From: S. Mack [mailto:Steve@MackTracks.com] Sent: Monday, May 10, 2004 11:45 PM To: rule-comments@sec.gov Subject: FW: File No. S7-11-04 - SEC Redemption Fee comment letter Stephen W. Mack, President Mack Investment Securities, Inc. 1939 Waukegan Road, Suite 300 Glenview, IL 60025 847-657-6600 Mr. Jonathon G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 May 10, 2004 By Email – Rule-Comments@SEC.gov Re: File No. S7-11-04 Dear Mr. Katz, Recently, while trying to think of the ideal mutual fund investment, I thought of the benefits that appeal to the majority of our investors. Mutual funds offer investors (and, our investors are absolutely the smaller investors) a high degree of diversification, the ability to choose a specific goal, and liquidity. Due to competition, the mutual fund industry has grown into a successful business commanding high respect from investors throughout the world. The recent proposal to impose a 2% fee for those redeeming their shares in mutual funds within five days of purchase is not in the best interest of investors. My background began as a Registered Representative in 1981, then a manager with Merrill Lynch until opening my own broker/dealer and investment advisory in 1986. Helping investors utilize markets to achieve goals through the purchase of both stocks and mutual funds has changed little since my early days. What has always been present, within US markets, is the ability for investors to take responsibility for their own decisions. If an investor bought an investment and decided a mistake had been made (with or without our advise), selling was (and is) always an option. The risk to the investor, of course, was the market’s change in value. The taxing of gains, while unpleasant, was at least after succeeding in a profit. Over the years, investors have been preached to that changing their investments, rather than just holding on, is unwise. Yet, looking at investors who work on exchanges for a living, those with the most success consistently employ protection, known as stops, to limit their losses. Certainly, individual investors do not have the same tools available to them. However, those individual investors have also never had a restriction to give them pause when making a loss protection decision. As an investment advisor, we ask clients to take a serious look at their risk levels and suggest they consider structuring portfolios with the same stop protections successful traders use. Those protective steps have always been available to both stock, as well as mutual fund investors. Our experience is that investors who must think through the extra step of paying redemption fees or surrender charges most always hesitate to take action even when losses could have been avoided. Adding another layer of fees will give investors a chance to further shift blame for an investment decision, this time to a regulation. Over the years competition and innovation, within the mutual fund industry, has compelled mutual fund companies to come up with their own methods of handling frequent trading issues. Indeed, new segments of the mutual fund industry have successfully come together to better satisfy those needing to trade more frequently. And, conversely, those fund families who shun frequent trading readily advertise their position. Looking back, regulation has had little impact on this innovation. The solutions have come because of market demand. Is this not what the United States has promoted throughout its history? That is, a free and fair market. Free markets to allow the movement of funds at an investor’s desire, whatever might prompt that decision. Fair markets to promote full and complete disclosure. If investors did not believe in this industry, certainly the more than $10 trillion would never have been entrusted to it. We see little reason for mutual fund redemption costs on even the shortest holding periods. More likely, for those who may unwittingly invest in a fund being impacted by frequent trading, additional disclosure should satisfy the question. Would investors shun a mutual fund that promoted frequent trading and higher costs if its performance was superior? We think not. More likely, investors would shun a mutual fund whose disclosure showed a promotion of frequent trading and mediocre returns. However, this is a decision that should be determined by the marketplace, not our government. If the majority of investors were moving funds frequently (and, that could happen in highly volatile market conditions), mutual funds could simply choose to increase their holdings in cash to better provide liquidity for needed funds (much as money markets must do on a daily basis). Assuming a mutual fund manager will invest 100% of available funds the day they are received is simply wrong. Most recent reports show the average mutual fund now holds 4% (record low) of its holdings in cash. It is that available cash that allows the fund to work with those, who for whatever reason, find it necessary to raise funds. For investment companies that prefer to limit investor movement within their fund, allowing themselves to be fully invested, they are already able to simply adopt their own redemption fees, not to be regulated into a redemption rule. It is our hope the SEC reconsider the proposal to impose redemption fees for frequent trading and instead allow the marketplace to compete amongst itself. Sincerely, Stephen W. Mack, CFP, RFC President