Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > Federal Regulation > SEC

SEC Revises Intermediary Rules

Your article was successfully shared with the contacts you provided.

The Securities and Exchange Commission is giving financial services companies more time to comply with some parts of a new market-timing prevention rule.

The SEC has included the compliance extensions in the final version of the rule, “Mutual Fund Redemption Fees,” which explains how fund managers should implement another rule, Rule 22c-2.

The SEC adopted Rule22c-2 under the Investment Company Act in March 2005, in an effort to curb abusive market timing, or efforts to profit from variations in the flow of financial information by making several large trades in a short time period.

Under Rule 22c-2, fund managers must decide whether to impose a redemption fee of up to 2% on the value of shares that investors redeem within 7 days of purchasing the shares.

Fund managers also must enter into agreements with financial intermediaries, to give managers the ability to work with the intermediaries to identify investors who violate restrictions on short term trading.

The new final rule, based on a proposed rule released in March 2006, which established a compliance date of Oct. 16, 2006.

The final rule still requires fund boards to decide by Oct. 16 whether to impose redemption fees or use other means to discourage marketing timing.

But the SEC has extended the deadline for negotiating shareholder information agreements with financial intermediaries 6 months, to April 16, 2007.

The SEC also has given intermediaries more time to set up systems that can quickly respond to funds’ requests for shareholder identity and transaction information. The new intermediary information compliance deadline is Oct. 16, 2007.

The American Council of Life Insurers, Washington, has been one of the groups asking the SEC to push back the fund redemption fee compliance deadline.

The final version of the redemption fee rule also clarifies the definition of the term “financial intermediary.”

The final rule excludes those plans that are viewed by a fund as an individual investor.

“If a fund, for example, applies a redemption fee or exchange limits to transactions by a retirement plan (an intermediary) rather than to the purchases and redemptions of the employees in the plan, then the plan would not be considered a ‘financial intermediary’ under the rule, and the fund would not be required to enter into an agreement with that plan,” SEC officials write in a preamble to the new final rule.

Additionally, the final rule clarifies what agreements should be in place when “chains” — multiple layers of direct and indirect intermediaries — exist.

Under the revised rule, a mutual fund must execute a shareholder information agreement only with those financial intermediaries that submit purchase or redemption orders directly to the fund or its transfer agent.

The revised rule does not require the “first-tier intermediary” to execute shareholder information agreements with any indirect intermediaries. Instead, a mutual fund would have to make a specific further request for information from the first-tier intermediary about certain shareholders. The first-tier intermediary would then be required to make its “best efforts” to determine if an account was an indirect intermediary.

“If an indirect intermediary that holds an account with a first-tier intermediary does not provide underlying shareholder information, the agreement must obligate the first-tier intermediary to prohibit, upon the fund’s request, that indirect intermediary from purchasing additional shares of the fund through the first-tier intermediary,” SEC officials write.

Officials report in a footnote to the final rule preamble that the ACLI and other commenters have worried about the effect of a redemption fee requirement on investors who invest in funds through insurance company separate accounts.

“We believe that because redemption fees and frequent trading policies are imposed by the fund, and not the insurance company, enforcing those limits or fees with respect to these investors should not cause insurance companies to breach their contracts,” SEC officials write in the footnotes. “Moreover, nothing in this rule would preclude a fund that is concerned about the legality under existing contracts of imposing these limits or fees on certain insurance contractholders, from choosing not to impose them with regard to investors whose policies would not permit imposition of such limits or fees.”


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.