T. Rowe Price fee aims at abuses

New redemption charges target rapid in-out trades

Market timing assumed to occur

April 27, 2004|By Paul Adams | Paul Adams,SUN STAFF

T. Rowe Price of Baltimore, one of the nation's largest mutual fund firms with $190 billion in assets, said yesterday that it would impose new redemption fee policies on more than 20 of its mutual funds to curb trading abuses that hurt everyday investors.

The fees, which range from 0.5 percent to 2 percent, will hit investors who purposely trade rapidly in and out of funds in an effort to take advantage of pricing inefficiencies.

So-called market timers raise a fund's administrative costs and force fund managers to keep more of their assets in cash to pay redemptions, rather than putting the money into stocks that could increase returns for long-term investors.

Market timing and other trading abuses have been the subject of an industrywide probe that has rocked the $7 trillion mutual fund industry since fall.

Industry analysts and shareholder advocates say Price's move is the latest evidence that the practice continues among some investors, despite increased regulatory pressure on fund firms and their intermediaries to do a better job of policing the practice.

The Securities and Exchange Commission has proposed a mandatory redemption fee of 2 percent for investors who sell shares within five days of buying them.

"Every fund complex has problems with market timers and it's hard to imagine any large fund complex not having to use redemption fees to some extent to combat this problem," said Mercer Bullard, a former SEC lawyer and president of Fund Democracy, a shareholder advocacy group.

Forrest Foss, associate legal counsel for T. Rowe Price, conceded that market timing probably does occur in the firm's funds among a small number of shareholders. He said he could not quantify the scope of the problem.

"But we have several million shareholders and we do police it," he said. "Again, the activity that we can see, I think we have a pretty good process in place to identify those people and restrict them."

T. Rowe Price will impose new fees on all of its international funds that don't already have redemption fees. The fees are a sort of penalty paid by the investor if they sell shares after holding them for less than 90 days to one year of purchasing the fund. The length of the mandatory holding period varies by fund.

In addition, T. Rowe Price said it will shorten the mandatory holding period on its index funds from 180 days to 90 days, but increase the redemption fee to 2 percent from 1 percent on its International Equity Index Fund.

Also, a 1 percent redemption fee and one-year holding period would be imposed on the so-called "adviser class" shares sold through intermediaries of the T. Rowe Price Small-Cap Value Fund and High Yield Fund.

The new rules are to take effect June 1 on shares purchased directly from T. Rowe Price or through an intermediary, such as Charles Schwab or other brokerages. Shares purchased before that date will not be affected by the rule change.

Industry consultants said the fees are aimed primarily at intermediaries, who offer clients one-stop shopping for a broad spectrum of mutual fund families. Fund firms such as T. Rowe Price are unable to police market timers who set up omnibus accounts through intermediaries, and firms are typically loath to impose restrictions for fear of losing business.

"By having a redemption fee, the intermediary should be able to set that up operationally to charge their client the redemption fee, which would be paid to the T. Rowe fund if they [the investor] were to violate the holding period," Foss said.

Foss declined to say whether Price was having difficulty with any intermediaries.

Geoff Barboff, an industry consultant, said such omnibus accounts set up through intermediaries have been the source of much of the trading abuses affecting the industry in recent months. He credited T. Rowe Price for taking action to curb market timers.

"I take my hat off to them," Barboff said. "It could cost them assets."

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