson, an ACLI chief counsel, says the SEC proposal will inevitably lead to unfair disparities in the market because it imposes different transactional deadlines on competing financial products.

Moreover, Wilkerson says, the ACLI worries that pension plan participants might be harmed under the proposal because they would be unable to formulate purchase, redemption and reallocation decisions based on the full day’s market developments.

Under the proposal, orders to purchase or redeem investment company shares would get the current day’s price only if the order were received by certain intermediaries, such as the investment company, by a specified deadline, which is generally 4 p.m. Eastern time.

This is called a “hard” 4 p.m. close.

However, orders processed by other intermediaries up until the 4 p.m. hard close would get the next day’s value, Wilkerson says, because the orders would not arrive at the investment company by the hard close.

Although the ACLI supports the thrust of the proposal, the final rules should be competitively neutral, Wilkerson says.

Wilkerson says the competitive imbalance can be corrected in several ways. He says mutual funds conducting business through “other” intermediaries could incorporate terms and conditions into their contracts that include right of inspection and review, to ensure compliance.

Another possibility, he says, would be using a clearinghouse that could process orders nearer to the hard close.

The SEC should allow companies to offer several solutions to the problems of late trading, rather than a single solution, so long as the solutions successfully thwart abuses, Wilkerson says.

“In this way, competition will be preserved and fraud will be terminated,” Wilkerson says.

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