Redemption limits in the Securities and Exchange Commission’s proposed rule governing funds of funds could hurt investors saving for retirement, specifically those invested in target-date funds, members of the fund industry are warning the agency.
“Our greatest concern focuses on the proposed redemption restrictions that would prevent fund managers from acting in the best interest of investors and could result in financial harm to shareholders, if included in the final rule,” Paul Schott Stevens, president and CEO of the Investment Company Institute, a trade group, told the SEC in an April 30 comment letter.
Jonathan de St Paer, CEO of Charles Schwab Investment Management, echoed Stevens’ concerns in his Thursday comment letter, stating that Schwab’s “most significant concern is that the redemption limits in the proposed rule would undermine the goals of the rule itself and are not in the best interest of either funds or individual investors.”
The proposal, which was out for comment until Thursday, would restrict funds of funds that invest more than 3% in another fund’s outstanding shares from redeeming more than 3% of the fund’s total outstanding shares in any 30-day period.
“These restrictions could harm funds of funds and their shareholders — including target date funds (TDFs), which are commonly structured as funds of funds and have grown in popularity among retirement savers,” Stevens said.
For example, Stevens said, “if a fund is underperforming, it may not make sense for a TDF to hold that fund. The redemption limits, however, could hinder the TDF from quickly replacing that underlying fund with a more appropriate one. This would prevent the fund manager from acting in investors’ best interests and could cause, and exacerbate, financial harm to savers.”
The restrictions, Stevens wrote, “would put funds of funds and their shareholders at a severe disadvantage compared to other investors.”