Firms Step up to the Plate on Rule 22c-2
February 12, 2007
Firms are starting to implement changes to comply with the Securities and Exchange Commission's redemption fee Rule 22c-2, but not without encountering challenges.
The deadline for the rule, which requires fund companies to have information-sharing contracts in place with their intermediaries, is fast approaching on April 16. The date by which fund companies are required to begin collecting data for analysis comes six months later on Oct. 16.
"The level of interest remains high, and the rule has forced more dialogue between intermediaries and fund companies," said Timothy O'Sullivan, a director in Deloitte & Touche's national investment regulatory consulting practice, during a Deloitte webcast last week, "What's Next For The Mutual Fund Redemption Fee Rule."
"It has generated a better understanding across parties as to what business challenges each side is facing and how to coordinate efforts better," O'Sullivan said.
"The primary focus of fund companies is getting the information-sharing agreements in place, and a number of fund companies have completed the agreements, or are close to completion," said Christine Gill, vice president and senior director at PFPC in Boston, in a separate interview.
If fund companies don't have agreements in place, it is imperative that they send registered letters and get compliance officers involved to meet the deadline, said James Nee, a senior manager in Deloitte's national financial services regulatory consulting practice.
The fund companies and intermediaries are taking this very seriously because, otherwise, fund companies need to be prepared to stop trading and intermediaries' trades will not go through, Gill said. However, complying with the rule has not come easily. A challenge on the fund side involves evaluating the redemption fee. Funds need to establish records documenting what was revised and explain the decision-making process, Nee explained. An effective approach that withstands scrutiny is key, he said.
On the intermediary side, firms are dealing with scores of fund companies requesting them to support various fees based on different timing schedules and amounts. Intermediaries need to evaluate whether they have the technology to support fund policies and enforcement requests, Nee said. In the future, they may need to adjust various parameters, he noted.
Fund companies also face the task of establishing new contract language with intermediaries and getting ready for a rigorous process of identifying and contacting all parties by the deadline, Nee said. Fund companies should take into consideration that an intermediary might have questions or concerns, or wants things changed, he said.
Intermediaries need to determine whether they will accept the agreement parameters from fund companies and if they are capable of supporting the requirements, Nee said. A lot of work is involved with managing the contract flow, such as receipt, tracking, review and getting the contract back out the door, he added.
If an intermediary and a fund company cannot come to an agreement, they won't be able to work together, he said.
One challenge comes down to "data, data, data," he said. Once an agreement is in place, fund companies have the ability to request data, and they need to determine from whom and when they will be able to make requests, he said. Also, a policy should be in place to determine what will happen if data is not supplied on a timely, accurate or complete basis, he said.
Intermediaries face the challenge of managing the data feeds and delivering requests in various formats quickly. Technology may need to be updated and supportable formats established, he said.
Additionally, risk management is crucial. Fund companies need to establish a consistent approach and have polices and procedures in place to monitor their requests for data, review results and track their internal communications.
Fund companies also need to evaluate intermediary relationships and act as needed to make decisions if trading should be suspended or if an entire business relationship should be reviewed, Nee said.
"The greatest challenge to the intermediaries will be preparing for the opening of the gates and more interaction with funds," Nee said. The rule could lead to a possible increase in site visits, as funds might want to look at operations a bit more closely, he said.
With the rule's new requirements, also come a variety of system challenges to both fund companies and intermediaries, said Nora Duffy, a senior manager in the capital markets practice at Deloitte.
Firms must evaluate how much data should be exchanged, what data should be requested and from whom, where data is going to be stored, if there is adequate storage capacity, and who will manage the responsibilities, costs, infrastructure and risks associated with access to the expanded data set, she said.
Going forward, firms will need to assess how successfully they are complying with Rule 22c-2 and also address other business needs, as well. Sales reporting, customer relationship management software and recordkeeping are possibly some areas of business that can be fine-tuned, Duffy said.
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