NEW YORK | Mon Aug 26, 2013 11:34am EDT
NEW YORK (Reuters) - T. Rowe Price Group Inc has permanently banned about 1,300 American Airlines employees from trading among its funds in their 401(k) retirement plans, a rare move to curb "collective" trading by subscribers to an investment newsletter.
About 800 additional employees have received warning letters about their trading patterns, according to sources at the airline and at JPMorgan Chase & Co, administrator of the retirement plan.
The ban, confirmed by the airline and the fund company in response to a Reuters inquiry, follows a period of several years in which T. Rowe Price imposed a series of temporary trading restrictions on some subscribers to the EZTracker LLC newsletter for American Airlines employees.
The newsletter suggests monthly mutual fund trades to more than 2,000 subscribers who invest in the company's defined contribution plan known as $uper $aver 401(k). The plan has more than 80,000 participants.
When large numbers of investors trade mutual funds in lockstep, it can force fund managers to buy and sell securities at inopportune times. They may have to find securities to buy in a hurry if the pack invests all at once, and may have to sell quickly to pay off sellers who cash out together.
T. Rowe Price spokesman Bill Benintende said collective trading can disrupt portfolio managers' strategies and raise costs for long-term investors.
"In limited situations" the company's funds restrict investors who significantly alter their holdings on the advice of a newsletter, he wrote in an emailed statement confirming the ban. He declined to name the newsletter or discuss other specifics.
Investment newsletter veterans said a permanent ban is highly unusual, and raises questions about why a giant like T. Rowe Price, which manages $614 billion, would single out activities of a small group of people. The controversy comes as workers' anxiety about managing their own retirement investments grows, while employers close company-paid and professionally managed pension plans.
"It's like taking a chainsaw to an ingrown toenail," said Dan Wiener, publisher of "Independent Advisor," a newsletter for investors in Vanguard Group funds. Wiener said he knew of no similar cases.
PILOT COMPLAINTS
The publishers of EZTracker's newsletter for American Airlines employees said many of its subscribers were banned. They did not know if other airline employees were also affected.
An American Airlines spokesman said the company in its role as plan sponsor has acted appropriately. Despite the ban, all plan participants still can put new payroll deductions into T. Rowe Price's funds or cash out of them, he emphasized. They cannot trade among the four T. Rowe Price funds in the plan, which has about 26 other investment choices.
Still, the restriction is rankling employees at a sensitive time.
Two weeks ago, the U.S. Justice Department sued to block the merger of American Airlines' bankrupt parent AMR Corp with U.S. Airways Group.
Last month, American distributed about $3.5 billion to pilots from a company-funded, professionally managed pension plan it had shuttered.
To avoid tax penalties, most pilots are reinvesting the money in 401(k) plans and other retirement vehicles.
"They have kept me from some of the better performing funds," William Simons, an American Airlines pilot wrote to Reuters in an e-mail. "We thought we were doing everything legally, yet we were punished."
HIGH-YIELD TRIGGER?
T. Rowe Price covered itself by amending the prospectuses of its funds in the American plan in 2010, according to some lawyers who declined to be named because they work with the firm. The new language permits each fund at its discretion to reject trades that "could dilute the value of the fund's shares, including trading by shareholders acting collectively (e.g., following the advice of a newsletter)."
EZTracker's co-publishers Paul Burger and former American Airlines captain Michael DiBerardino call the restrictions anti-competitive and vague. "We are being held to a standard that's not being applied to other newsletters, publications or investment advisers," Burger said.
The permanent ban was probably triggered by EZTracker's April 1 suggestion that employees sell T. Rowe's High Yield Fund, which it had suggested buying five months earlier, he said in an interview.
EZTracker has recommended exiting T. Rowe Price funds in American's 401(k) plan six times since mid-2010 after a holding period of less than a year, Burger said.
The recommendations trigger a rush of buys and sells in the days following the end-of-month release of the newsletter, Burger acknowledges. He voiced doubts that those would be significant enough to affect the performance of such large funds. The other funds in the plan are T. Rowe's Science & Technology, MidCap Growth and New Horizons funds.
Since 2010, T. Rowe Price has sent a series of warning letters and outright one-year trading bans to several subscribers, some of whom complained to EZTracker.
SEC COMPLAINT
In May 2012, EZTracker filed a complaint with the U.S. Securities and Exchange Commission, saying that the then-temporary restrictions were "discriminatory and anti- competitive." It said it had received complaints from hundreds of subscribers, claiming they were injured by the bans.
SEC spokesman John Nester declined to comment on the status of the complaint.
The T. Rowe Price letters were sent through JPMorgan, which also markets a managed account service called JPMorgan Personal Asset Manager to participants in many of the plans it administers.
EZTracker charges $84.95 a year for its newsletter while JPMorgan charges an asset management fee that can result in charges of $945 for a $250,000 account. Unlike the newsletter, which simply advises subscribers who make their own trades, the JPMorgan program makes trades on behalf of participants.
Burger said he suspected JPMorgan helped orchestrate the trading bans to further its own advisory services among highly compensated airline employees. The complaint to the SEC said the bank's willingness to enforce the bans is "self-serving."
"I'm sure they would like to manage the 401(k) plans of all our subscribers," Burger wrote in an email.
The bank dismissed the claims.
"JPMorgan in its role as a plan service provider and financial intermediary for the funds has acted appropriately and as directed by the plan sponsor and the fund provider," bank spokeswoman Kristen Chambers wrote in an email.
"All communication to participants is plan-sanctioned, including any mention of the managed account feature."
(Reporting by Jed Horowitz; Editing by Paritosh Bansal, Andrew Hay and Jeffrey Benkoe)
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