SEC Adopts Amendments to Rule 22c-2 and Extends Compliance Date
- United States
- 09/28/2006
- Morgan, Lewis & Bockius LLP
On September 26, 2006, the SEC adopted amendments to Rule 22c-2 under the Investment Company Act of 1940. Rule 22c-2, among other things, provides that a mutual fund may not allow redemption of its shares within seven days of purchase unless the fund enters into information sharing agreements with financial intermediaries that hold fund shares through omnibus accounts. Specifically, the intermediaries must agree to provide the fund with information about the shareholders who own shares of the fund through the intermediary and to restrict or prohibit trading by shareholders who violate the fund’s restrictions on short-term trading.
In addition to adopting the amendments to Rule 22c-2, the SEC extended the rule’s compliance date, which originally had been October 16, 2006. Specifically, the SEC has extended the compliance date for entering into shareholder information agreements until April 16, 2007, and extended the date by which funds must be able to obtain information from intermediaries under those agreements until October 16, 2007.
The amendments to Rule 22c-2 (i) limit the types of intermediaries with which funds must enter into shareholder information agreements, (ii) address the rule’s application to so-called “intermediary chains,” and (iii) clarify the effect of a fund’s failure to obtain a shareholder information agreement with any of its intermediaries.
Definition of “Financial Intermediary”
The amended rule clarifies the definition of a “financial intermediary” to exclude any entity that a fund treats as an “individual investor” for purposes of the fund’s frequent trading and redemption policies (e.g., small business retirement plans). The amended rule also clarifies that a financial intermediary includes any agent of the financial intermediary that submits orders to purchase fund shares.
Intermediary Chains
The amended rule requires that a fund enter into a shareholder information agreement only with so-called “first-tier intermediaries,” i.e., financial intermediaries that submit purchase or redemption orders directly to the fund, its distributor or transfer agent, or a registered clearing agency. Rule 22c-2 does not require first-tier intermediaries to enter into shareholder information agreements with any indirect intermediaries. The shareholder information agreement must provide that the first-tier intermediary use its best efforts to identify whether or not certain specific accounts identified by the fund are indirect financial intermediaries. If an indirect intermediary that holds an account with a first-tier intermediary does not provide underlying shareholder information, the agreement must, upon the fund’s request, prohibit that indirect intermediary from purchasing additional shares of the fund through the first-tier intermediary.
Effect of Lacking an Agreement
The amended rule provides that if a fund does not have a shareholder information agreement with a particular financial intermediary, the fund must prohibit that intermediary from purchasing fund shares in nominee name on behalf of other persons.
Operation of the Rule
The SEC noted that it is up to each fund to determine how often to request information from intermediaries. In addition, the SEC stated that, under appropriate circumstances, a fund could reasonably conclude that an intermediary’s frequent trading policies sufficiently protect fund shareholders and could therefore defer to the intermediary’s policies with adequate prospectus disclosure.
To view a copy of the SEC’s release, please visit: http://www.sec.gov/rules/final/2006/ic-27504.pdf.
For additional information, please contact:
Thomas S. Harman
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, NW
Washington, D.C. 20004
202.739.5662
[email protected]
Karen A. Aspinall
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, NW
Washington, D.C. 20004
202.739.5355
[email protected]
