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News February 28, 2005 Issue

SEC Moves on Redemption Fees; Others Fund Rulemakings Still Pending

The SEC will take up the subject of mutual fund redemption fees at an open meeting this week. New Rule 22c-2, to be adopted March 3, would "allow" (but apparently not require) mutual funds to impose a redemption fee up to two percent.

Of course, funds can do that now. However, the rule additionally would require funds to enter into written agreements with broker-dealers, plan administrators, and other intermediaries that hold fund shares on behalf of investors, under which the intermediary agrees to provide funds with shareholder identity and transaction information on request and to implement the fundís trading restrictions against market timers. The SEC said it will seek additional comment on whether to establish uniform standards for redemption fees.

At the same meeting, the SEC will consider whether to propose a new rule defining the term "nationally recognized statistical rating organization," or "NRSRO."

SEC Division of Investment Management associate director Robert Plaze, speaking at the recent Mutual Fund Directors Forum, gave some inkling as to the status of several other Division rulemakings

Plaze indicated that the fair valuation interpretative release, hinted at in recent months by various SEC officials, has been stalled. "When we move on the valuation issues is not something we can give you more guidance on because there is some litigation involved," said Plaze. That litigation would be the case of DH2 vs. SEC. DH2, a hedge fund that engaged in the active trading of mutual fund shares, challenged the SECís statements about fair valuation, which the SEC made in the compliance program adopting release and proposed redemption fee release. The case was argued last November, but thereís no telling when we can expect to see a written opinion from the court. "They can take as long as they want," said a clerk in the Seventh Circuit Court of Appeals, which heard the case.

Plaze also said that the industry will "need to wait a little more" to see what the SEC does in response to its transaction cost concept release.