The Securities and Exchange Commission is proposing a mandatory redemption fee for mutual funds, in an effort to fight abusive market timing trading.
The rule would require all mutual funds to impose a 2% fee on the redemption proceeds of shares redeemed within five days of their purchase. The fund itself would retain the proceeds from the redemption fees. The SEC says that the rule is designed to require short-term shareholders to reimburse the fund for the direct and indirect costs that the fund pays to redeem these investors’ shares. “In the past, these costs generally have been borne by the fund and its long-term shareholders. Thus the redemption fee would be a ‘user fee’ to reimburse the fund for the cost of accommodating frequent traders,” it says.
The proposed rule includes several provisions designed to prevent the fee from affecting most ordinary redemption transactions by smaller investors. Also, the rule would not apply to money market funds and exchange-traded funds. It also would not apply to mutual funds that encourage active trading and disclose to investors in the prospectus that such trading will likely impose costs on the fund.
The SEC says that the rule would supplement other measures it has recently taken to address short-term trading, including abusive market timing activity. “It is not designed to be an exclusive cure for the problem of abusive market timing, which will often (but need not) involve rapid trading strategies,” it says. “The principal solution to abusive market timing transactions is the accurate calculation of net asset value each day, using current and not stale prices.”