The SEC's Dec. 11, 2003 proposal to end forward-pricing end runs around the 4 p.m. hard NAV close, has raised criticism from 401(k) plan sponsors, investors and administrators.
Noting numerous instances where financial intermediaries or investors were able to sidestep existing forward-pricing regulations, the SEC proposed new requirements aimed at curtailing already illegal late-day trading. Comments were due to the SEC by last Friday.
Currently, trades, either to purchase or to liquidate, mutual fund shares must be received by a financial intermediary or retirement plan administrator by the close of the fund's business day (often coinciding with the 4:00 p.m. EST closing of the New York Stock Exchange). At that closing time, a fund sponsor or service provider then calculates the NAV (net asset value) and applies that NAV to each trade that was received by intermediaries and/or administrators before that deadline.
But under current rules, the exact details of each particular fund trade may be transmitted to the individual mutual fund after that close time, sometimes even several hours later. That window has been the source of repeated abuses, the SEC noted.
Under the SEC's newly proposed rule, in order to receive the same day's calculated NAV, the particular details of each and every trade would have to be received by a fund company, contracted transfer agent or authorized clearing agency at or before the close of business. Details of trades that are received after the particular fund's closing and pricing deadline, generally 4:00 p.m., would get the following day's closing NAV price.
Will Money Funds
Face the Hard Close?
That "hard close" of mutual fund trading has had some wondering if exceptions would be made for money market funds, many of which don't hold to the traditional 4:00 p.m. closing and pricing time. Total assets in all taxable, tax-free and government money market funds topped $2.03 trillion as of Jan. 5, according to iMoneyNet, the data provider in Westborough, Mass.
Many money fund sponsors, especially those that cater to large institutional investors or corporate clients that utilize money funds as short-term cash management vehicles, allow their investors to continue trading until as late as 4:30, 5:00 or even 5:30 p.m. (see accompanying chart).
"Anyone who is anyone in the institutional business has late closings," said Peter Crane, vice president and managing editor of iMoneyNet's Money Fund Report.
A 4:00 p.m. hard close could prove to be a hardship for these investors, said Bruce Bent, chairman and founder of The Reserve Funds, and architect of the first money market fund. Reserve currently manages almost $20 billion in money fund assets, of which $10.6 billion is for institutional clients.
The SEC's proposals, in tandem with two similar bills introduced into the Senate last November aimed at preventing late trading, could have unintended consequences, Bent noted. Without the availability of money funds at the end of the corporate business day, large institutions and corporate treasurers could have to sacrifice 40 to 50 basis points of yield if they have to alternatively dump idle cash into an overnight cash sweep account, he said.
"The opportunity costs of [money fund investors] being forced to park cash in a potentially lower-yielding or non-interest bearing account creates a significant financial problem.," Bent added.
Allowing for later day trading in money funds isn't the same as allowing for late-day trading in equity funds because, by design, money funds maintain a $1 per share net asset value, Bent reminded. That steady share price automatically foils would-be arbitrageurs who look to profit from daily changes in fund share prices or events taking place after a fund's close.
According to the SEC, money funds that offer a later trading feature won't be impacted by new regulations. The proposal "doesn't exempt money market funds. It would apply to them," said John Heine, SEC spokesman. But the proposed SEC rule doesn't stipulate that all funds must hold to a strict 4:00 p.m. close, he noted. Instead, the precise time at which trading ends and NAVs are calculated has always been left up to the discretion of a fund's board of directors.
That same rule not only applies to money funds, whose boards have approved extended trading times, but also to funds that don't conform to the typical 4:00 p.m. close.
For example, in February 1999, concerned that international arbitrageurs were maneuvering within their Asia-focused equity funds, the former Investec Guinness Flight Funds, now known as the Guinness Atkinson Funds, imposed a 9:30 a.m. trading cut-off time. The earlier deadline was imposed to better coincide with Asian markets' closings and precede the NYSE's opening. Two of the group's funds still retain that morning trading deadline.
Hard Close, Raw Deal for 401(k)s?
Even if funds are left to decide for themselves when their funds' own hard close will occur, the prospect of these new SEC regs isn't sitting well with 401(k) plan sponsors and participants.
Many are concerned that an early cut-off time for some 70 million plan participants could go as early as 10:00 a.m., Pacific Standard Time. That, they argue, would be discriminatory.
A significantly earlier cut-off time for plan sponsors, estimated at between four and six hours before a mutual fund's trading deadline, "would essentially result in the creation of two classes of investors: those who invest directly with a mutual fund for today's NAV, and plans and others who use intermediaries who would be subject to an earlier cut-off time," said Robert G. Wuelfing, on behalf of The Society of Professional Recordkeepers and Administrators (SPARK) whose members service 95% of all 401(k) plan participants.
Moreover, Wuelfing added, a hard deadline would discourage plan sponsors' use of open architecture and the offering of funds from multiple families.
Since many of the problems associated with late-day trading have emanated from financial intermediaries, the Profit Sharing/401(k) Council of America advocates the SEC's expanded jurisdiction to allow for limited policing of intermediaries to ensure that late trading doesn't occur, said David L. Wray, president of the organization in a comment letter to the SEC.
"The hard cut-off approach may be superficially appealing, but it will not be evenhanded," said a contingent of independent directors who oversee the OppenheimerFunds of New York, in another SEC comment letter. The group supports the SEC beefing up policies and procedures - such as time stamping of orders - by intermediaries, and annual audits.
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