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.