Fund Democracy Insights

Resource Materials

August 2001

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The August 2001 issue of Fund Democracy Insights plumbs the depths of the SEC's policy on mutual fund redemption fees. The policy's questionable legal basis and other policy considerations favor a broad reevaluation of the SEC's position that places greater emphasis whether and how shareholders benefit from redemption fees.

Table of Contents - August 2001

The Promise of Redemption . . . . . . . . . . . . . . . . . . . . . 1

The Limits of Fidelity Korea . . . . . . . . . . . . . . . . . . . . . 7

The Benefits of Redemption Fees . . . . . . . . . . . . . . . . 8

The Equities of Redemption Fees . . . . . . . . . . . . . . . . 13

Redeemability and In-Kind Redemption Policies . . . 14

Roye on Redemption Fees . . . . . . . . . . . . . . . . . . . . . . 17

Worth Reading on the Internet . . . . . . . . . . . . . . . . . . 20

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Links to resource materials (.pdf files require Adobe Acrobat for viewing):

The Promise of Redemption

• Section 2(a)(32) of the Investment Company Act (definition of redeemable security)
• Section 10(d)(4) of the Investment Company Act (limiting redemption fee to 2% for funds that have only one nonindependent director)
• Rule 23c-3(b)(1) under the Investment Company Act (imposing maximum 2% repurchase fee for interval funds and requiring that fee be reasonably intended to compensate the fund for expenses directly related to the repurchase of fund shares)
• Rule 11a-3(a)(7) under the Investment Company Act (defining "redemption fee" as fee reasonably intended to compensate the fund for expenses directly related to the redemption of fund shares)
• Paul F. Roye, Challenges for the Mutual Fund Industry in the Competitive Frontier, before the Mutual Funds and Investment Management Conference (Mar. 27, 2000) (discussing SEC's position on maximum allowable redemption fee)
• Fidelity Advisor Korea Fund, Inc., SEC No-Action Letter (Mar. 7, 2001) (permitting imposition of 4% redemption fee on sale of shares received pursuant to conversion to open-end status within 199 days of conversion)
• Fidelity Advisor Korea Fund Registration Statement (Apr. 3, 2000) (imposing 4% redemption fee on sales of shares received pursuant to conversion to open-end status within 199 days of conversion)

The Limits of Fidelity Korea

• Alliance Korean Investment Fund Proxy Statement (June 20, 2001) (imposing 2% redemption fee in connection with merger and discussing redemption fee and SEC staff position on page 24)
• Fidelity Emerging Asia Fund Registration Statement (Aug. 3, 1999) (imposing 4% redemption on shares sold within 6 months of the date of fund's conversion to open-end status)
• Alliance Korean Investment Fund Press Release (Dec. 18, 2000)

The Benefits of Redemption Fees

• Whitney Dow, Redemption Fees Surge 82% Since 1999: Assessment Periods Lengthen, While Fees Remain Constant, Financial Research Corporation (June 2001)
• Eric Zitzewitz, Daily Mutual Fund Net Asset Predictability and the Associated Trading Profit Opportunity, Massachusetts Institute of Technology (Feb. 2000) (finding that redemption fee of at least 3% for international equity funds and 2% for small cap funds would be necessary to eliminate possibility of arbitrageurs exploiting stale mutual fund prices) (.pdf file)
• William Samuel Rocco, Fighting Redemptions, Morningstar.com (Aug. 6, 1998) (finding small or no correlation between imposition of redemption fees and increase in asset retention levels in declining markets)
• Investment Company Institute, Redemption Activity of Mutual Fund Owners, 10 Fundamentals 1 (Mar. 2001) (discussing redemption rates of mutual fund shareholders)(.pdf file)

The Equities of Redemption Fees

• Section 18(f)(1) & (g) of the Investment Company Act
• Growth Fund of Spain, Inc. Definitive Proxy (Oct. 5, 1998) (imposing 2% redemption fee on transactions in shares held less than 1 year, including the period shares are held prior to conversion to open-end status)
• Dresdner RCM Europe Fund Press Release (Apr. 26, 2001) (formerly The Emerging Germany Fund, Inc.) (announcing waiver of 1% redemption on transactions in shares held for more than one year)
• Fidelity Advisor Korea Fund Registration Statement, supra
• Fidelity Emerging Asia Fund Registration Statement, supra
• Alliance Korean Investment Fund Proxy Statement, supra
• Alliance Korean Investment Trust Definitive Proxy (June 20, 2001) (amending articles of incorporation to grant discretion to board of directors to reduce or waive redemption fee)
• Templeton Global Investment Trust Registration Statement (July 27, 2001) (imposing 2% redemption fee for "Identified Market Timers")
• Progressive Return Fund, Inc. Definitive Proxy (Sep. 2, 1999) (formerly the Portugal Fund) (proposing to charge 1.5% 1-year redemption fee upon conversion to open-end status and offering to waive fee for shareholder redeeming at least $250,000 and accepting proceeds in kind)

Redeemability and In-Kind Redemption Policies

• Rule 18f-1 under the Investment Company Act (permitting election to redeem only in cash when redemption amount is lesser of $250,000 or 1% of fund assets)
• Letter from Solomon Freedman, Director, Division of Corporation Finance to Carl Shipley, Shipley, Akerman, Stein & Kaps (July 13, 1971) (discussing rule 18f-1)
• American Century Avanti Fund Registration Statement (Jan. 19, 2001) (requiring in-kind redemption unless fund receives 15-days' notice of intent to redeem)

Roye on Redemption Fees

• Paul Roye, supra

Worth Reading on the Internet

• Russ Wermers, The Potential Effects of More Frequent Portfolio Disclosure, 7 Investment Company Institute Perspective (June 2001) (study commissioned by Investment Company Institute discussing possibility of front running based on fund portfolio disclosure) (.pdf file)
• NAV/Fair Value Practices Survey, Capital Market Risk Advisors (July 2001) (finding large discrepancies in prices used by different funds to value certain securities and significant differences in pricing methodologies)
• Alan R. Palmiter, Mutual Fund Voting of Portfolio Shares: Why Not Disclose? (May 2001)(arguing that requiring disclosure of mutual fund voting policies and activities offers many potential benefits at relatively low cost)
• Interim Report of the President's Commission to Strengthen Social Security (July 23, 2001) (arguing that Social Security should be reformed with the goal of increasing personal saving and investing rates) (.pdf file)

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This page was last updated on August 1, 2001.