In an effort to stifle the unfortunate trend of market timing, the Securities and Exchange Commission voted Wednesday to consider the division of investment management’s proposal that would make 2% redemption fees mandatory for shares redeemed within five days of purchase.

The money from the fees, if rule 22c-2 of the Investment Company Act of 1940 becomes reality, would be invested directly back into the funds themselves, assuring long-term shareholders do not get trampled by quick-hitting investors trying to time funds.

A four-to-one vote threw the issue of redemption fees into a 45-day public comment forum. After that, the Commission will decide whether to propose a rule.

Paul Roye, head of the SEC’s Division of Investment Management, said in a statement yesterday: "Such a redemption fee, together with fair value pricing, can serve to reduce – if not eliminate – the profits that market timers seek to extract from the fund."

SEC Chairman William Donaldson said in an opening statement , "This proposal is clearly only one piece of a much larger regulatory response to short-term trading and market-timing. I anticipate that there will be significant comment and debate about the proposal, particularly in light of its potential impact on the smaller investor."

At an open meeting designed to figure out the feasibility of such a rule proposal, Donaldson called the idea of mandating redemption fees an "effective deterrent to abusive short-term trades." But he did cite caveats, such as possible confusion by intermediary brokers, which could result in them being "reluctant to undertake this burden on behalf of the funds."

Matt Fink, president of the mutual fund lobbying group Investment Company Institute, also issued a statement yesterday, supporting the 2% redemption fee, calling it "an essential step to combat market timing abuses."

The proposal is the latest in a barrage of reform ideas by the SEC, which has already passed a rule making fund portfolios more transparent, considered many ways to combat late trading and market timing, and proposed code of ethic requirements for firms.

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