FIS Relius
Mutual Fund Trading Restrictions 5/20/2004
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Recently, the rise in short-term trading of mutual funds has attracted scrutiny from federal regulators at the Securities and Exchange Commission (SEC) and from the Department of Labor (DOL). While only a small percentage of trading in retirement plans is done for "market timing," some fund providers are changing practices in advance of the issuance of new rules from the SEC.

The SEC is proposing rules to require mutual funds to impose a 2% redemption fee on most transactions in which shares are held for five days or less. These fees are intended to prevent "market timing" and other abuses, and to penalize short-term traders who gain at the expense of long-term investors. Fund and financial intermediaries would have to keep track of the trading activities and make sure that the fees are imposed. In addition, DOL Assistant Secretary Ann Combs released a statement encouraging fiduciaries to review their plans' investment options in light of the ongoing problems and also to take steps to make sure that the funds being offered have "procedures and safeguards in place to limit their vulnerability to abuse."

In response to these official pronouncements, some fund providers have taken steps (e.g., imposing limits on the number of trades that may be made in a month) to curb problems with short-term trading and avoid being subject to mandatory redemption fees, if implemented by the SEC. According to the DOL, imposing redemption fees or restricting the number of trades to limit short-term trading will not result in a violation of ERISA ยง 404(c), if the restrictions are allowed under the plan and are clearly disclosed to plan participants.

There are no provisions in the SunGard Corbel family of documents (both prototype and volume submitter plans) that restrict the ability to impose trading restrictions or redemption fees. The plans allow the plan administrator to establish procedures to implement participant directed investments. It is the procedures or other investment material provided to participants that needs to be modified to reflect any trading restrictions or redemption fees.

Plan investment practices may be further affected based on any final SEC rules. In the meantime, providers need to ensure that materials provided to participants are updated and that any restrictions or redemption fees can be accommodated in operation. For more information regarding the SEC proposal and fiduciary duties with respect to short-term trading (and late day trading), see:

SEC Proposed Rule: Mandatory Redemption Fees
http://www.sec.gov/rules/proposed/ic-26375a.htm

Statement of DOL Assistant Secretary Ann Combs:
http://www.dol.gov/ebsa/newsroom/sp021704.html