SEC Revises Intermediary Rules

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.”