a. What is an excessive trading policy? Large and frequent short-term trades within a mutual fund increase the administrative costs associated with processing shareholder transactions. These types of trades have the potential to interfere with the efficient management of the fund’s portfolio and increase the costs associated with trading its portfolio securities. Under certain circumstances, frequent trading may dilute the returns earned by other fund shareholders. Because mutual funds are not designed to serve as frequent-trading vehicles, fund companies and intermediaries have adopted policies intended to discourage shareholders from initiating trades that could be detrimental to long-term shareholders. Excessive trading policies, also known as “frequent trading policies” or “short-term trading policies,” provide for the monitoring of shareholder trading activity and will restrict a shareholder’s trading privileges if that shareholder is found to have engaged in a “Round Trip” transaction. A “Round Trip” is typically defined as a purchase followed by a sale or a sale followed by a repurchase of shares in a fund within a specified period of time. b. What will an excessive trading policy tell me? An excessive trade policy will state the required holding period and/or the number of “Round Trip” transactions, also called turn-around trades, are allowed by the participant without violating the policy. An example of a fund company’s policy would be, “a participant who purchases a fund must wait 60 days before selling it.” The 60 days would be the “required holding period.” c. How will Alerus comply with various fund company policies? Alerus Financial will monitor participant activity for the fund companies listed on our Excessive Trading Fund List. Click here to view the list. Trade requests violating the excessive trading policy will not be allowed. d. When are the excessive trading rules enforced? Our computer system will monitor all requests to purchase or sell shares of a mutual fund. If an excessive trading rule is violated, the trade will be rejected. e. Are there any exceptions to the policy? Yes, there are exceptions to the policy. We will not apply the policy to the following transactions: i. Distributions such as hardship, rollovers, loans, or retirement withdrawals II. Automated account realignments iii. Contributions iv. Plan sponsor initiated fund changes v. Share class conversions vi. Reinvestment of dividends or interest f. As a participant, how will I know if a trade I initiate will be affected by an excessive trading rule? You can review your historical account activity, along with the Excessive Trading Fund List. Click here to view the list. g. As a participant, will a trade I initiate be rejected if it violates an excessive trading rule? Yes. Any trade request violating a fund’s excessive trading policy will be rejected. h. As a participant, will I be notified if a trade I initiated did not take place because of an excessive trading rule? Yes. You will receive notification by mail that the requested transaction was rejected due to a violation in the excessive trading policy. i. Why is this important? How will this policy affect me? If you try to make short-term trades, you may be unable to buy or sell as planned. For example, you may purchase a fund, but then be unable to sell it quickly. In that case, you may be forced to hold the fund regardless of whether the fund is gaining or losing value. So long as you were within the required-holding period, you would not be able to reap quick profits in an up market or sell in a down market. Likewise, if you sold a fund, planning to buy back into it in a short period of time, the policy may limit your ability to do so. The policy is designed to discourage you from trying to time the market.
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