Daily Rules, Proposed Rules, and Notices of the Federal Government
Notice is hereby given that pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501
Rule 22c-2 (17 CFR 270.22c-2 "Mutual Fund Redemption Fees") under the Investment Company Act of 1940 (15 U.S.C. 80a) (the "Investment Company Act" or "Act") requires the board of directors (including a majority of independent directors) of most registered investment companies ("funds") to either approve a redemption fee of up to two percent or determine that imposition of a redemption fee is not necessary or appropriate for the fund. Rule 22c-2 also requires a fund to enter into written agreements with their financial intermediaries (such as broker-dealers and retirement plan administrators) under which the fund, upon request, can obtain certain shareholder identity and trading information from the intermediaries. The written agreement must also allow the fund to direct the intermediary to prohibit further purchases or exchanges by specific shareholders that the fund has identified as being engaged in transactions that violate the fund's market timing policies. These requirements enable funds to obtain the information that they need to monitor the frequency of short-term trading in omnibus accounts and enforce their market timing policies.
The rule includes three "collections of information" within the meaning of the Paperwork Reduction Act of 1995 ("PRA").
The collections of information created by Rule 22c-2 are necessary for funds to effectively assess redemption fees, enforce their policies in frequent trading, and monitor short-term trading, including market timing, in omnibus accounts. These collections of information are mandatory for funds that redeem shares within seven days of purchase. The collections of information also are necessary to allow Commission staff to fulfill its examination and oversight responsibilities.
Rule 22c-2(a)(1) requires the board of directors of all registered investment
Based on conversations with fund representatives,
Rule 22c-2(a)(2) requires a fund to enter into information sharing agreements with each of its financial intermediaries. Commission staff understands that all currently registered funds have already entered into such agreements with their intermediaries. Funds enter into new relationships with intermediaries from time to time, however, which requires them to enter into new information sharing agreements. Commission staff understands that, in general, funds enter into information-sharing agreement when they initially establish a relationship with an intermediary, which is typically executed as an addendum to the distribution agreement. Commission staff estimates that there are approximately 6911 open-end fund series currently in operation (excluding money market funds and ETFs). However, the Commission staff understands that most shareholder information agreements are entered into by the fund group (a group of funds with a common investment adviser), and estimates that there are currently 669 currently active fund groups.
In addition, newly created funds advised by new entrants (effectively new fund groups) must enter into information sharing agreements with all of their financial intermediaries. Commission staff estimates that there are approximately 40 new funds or fund groups that form each year that will have to enter into information sharing agreements with each of their intermediaries.
Rule 22c-2(a)(3) requires funds to maintain records of all information sharing agreements for 6 years in an easily accessible place. Commission staff estimates that there are approximately 6911 open-end fund series currently in operation (excluding money market funds and ETFs). However, the Commission staff anticipates that most shareholder information agreements will be stored at the fund group level and estimates that there are currently approximately 669 fund groups. Commission staff understands that information-sharing agreements are generally included as addendums to distribution agreements between funds and their intermediaries, and that these agreements would be stored as required by the rule as a matter of ordinary business practice. Therefore, Commission staff estimates that maintaining records of information sharing agreements requires approximately 10 minutes of time spent by a general clerk per fund, each year. Accordingly, Commission staff estimates that all funds will incur approximately 112 hours
Therefore, Commission staff estimates that to comply with the information sharing agreement requirements of rule 22c-2(a)(1) and (3), it requires a total of 24,140 hours.
The Commission staff estimates that on average, each fund group requests shareholder information once a week, and gives instructions regarding the restriction of shareholder trades every day, for a total of 417 responses related
Rule 22c-2 requires funds to enter into information sharing agreements with their intermediaries that enable funds to, upon request (i) be provided certain information regarding shareholders and their trades that are held through a financial intermediary or an indirect intermediary, and (ii) require the intermediary to execute instructions from the fund restricting or prohibiting further purchases or exchanges by shareholders that violate the fund's frequent trading policies. As a result of this requirement, some funds and intermediaries have had to develop and maintain information sharing, monitoring, and order execution systems (collectively "information sharing systems"). In general, costs related to these information-sharing systems are borne at the fund group level.
The Commission understands that all currently operating funds and intermediaries have either developed information systems themselves or purchased them from third parties. However, these funds and intermediaries also incur certain ongoing costs related to these systems' maintenance and operation. The Commission staff understands that various organizations have developed, enhancements to their systems that allow funds and intermediaries to share the information required by the rule without developing or maintaining systems of their own. Other organizations have developed "22c-2 solution" systems that funds may lease. The Commission staff understands that most funds and intermediaries use these outside systems. In general, the staff estimates that the typical charges involved in operating and maintaining information sharing systems average 25 cents for every 100 account transactions requested. These systems generally also provide analytics, spreadsheets, and other tools designed to enable funds to analyze the data presented, as well as communication tools to process fund instructions regarding the restrictions and prohibitions they may request. Commission staff estimates that the costs of developing, maintaining and operating information systems for funds and intermediaries that do not use outside provider's systems is comparable to the costs charged by outside providers.
In addition, newly formed funds and fund groups advised by advisers who are new entrants would also need to incur certain additional costs related to the initial development or purchase of these information-sharing systems. Commission staff estimates that it requires approximately $100,000 to purchase or develop and implement such an information sharing system for the first time. Commission staff has previously estimated that approximately 40 funds or fund groups are formed each year managed by new advisers, and therefore estimates that all these funds would incur total costs of approximately $4,000,000.
Responses provided to the Commission will be accorded the same level of confidentiality accorded to other responses provided to the Commission in the context of its examination and oversight program. Responses provided in the context of the Commission's examination and oversight program are generally kept confidential. Complying with the information collections of rule 22c-2 is mandatory for funds that redeem their shares within 7 days of purchase. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid control number.
Written comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency's estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication.
Please direct your written comments to Thomas Bayer, Director/Chief Information Officer, Securities and Exchange Commission, C/O Remi Pavlik-Simon, 6432 General Green Way, Alexandria, VA 22312; or send an email to: