Mutual Funds UpdateMutual Funds Update

Presented by Delta Data Burton Keller, Senior Vice President of Product Development

Short Term Redemption Fees and SEC Rule 22c-2

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

How did we get here?Market timing – 2003 to 2005

Fall of 2003 – Spitzer uncovers mutual fund abuses, including market timing

March 2004 – original proposed SEC 22c-2 rule required mandatory redemption fees and weekly reporting requirements for omnibus accounts

March 2005 - 400 comment letters later, the SEC released final Rule 22c-2

Between 2003 and 2005, funds voluntarily started imposing short term redemption fees

Today, 35 of the 50 largest fund families impose STR fees on some of their funds

STR Fee Issues common to banks.

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

Most funds require FIFO share-lot accounting and many trust systems only support a single share-lot method – high cost, average cost, etc.

Most trust trades are dollar certain – share-lot aging performed at confirmation time – requires settling gross with the fund

Calculation and remittance of STR fees comes later.

STR Fee Issues EB/401K Recordkeeper Advantage Over Bank Trusts

Trades are not sent until trades have been extended and share amounts are known

Many recordkeeping systems can now age participant level trades and calc STR fees

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

SEC Answer to Market Timing “Rule 22c-2”

Effective date is May 23, 2005 Compliance date is October 16, 2006 Indications from the SEC is that the compliance

date will not be extended There may be further technical amendments

concerning fee uniformity issues The conflict between 22c-2 and the shareholder

communication rules of 14a-13, 14b-1, 14b-2 and 14c-1 should be resolved

SEC Rule 22c-2 Key Components

Mutual fund’s board must either approve a redemption fee or determine that imposition of a redemption fee is not necessary or appropriate

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

STR Fee UniformityIncluded in Rule 22c-2

Not a lot of guidance from the rule – SEC has requested comments on fee uniformity

For Certain: 2% maximum on fees Minimum 7 calendar day holding period

Fairly Sure: FIFO share lot aging required De minimis and hardship waivers allowed SEC will not mandate a uniform holding

period

Agreements with IntermediariesTwo primary provisions

Funds allowed to request information from intermediaries about the identity of shareholders and their transactions in fund shares

The intermediary must agree to execute the funds instructions to restrict or prohibit further purchases by a specific shareholder

All open-end mutual funds – even those that do not impose STR fees

Intermediaries that trade in omnibus accounts including DC plans

Intermediaries that trade long-title/fully disclosed but use bank/nominee ID number instead of the actual TIN

Does not apply to money market funds or funds that affirmatively permit short term trading as disclosed in the prospectus

Agreements with IntermediariesApplicability

Data Reporting RequirementsRule 22c-2

Funds may request the underlying trades and taxpayer IDs in any omnibus account for a specified period of time

Some funds have indicated they will request a daily feed of underlying trade transactions on certain omnibus accounts

Intermediaries are to provide the trade details and taxpayer IDs promptly upon request by the fund

Standardized Data ReportingDTCC Service

Standardized data format and centralized portal is needed to facilitate the transmission of millions of trade details from thousands of intermediaries

The ICI and DTCC formed a working group, consisting of both BTAC and BDAC committee members to develop the standardized format and best practices

The finalized formats are expected to be released by DTCC January 2006

Standardized Data ReportingFeatures of DTCC Service

DTCC will support the centralized remitting and receiving of detail trade transactions, similar to how Fund/SERV works for trading

Format allows for requesting/submitting transactions for a specified date range

Format also allows for requesting/submitting recurring daily transaction activity

Format supports submitting summary level data on initial request on super omnibus accts

Includes provision to allow an intermediary to reject an unreasonable request from a fund

Standardized Data ReportingFeatures of DTCC Service

Unique control numbers supplied with both requests and submissions for tracking and matching requests with submissions

Formats allow an intermediary to use an agent for firm for processing requests from funds and corresponding submissions through DTCC

Funds may request trade details related to a specific Fund/SERV trade by referencing the control number on the original trade

Standardized Data ReportingFeatures of DTCC Service

Funds may include a dollar amount threshold Funds may restrict the request to a specific

transaction source – such as participant directed, plan directed, or rep directed

Funds may optionally restrict trades to just buys, just sells or just exchange buys or sells

Format includes an indicator to notify the fund that the trades being submitted are a full response or a partial response to their request

SEC Rule 22c-2 Open Items

Model contract language is currently being developed by the ICI and SIA

DTCC is considering allowing Data Service Only (DSO) members to utilize the SDR services

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

SEC Rule 22c-2 Open Items

SEC technical amendments on fee uniformity items such as – FIFO aging, hardship and de minimis waivers

SEC guidance on privacy issue conflicts between existing SEC rules and ERISA rules

The SDR formats should be finalized and published by January 2006

Like it or Not – Here it Comes

Compliance date is October 16, 2005

355 days left !

Thanks for your attention

Burton KellerDelta Data Software

www.deltadatasoft.com