Life insurers say a redemption fee proposal is the wrong hammer to use to fix the investment fund market-timing problem.
The U.S. Securities and Exchange Commission has suggested the 2% fund redemption fee in a proposed regulation that would amend Rule 22c-2, a regulation that the SEC adopted in March 2005.
Rule 22c-2 describes procedures that open-end investment companies and intermediaries, such as broker-dealers, can use to curb abusive short-term trading of fund shares. The rule would encourage mutual funds to impose a fee of up to 2% on redemptions made within 7 or more days of a fund share purchase.
The proposed regulation would limit the types of intermediaries with which funds must negotiate information-sharing agreements, address the rule’s application to situations involving chains of intermediaries, and clarify the effect of a fund’s failure to obtain an agreement with any of its intermediaries.
The American Council of Life Insurers, Washington, has submitted a comment letter contending that the proposed rule is a poor fit for 2-tier products, such as variable annuities.
The current version of the proposal is “heavily skewed in favor of retail mutual funds’ operation, structure and convenience,” ACLI officials write in the comment letter.
The ACLI also is concerned about the possibility that the changes the SEC is drafting now might have to be in place by the Oct. 16 compliance date that the SEC has established for the rule as a whole, according to Carl Wilkerson, an ACLI chief counsel.
Fair value pricing and limitations on excessive transactions “operate successfully and more equitably for variable contracts and pension plans,” and the SEC should use those tools to control market timing in variable products and pension plans, ACLI officials write.
The U.S. Labor Department and Treasury Department also could authorize pension plan record keepers to take action against individual participants who engage in market timing, ACLI officials write.
“The ACLI believes these approaches would improve the rule’s economic and competitive burdens on variable contracts and pension plans in a balanced, competitive manner,” officials write.