SIA Asks for Clarification on Redemption Fee Rule Amendments

April 17, 2006 ( - The Securities Industry Association (SIA) suggested changes in the proposed amendments to the Securities and Exchange Commission's mutual fund redemption fee rule concerning the chain of intermediaries and the compliance date for the amendments.

In its letter to the SEC, the SIA said that while working with the Investment Company Institute (ICI) on model contracts to help clients comply with rule 22c-2, it discovered that one of the most difficult challenges in implementing the rule was determining when a non-natural person account was acting in a nominee, rather than proprietary, capacity.   SIA said it realized funds would be faced with a costly, labor intensive, and perhaps futile task of identifying if and with whom a nominee relationship exists and obtaining information sharing agreements with indirect or chains of intermediaries with whom the funds have no knowledge.

SIA suggested the SEC delete a section of the proposed rules that calls for financial intermediaries to use best efforts to identify indirect intermediaries and instead apply an underlying obligation to provide shareholder information only with respect to those financial intermediaries who enter purchase or redemption orders directly with the broker-dealer or through a fully disclosed correspondent.   “Any others would be treated as individual investors,” the letter said.

SIA suggested, however, that when indirect intermediaries have identified themselves as acting in a nominee capacity, they would not be treated as individual investors.

In addition, a letter to the SEC from ICI asked for a revision to the rule’s definition of financial intermediary to include people who submit orders directly to the fund on behalf of a financial intermediary.  ICI’s letter pointed out that, “ Many financial intermediaries (e.g., banks) do not transact business with the fund directly. Instead, they utilize the services of other entities that aggregate customer orders and submit them to the fund for processing.”

Both SIA and ICI asked that the compliance date for the rule be extended six months from the current date of October 16, 2006.   ICI said delays in obtaining executed shareholder information agreements have resulted from the confusion as to which intermediaries were required to execute agreements with the funds and what the terms of the agreements should be.

Other comments to the proposed rule amendments can be viewed here .