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GAO-15-427R 1 (2015-05-14)

handle is hein.gao/gaobaaixc0001 and id is 1 raw text is: GAO U.S. GOVERNMENT ACCOUNTABILITY OFFICE 441 G St. N.W. Washington, DC 20548 May 14, 2015 The Honorable Ron Wyden Ranking Member Committee on Finance United States Senate The Honorable Patty Murray Ranking Member Committee on Health, Education, Labor, and Pensions United States Senate The Honorable Elizabeth Warren United States Senate 40 1(K) PLANS: Frequent and Collective Trading Are Uncommon and Not a Significant Concern for Plan Participants, Sponsors, or Mutual Funds In the early 2000s, federal regulators identified patterns of short-term trading abuses in mutual funds, including certain undisclosed market timing practices. Market timing involves frequent trading of shares of the same mutual fund to take advantage of temporary disparities in the value of a fund and its underlying assets in the fund's portfolio.1 Such practices have the potential to compromise the savings of long-term investors, including retirement plan participants who own mutual fund shares.2 Frequent trading occurs when a shareholder, including a retirement plan participant, trades (i.e., purchases, redeems/sells, or exchanges) shares in the plan's mutual funds repeatedly within a specified period of time, at times to take advantage of short-term price fluctuations. In response to these practices, federal regulators 1 See: Mutual Fund Redemption Fees, 70 Fed. Reg. 13,328, n.4 (March 18, 2005)(adopting redemption fee rule) (Redemption Fee Rule). Market timing includes (a) frequent buying and selling of shares of the same fund or (b) buying or selling fund shares in order to exploit inefficiencies in fund pricing. See also: GAO, MUTUAL FUNDS: Assessment of Regulatory Reforms to Improve the Management and Sale of Mutual Funds. GAO04-533T (Washington, D.C.: March 10, 2004). Market timing and frequent trading are distinct from high-frequency trading where professional traders act in a proprietary capacity to generate a large number of trades on a daily basis. These traders use extraordinarily high speed and sophisticated programs for generating, routing, and executing orders within very short time-frames to establish and liquidate positions. 2 Market timing by investors, while not illegal per se, can harm other fund shareholders because (a) it can dilute the value of their shares, if the market timer is exploiting pricing inefficiencies, (b) it can disrupt the management of the fund's investment portfolio, and (c) it can cause the targeted fund to incur costs borne by other shareholders to accommodate the market timer's frequent buying and selling of shares. See: Redemption Fee Rule, n.4. GAO-1 5-427R 401(k) Plan Trading Restrictions Page 1

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