The US Securities and Exchange Commission (SEC) last week voted to adopt amendments to Rule 22c-2, the redemption fee rule, under the Investment Company Act. The rule, which the Commission originally adopted in 2005, requires most mutual funds to enter into shareholder information agreements with intermediaries, such as broker-dealers, that hold shares on behalf of other investors.
The amendments to Rule 22c-2 clarify the operation of the rule, and reduce the number of shareholder information agreements that funds must enter into with their intermediaries. These amendments extend the compliance date for entering into shareholder information agreements by 6 months, and the date by which funds must be able to obtain information from intermediaries will be extended by 12 months.
In 2005, TowerGroup questioned the initial cost estimates of the SEC, expecting the three-year costs to exceed $600 million for the mutual fund industry. Peter Delano, a senior analyst in Investment Management research practice at TowerGroup, says the latest modifications will have a positive effect on the industry for the following reasons:
– They will reduce overall industry expenditures on technology and operations staff.
– Now the industry will have more breathing room to make decisions on technology and time to implement that technology.
– When it comes to market timing oversight by fund companies, different fund companies will be able to take different approaches as long as they have a defensible rationale (such as the low risk of market-timing or effective market-timing policies at intermediaries).
The Securities and Exchange Commission voted on 26 September to adopt the amendments to Rule 22c-2, which requires most mutual funds to enter into shareholder information agreements with intermediaries, such as broker-dealers, that hold shares on behalf of other investors. To help funds enforce restrictions on market timing and similar abusive transactions, these agreements provide funds access to information about the identity of customers involved in such transactions, including those made through so-called omnibus accounts. The rule also requires fund boards of directors to consider whether a redemption fee policy is appropriate for their funds.
The rule as originally adopted had a compliance date of 16 October 2006. The amendments approved by the Commission will extend the compliance date for portions of the rule. The compliance date for entering into shareholder information agreements will be extended by 6 months, until 16 April 2007, and the date by which funds must be able to obtain information from intermediaries under those agreements will be extended by 12 months, until 16 October 2007.