[17264]
March 22, 2004
TO: BOARD OF GOVERNORS No. 22-04
CEOS
INVESTMENT COMPANY DIRECTORS No. 14-04
PRIMARY CONTACTS - MEMBER COMPLEX No. 29-04
SEC RULES MEMBERS No. 44-04
SMALL FUNDS MEMBERS No. 35-04
RE: ICI RESPONSE TO WALL STREET JOURNAL ARTICLE
As you may have seen, today’s Wall Street Journal includes an article suggesting that
Institute staff were aware, or should have been aware, of “deals” between mutual funds and
market timers that facilitated abusive short-term trading well before September 3. This
assertion is entirely inaccurate, as noted by the response we provided that was included in the
article.
Beginning in 2000, ICI staff held a series of meetings and conference calls with members
to address concerns about abusive short-term trading by suspected market timers. The sole
focus and purpose of all ICI efforts throughout this period was to identify effective ways to
restrict the activities of suspected market timers. Among the issues considered was whether the
ICI should ask the SEC to provide funds with additional tools to more effectively restrict
suspected market timers. The ICI staff who were involved in these meetings do not recall any
discussions concerning arrangements to accommodate or facilitate market timers or market
timing activities. The only arrangements or “deals” that were discussed were those that some
members had implemented to restrict suspected market timers, including denying suspected
market timers the ability to invest in certain funds, limiting the number of roundtrip trades,
requiring suspected market timers to provide prior notice of intended transactions, and forcing
investors who failed to comply with such restrictions to redeem their investments. Whether it
was described by a meeting participant as an arrangement, restriction, limitation, method,
technique, or deal, they meant the same thing: ways to protect long-term investors from the
abuses of short-term trading.
Consistent with the purpose of these meetings, in January 2001, the ICI submitted a draft
no-action letter to the SEC explaining what mutual funds were doing to combat abusive short-
term trading and asking that mutual funds be allowed to deter suspected market timers by
delaying exchanges for certain funds. The ICI and the SEC had extensive discussions about the
2
underlying regulatory considerations following the submission of the draft letter. A formal ICI
request followed in late 2002, and the SEC granted the requested relief shortly thereafter.
All of this information was provided to the Journal before the article was published.
Additional background information about the ICI’s efforts in this area are attached. Please feel
free to contact me directly if you have any questions about this matter.
Matthew P. Fink
President
Attachments
(1) Press Release: ICI President Comments on Inaccurate Media Report
(2) Chronology of ICI Actions re Abusive Short-Term Trading By Suspected Market Timers
(3) Link to Correspondence Between the ICI and SEC Regarding the Issue of Delayed
Exchanges – http://memos.ici.org/getMemoPDF.do?file=17264
FOR IMMEDIATE RELEASE
John Collins 202/326-5864 collins@ici.org
Chris Wloszczyna 202/326-5889 chris@ici.org
James Doyle 202/326-8317 jdoyle@ici.org
ICI President Comments on Inaccurate Media Report
Washington, March 22, 2004 – In a speech to a mutual fund legal conference in California this
morning, ICI President Matthew P. Fink characterized as “entirely inaccurate” the suggestion in
a Wall Street Journal article today that the ICI may have been aware of arrangements to facilitate
abusive market timing in mutual funds. Fink said the article’s additional insinuation, that the ICI
failed to share its knowledge with the SEC – was also was “completely untrue.”
Fink noted that both of the article’s suggestions were belied by the ICI’s consistent efforts to find
ways to restrict and deter suspected market timers. “The purpose of the November 2000
conference call -- and many other ICI efforts like it -- was to identify effective ways to restrict
market timing, not facilitate it. One of the major subjects discussed was whether the ICI should
ask the SEC for legal authority to impose additional restrictions on market timers. In fact, we
made this request to the SEC ten weeks later.”
Fink said that during the call, “ICI members described a number of steps they had implemented
to restrict market timers and prevent or deter abusive short-term trading. These included denying
suspected market timers the ability to invest in certain funds, limiting the number of roundtrip
trades, requiring suspected market timers to provide prior notice of intended transactions, and
forcing investors who failed to comply with such restrictions to redeem their investments.”
Most important, Fink said, “Whatever words members used -- arrangement, restriction,
limitation, method, technique, or deal -- they meant the same thing. Everyone was discussing
ways to protect long-term mutual fund investors from the abuses of short-term traders.”
Fink made it clear that the ICI reported everything it learned about market timing to the SEC.
Fink said a January 16, 2001 letter to the SEC stated: “Fund groups have sought to employ a
number of methods to try to deter market timing, such as imposing redemption fees, limiting
frequent trading, and restricting exchange privileges.”
In short, Fink said, “at no point during these conference calls did any ICI staffer or ICI member
suggest or imply that market timing or market timers were being accommodated, or should be
accommodated. Indeed, the entire purpose of these discussions was to find forceful and effective
ways to combat abusive short-term trading.” Fink said it is “sadly paradoxical to see serious and
sincere efforts to combat abuses recast as an attempt to facilitate them. The ICI remains fully
committed – today and tomorrow, as in years past – to focusing on serving the interests of fund
shareholders and working constructively with policymakers to achieve those objectives.”
ICI-04-40
The Investment Company Institute’s Record In Addressing
Abusive Short-Term Trading By Suspected Market Timers
____________________________________________________________________________
As We Have Stated Publicly, The ICI Was Entirely Unaware of
Agreements or Understandings That Allowed Abusive Market Timing
ICI Chairman Paul Haaga and ICI President Matthew Fink have both stated in testimony before the
U.S. Congress that the Institute was entirely unaware that any mutual fund employees, let alone some
senior executives, had agreements or understandings with hedge funds or any other clients that
permitted abusive short-term trading in fund shares. This is the case whether or not the mutual fund
had an express policy discouraging or restricting such practices.
As We Have Stated Publicly, The ICI Was Aware of Research Indicating
That Abusive Short-Term Trading Was Occurring In Overseas Funds
The ICI was aware of research indicating that short-term market timing in overseas mutual funds was
occurring, and was working actively with its members and the SEC to find ways to restrict such
trading and deter those responsible for it. For example, this research was highlighted and discussed at
an ICI-sponsored academic research conference in September 2000 that was led by ICI Chief
Economist John Rea. Academic researchers who participated in the ICI conference included most of
the authors of relevant studies on abusive short-term trading at that time, and the potential
effectiveness of various possible responses was discussed extensively.
As We Have Stated Publicly, The ICI Repeatedly Expressed
Concern About Abusive Short-Term Trading to the SEC
Over the last five years, the ICI has repeatedly called on the SEC to give mutual funds additional tools
to restrict abusive short-term trading and thus protect long-term shareholders. These efforts are
reflected in speeches by the ICI’s President and General Counsel, in meetings with SEC staff, in
discussions held in ICI-sponsored legal and academic conferences, and in formal correspondence
with the Commission. For example, in December 2001, ICI General Counsel Craig Tyle expressed his
strong hope that the SEC staff would look at ways to restrict suspected market timers ”from the
perspective of long-term shareholders and [allow] mutual funds to take prudent steps to safeguard
their interests.”
As We Have Stated Publicly, The ICI Formally Asked the SEC Give
Mutual Funds the Authority To Combat Market Timing More Effectively
In November 2002, after more than two years of discussions with the Institute, the SEC staff agreed
with the ICI and decided that mutual funds should be allowed to “delay exchanges” to deter
suspected market timers. The ICI had urged the SEC to recognize that the use of delayed exchanges
could be a targeted and effective weapon in the effort to combat abusive short-term trading.
A chronology of ICI activities related to
restricting abusive market timing follows.
Chronology of ICI Activities and Statements Regarding
Abusive Short-Term Trading and Related Issues
Since at least 1995, the ICI has been addressing the valuation methods mutual funds use to price their
shares each day. In addition to strengthening valuation procedures, the ICI advanced proposals to
deter abusive short-term trading by asking the SEC (a) to permit fund to delay exchanges between
funds and (b) to permit funds to impose short-term redemption fees exceeding two percent. As the
list below demonstrates, the ICI discussed these issues on a frequent and ongoing basis with
academics, practitioners, regulators and its members. Among the specific ICI actions that occurred
during this time are the following.
1996
ICI surveys members regarding valuation procedures used to meet legal pricing requirements for
mutual funds’ portfolio securities.
May 1996
ICI memo to members summarizes SEC guidance on statutory pricing requirements for mutual funds
in light of emergencies that disrupted global markets and may have affected securities valuations.
February 1997
ICI publishes and distributes 54-page mutual fund valuation, liquidity and pricing compliance paper.
March 1997
ICI distributes memo prepared by outside counsel to its members summarizing SEC enforcement
actions and court cases regarding mutual fund valuation issues.
October 1997
Stock market crashes in the US and Asia, particularly in Hong Kong, raise valuation issues for mutual
funds. Some market timers that sought to take advantage of sharp market movements subsequently
complained to the SEC that mutual funds fair valued their portfolios.
December 1997
At ICI securities law procedures conference, SEC Investment Management Director Barbash
addresses mutual fund pricing duties and describes results of special SEC pricing inspections.
June 1998
ICI proposes modification of SEC rule to provide for uniform mutual fund pricing standards in the
event that trading markets close early.
February 1999
SEC Chairman Levitt convenes Roundtable on Role of Independent Fund Directors, which includes a
panel on mutual fund valuation and liquidity issues. ICI members participate.
September 1999
Crisis in Malaysian financial markets leads ICI to convene series of conference calls and meetings
with members regarding valuation of Malaysian securities in particular, and later, overseas valuation
procedures generally. Group later organized formally as ICI Valuation Procedures Task Force.
December 1999
SEC staff letter to ICI regarding mutual funds’ duties to value and price shares “during emergency
and unusual situations.”
June 2000
ICI forms the Foreign Securities Valuation Working Group to discuss the issues that arise in valuing
foreign securities in mutual fund portfolios.
September 2000
Major part of ICI conference for academics and practitioners focuses on identifying and remedying
abusive short-term trading and fair valuation. Academic researchers who participated in the ICI
conference included most of the authors of relevant studies on abusive short-term trading at that time
(e.g., Gregory B. Kadlec, Virginia Tech; John Chalmers, University of Oregon; William Goetzmann and Geert
Rouwenhorst, Yale University).
October 2000
ICI staff and members meet with SEC to address valuation and abusive short term trading.
November 2000
ICI conference call with members to discuss ways to restrict abusive short-term trading and suspected
market timers, including by asking the SEC for authority to delay exchanges.
December 2000
ICI conference call with members regarding abusive market timing. Group decides to have the ICI
pursue efforts to secure authority from the SEC to delay exchanges.
January 2001
ICI submits first draft of letter to the SEC requesting that, to help combat abusive short-term trading
by market timers, mutual funds be permitted to delay exchanges in certain funds.
April 2001
Second SEC staff letter is sent to the ICI providing further commentary and guidance on a mutual
funds’ duties to value and price shares.
May 2001
ICI reconvenes Foreign Securities Valuation Working Group to help prepare a supplement to the ICI’s
1997 white paper on the valuation of mutual fund portfolio securities.
May 2001
ICI’s globalization conference includes a morning workshop on how and when to price an
international fund portfolio.
May 2001
SEC Investment Management Director Paul Roye, speaking at the ICI's annual meeting, states that the
SEC "is very aware of the problems of arbitrageurs and market-timers" and is willing to consider
innovative ideas to address the problem.
June 2001
At an ICI conference, SEC Director of Inspections and Compliance Lori Richards gives speech
addressing valuation, trading and disclosure issues.
August 2001
SEC Investment Management Director Paul Roye addresses mutual fund pricing and valuation issues
in an extensive interview in The Investment Lawyer.
October 2001
ICI staff and members meet with SEC regarding valuation and abusive short term trading.
November 2001
ICI distributes to its members a summary of a court decision dismissing a market timer’s lawsuit that
a mutual fund had illegally restricted his attempt to make frequent exchanges between funds.
December 2001
ICI General Counsel Craig Tyle’s opening speech at ICI’s securities law procedures conference asks
the SEC to give mutual funds the authority to protect long-term shareholders by restricting abusive
short-term trading.
January 2002
ICI submits to the SEC a legal memo prepared by ICI’s outside counsel describing why the SEC
should provide mutual funds with the authority to delay exchanges.
March 2002
ICI completes and distributes 26-page supplement to its 1999 white paper on mutual fund valuation
and pricing compliance issues.
March 2002
In a speech at the ICI’s annual legal conference, ICI President Matthew Fink calls upon SEC to permit
funds to impose additional restrictions on suspected market timers whose activities are harmful to
long-term fund shareholders.
May 2002
ICI’s globalization conference includes full panel discussion of valuation issues, including problems
created by abusive short-term trading in international funds.
May 2002
ICI submits to the SEC series of proposals to improve investment company regulation, including
changes that would allow mutual funds to restrict market timers who make short-term exchanges
between funds.
October 2002
ICI publishes Frequently Asked Questions brochure about mutual fund pricing.
October 2002
ICI formally asks the SEC to grant mutual funds the legal authority to delay exchanges between
certain funds where abusive short-term trading is found or suspected.
November 2002
SEC staff responds to the ICI, and says that mutual funds can delay exchanges.
December 2002
SEC Investment Management Director Paul Roye acknowledges continuing problems caused by
market timers, expressing hope that recent SEC response to ICI will provide funds with helpful tools.
February 2003
In a published article reviewing mutual fund developments in 2002, ICI economist Brian Reid notes
the continuing disruptive impact of market timers on mutual funds with a large concentration of
overseas holdings.
June 2003
SEC responds to congressional inquiries about a number of mutual fund issues, including pricing and
valuation procedures.
October 2003
ICI urges the SEC to impose a mandatory, minimum two percent redemption fee that applies to all
non-money market mutual fund sales not held for at least five days.
March, 2004