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Rule 22c-2, the SEC's Response to Market Timing: Implications for the Mutual Fund Industry

Published by: TowerGroup

Published: Aug. 15, 2005 - 16 Pages


Table of Contents


TowerGroup Take-Aways




Report Coverage




Background


Exhibit 1: Recent History of SEC Regulations Regarding Market Timing (2003-06)


An Omnibus Primer


Exhibit 2: With Omnibus Accounting, Only the Intermediary Knows the Shareholder (2005)

Exhibit 3: Allocation of US Mutual Fund Accounts by Recordkeeping Method (2005)




Components of Rule 22c-2

Omnibus Transparency

Voluntary Redemption Fees




Rule 22c-2 Exceptions and Open Issues


Exhibit 4: Superomnibus Approach: Multiple Intermediary Relationships (2005)


Clarification from the SEC Will Bring Relief




Implications of Rule 22c-2


Exhibit 5: US Mutual Funds' Phased Approach to Rule 22c-2




Phase 1A: Agreement Process




Phase 1B: Redemption Fee Policy




Phase 2: Transaction Monitoring

The Need for a Standard Data Feed

Transmission of Transaction Data

More Frequent Oversight

Corrective Action and Reporting




Options for Transaction Monitoring Technology


Exhibit 6: Analysis Tools for Mutual Funds to Supervise Frequent Trading (2005)


Analysis Tools by Top 3 Transfer Agency Software Providers

Third-Party Solutions

Frequent Trading Policies as an Alternative to Redemption Fees




Price Tag for Compliance with Rule 22c-2


Exhibit 7: Rule 22c-2 Costs to Mutual Funds: SEC Estimates vs. TowerGroup Estimates (2005-08)


Agreement Process

Redemption Fee Policy Preparation


Exhibit 8: Estimated Year 1 Costs of Rule 22c-2 Compliance: Redemption Fee Policy (2005)


Redemption Fee Implementation

Transaction Activity Monitoring




Summary

Abstract

The culmination of the regulatory approach is Rule 22c-2 under the Investment Company Act of 1940. The Rule not only directs mutual fund boards to formally assess the need for redemption fees but also instructs funds to contract with intermediaries to receive underlying shareholder account data for the purposes of monitoring and stopping market timing. This TowerGroup Research Note examines the implications of Rule 22c-2 across the investment management industry. Note: Addressing stale pricing is one way to minimize the risk of market timing in a fund, but this report does not cover that topic.

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