From: Paul Lofton [paul_lofton@yahoo.com] Sent: Sunday, February 08, 2004 5:14 PM To: rule-comments@sec.gov Subject: Unfair Mutual Fund and 401k Rules Dear Sec Commisioners: The Unfair Treatment of Mutual Fund and 401k Investors. The Brainwashing Of America's Investing Public. One segment of market participants (Mutual Fund Investors) have been led down the path of "You need to be a long-term investor", "You need to dollar cost average", "You need to stay fully invested and don't try to time the market". All of this is propaganda and is meant to keep you in the market while brokerage house floor traders trade the markets without restriction. And so the mutual fund managers do not have to fulfill their responsibility towards investors. That responsibility is to actively manage the money that you have entrusted to them. They don't want redemptions; they want a steady stream of inflow. Traders Have Full Trading Flexibility. Do You? On the floor of the NYSE and in front of computers all over the world, traders are actively trading hundreds of millions of shares on an hourly basis. They make up the market. They are the buyers and sellers of the American Capital Machine every hour of every trading day. They are able to practice their trading practically unencumbered and without restriction. They are the ones providing daily liquidity to the markets. They are the market. And yet, we who hold mutual funds in our 401k accounts are mandated to stand still and stay the course, we are not sell. All the while the traders have full timing flexibility. When large sell offs occur mutual fund participants must stay on the train track while the freight train barrels towards them on a path of certain destruction. Mutual fund investors are not able to get out of the way of impending market declines. This is not fair. Not even a little. The so called inves tment experts have mislead the investing public into believing that buy and hold is the only way to grow assets. Oh really? Do you know any mutual fund investors whose 401k or mutual fund is worth more today than it was in March of 2000? If there are any out there whose assets are worth more, they had to have either been in cash or in bear market fund. Buy and hold does not work anymore. It used to, but it doesn't anymore. Times have changed, but the mutual fund industry and 401k plans have not changed with the times. It's Not A Level Playing Field. The playing field is not level. Not when someone with a brokerage account can sit in front of his or her computer and trade stocks all day long without restriction, without time limits and without interference from the mutual fund companies and their restrictive policies. The mutual fund investor is limited to one trade per day and that has to be done by the end of the trading day. Yes, that's right. If you trade mutual funds, you have only one opportunity to make a trade in a single day, and you don't know what the trade price is until the next day when the newspaper arrives at your doorstep. Is this a modern way of investing? I don't think so. . If companies can announce earnings after the market closes, and stock trading can occur after the market closes, then "late trading" of mutual funds should be both legal and allowed. The Securities and Exchange Commission should either allow late trading of mutu al funds or make the market stay open until 7:00pm (this is when after market trading stops), or shut down all market related activities (including the announcing of earnings by all companies) at 4:00pm. Hey, what's fair is fair. Currently, there's not anything that is fair about the way all these aspects and activities are being conducted. Mutual fund investors have been stuck in an old, outdated method of investing while day traders and active market participants have all the modern trading tools and methods available to them. Individual investors and traders receive almost instant trade verification and pricing information when buying stocks. Mutual fund investors are stuck in a horse and buggy while everyone else is driving Corvettes. A Rigged Game. Why is it that companies are allowed to announce earnings before the open or after the close of the market? If you are a mutual fund investor what do you think is going to happen to your fund price when one or more large companies announce disappointing earnings in the after market? You're stuck. You have to wait out an entire whole day of market volatility the following day before you can do anything about it. The game is stacked against the mutual fund investor. Wouldn't it be fair to all investors if companies were compelled to announce earnings during market hours so that everyone has an opportunity to react to the news all within the same day? Come on man. Let's be fair about this. If companies can announce earnings after the market closes, and stock trading can occur after the market closes, then "late trading" of mutual funds should be both legal and allowed. The Securities and Exchange Commission should either allow late trading of mutual funds or make the market stay open until 7:00pm (this is when after market trading stops), or shut down all market related activities (including the announcing of earnings by all companies) at 4:00pm. Hey, what's fair is fair. Currently, there's not anything that is fair about the way all these aspects and activities are being conducted. Mutual Fund Investors Will Get Burned Again. When the market tops out the next time and begins to reverse direction, the traders are the ones who will be able to get out of the way of an impending market decline, while the mutual fund investors are encouraged to stay the course and stay invested and watch their assets get decimated. And some, like myself, who have been officially warned, sanctioned, and monitored daily by my 401k plan managers are the ones who will likely be hurt the most. It is the mutual fund industry that is pumping out the bad advice of staying fully invested at all times. Did you know that you don't have to be in the market at all? To hear most financial advisors talk, you get the impression that the stock market is the only game available. They are the ones who are causing millions of investors to get badly hurt when big market declines occur. They hope that the poor uneducated, unsuspecting, non-market savvy mutual fund investor will act as a stabilization force (by not selling) for the rest of the market. Never mind that they (the mutual fund investors) are losing their collective shirts, while the traders can come and go in the market as they darn well please anytime during the trading day. This is not only unfair, but is discrimination. Think about it. It's ok for one segment of the investing public to have certain trading rights but not ok for another segment, nam ely the mutual fund investor. And currently it's legal. Legal? Yes and here's why. In the prospectus of most mutual fund literature, they discourage excessive exchanges of mutual funds. Then, the parent company of the mutual fund or 401k-plan manager can then use this policy to keep individuals from actively managing their funds. Never mind that mutual fund managers do little to manage the funds. And, never mind that in their web site trading screen, their stated policy is unlimited number of trades. Apparently, there's a bit of a double standard or they're unaware of what's on their website. An entire segment of the investing population is being forced to play by a different set of rules. Why is this? The experts are likely to site the investment company act of 1940. Let's see. We have a set of guidelines that is 64 years old dictating how we should invest in the year 2004. Does this make any sense? Prudent & Responsible Management of Your Money? The mutual fund industry has not and is not serving its customers in a faithful manner. During the market decline of 2000, 2001 and 2002, most mutual funds held on to their losing stocks all the way down from the top. Was what they did in your best interest? They sat idly by and waited and watched Billions of dollars of assets vaporize. It's called wealth evaporization. Your mutual fund manager just let your money vaporize into thin air by failing to act on your behalf. How did it feel to see your account go down by as much as 70 percent? You may have though that your mutual fund manager was going to protect your hard earned money. You put your trust in the "team" that had been appointed to manage your fund. Have you made up all that your mutual fund manager lost for you by his or her mismanagement of your money? Do you call what they did during the record declines of the early 2000's prudent or proper mon ey management? They, the managers, were either frozen with fear or were inept, or were under orders to not sell. They, the managers of most mutual funds, did little to effectively and properly manage the people's money. They just let the valve erode away while they hoped and prayed that the market would turn around. The mutual fund managers of the past few years did not act prudently while stewarding over their client's money. They blew it then and they will blow it again in the future. History will repeat itself. Tell me who among you would buy Intel at $25, hold on to it up to $76 per share, and then hold onto to it down to $12.50 per share and think you did a good job at managing that asset? Well, guess what? Many mutual fund managers did just that. In a time when every mutual fund manager had the ability to put on portfolio insurance, sell deep in the money covered calls, and buy options on futures contracts, most did not utilize any of these protective tools and measures a vailable to them. The least of which was to raise cash or diversify among safer asset classes. Mutual fund managers did not actively manage the funds assets. In my opinion, all they really did was to buy a stock, place it in the portfolio, and hold it for ten years. Then they sit back and hope they're perceived as doing a good job. This is not the proper way to manage a mutual fund. You must trade the assets of a fund periodically and on an as needed basis. Every stock in the market has a level at which it is over bought or over valued. Selling in not a sin, or least it shouldn't be. For heavens sake, there's more to managing a portfolio than buying once and holding on through bull and bear with no real forward movement over a five or ten year period. Most mutual fund managers stayed fully invested all through the decline. Only a few raised some cash as a defensive maneuver. That was very unfortunate. They had so many tools available for use and so few of them were used. Our money was grossly mismanaged during the fall of the markets during the early 2000's. Many mutual fund managers are guilty of gross mismanagement of American's money. They used phrases like the following to justify their poor performance. The Internet bubble burst. September 11th happened. "The market fluctuates, and we had high interest rates". I suppose you could even say it was the way the stars lined up. All of the above are lame excuses from highly educated and highly paid so called professional money managers. And we the American investing public are expected to buy their excuses. I think Americans are much smarter than th ey give us credit for. No Lessons Have Been Learned From History. The current 401k industry today is a dangerous one. Dangerous because those in charge do not have the skills, ability, and desire to actively manage other peoples money in a prudent, responsible, and respectful manner. Remember Monday, October 19th, 1987? I remember the day well. Not only do I remember the day, I remember the days and the market events that led up to the worst percentage loss in modern times. History repeated itself that day. On that day in history every one who owned a mutual fund was stuck like rat on a sinking ship. If only they had the opportunity to get out of the market at midday that day, they would have cut their losses in half. What lessons were learned from that period in market history? Apparently nothing when you look at the performance of most mutual funds. Did any of your mutual fund managers call or write to you and apologize for losing so much of your money? Did they explain that they sat idly by and did not use any of the protective measures and tools available to them and, thereby, failed in their responsibility to you, the owner? They are counting on the current market rally to make you forget just how badly they performed. They figure that time will heal all wounds. Tell me, is your account back to the levels it was at in March of 2000? Most mutual fund and 401k investors accounts are not even close. Mine is not, and I consider myself a highly skilled stock market investor. I encourage every reader of this letter and website to think about the events of the past few years and remind yourself of how much your 401k account went down in value because of the gross mismanagement of your investments by your 401k mutual fund manager and their parent company. History will repeat itself. The question is what lessons have we learned, and will your mutual fund manager act in your best interest. I firmly believe the best person to manage your money, is you. Believe it or not, it's not that hard. But in order to do so, you must be enabled with the right kind of laws and the proper tools. American people and American investors deserve the best possible investment tools and policies available. Stand up for your rights today. Demand that well thought out changes be made that will enable every American to manage their own investments. The Mutual Fund Industry Is In Full Reverse. At a time when the world is wired and wireless to the hilt with every kind of technological advantage the mutual fund industry is backing up fast in full reverse. They are stuck in the Stone Age with old ways of thinking. Instead of modernizing and making new investment opportunities available, they have been scared into the Stone Age by the New York State Attorney General. Instead of innovation, new products and new ideas, they are burying their heads ever deeper in the sand by imposing ever-tighter restrictions on mutual fund and 401k investors. In fear they have taken away choice and opportunities and have imposed ever-tighter restrictions on everyone. While the rest of the modern investing world is taking advantage of all the new trading tools and technology, the mutual fund industry continues to digress by disallowing marke t timing and penalizing those savvy investors who capitalize on time zone differences between the United States and European markets. Oh my, some teamster in New England made a million dollars by taking advantage of market timing and time zone differences. This must be stopped. Certainly there's something wrong if someone is making that much money. Let's clamp down on the entire mutual fund industry and stop them from making money. Duh! Even in the Bible, in the book of Ecclesiastes King Solomon said there's a time for everything, and a season for every activity under heaven. He went on to say there's a time to plant and time to uproot, a time tear down and a time to build, a time to keep and a time to throw away, a time to be silent and a time to speak. Involvement in the stock market requires timing. It's all about timing. I believe it is time to tear down the current mutual fund and 401k systems and rebuild it with new and modern ideas and products that meet all needs of all inves tors. With all the discussion that has taken place about mutual funds recently, I have yet to hear anyone speak up for the market participants who practice market timing. Who is standing up for this very large segment of the market participants? A Call For Action. Reflect on this and then decide if you should express your views to your elected representative. We, the fund owners should have more control over our money, more say and more policy making input with regard to the funds that have been placed into 401k accounts. Congress should mandate that 401k investors have maximum control and flexibility with their money and investment choices. Moreover, no investor should ever be handcuffed and be made to stay in the market by mutual fund company policy makers while others (traders and private investors) have full freedom to move about in a free and open stock market. To me, this is a form of financial jail. You can't trade. You are in jail. (Restrictions) I am advocating that the following options be open and available to all 401k participants. 1. All 401k plans to be placed in an employees Self Directed 401k Brokerage Account of the employees choosing. Company matching funds could then be payroll deducted and sent to the account just like payroll deductions and automatic deposits occur now. 2. All 401k plans to be owned by the employee and be portable, in the event the employee moves to different employers. 3. Make full brokerage capabilities available to all 401k-plan participants through the use of self-directed 401k brokerage accounts. This would allow 401k participants to own individual stocks of their choosing instead of the very limited choice of funds currently available to most plan participants. 4. Make all mutual funds mark to the market it's net asset valve twice per day during the hours the market is open, thus making intra day purchases and redemptions possible to all who choose or need to do so. The present system of determining a funds net asset value just once at the end of the day, after the market close, is archaic and outdated. With our current computing capabilities, all pricing possibilities and times are possible. 5. Make unlimited trading of mutual funds legal and possible for all who wish to do so. Or if not this, then allow investors to use exchange-traded funds in place of mutual funds. 6. Mandate that all 401k accounts have the S&P 500 spyder symbol SPY, the Diamonds Trust symbol DIA and the triple QQQ' available for use by everyone. These are essential basic investment choices that need to be available to all 401k investors. 7. Make it law that companies reporting earnings must do so during the business day while the stock market is in full session. Thereby giving all market participants the same opportunity to respond to the news in a way of his or her, own choosing. 8. Legalize late and early trading of mutual funds. If companies can announce earnings after the market closes, and stock trading can occur after the market closes, then "late trading" of mutual funds should be both legal and allowed by every mutual fund and 401k investor. The Securities and Exchange Commission should either allow late trading of mutual funds, or make the market stay open until 7:00pm (this is when after hour market trading stops), or shut down all market related activities (including the announcing of earnings by all companies) at 4:00pm. Hey, come on, what's fair is fair. Currently, there's not anything that is fair about the way all these aspects and activities are being conducted. The mutual fund i nvestor is getting the short end of the deal. Investors should be able to trade a mutual fund and get the market close for that day, all the way up to 7:00pm. This makes perfect sense. Especially since most employers do not want or even allow the employees time to perform personal business on company time. 9. Change the hours of operation for the New York Stock Exchange. Again you talk about being the Stone Age! The NYSE currently opens at 9:30am and closes at 4:00pm. The day is half over by the time they open. Most every American citizen is at work well before the market opens and well afterwards. What's up with that? Why can't the market open at say 7:00am and close at 5:00pm like the rest of the working world. Are they so privileged? Again the major exchange is out of sync with the rest of American and the investing public. I propose that the market hours of operation be 7:00am through 5:00pm. Then have a morning session that marks everything to the market at 12:00pm. The hours between 7:00am and 12:00pm would be the morning session. Mutu al funds would be priced at 12:00 noon prices and again at the close of 5:00pm. Then a second session would begin at 12:00noon and run until 5:00 pm, at which time all equities would be marked to the market and all mutual funds would have a second or final closing price for publishing in the press. The reports would provide two net asset values for the day. One for the morning session and one for the afternoon session. This is not that hard. This would afford mutual fund investors some of the same flexibility that the rest of the investing public has. We have got get out of the Stone Age when it comes to mutual fund investing. The NYSE has got to come around to a modern way of serving its customers. In Summary, When the next selling avalanche occurs, current mutual fund investors will be left holding the losses once again. This is because we cannot get out of its way when it happens. It will be just like all the times before. The mutual fund investor can count on getting hurt if the changes I've outlined above are not brought about. It's like we are tied to a set of railroad tracks. For most of us, we will be forced to endure being run over by a speeding train. Is this fair? The mutual fund companies would like you to believe it is. They want you to stay the course and be patient. Never mind that every other market participant was able to trade out his or her stocks and get out the market. But you, you because you have been spoon-fed a steady diet of old fashion mutual fund brainwash "thinking long term" "don't try to time the market" you who have invested in mutual funds must now play the waiting game for several years to recoup the losses. I don't think this if fair or just. In fact, I think mutual fund advisers have done a huge disservice to the investing public. They certainly haven't had a modern thought in ages. Please consider the above proposals. Do you want a new and level playing field? Would you like to have the same rights as individual stock investors, who are free to trade the markets as much as they want and without heavy-handed restrictions of the current mutual fund industry? I would like very much to hear from you and hear your thoughts. If you are a mutual fund or 401k investor who wants the ability to actively trade and manage your mutual funds and 401k without the current severe limitations, then I encourage you to call or write your Congressman and Senator and express your views. Please don't sit idly by and let a terrible time in our financial history be repeated. Act now to help make more options, choices, and more freedom available to every 401k and mutual fund investor. Call or write your elected representative today. Thank you and may God richly bless you and your family and may God bless America. Call or write your United States Senator today. Let your views be known. http://www.senate.gov/general/contact_information/senators_cfm.cfm Sincerely, Paul Lofton Paul_Lofton@yahoo.com -------------------------------------------------------------------------------- Do you Yahoo!? Yahoo! Finance: Get your refund fast by filing online