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November 4, 2003
TO: BROKER/DEALER ADVISORY COMMITTEE No. 31-03
BANK AND TRUST ADVISORY COMMITTEE No. 13-03
TRANSFER AGENT ADVISORY COMMITTEE No. 99-03
INTERNATIONAL OPERATIONS ADVISORY COMMITTEE No. 46-03
SMALL FUNDS COMMITTEE No. 28-03
RE: INSTITUTE RECOMMENDATIONS REGARDING LATE TRADING AND MARKET
TIMING
The Institute’s Executive Committee has directed the Institute to take the following three
specific steps in response to abuses related to trading in mutual fund shares.
First, with respect to late trading, the Institute will call for and vigorously support a firm
4:00 p.m. deadline for all mutual fund trades to be reported to the fund or the fund’s transfer
agent.
Second, with respect to market timing, the Institute will call for and vigorously support
a mandatory, minimum industry-wide two-percent redemption fee that will apply to the sale of
non-money market fund shares that are not held for a minimum of five days following
purchase. A narrow exemption should be provided, however, for those funds specifically
designed for short-term trading.
Third, with respect to personal trading, the Institute will immediately urge all mutual
fund advisers to clarify or amend their codes of ethics so that all transactions by affiliated
personnel in mutual fund shares sponsored by the adviser are covered by the code.
As explained in a memorandum to the Institute’s Board of Governors, the Executive
Committee recognized that these steps would change some of the fundamental ways in which
mutual fund shareholders invest and mutual funds interact with brokers and other
intermediaries. The recommendations will require fund companies and intermediaries to make
major changes to computer systems and procedures that will take time and financial resources
2
to implement. However, the Committee concluded that the benefits these changes will bring to
long-term mutual fund shareholders in terms of enhanced confidence in mutual funds far
outweigh the costs of implementation.
Keith Lawson Frances M. Stadler
Senior Counsel Deputy Senior Counsel
Attachment (in .pdf format)