Vanguard to Strengthen Fund Trading Safeguards

March 05, 2004

Plans to limit shareholders to four exchange transactions out of a fund each calendar year.

Yesterday Vanguard announced it would be implementing new policies for its mutual fund to further deter market timing activities, which can harm long-term investors with higher transaction costs and adverse tax consequences.

'Over the years, we have found that levying redemption fees, limiting exchange transactions, employing fair value pricing, and screening large dollar transactions have been quite effective at turning away investors-and investing behavior-that could be detrimental to our funds,' said Vanguard in a statement. 'While our safeguards have been successful, we began to re-examine them even before the revelations of late trading, market-timing, and other improprieties began surfacing at other fund companies in September 2003.'

In the statement, Vanguard said it does not believe that short-term trading strategies are a viable way for most investors to create wealth.

'Some 23 Vanguard funds today assess redemption fees, so it is fair to say we support their use as a tool to combat short-term trading activity,' said Gus Sauter, Vanguard's chief investment officer. 'We are studying the SEC's proposal, which was issued last week, and plan to provide comments to the commission in due course, as we do with any regulatory issue of importance to our shareholders. In the meantime, we're moving ahead with plans to implement redemption fees more broadly as part of the new approach that we've developed.'

'Our plan is to limit shareholders to no more than four exchange transactions out of a fund each calendar year, whether by Web, telephone, or in writing,' said Sauter. 'Four exchanges per year will offer shareholders the flexibility to rebalance quarterly if they so desire. Rest assured, too, that shareholders would still be able to redeem shares at any time to meet a financial emergency or short-term spending needs.'

Apparently the recent launch of Vanguard VIPERs ETF share classes was a factor in the decision, as they are more suitable home for traders. 'These shares give investors who feel constrained by our traditional share restrictions a Vanguard option that has no negative impact on the fund or its shareholders,' said Sauter.

'We expect to roll out our simplified approach in the coming months, but given some of the operational issues involved, it may take a reasonable amount of time to implement them in full,' said Sauter.

For more information see this link.


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