Mutual Funds Update

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Mutual Funds Update

• Presented by Delta Data
• Burton Keller, Senior Vice President of Product
  Development

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Short Term Redemption Fees and SEC Rule 22c-2
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STR Fees and SEC Rule 22c-2

• Market timing - How did we get where we are?
• STR fee issues in banks
• Rule 22c-2 SECs answer to market timing
• The two major components of Rule 22c-2
• Fee Uniformity are we there yet?
• Written agreements provisions / applicability
• Data reporting requirement of Rule 22c-2
• The new DTCC Standardized Reporting Service
• Open Issues

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How did we get here?Market timing 2003 to 2005

• Fall of 2003 Spitzer uncovers mutual fund
  abuses, including market timing
• March 2004 original proposed SEC 22c-2 rule
  required mandatory redemption fees and weekly
  reporting requirements for omnibus accounts
• March 2005 - 400 comment letters later, the SEC
  released final Rule 22c-2
• Between 2003 and 2005, funds voluntarily started
  imposing short term redemption fees
• Today, 35 of the 50 largest fund families impose
  STR fees on some of their funds

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STR Fee Issues common to banks.

• Omnibus accounts place burden of share aging and
  calculation of fees on the bank whereas with
  fully disclosed accounts, shares can be aged and
  STR fees calculated by the fund
• Most funds require FIFO share-lot accounting and
  many trust systems only support a single
  share-lot method high cost, average cost, etc.
• Most trust trades are dollar certain share-lot
  aging performed at confirmation time requires
  settling gross with the fund
• Calculation and remittance of STR fees comes
  later.

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STR Fee Issues EB/401K Recordkeeper Advantage
Over Bank Trusts

• Trades are not sent until trades have been
  extended and share amounts are known
• Many recordkeeping systems can now age
  participant level trades and calc STR fees
• As of Sept 19, 2005 DTCC supports sending of
  trades with STR fee information, allowing funds
  to deduct the applicable fees and settle net with
  the intermediary

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SEC Answer to Market Timing Rule 22c-2

• Effective date is May 23, 2005
• Compliance date is October 16, 2006
• Indications from the SEC is that the compliance
  date will not be extended
• There may be further technical amendments
  concerning fee uniformity issues
• The conflict between 22c-2 and the shareholder
  communication rules of 14a-13, 14b-1, 14b-2 and
  14c-1 should be resolved

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SEC Rule 22c-2 Key Components

• Mutual funds board must either approve a
  redemption fee or determine that imposition of a
  redemption fee is not necessary or appropriate
• Each fund is required to enter into a written
  agreement with its financial intermediaries,
  providing the fund access to information about
  transactions by fund shareholders

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STR Fee UniformityIncluded in Rule 22c-2

• Not a lot of guidance from the rule SEC has
  requested comments on fee uniformity
• For Certain
• 2 maximum on fees
• Minimum 7 calendar day holding period
• Fairly Sure
• FIFO share lot aging required
• De minimis and hardship waivers allowed
• SEC will not mandate a uniform holding period

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Agreements with IntermediariesTwo primary
provisions

• Funds allowed to request information from
  intermediaries about the identity of shareholders
  and their transactions in fund shares
• The intermediary must agree to execute the funds
  instructions to restrict or prohibit further
  purchases by a specific shareholder

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Agreements with IntermediariesApplicability

• All open-end mutual funds even those that do
  not impose STR fees
• Intermediaries that trade in omnibus accounts
  including DC plans
• Intermediaries that trade long-title/fully
  disclosed but use bank/nominee ID number instead
  of the actual TIN
• Does not apply to money market funds or funds
  that affirmatively permit short term trading as
  disclosed in the prospectus

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Data Reporting RequirementsRule 22c-2

• Funds may request the underlying trades and
  taxpayer IDs in any omnibus account for a
  specified period of time
• Some funds have indicated they will request a
  daily feed of underlying trade transactions on
  certain omnibus accounts
• Intermediaries are to provide the trade details
  and taxpayer IDs promptly upon request by the fund

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Standardized Data ReportingDTCC Service

• Standardized data format and centralized portal
  is needed to facilitate the transmission of
  millions of trade details from thousands of
  intermediaries
• The ICI and DTCC formed a working group,
  consisting of both BTAC and BDAC committee
  members to develop the standardized format and
  best practices
• The finalized formats are expected to be released
  by DTCC January 2006

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Standardized Data ReportingFeatures of DTCC
Service

• DTCC will support the centralized remitting and
  receiving of detail trade transactions, similar
  to how Fund/SERV works for trading
• Format allows for requesting/submitting
  transactions for a specified date range
• Format also allows for requesting/submitting
  recurring daily transaction activity
• Format supports submitting summary level data on
  initial request on super omnibus accts
• Includes provision to allow an intermediary to
  reject an unreasonable request from a fund

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Standardized Data ReportingFeatures of DTCC
Service

• Unique control numbers supplied with both
  requests and submissions for tracking and
  matching requests with submissions
• Formats allow an intermediary to use an agent for
  firm for processing requests from funds and
  corresponding submissions through DTCC
• Funds may request trade details related to a
  specific Fund/SERV trade by referencing the
  control number on the original trade

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Standardized Data ReportingFeatures of DTCC
Service

• Funds may include a dollar amount threshold
• Funds may restrict the request to a specific
  transaction source such as participant
  directed, plan directed, or rep directed
• Funds may optionally restrict trades to just
  buys, just sells or just exchange buys or sells
• Format includes an indicator to notify the fund
  that the trades being submitted are a full
  response or a partial response to their request

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SEC Rule 22c-2 Open Items

• Model contract language is currently being
  developed by the ICI and SIA
• DTCC is considering allowing Data Service Only
  (DSO) members to utilize the SDR services
• Guidance is needed from the SEC on determination
  of the level at which written agreements will be
  required when you have a chain of intermediaries

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SEC Rule 22c-2 Open Items

• SEC technical amendments on fee uniformity items
  such as FIFO aging, hardship and de minimis
  waivers
• SEC guidance on privacy issue conflicts between
  existing SEC rules and ERISA rules
• The SDR formats should be finalized and published
  by January 2006

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Like it or Not Here it Comes

• Compliance date is October 16, 2005
• 355 days left !
• Thanks for your attention
• Burton Keller
• Delta Data Software
• www.deltadatasoft.com