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Mutual Funds Update  Presented by Delta Data  Burton Keller, Senior Vice President of Product Development.

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Presentation on theme: "Mutual Funds Update  Presented by Delta Data  Burton Keller, Senior Vice President of Product Development."— Presentation transcript:

1 Mutual Funds Update  Presented by Delta Data  Burton Keller, Senior Vice President of Product Development

2 Short Term Redemption Fees and SEC Rule 22c-2

3 STR Fees and SEC Rule 22c-2 n Market timing - How did we get where we are? n STR fee issues in banks n Rule 22c-2 – SEC’s answer to market timing n The two major components of Rule 22c-2 n Fee Uniformity – are we there yet? n Written agreements – provisions / applicability n Data reporting requirement of Rule 22c-2 n The new DTCC Standardized Reporting Service n Open Issues

4 How did we get here? Market timing – 2003 to 2005 n Fall of 2003 – Spitzer uncovers mutual fund abuses, including market timing n March 2004 – original proposed SEC 22c-2 rule required mandatory redemption fees and weekly reporting requirements for omnibus accounts n March comment letters later, the SEC released final Rule 22c-2 n Between 2003 and 2005, funds voluntarily started imposing short term redemption fees n Today, 35 of the 50 largest fund families impose STR fees on some of their funds

5 STR Fee Issues common to banks. n Omnibus accounts place burden of share aging and calculation of fees on the bank whereas with fully disclosed accounts, shares can be aged and STR fees calculated by the fund n Most funds require FIFO share-lot accounting and many trust systems only support a single share-lot method – high cost, average cost, etc. n Most trust trades are dollar certain – share-lot aging performed at confirmation time – requires settling gross with the fund n Calculation and remittance of STR fees comes later.

6 STR Fee Issues EB/401K Recordkeeper Advantage Over Bank Trusts n Trades are not sent until trades have been extended and share amounts are known n Many recordkeeping systems can now age participant level trades and calc STR fees n As of Sept 19, 2005 DTCC supports sending of trades with STR fee information, allowing funds to deduct the applicable fees and settle net with the intermediary

7 SEC Answer to Market Timing “Rule 22c-2” n Effective date is May 23, 2005 n Compliance date is October 16, 2006 n Indications from the SEC is that the compliance date will not be extended n There may be further technical amendments concerning fee uniformity issues n The conflict between 22c-2 and the shareholder communication rules of 14a-13, 14b-1, 14b-2 and 14c-1 should be resolved

8 SEC Rule 22c-2 Key Components n Mutual fund’s board must either approve a redemption fee or determine that imposition of a redemption fee is not necessary or appropriate n Each fund is required to enter into a written agreement with its financial intermediaries, providing the fund access to information about transactions by fund shareholders

9 STR Fee Uniformity Included in Rule 22c-2 n Not a lot of guidance from the rule – SEC has requested comments on fee uniformity n For Certain: n 2% maximum on fees n Minimum 7 calendar day holding period n Fairly Sure: n FIFO share lot aging required n De minimis and hardship waivers allowed n SEC will not mandate a uniform holding period

10 Agreements with Intermediaries Two primary provisions n Funds allowed to request information from intermediaries about the identity of shareholders and their transactions in fund shares n The intermediary must agree to execute the funds instructions to restrict or prohibit further purchases by a specific shareholder

11 n All open-end mutual funds – even those that do not impose STR fees n Intermediaries that trade in omnibus accounts including DC plans n Intermediaries that trade long-title/fully disclosed but use bank/nominee ID number instead of the actual TIN n Does not apply to money market funds or funds that affirmatively permit short term trading as disclosed in the prospectus Agreements with Intermediaries Applicability

12 Data Reporting Requirements Rule 22c-2 n Funds may request the underlying trades and taxpayer IDs in any omnibus account for a specified period of time n Some funds have indicated they will request a daily feed of underlying trade transactions on certain omnibus accounts n Intermediaries are to provide the trade details and taxpayer IDs promptly upon request by the fund

13 Standardized Data Reporting DTCC Service n Standardized data format and centralized portal is needed to facilitate the transmission of millions of trade details from thousands of intermediaries n The ICI and DTCC formed a working group, consisting of both BTAC and BDAC committee members to develop the standardized format and best practices n The finalized formats are expected to be released by DTCC January 2006

14 Standardized Data Reporting Features of DTCC Service n DTCC will support the centralized remitting and receiving of detail trade transactions, similar to how Fund/SERV works for trading n Format allows for requesting/submitting transactions for a specified date range n Format also allows for requesting/submitting recurring daily transaction activity n Format supports submitting summary level data on initial request on super omnibus accts n Includes provision to allow an intermediary to reject an unreasonable request from a fund

15 Standardized Data Reporting Features of DTCC Service n Unique control numbers supplied with both requests and submissions for tracking and matching requests with submissions n Formats allow an intermediary to use an agent for firm for processing requests from funds and corresponding submissions through DTCC n Funds may request trade details related to a specific Fund/SERV trade by referencing the control number on the original trade

16 Standardized Data Reporting Features of DTCC Service n Funds may include a dollar amount threshold n Funds may restrict the request to a specific transaction source – such as participant directed, plan directed, or rep directed n Funds may optionally restrict trades to just buys, just sells or just exchange buys or sells n Format includes an indicator to notify the fund that the trades being submitted are a full response or a partial response to their request

17 SEC Rule 22c-2 Open Items n Model contract language is currently being developed by the ICI and SIA n DTCC is considering allowing Data Service Only (DSO) members to utilize the SDR services n Guidance is needed from the SEC on determination of the level at which written agreements will be required when you have a chain of intermediaries

18 SEC Rule 22c-2 Open Items n SEC technical amendments on fee uniformity items such as – FIFO aging, hardship and de minimis waivers n SEC guidance on privacy issue conflicts between existing SEC rules and ERISA rules n The SDR formats should be finalized and published by January 2006

19 Like it or Not – Here it Comes Compliance date is October 16, days left ! Thanks for your attention Burton Keller Delta Data Software


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