2007 Study Results

On June 20, 2007, CMFI released its third study evaluating the short-term trading policies of the 50 largest mutual fund groups. The study concluded that it is impossible for mutual funds to uniformly enforce their policies because of a lack of transparency in omnibus accounts held by broker-dealers, financial advisors, retirement plans, and other third-party financial intermediaries.

Many of these intermediaries buy and sell mutual funds by consolidating all of their customer transactions into one order during each trading day. An “omnibus account” order may represent the transactions of thousands of customers, yet no identity or transaction information about individual shareholders is generally disclosed to the mutual fund.

The results of the 2007 CMFI study were similar to the findings of earlier CMFI studies in 2004 and 2005.

Highlights of the 2007 CMFI omnibus account study include the following:

• Most mutual fund groups continue to use redemption fees as a tool to deter short-term trading abuses. Of the 50 fund groups evaluated, 31 of the groups (62%) have implemented redemption fees on at least one domestic or international equity fund. This is a decrease of 8% from the 2005 study, where 70% of the fund groups utilized a redemption fee on at least one fund.

• All fund groups are now disclosing in prospectus materials the impossibility of enforcing redemption fees or other short-term trading policies within omnibus accounts. Every one of the fund groups with redemption fee policies (100%) disclosed that the funds may exclude, waive, or limit the enforcement of redemption fees in omnibus accounts. This is an increase of 3% from the 2005 study, where 97% of the fund groups disclosed exclusions, waivers, and limitations on enforcement within omnibus accounts. For fund groups with other short-term trading policies, every one of these groups (100%) disclosed concerns about the ability or practicality of enforcing these policies in omnibus accounts. This is an increase of 47% from the results of the 2005 study.

• None of the large fund groups use the LIFO accounting method, despite its effectiveness in deterring abusive short-term trading. Of the 31 groups with redemption fee policies, 26 groups (84%) disclosed that they use the FIFO (“First In, First Out”) accounting method to calculate redemption fees. No fund group disclosed that it uses the LIFO accounting method, despite the fact that it is the only accounting method that actually matches up market timing transactions (i.e., the most recent purchases matched with the most recent redemptions).

As a result of the conclusions reached by this study, CMFI recommends that: (1) financial intermediaries should disclose omnibus account information to mutual funds on a same-day basis; and (2) LIFO should be the required accounting method for the calculation of redemption fees.

Please click here to read a summary of the CMFI 2007 study

Please click here to view the full study

Please click here to read the news release announcing the results of the study

Please click here to read CMFI’s letter to SEC Chairman Cox

Please click here to read the SEC's response to the CMFI letter

2005 Study Results

On May 5, 2005, the Coalition of Mutual Fund Investors released a second study examining the 50 largest fund groups for their use of redemption fees and other mutual fund policies aimed at deterring short-term trading. The study found that it is impossible for mutual funds to effectively enforce their policies because many of their customers are concealed in third-party omnibus accounts. These results are similar to those found in a 2004 study conducted by CMFI.

Some highlights from the 2005 study include:

• More fund groups are using redemption fees as a tool to deter short-term trading. Of the 50 fund groups examined, 35 of the groups (70%) utilize a redemption fee for at least one equity mutual fund. This is an increase of 6% from last year’s study, where 32 of the 50 fund groups utilized a redemption fee on at least one fund.

• More fund groups are disclosing in prospectus filings the impossibility of enforcing market timing restrictions on omnibus accounts. Of the 35 fund groups with redemption fee policies, 34 of the groups (97%) disclosed that they exclude, waive, or limit the enforcement of redemption fees in omnibus accounts. This is an increase of 9% from last year’s study, where 28 of the 32 groups with redemption fee policies disclosed similar disclaimers in prospectus filings with the SEC.

• More fund groups are using the FIFO accounting method, instead of the accounting method most effective in deterring abusive short-term trading. Of the 35 groups with redemption fee policies, 22 groups (63%) disclosed that they use the FIFO (“First In, First Out”) accounting method to calculate redemption fees. No fund group disclosed that it uses the LIFO (“Last In, First Out”) accounting method, despite the fact that it is the only accounting method that actually matches up market timing transactions, (i.e., the most recent purchases matched with the most recent redemptions).

CMFI also suggested the following recommendations:

• Redemption Fees Are a Helpful Tool to Deter Market Timing

• Financial Intermediaries Should Disclose Omnibus Account Information to Funds, on a Daily or Transactional Basis

• LIFO (Last In, First Out") Should Be the Required Accounting Method for Redemption Fees

Please click here to read the executive summary

Please click here to view the full study

Please click here to read the news release

Please click here to read CMFI's letter to SEC Chairman Donaldson

2004 Study Results

On August 3, 2004, the Coalition of Mutual Fund Investors released a study examining the redemption fee and market timing policies of the 50 largest Mutual Fund groups. The study concluded that these Fund groups are unable to monitor or regulate market timing activities in omnibus accounts, which are shareholder accounts held by third-party financial institutions. The results of this study demonstrate the need for full transparency regarding the identities and trading activities of shareholders in these third-party omnibus accounts.

Some of the study highlights include:

• Of the fund groups with a redemption fee policy, 88% disclosed in public filings that they exclude, limit, or waive the enforcement of redemption fees in third party accounts where the outside financial institution maintains the underlying shareholder account.

• Of the fund groups with no policy to impose a redemption fee, 50% disclosed concerns about their ability to enforce their market timing policies within these third party accounts where the shareholders are unknown to the mutual fund.

• None of the fund groups with redemption fee policies use a “last in, first out” accounting method (LIFO) to apply the fee, permitting market timers to circumvent these trading restrictions, especially in third party accounts.

CMFI Recommendations:

• Redemption Fees Are a Helpful Tool to Deter Market Timing

• Financial Intermediaries Should Disclose Omnibus Account Information to Funds

• LIFO (Last In, First Out") Should Be the Required Accounting Method for Redemption Fees

Please click here for an executive summary of the findings (2004)

Please click here to review the full study (2004)

Please click here to read Senator Fitzgerald's news release (2004)

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