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Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
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March 3, 2006
TO: CHIEF COMPLIANCE OFFICER COMMITTEE No. 5-06
COMPLIANCE MEMBERS No. 14-06
OPERATIONS MEMBERS No. 6-06
PENSION MEMBERS No. 14-06
SEC RULES MEMBERS No. 26-06
SMALL FUNDS MEMBERS No. 20-06
RE: SEC PROPOSES REVISIONS TO THE REDEMPTION FEE RULE
The Securities and Exchange Commission has published for comment the long-expected
amendments to Rule 22c-2, the redemption fee rule.* The amendments are intended to address
concerns that came to the Commission’s attention in response to comments it received when it
adopted Rule 22c-2 last March. As discussed in more detail below, the amendments would: (1) exclude
certain persons from the definition of “financial intermediary;” (2) address the rule’s application to
“chain of intermediary” situations; and (3) clarify the consequence of a financial intermediary not
executing the required agreement with the fund. The Release also responds to privacy issues raised with
Rule 22c-2 and seeks comment on whether the rule’s original compliance date of October 16, 2006,
which remains in effect, should be revised or extended. Comments on the proposal are due by April
10, 2006.
DEFINITION OF FINANCIAL INTERMEDIARY
The Commission has proposed to exclude from the rule’s definition of “financial intermediary”
any person that the fund treats as an individual investor for purposes of its market timing policies. This
provision is intended to relieve small intermediaries (e.g., a small business retirement plan that holds
mutual fund shares on behalf of only a few employees) from having to execute an agreement with the
fund. If, however, the fund does not have a policy to treat these smaller intermediaries as individuals for
purposes of the fund’s market timing policies, the fund would not be able to rely upon this exclusion.
* See Mutual Fund Redemption Fees, SEC Release No. IC-27255 (Feb. 28, 2006) (the “Release”). The Release is available on
the SEC’s website at: http://www.sec.gov/rules/proposed/ic-27255.pdf.
2
CHAIN OF INTERMEDIARIES
The proposed amendments would address concerns with the rule’s application to “chain of
intermediaries” by revising the agreement the fund must execute with its financial intermediaries. In
particular, these agreements would be required to include a provision under which the financial
intermediary agrees, promptly upon request of the fund, to “use best efforts” to determine whether any
other persons that holds fund shares through the intermediary is itself a financial intermediary (i.e.,
whether it is an “indirect intermediary” of the fund). If so, upon further request of the fund, the
financial intermediary must either:
¾ Provide or arrange to have provided, to the fund upon request, identification and transaction
information for any shareholder who holds an account with an indirect intermediary; or
¾ Restrict or prohibit the indirect intermediary from purchasing, on behalf of itself or other
persons, securities issued by the fund.
According to the Release, the proposed revisions would not require first-tier intermediaries to
enter into formalized information-sharing agreements with indirect intermediaries. The Release seeks
comment, however, on whether the Commission should add such a requirement to the rule. It also
seeks comment on whether the rule should require funds to collect information from indirect
intermediaries instead of having first-tier intermediaries assume this responsibility.
FAILURE TO HAVE AN AGREEMENT WITH A FINANCIAL INTERMEDIARY
The rule has also been revised to clarify that a fund that fails to have an agreement with a
financial intermediary must prohibit that intermediary from purchasing, on behalf of itself or other
persons, securities issued by the fund.
PRIVACY
According to the Release, the Commission’s review of the federal privacy laws indicates that
exceptions in those laws permit financial intermediaries to share with funds the shareholder
information required by the rule. The Release also notes that, to the extent a financial intermediary’s
privacy policy permits the intermediary to make disclosures to nonaffiliated third parties as permitted
by law, the intermediary may not need to provide new privacy notices or opt-out opportunities to their
customers.
Tamara K. Salmon
Senior Associate Counsel