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News October 2, 2006 Issue

SEC Adopts Rule 22c-2 Amendments; Pushes Back Compliance Date

As expected, the SEC has pushed back the compliance date for the information-sharing agreement provisions of Rule 22c-2, the fund redemption fee rule.

The new compliance date for entering into information-sharing agreements has been extended by six months, until April 16, 2007. Moreover, funds wonít be required to actually obtain information from their intermediaries under those agreements until October 16, 2007.

The SEC also adopted several amendments to the rule proposed last March. The definition of "financial intermediary" now excludes any entity that the fund treats as an "individual investor" for purposes of the fundís frequent trading and/or redemption fee policies. In response to comments that it was not clear whether an order submitted by an agent of an intermediary would be covered by the rule, the SEC clarified that funds must enter into agreements with financial intermediaries or their agents, even if the agent itself does not qualify as a financial intermediary.

As amended, the revised rule requires funds to enter into information-sharing agreements only with first-tier intermediaries. The SEC clarified that these agreements need not obligate the first-tier intermediaries to canvass all of their accounts to identify which of their accountholders are themselves intermediaries. Instead, the agreements need only require the first-tier intermediaries to use best efforts to identify whether certain specific accounts identified by the fund are indirect intermediaries.

Lastly, the amended rule provides that if a fund is not able to enter into an information-sharing agreement with a particular intermediary, the fund must prohibit the intermediary from purchasing the fundís securities, but only in nominee name on behalf of other persons. In other words, the intermediary can still purchase fund shares on behalf of a fully-disclosed account, as well as for its own account.

And lastly . . . guess how much of the SECís 56-page release was actually devoted to explaining the rule amendments? A mere 18 pages. The remainder of the release, which discussed costs and benefits, regulatory flexibility, and paperwork burdens (a.k.a. "the stuff at the back nobody reads") totalled a whopping 37 pages.