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News February 13, 2006 Issue

IM Staff to Recommend 22c-2 Relief For Omnibus Account Info

If you think the mutual fund industry doesnít like the omnibus account agreement requirement in the SECís redemption fee rule, you should hear the plan service provider community talk about it.

Under ICA Rule 22c-2(a)(2), nearly all mutual funds (or their principal underwriters) must enter into a written agreement with each "financial intermediary" of the fund, obligating the intermediary to promptly provide the fund, upon the fundís request, with the Taxpayer Identification Number (TIN) of all shareholders that purchased, redeemed, transferred, or exchanged shares held through an account with the intermediary. Keep in mind that for individuals, the TIN is their Social Security Number.

The intermediary also must provide the fund with the amounts and dates of those transactions. Moreover, the intermediary must agree to execute any instructions from the fund to restrict or prohibit transactions by a shareholder who the fund has identified as having engaged in transactions that violate the fundís anti-market timing policies.

Robert Wuelfing of the SPARK Institute pointed to a host of problems with the requirement. One, he said, is privacy. While mutual funds are required, by law, to collect the information, banks, broker-dealers, and other intermediaries are not required, by law, to provide it. Therefore, they canít rely on the "required by law" safe harbor from applicable privacy regs.

In his view, the intermediary agreement requirement will drive up the cost of providing recordkeeping services in instances where retirement plans invest in mutual funds. As a result, he predicted, retirement plans "are going to go to separate accounts or collective trust funds." Mutual funds, he said, "will be too expensive."

Wuelfing said that the SEC staff should address the issue. "They need to do something, and theyíve done nothing."

Certainly, theyíve been asked. Last spring and fall, a number of commenters asked the SEC to address implementation issues raised by the intermediary agreement issue. (Of particular note: Vanguard lawyer Heide Stam said that to implement the requirement, Vanguard would have to review more than 1.3 million accounts!) Citing the significant issues raised by the agreement requirement, the Investment Company Institute told the SEC that it is "critical that the Commission modify the rule as soon as possible."

That was back in May.

A law firm partner speculated that one of the reasons the SEC has not yet addressed the issue might be what he called the "crisis of leadership" in the SECís Division of Investment Management. "There hasnít been a permanent head of IM for over a year now," he noted. And, he added, acting director Susan Wyderko (who he spoke highly of) "may not be completely aware of the difficulties this rule presents" because "she hasnít been in the Division."

The law firm partner reported hearing that funds have run into resistance when asking 401(k) plan service providers to enter into the agreements. "They really donít want to," he said. However, he predicted that broker-dealers are more likely to enter into the agreements, because "they donít want to be associated with market timers." In contrast, he said, plan sponsors and service providers "donít have that albatross around their necks."

In any event, he noted that some fund groups have been holding off on implementing the agreements. "They seem to think that the SECís going to say something thatís going to be helpful to them," said the lawyer.

Those fund groups might be right.

"The staff recognizes that there are issues that were not identified in the adopting release in a few areas," Division of Investment Management associate director Robert Plaze told IM Insight. "We intend to recommend to the Commission that they be fixed."

Plaze acknowledged that the October 2006 compliance date was approaching, and said that he would expect that the staff would recommend that the Commission "deal with that issue."

Plaze said that the privacy concerns raised by intermediaries would be addressed by the staffís recommendation. While intermediaries might not be able to point to the "required by law" safe harbor under applicable privacy regulations, he said, they could point to the "necessary for doing business" safe harbor. Intermediaries that want to open omnibus accounts for their customers to invest in funds, he explained, will have a contractual obligation to provide TIN numbers. Under that theory, the provision of TIN numbers would be protected because they are shared for the purpose of servicing or processing a transaction or maintaining or servicing a customer account.