NU Online News Service, May 12, 2004, 5:47 p.m. EDT – A U.S. Securities and Exchange Commission proposal aimed at combating mutual fund market timing abuses would unfairly disadvantage variable annuities and pensions.[@@]
Carl Wilkerson, chief counsel for securities and litigation at the American Council of Life Insurers, Washington, makes that argument in a formal letter to the SEC.
The SEC’s proposed solution to market timing abuses would give mutual funds an “unequal marketplace advantage” over competing financial products,” Wilkerson writes. “The mutual fund industry should not be able to obtain leverage over competitors through market timing remedies.”
The issue involves an SEC proposal that would impose a 2% fee on the proceeds of mutual fund shares that are redeemed within 5 business days of purchase.
Wilkerson says the proposal does not appear to accommodate the differences between publicly available mutual funds and other structures, including 2-tiered financial products such as variable annuities or employer-sponsored retirement plans.
“Imposition of mandatory redemption fees in these arrangements is costly and burdensome to administer and can lead to unfair application of redemption fees,” he says.
He adds that the SEC proposal will create “nearly impossible administrative challenges” for certain employer-sponsored retirement plans.
Looking first at variable annuities, Wilkerson notes that they generally operate under a 2-tier structure. At the top tier, he says, a separate account funds the variable contract based on an underlying menu of mutual funds at the bottom tier.
Purchases, sales and exchanges are transmitted from customers to the life insurance company, he says, which in turn communicates the appropriate instructions to the underlying mutual fund.
Variable contract customers, Wilkerson says, do not have direct contact with the underlying mutual funds.
Thus, he says, while retail mutual funds can assess a redemption fee directly against their shareholders, variable contracts must assess the fee at the level of the separate account.
It would be extremely burdensome, he says, for insurers to allocate redemption fees at this level, particularly if the participant’s transactions did not involve actual market timing activity, but nonetheless triggered a mandatory redemption fee.
As for pensions, Wilkerson says that many plans utilize an “open architecture” framework making options available to plan participants from multiple mutual funds.
Increasingly, he says, mutual funds have established redemption restrictions that are different from one mutual fund family to another and from mutual fund to mutual fund within the same family.
Most investments in employer-sponsored plans use omnibus accounts, Wilkerson says.
“The imposition of mandatory redemption fees at the omnibus account level would be difficult, if not impossible, to administer,” he says.
The SEC, Wilkerson says, should look at alternative ways of combating market timing that would not create competitive imbalances.
For example, he says, fair value pricing or limitations on excessive transactions operate without discrimination across all product platforms.