The Securities and Exchange Commission's proposed hard 4 p.m. deadline for submitting mutual fund trades is unacceptable.
Corporations, state and local governments and other organizations that sponsor 401(k) and other defined contribution plans must continue to protest the SEC's proposal.
The proposed hard cutoff is unacceptable because it disadvantages millions of investors, especially those in unbundled 401(k) plans.
That's because, under the proposal, any trades not received by the 4 p.m. Eastern time deadline would be priced at the next day's close. Yet sales or purchases of funds made through non-fund company intermediaries, such as those made by employees in unbundled 401(k) plans, often are not received by the fund companies until after 4 p.m.
The SEC's proposal thus put those employees at a disadvantage compared with those in bundled 401(k) plans, or other investors dealing directly with fund companies.
The SEC states in its proposal: "The burden (of a strict 4 p.m. deadline) on most fund investors will be small because most are not sensitive to the time at which their purchase or redemption orders are priced. They make longer-term investments." Imagine the reaction by the SEC if a mutual company made such a statement to justify a trading policy that gave an advantage to shareholders dealing directly with it while penalizing others who dealt through intermediaries.
In essence in its proposal, the SEC is saying investors are concerned about late-trading abuses and they want them stopped, yet they don't care about pricing enough to be bothered if they receive next-day prices. That makes no sense.
Certainly, the 140 comment letters — from 401(k) plan sponsors, mutual funds, intermediaries and investor activists — plus another 797 comments through various form letters ought to get the attention of the SEC.
Bruce A. Hill, senior vice president and director of human resources and administration, J.C. Penney Corp., Plano, Texas, expressed the sentiments of many 401(k) participants and plan sponsors in commenting on the proposal in a letter to the SEC.
For 401(k) participants, he writes, "the new rules provide unbalanced favoritism to a bundled provider," or those participants who trade directly with mutual fund companies.
He notes J.C. Penney's plan is unbundled — that is, it has separate record keeper, trustee/custodian and fund managers — to provide "participants the best services within a reasonable expense."
"As a plan sponsor, J.C. Penney is very concerned that the proposed late-day trading regulations would place our active and former employees at an unfair disadvantage relative to other investors, effectively subjecting them to different trading rules and, ultimately, different trading prices than other investors," he writes.
The SEC deserves credit for taking action promptly to tackle market-timing and late-trading abuses late last year. As market-timing and late-trading cases so far uncovered show, the SEC needs to revise trading rules. But in it its rush to take action, the SEC put forward a poorly designed solution.
The ERISA Industry Committee, Washington, an association of plan sponsors, offers a sensible compromise. Under it, a retirement plan could submit orders through a designated transfer agent after the deadline, "if the plan's record keeper has adopted adequate precautions to protect against late trading," including secure time-stamping of orders and "an annual audit of the plan record keeper's controls on late trading."
At the same time, intermediaries shouldn't be let off the hook. The SEC must press them to use technology to find a way to submit orders on a more timely basis.
Right now, the SEC, in effect, acknowledges in its proposal that some investors are more equal than others in terms of mutual fund pricing.
As we said at the start: That's unacceptable. The SEC must change its proposal so all mutual fund investors are treated equally.