Funds Seek Higher Fees as Redemptions Rise

An escalation in short-term trading has some mutual funds seeking to boost redemption fees--a move the Securities and Exchange Commission has so far resisted.

The SEC limits the fees to a maximum of 2%, though some funds have exceeded that, according to Frank Stanton, an analyst at Chicago-based fund tracker Morningstar Inc.

“Redemption fees are the one fee that Morningstar thinks should be raised because they benefit long-term investors,” Stanton said, noting that short-term trading in mutual funds has picked up substantially in recent years.

“Some companies have tried to go ahead and impose a 3% or higher redemption fee,” said the SEC’s Cindy Fornelli. “And when we see that come through our disclosure office, we inform them that they have to go back down to 2%.”

Fornelli said the SEC has received more inquiries over the last year from firms seeking to impose higher redemption fees. But the SEC says it has yet to hear a good reason why it should exceed 2%.

Twelve of Vanguard Group’s 103 funds have redemption fees, the fund giant said, adding that it has no problem with the 2% cap.

Funds argue that costs involved in letting short-timers out are a burden to those who stay in.

Morningstar’s Stanton noted that the fee money goes back into the funds, benefiting long-term shareholders..

Financial Research Corp., a Boston-based mutual fund consultant, said 309 funds out of about 5,900 long-term mutual fund portfolios had redemption fees as of April 1999. That compares with 209 funds out of about 5,600 funds as of December 1997.