SPARK Offers Rule 22c-2 Guidelines: Despite Help, Compliance Won't Come Easy
July 10, 2006
As fund companies and their intermediaries continue to grapple with the finer points of the Securities and Exchange Commission's looming redemption fee rule, industry groups have been working on ways to make complying less complicated.
The rule, officially called 22c-2, has been controversial since its March 2005 passage. Slated to take effect on Oct. 16 of this year, it allows fund companies to impose a redemption fee of as much as 2% on shareholders who sell their stakes within one week of purchase. Meant to detect market timers whose trades might be illegal or expensive to long-term shareholders, the rule also poses several logistical challenges for intermediaries and offers little guidance.
"One of the main questions we were getting from our members was, What is everyone else doing? What guidelines should we follow?'" said Larry H. Goldbrum, general counsel at RG Wuelfing & Associates and chairman of the government relations committee for The SPARK Institute, an organization of retirement plan service providers with headquarters in Simsbury, Conn.
The SEC's rule has left details of just what information is required, how often it is requested and in what format it is delivered to the discretion of fund companies, which are then responsible for determining that none of their internal market-timing policies have been breached.
"The onus will be on the fund companies," said Tamara Salmon, senior associate counsel with the Investment Company Institute in Washington. "The SEC will come down on the mutual funds, not the intermediaries, to demonstrate that they are in compliance."
The rule further requires that fund companies negotiate and have in place agreements with all of their intermediaries before the rule takes effect, an undertaking that has been projected to cost at least $2 billion industry-wide. Progress on this complicated and potentially costly endeavor has been slow as fund companies and, therefore, their intermediaries look to the SEC for clarification before diving in.
In the meantime, The SPARK Institute is one of several groups to have lobbied the SEC for an extension before the rule takes effect. In May, The SPARK Institute asked the SEC to extend the deadline for the agreements to be in place until April 30, 2007 and until July 31, 2007 before recordkeepers would be expected to provide data to funds (see MME 6/19/06).
The group cited a survey of its members in which 70% said they could not meet the Oct. 16 deadline, and 39% said that doing so would require a commitment of "significant additional resources." SPARK's report also noted that many of its members had yet to receive contracts from the mutual fund companies with which they work.
Likewise, in an April 10 letter to the Commission, the Investment Company Institute, which has issued statements in support of the rule, requested an extension of at least six months, while the National Association for Variable Annuities of Reston, Va., has lobbied for an 18-month delay, so that insurers can determine fees and devise a way to accommodate the automatic rebalancing programs that many plans undertake without triggering redemption fees from fund companies.
Salmon notes that while both insurers and retirement plan providers have expressed concern that redemption fees will only eat away at the gains that would otherwise go to customers, there is a way to avoid such expenses. "They can choose funds that don't have redemption fees," Salmon said. The rule, as revised from its original form, leaves the decision of whether to impose fees to deter frequent traders up to each fund's board of directors.
As the SEC considers these requests and continues to fine tune the rule and clarify its terminology, industry groups like The SPARK Institute are moving forward with template contract language and best practice guidelines to ensure their constituents are prepared.
"This is a set of standards that at a minimum would be a starting point for the industry," Goldbrum said.
The guidelines, published on June 29, come from consultations with both retirement recordkeepers and fund companies, in an effort to devise a system that is amenable to both, and still within the parameters of the SEC rule.
"There were unlimited possible variations of how fund companies want to enforce market-timing restrictions and how the monitoring is done," Goldbrum said. "This kind of limits the field."
As written, the best practice guidelines call for recordkeepers to be required to monitor only those transactions that participants request and that offer the potential for market timing or excessive trading abuse, and exempt all those purchases and redemptions under $1,000. The guidelines also call for round-trip monitoring periods to be defined as 60 days, and suggests software development guidelines.