By Roger E. Dahl and Kathryn Kretschmer-Weyland
January 19, 2004

The Securities & Exchange Commission has proposed a rule (see Federal Register, December 17, 2003, Part IV or go to the SEC website http://www.sec.gov), which would require a "firm" 4:00 pm cut-off for reporting trades in an effort to eliminate the recently reported late trading and market timing abuses by certain mutual fund companies.

Late trading and market timing abuses erode investor confidence and the integrity of the markets and must be stopped. However, the Commission's proposed solution could unnecessarily disadvantage millions of employees whose retirement savings are invested in mutual funds. Many of the millions of public employees participate in retirement programs that are offered by financial services intermediaries that provide "multi-manager" retirement plans. The more than 300,000 city employees in the USCM Deferred Compensation Program are among them.

The Commission's proposed solution could unnecessarily disadvantage millions of county, city and state employees.

Financial service intermediaries such as Nationwide Retirement Solutions, the administrator of our own USCM Deferred Compensation Program, generally offer funds from a variety of mutual fund managers under a single retirement plan. Such multi-manager products have become popular because they give city and other government workers greater diversification in their saving through a variety of fund managers.

A firm 4:00 p.m. cut-off for reporting trades would require financial intermediaries and broker-dealers to impose a much earlier order cut-off time in order to allow them sufficient time to properly process and transmit the orders to the fund by 4:00. However, single-manager plans would be able to accept trades until the 4:00 p.m. deadline. We strongly believe this to be an unacceptable competitive advantage, and could hurt small investor's (i.e. most government employees) retirement plans.

It can take a retirement plan intermediary four to six hours to reconcile mutual fund trades for submission directly to a fund company whose processing is done after 4:00 p.m. Such a rule would necessitate some intermediary plans to close trading as early as noon each day, or even earlier for participants on the West Coast.

Employees saving for their retirement might also be subject to higher expenses for the added administrative complexity this new requirement could create.

We believe these outcomes are unintended consequences of the Commission's approach to solving these trading abuses.

The approach taken by the House of Representatives in H.R. 2420 appears to be more equitable. The legislation permits trades received by 4:00 p.m. to be processed and executed based on that day's 4:00 p.m. Net Asset Value or NAV. This approach would allow for more strict compliance than current law, and should prevent many of the abuses that have caused the Commission to act. It would do so without establishing competitive imbalances or hurting the small investor and their retirement accounts.