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Mutual Funds Could Charge For Withdrawals During Peiords Of High Volatility Under SEC Proposal
Makes no sense. Can't make up stuff. Some mutual funds have long lock in periods like 1 year I believe for MXXVX. Fund company welcome to do that by clearly mentioning in prospectus.
Earthquake in San Francisco...I cannot sell my mutual fund without redemption? Who are we helping here? All such rules will do is prevent mom and pop from selling their funds while high net worth investors will cash out. Even if those pay the redemption fees, they will not feel it much and it is THEY who move the markets, not mom and pop investors.
SEC always seemed like a "captured" organization, but now I think they have too much time on their hands.
"Officials at the regulator think the change could curb the impulse to stampede out of mutual funds when asset prices are at risk of tanking ...".
Duh? Better re-think that one guys. The proposal would actually be a good way to start a stampede by increasing investor anxiety when markets get choppy. They'll react sooner, racing one another to withdraw their funds before the fees are imposed.
Where's the detriment anyway? If fees could deter itrational investor behavior ... than a whole lot of high-fee funds and practices would have disappeared by now.
The article implies that funds currently can only impose redemption fees for limited holding periods: "Unlike redemption fees, which are imposed on investors who trade frequently ..."
That's not exactly the case. Vanguard used to impose redemption and purchase fees on VEIEX for all transactions, regardless of how long you held your shares. Vanguard clearly said that it did this because: "Funds incur trading costs when they invest new cash or sell securities to meet redemption requests; these costs run higher for funds that invest in small-company or international stocks. " 2003 Vanguard Prospectus:
Sounds like what Blackrock says (in the article) it is currently doing with swing prices in Europe: "shifting trading costs to exiting investors". Seems fair - you pay for what you use. It's not saying that small trades are influencing the trading costs per share; it's saying that everyone should pay whatever their trades cost at the time - more when the costs are high, and less when the costs are low. No special treatment for investors, large or small.
There are already other rules ("circuit breakers") in place to tamp down volatility. Those rules affect everyone, not just the institutional traders. So from the perspective of managing runs on the market, the proposed rule doesn't seem to be that radical.
What is novel is the idea that the fee could be dependent not on the market volatility, but on the net cash flow of the individual fund. If there were tons of redemptions but also tons of matching purchases, it sounds like the fund would not impose redemption fees.
IMHO that should be eliminated. This would cause even more confusion than the article suggests. And it wouldn't achieve an intended effect of reducing volatility, since people wouldn't know for sure that trades on a given day would cost them more.
Instead, the fees could be triggered simply on market volatility - something people can see when they put in their orders. If the fund makes a profit (because cash flows balanced at the end of the day and it incurred lower net trading costs), then the excess fees would flow back into the fund, just as redemption fees do under current regulations.
When half the Chinese market was halted, I thought, wow this is a great way to increase panic because when you close doors, it's just going to make people that much more tense and really start moving towards what exits are available.
Ultimately, you have to make redemptions easier in times of panic because when you show people that the exits are clearly available, they're not going to panic and those who do will result in the panic working itself out quicker. If institutions can't handle redemptions, then that's a real problem that has to be addressed. We give financial institutions all the leeway in the world after 2008 (because if we didn't, the sun wouldn't have risen the next morning, or so I'm told), then when there's the potential of panic, the solution is to have them suddenly charge for redemptions?
Gee,glad we bailed out the financial industry so that they can continue to bend over investors, savers and whoever else while regulators still coddle them.
To hank's concern - since mutual funds trade on a daily basis, one can't beat fees by trading a few minutes or a couple of hours earlier in the day. The fees would be imposed on all trades for that day, because all trades execute at close of market.
So that drop in prices seems to have been at least somewhat justified by fundamentals - something the Chinese government finally failed to paper over. The Chinese government exacerbates the situation with ham handed attempts to prop up stock prices.
In contrast, the 1933 bank holiday did not increase panic, but ameliorated it. It gave the public time to cool down, and time for the US government to take actions that, in contrast to the Chinese actions, served to build confidence. Each situation is different.
More generally, this is not a proposal to shut down daily buying/selling of mutual funds, but to give funds the option of imposing redemption fees when trading costs spike. The redemption fees are not going into the management company's pockets. These are not management fees. They are not going into the pockets of salespeople. They are not commissions. No one is getting ripped off; people are paying for the costs they are imposing on the other investors (in excess of redemption costs in quiescent times).
I agree with the observation that the proposal as described creates uncertainty in whether the redemption fees will be applied on a particular day. Which is why I suggested greater transparency - base the decision to apply the fees on visible market data rather than opaque fund cash flows. Greater transparency = less panic.
Trading costs are already built into stocks and ETFs. We've just seen that in a rapidly falling market, people can wind up selling way ETFs well below NAV. The bid/ask spread increases, and it is that trading cost that the redemption fee on open end mutual fund shares is designed to recover.
Comments
Earthquake in San Francisco...I cannot sell my mutual fund without redemption? Who are we helping here? All such rules will do is prevent mom and pop from selling their funds while high net worth investors will cash out. Even if those pay the redemption fees, they will not feel it much and it is THEY who move the markets, not mom and pop investors.
SEC always seemed like a "captured" organization, but now I think they have too much time on their hands.
Derf
Duh? Better re-think that one guys. The proposal would actually be a good way to start a stampede by increasing investor anxiety when markets get choppy. They'll react sooner, racing one another to withdraw their funds before the fees are imposed.
Where's the detriment anyway? If fees could deter itrational investor behavior ... than a whole lot of high-fee funds and practices would have disappeared by now.
That's not exactly the case. Vanguard used to impose redemption and purchase fees on VEIEX for all transactions, regardless of how long you held your shares. Vanguard clearly said that it did this because: "Funds incur trading costs when they invest new cash or sell securities to meet redemption requests; these costs run higher for funds that invest in small-company or international stocks. "
2003 Vanguard Prospectus:
Sounds like what Blackrock says (in the article) it is currently doing with swing prices in Europe: "shifting trading costs to exiting investors". Seems fair - you pay for what you use. It's not saying that small trades are influencing the trading costs per share; it's saying that everyone should pay whatever their trades cost at the time - more when the costs are high, and less when the costs are low. No special treatment for investors, large or small.
There are already other rules ("circuit breakers") in place to tamp down volatility. Those rules affect everyone, not just the institutional traders. So from the perspective of managing runs on the market, the proposed rule doesn't seem to be that radical.
What is novel is the idea that the fee could be dependent not on the market volatility, but on the net cash flow of the individual fund. If there were tons of redemptions but also tons of matching purchases, it sounds like the fund would not impose redemption fees.
IMHO that should be eliminated. This would cause even more confusion than the article suggests. And it wouldn't achieve an intended effect of reducing volatility, since people wouldn't know for sure that trades on a given day would cost them more.
Instead, the fees could be triggered simply on market volatility - something people can see when they put in their orders. If the fund makes a profit (because cash flows balanced at the end of the day and it incurred lower net trading costs), then the excess fees would flow back into the fund, just as redemption fees do under current regulations.
Ultimately, you have to make redemptions easier in times of panic because when you show people that the exits are clearly available, they're not going to panic and those who do will result in the panic working itself out quicker. If institutions can't handle redemptions, then that's a real problem that has to be addressed. We give financial institutions all the leeway in the world after 2008 (because if we didn't, the sun wouldn't have risen the next morning, or so I'm told), then when there's the potential of panic, the solution is to have them suddenly charge for redemptions?
Gee,glad we bailed out the financial industry so that they can continue to bend over investors, savers and whoever else while regulators still coddle them.
To scott's concern - each situation is different. People long believed that the Chinese government was inflating its market. The market had been up 150% in the trailing twelve months before coming back to earth. Even now, the Shanghai is barely down YTD (-2.3%), and up 36% over the past twelve months. People "panicked" on the upside as well.
So that drop in prices seems to have been at least somewhat justified by fundamentals - something the Chinese government finally failed to paper over. The Chinese government exacerbates the situation with ham handed attempts to prop up stock prices.
In contrast, the 1933 bank holiday did not increase panic, but ameliorated it. It gave the public time to cool down, and time for the US government to take actions that, in contrast to the Chinese actions, served to build confidence. Each situation is different.
More generally, this is not a proposal to shut down daily buying/selling of mutual funds, but to give funds the option of imposing redemption fees when trading costs spike. The redemption fees are not going into the management company's pockets. These are not management fees. They are not going into the pockets of salespeople. They are not commissions. No one is getting ripped off; people are paying for the costs they are imposing on the other investors (in excess of redemption costs in quiescent times).
I agree with the observation that the proposal as described creates uncertainty in whether the redemption fees will be applied on a particular day. Which is why I suggested greater transparency - base the decision to apply the fees on visible market data rather than opaque fund cash flows. Greater transparency = less panic.
Derf