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Portfolio > Mutual Funds

ACLI Blasts Market Timing Plan

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A Securities and Exchange Commission proposal aimed at combating mutual fund market timing abuses would unfairly disadvantage variable annuities and pensions, the American Council of Life Insurers says.

The SECs proposed solution to market timing abuses would give mutual funds an “unequal marketplace advantage” over competing financial products,” says Carl B. Wilkerson, ACLIs vice president and chief counsel for securities and litigation.

“The mutual fund industry should not be able to obtain leverage over competitors through market timing remedies,” he says in a formal letter to the SEC.

The issue involves an SEC proposal that would impose a 2% fee on the proceeds of mutual fund shares redeemed within 5 business days of purchase.

But Wilkerson says the proposal does not appear to accommodate the differences between publicly available mutual funds and other structures, such as two-tiered financial products like 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 proposal will create “nearly impossible administrative challenges” for certain employer-sponsored retirement plans.

Looking first at VAs, Wilkerson notes that they generally operate under a two-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 participants transactions did not involve actual market timing activity, but nonetheless triggered a mandatory redemption fee.

As for pensions, Wilkerson says 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 fund to 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.

Reproduced from National Underwriter Edition, May 14, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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