Blogging Employee Benefits

March 1, 2006

SEC Proposes Changes to Market-Timing Intermediary Rules

Filed under: Investment, SEC — Fuguerre @ 11:00 pm

The Securities Exchange Commission has proposed amendments to rule 22c-2 under the Investment Company Act relating to mutual fund redemption fees. [17 CFR 270, File No. S7-06-06] The proposed change is a technical rule modifying identification of intermediaries with whom information-sharing agreements must be established and clarifying operation of the rule governing those agreements.

Rule 22c-2 was originally adopted in March 2005 to address short-term trading abuses. [70 FR 13327] The rule requires a fund’s board to consider imposing a redemption fee of as much as 2 percent on the value of shares redeemed within 7 days. Funds are also required to establish agreements with intermediaries, such as broker-dealers, enabling identification of investors whose trading violates short-term trading restrictions. Compliance with rule 22c-2 is required by October 16, 2006. (See Benefitsblog for further discussion.)

The SEC’s proposed amendment addresses practical problems that had been raised with the rule on information-sharing agreements with intermediaries –

  • Small Intermediaries – If a fund treats an entity as an individual for purposes of control of market-timing, then the entity would not be treated as an intermediary for purposes of the rule on information-sharing agreements. For example, if a fund applies a redemption fee or exchange limits to the transactions of a small retirement plan rather than separately to the transactions made by each plan participant, then the plan would not be treated as an intermediary, and the fund would not be required to establish an agreement with the plan.
  • Intermediary Chains – Frequently an intermediary, such as a brokerage firm, may hold mutual fund shares on behalf of other intermediaries, such as pension plans. The SEC’s proposed amendment to the rule would require the fund to establish an agreement only with “first-tier intermediaries,” those that directly submit orders to purchase or redeem fund shares.
  • Failure to Obtain Agreement – If a fund has obtained agreements with some of its intermediaries, but has been unable to obtain an agreement with one or more other intermediaries, then trading prohibitions would be required only with respect to any intermediary lacking an agreement, without adversely affecting those with agreements.

The proposed rule does not delay the original 10/16/06 compliance date. Although the SEC seeks further comment on other market-timing issues, the current proposal does not address uniform standards nor numerous additional matters of concern to retirement plan sponsors. Comments on the proposed rule should be submitted to the SEC by 4/10/2006.

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