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Amy Domini on Market Timing and Late Trading

Dear Fellow Shareholder:

If you’ve been reading the business pages in recent weeks, you’re already aware of the scandals involving market timing and late trading that have erupted at a number of mutual fund companies. We are writing to assure you that Domini is not involved in these practices and has strong policies and procedures in place to help ensure that your investment is not affected by them.

This letter has two purposes.

  • First, to give you the information you need as a mutual fund investor to understand the issues surrounding market timing and late trading
  • Second, to describe the steps Domini has taken to guard against these practices

What Is Market Timing?

“Market timing” refers to the rapid buying and selling of shares in an effort to profit from short-term movements in the stock or bond markets. Although market timing by an investor is not illegal, it drives up portfolio trading costs that are borne by all investors in the fund and creates “dilution” costs (the costs associated with one investor cashing out a quick profit based on the discrepancy between the fund’s net asset value and shifting security prices). For that reason, many mutual funds charge fees or take other actions to discourage market timers.

What Is Late Trading?

Unlike individual stocks, mutual funds are priced once a day, after the close of the stock market. “Late trading” is the practice of entering or confirming trades after the close of trading for the day. This makes it possible for investors to use information received after the close of the markets to make trading decisions and still be assured of receiving the day’s closing price for the trade. Late trading is illegal.

Late trading should not be confused with certain permissible and common practices that allow intermediaries, such as retirement plan administrators, to receive trades from investors made before the close of trading for the day and to transmit them to mutual funds after the close of trading. This provides the intermediary with sufficient time to process such trades. This practice is not considered to be late trading, and is not illegal.

How Is Domini Acting to Avoid These Practices?

The Domini Funds are committed to keeping market timers out of our Funds and to preventing illegal late trading. We have policies in place to prohibit late trading, and to prevent and detect market timing. These are some of the specific steps we take:

  • Each day we review transactions in excess of specific limits in order to monitor unusual activity.
  • If a large purchase and sale are made within 90 days, we contact the investor to determine the purpose of the trade. If we suspect market timing, we cancel the transaction if possible and close the account and/or broker number to prevent any future activity.
  • In order to deter market timers, beginning on December 1, 2003, we will charge an early redemption fee of 2% on sales of shares that are made within 90 days of a purchase. (Redemptions of shares held in 401(k) plans or shares acquired through reinvestment of dividends or distributions will not be subject to the redemption fee.)
  • Our transfer agent, PFPC, processes current-day trades using a call relationship manager (CRM) system. At the cut-off time for the day’s trades, the CRM system automatically changes to the next day so that trades received after that time receive the next business day’s price.
  • Each year we seek assurances from broker-dealers and other intermediaries that they are following all relevant rules and regulations as well as internal policies and procedures regarding the timely handling of mutual fund orders.

How Can I Find Out More?

For a more detailed summary of our policies on these practices, please see Domini's Policies and Procedures to Deter Market Timing and Late Trading.

Your trust is important to us. If after reviewing the information in this letter and on our website, you have any further questions about our policies on market timing and late trading, please call our shareholder representatives at 1-800-582-6757 (Monday through Friday, 9 am to 5 pm Eastern Time) or send me an email at amy@domini.com.

Sincerely yours,

Amy L. Domini
Founder and CEO