From: john roberts [jrz_336699@yahoo.com]
Sent: Wednesday, May 05, 2004 6:36 PM
To: rule-comments@sec.gov
Subject: File No. S7-11-04

May 5, 2004

Jonathan G. Katz
Securities and Exchange Commission 
450 Fifth Street, NW 
Washington, DC 20549-0609

RE: File No. S7-11-04


Dear Mr. Katz:

I am writing to oppose SEC proposed rule S7-11-04
regarding the 2% mandatory redemption fee on mutual
fund holdings of less than five days.  Not only are
the fees excessive and outright punitive, but more
importantly, the redemption period may be unknown and
arbitrary and may extend well beyond the proposed 5
day time period.  The mandatory 2% redemption fee will
only hurt individual investors.  This is contrary to
the intent of the Investment Company Act.

Investors rely on mutual funds for the benefits of
diversification which they offer.  However,
redemptions are often necessary due to a variety of
circumstances and market trends.  Asset allocation and
portfolio rebalancing, for instance, are quite prudent
nowadays as markets often have sizeable and quick
moves.  No serious investor would allow “too many eggs
to accumulate in one basket.”  If the bear market in
the recent past few years taught us anything, it is
that investors need a flexible investment strategy to
protect their capital.  Furthermore, if an investment
is underperforming, investors should be able to
withdraw their money from such a fund and allocate
their investment capital to better performing funds. 
After all, diligent investors seek to maximize their
account value and minimize the risk on their hard
earned dollars.  This is no different from the
philosophy of most mutual fund managers as is
evidenced by the high portfolio turnover rates of the
funds they manage.  Why shouldn’t individual investors
have the same ability?

Finally, while emphasis is always placed on saving and
investing, what about the eventual outright
withdrawals that are needed to pay for such things as
living expenses, college, retirement, emergencies,
etc.?  All of these expenses are high and illustrate
how unbelievably low the $2,500 de minimis provision
is.  Should investors be penalized for withdrawing
their money for such legitimate expenses that have
nothing to do with market timing?  And what if they
were withdrawing their money from a fund that engaged
in unethical or illegal behavior?  If a mandatory
redemption fee structure was in place, investors would
certainly be hurt; especially if the redemption period
extended beyond 5 days.  This would be analogous to an
early withdrawal penalty on a CD.  The big difference,
of course, is that the CD is essentially a riskless
asset, whereas a mutual fund is not.  Since they bear
the risk, why shouldn’t investors be compensated for
this and be allowed to keep as much reward (investment
gain) as possible.   A mandatory redemption fee is a
penalty on success, since the greater the investment
gain (and therefore, the total investment capital
base), the higher the redemption fee amount.

Mandatory compliance with the proposed rule will add
unnecessary complexity and regulation and will force
fees higher for all funds and all investors.  Higher
fees and expenses are tantamount to lower investment
returns.  Such a situation may even provide a carte
blanche incentive (indeed, an excuse) for mutual fund
companies to extend a mandatory redemption fee beyond
the proposed 5 days to cover the additional expenses
of compliance with the rule.

As recent fund trading scandals illustrate, regulation
is necessary, but it should be the right kind of
regulation and it should not be over-regulation.  The
solution should not be worse than the problem. 
Individual investors should be protected (as mandated
by the Investment Company Act), not punished.  The
proposed mandatory redemption fee structure is not a
viable solution.  It is too punitive toward individual
investors, especially if mutual fund companies have
the discretion to extend the proposed 2% redemption
fee beyond 5 days.  I ask that the SEC act in the best
interest of the investing public.  Keep our capital
markets fair, trustworthy, and open to as much freedom
of choice and opportunity as possible.  Do not impose
undue restrictions and regulations that punish hard
working individual investors.


Sincerely Yours,


John R. Zak, CPA 		



	
		
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