Federal Register / Vol. 71, No. 44 / Tuesday, March 7, 2006 / Proposed Rules 11351

Issued in Renton, Washington, on February Paper Comments Investment Company Act.4 We adopted 22, 2006. • the rule to help address abuses Michael J. Kaszycki, Send paper comments in triplicate associated with short-term trading of Acting Manager, Transport Airplane to Nancy M. Morris, Secretary, fund shares. Rule 22c–2 provides that if Directorate, Aircraft Certification Service. Securities and Exchange Commission, a fund redeems its shares within seven [FR Doc. E6–3227 Filed 3–6–06; 8:45 am] 100 F Street, NE., Washington, DC days,5 its board must consider whether 20549–9303. BILLING CODE 4910–13–P to impose a fee of up to two percent of All submissions should refer to File the value of shares redeemed shortly Number S7–06–06. This file number after their purchase (‘‘redemption fee’’).6 SECURITIES AND EXCHANGE should be included on the subject line The rule also requires such a fund to COMMISSION if e-mail is used. To help us process and enter into agreements with its review your comments more efficiently, intermediaries that provide fund 17 CFR Part 270 please use only one method. The management the ability to identify Commission will post all comments on investors whose trading violates fund [Release No. IC–27255; File No. S7–06–06; the Commission’s Internet Web site restrictions on short-term trading.7 File No. 4–512] (http://www.sec.gov/rules/ When we adopted rule 22c–2 last RIN 3235–AJ51 proposed.shtml). Comments are also March, we asked for additional available for public inspection and comment on (i) whether the rule should Mutual Fund Redemption Fees copying in the Commission’s Public include uniform standards for 8 AGENCY: Securities and Exchange Reference Room, 100 F Street, NE., redemption fees, and (ii) any problems Commission. Washington, DC 20549. All comments with the rule that might arise during the received will be posted without change; course of implementation.9 We received ACTION: Proposed rule. we do not edit personal identifying over 100 comment letters in response to 10 SUMMARY: The Securities and Exchange information from submissions. You the request for comment. Commenters Commission (‘‘Commission’’ or ‘‘SEC’’) should submit only information that expressed various views on the need for is proposing amendments to the you wish to make available publicly. uniform standards, but a number of commenters also raised concerns with redemption fee rule we recently FOR FURTHER INFORMATION CONTACT: adopted. The rule, among other things, the basic requirements of the rule. Thoreau Bartmann, Staff Attorney, or C. In their letters in response to the requires most open-end investment Hunter Jones, Assistant Director, Office companies (‘‘funds’’) to enter into rule’s adoption, commenters of Regulatory Policy, (202) 551–6792, representing fund managers and other agreements with intermediaries, such as Division of Investment Management, broker-dealers, that hold shares on Securities and Exchange Commission, 4 See Mutual Fund Redemption Fees, Investment behalf of other investors in so called 100 F Street, NE., Washington, DC Company Act Release No. 26782 (Mar. 11, 2005) [70 ‘‘omnibus accounts.’’ These agreements 20549–5041. FR 13328 (Mar. 18, 2005)] (‘‘Adopting Release’’). must provide funds access to 5 Because the large majority of funds redeem information about transactions in these SUPPLEMENTARY INFORMATION: The shares within seven days of purchase, the practical accounts to enable the funds to enforce Commission today is proposing effect of rule 22c–2, and these proposed 1 amendments, would be to require most funds to restrictions on market timing and amendments to rule 22c–2 under the 2 comply with the rule’s requirements. Therefore, similar abusive transactions. The Investment Company Act of 1940 (the throughout this Release we may describe funds as Commission is proposing to amend the ‘‘Investment Company Act’’ or the being ‘‘required to comply’’ with a provision of the ‘‘Act’’).3 rule, when the actual requirement only applies if rule to clarify the operation of the rule a fund redeems its shares within seven days. A fund and reduce the number of Table of Contents that does not redeem its shares within seven days intermediaries with which funds must would not be required to comply with those negotiate information-sharing I. Background provisions of rule 22c–2. II. Discussion 6 agreements. The amendments are Rule 22c–2(a)(1). Under the rule, the board of A. Small Intermediaries directors must either (i) approve a fee of up to 2% designed to address issues that came to B. Intermediary Chains of the value of shares redeemed, or (ii) determine our attention after we had adopted the C. Effect of Lacking an Agreement that the imposition of a fee is not necessary or rule, and are designed to reduce the III. Compliance Date appropriate. Id. costs to funds (and fund shareholders) IV. Current Industry Efforts Regarding 7 Under the rule, the fund (or its principal while still achieving the goals of the Shareholder Information underwriter) must enter into a written agreement V. Ongoing Monitoring of Implementation with each of its financial intermediaries under rulemaking. which the intermediary agrees to (i) provide, at the VI. Cost-Benefit Analysis DATES: fund’s request, identity and transaction information Comments must be received on VII. Consideration of Promotion of Efficiency, about shareholders who hold their shares through or before April 10, 2006. Competition, and Capital Formation an account with the intermediary, and (ii) execute ADDRESSES: Comments may be VIII. Paperwork Reduction Act instructions from the fund to restrict or prohibit submitted by any of the following IX. Initial Regulatory Flexibility Analysis future purchases or exchanges. The fund must keep a copy of each written agreement for six years. Rule methods: X. Statutory Authority Text of Rule 22c–2(a)(2),(3). Electronic Comments 8 See Adopting Release, supra note 4, at Section I. Background II.C. As we noted when we adopted the rule, • Use the Commission’s Internet ‘‘[a]lthough we received comment on these comment form (http://www.sec.gov/ On March 11, 2005, the Commission [uniform standards] issues during the initial adopted rule 22c–2 under the comment period, those comments were offered in rules/proposed.shtml); or the context of a mandatory redemption fee’’ rather • Send an e-mail to rule- than in the context of the voluntary approach that [email protected]. Please include File 1 17 CFR 270.22c–2. we adopted. See id. Number S7–06–06 on the subject line; 2 15 U.S.C. 80a. 9 See id. or 3 Unless otherwise noted, all references to 10 Comment letters on the 2004 proposal and the • statutory sections are to the Investment Company 2005 adoption are available in File No. S7–11–04, Use the Federal eRulemaking Portal Act, and all references to ‘‘rule 22c–2’’ or any which is accessible at http://www.sec.gov/rules/ (http://www.regulations.gov). Follow the paragraph of the rule will be to 17 CFR 270.22c– proposed/s71104.shtml. References to comment instructions for submitting comments. 2. letters are to letters in that file.

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market participants stated that Among the commenters who argued that agreements, the intermediaries must implementing the rule would be more uniform standards would benefit market agree to provide, at the fund’s request, costly than we had anticipated, and participants, no consensus emerged as the shareholder identity (i.e., taxpayer requested that we address certain to what those uniforms standards identification number) and transaction interpretive issues that arose in should be, if they were adopted. We are information,17 and carry out connection with the implementation of taking the commenters’ views under instructions from the fund to restrict or the rule.11 The amendments we are advisement, but are not proposing prohibit further purchases or exchanges proposing today address concerns and uniform redemption fee standards at by a shareholder (as identified by the questions regarding rule 22c–2 that this time. fund) that has engaged in trading that commenters have brought to our II. Discussion violates the fund’s market timing attention. These amendments are policies.18 We designed this provision designed to reduce the costs of The amendments to rule 22c–2 we are to enable funds to obtain the complying with the rule and clarify its proposing today (i) limit the types of information that they need to monitor application in certain circumstances.12 intermediaries with which funds must short-term trading in omnibus accounts We also received comments on negotiate information-sharing and enforce their market timing whether we should provide for a agreements, (ii) address the rule’s policies.19 uniform redemption fee applicable to application when there are chains of Many fund commenters expressed those funds whose directors determined intermediaries, and (iii) clarify the effect concern that the requirement would to impose a redemption fee. While most of a fund’s failure to obtain an necessitate reviewing a large number of commenters asserted that funds and agreement with any of its their shareholder accounts in order to intermediaries would likely achieve intermediaries. determine which shareholders meet the certain benefits or cost savings if the A. Small Intermediaries definition of ‘‘financial Commission mandated uniform intermediary.’’ 20 They noted that redemption fee standards,13 others Rule 22c–2 prohibits a fund from redeeming shares within seven days because the definition encompasses any disagreed, asserting that the best way to entity that holds securities in nominee serve funds, intermediaries, and unless, among other things, the fund enters into written agreements with its investors was by allowing each fund to financial intermediaries other than broker-dealers, adopt redemption fee policies that best financial intermediaries (such as broker- and contain comparable exceptions. See, e.g., 12 fit its particular circumstances.14 dealers and retirement plan CFR part 40 (rules applicable to national banks, administrators) 15 that hold shares on adopted by the Comptroller of the Currency). 16 We believe that the disclosure of information 11 For example, a number of commenters in their behalf of other investors. Under those under shareholder information agreements, and the 2005 letters objected to the definition of ‘‘financial fund’s request and receipt of information under intermediary’’ and to the requirement that funds standardization under these circumstances would those agreements, are covered by these exceptions. enter into agreements with these intermediaries to create significant disincentives to the adoption of We also note that financial institutions often state receive transaction information upon request. See, redemption fees that might otherwise benefit a e.g., Comment Letters of OppenheimerFunds, Inc. in their privacy policy notices that the institution fund.’’). makes ‘‘disclosures to other nonaffiliated third (May 9, 2005), T. Rowe Price Associates, Inc. (May 15 ‘‘Financial intermediary’’ is defined in rule 24, 2005), and the Vanguard Group (June 1, 2005). parties as permitted by law.’’ See 17 CFR 248.6(b). 22c–2(c)(1) as: (i) Any broker, dealer, bank, or other Therefore we believe it will not be necessary for 12 We received a number of comments from entity that holds securities of record issued by the intermediaries such as broker-dealers and banks to insurance companies and other market participants fund, in nominee name; (ii) a unit investment trust provide new privacy notices or opt-out that sell variable insurance products. Many of these or fund that invests in the fund in reliance on opportunities to their customers, in order to comply commenters were concerned that rule 22c–2 could section 12(d)(1)(E) of the Act (15 U.S.C. 80a– with rule 22c–2, both as adopted and as we propose expose insurance companies to increased liability. 12(d)(1)(E)); and (iii) in the case of a participant- to amend it. These commenters stated that variable insurance directed employee benefit plan that owns the 17 One commenter expressed concern that the product contracts typically include clauses that securities issued by the fund, a retirement plan’s contract provision of rule 22c–2, requiring that specify the maximum charges and fees that an administrator under section 3(16)(A) of the agreements with intermediaries mandate the insurance company can assess against an annuity Employee Retirement Income Security Act of 1974 disclosure of shareholder information at the fund’s holder. We do not believe that redemption fees (29 U.S.C. 1002(16)(A)) or any entity that maintains request, conflicts with Commission rules governing charged pursuant to rule 22c–2 should be the plan’s participant records. proxy solicitations. See Comment Letter of the interpreted to cause insurance companies to breach 16 Rule 22c–2(a)(2). Some commenters expressed American Bankers Association (June 6, 2005). The their contracts with annuity holders. Redemption concern about the ability of financial intermediaries Commission’s proxy solicitation rules are set forth fees are not fees that the insurance companies are to provide information to funds, in light of in Regulation 14A under the Exchange Act, 17 CFR themselves imposing pursuant to the contract applicable privacy laws. See, e.g., 15 U.S.C. 6801– 240.14A. The proxy rules govern the disclosure of between the insurance company and its customer. 09, 6821–27 (privacy provisions of Gramm-Leach- information in the context of proxy solicitations. Instead, the funds underlying the separate accounts Bliley Act); Regulation S–P, 17 CFR part 248 They do not prohibit banks, broker-dealers and will impose any redemption fees that are charged. (Commission rules implementing privacy other intermediaries from complying with See Miller v. Nationwide Life Ins. Co., 2003 WL provisions for funds, broker-dealers, and registered agreements entered into pursuant to rule 22c–2. 22466236 (E.D. La.) (Oct. 29, 2003), aff’d on other investment advisers). Under those laws, financial 18 grounds, 391 F.3d 698 (5th Cir. 2004). institutions such as funds, broker-dealers, and See proposed rule 22c–2(c)(5) (defining 13 Comment Letter of Flexible Plan Investments banks must provide a notice describing the ‘‘shareholder information agreement,’’ which is Ltd., at 2 (May 9, 2005) (‘‘[O]ne of the most institution’s privacy policies and an opportunity for discussed further below in Section II.B). complicating factors caused by redemption fees is consumers to opt out of the sharing of information 19 As we noted when we adopted rule 22c–2 in the lack of uniformity in their calculation and with nonaffiliated third parties. These privacy laws 2005, a fund that receives shareholder information imposition * * * When intermediaries and also contain important exceptions to the notice and for a purpose permitted by the privacy rules under advisors are dealing with many platforms and fund opt-out requirements. Under the Commission’s the exceptions to consumer notice and opt out families, sorting out the requirements of each is a privacy rules, for example, these requirements do requirements may not disclose that information for tremendous burden on the industry, adding costs not apply to the disclosure of information that is other purposes, such as marketing. See Adopting that are simply passed on to investors.’’); Comment ‘‘necessary to effect, administer, or enforce a Release, supra note 4, at n.47 (‘‘Our privacy rule Letter of Horton, Lantz & Low at 1 (May 24, 2005) transaction that a consumer requests or authorizes,’’ prevents a fund that receives this [shareholder] (‘‘[T]he lack of uniformity may result in increased which includes a disclosure that is ‘‘[r]equired, or information from using the information for its own costs associated with our retirement plan. Such is a usual, appropriate, or acceptable method * * * marketing purposes, unless permitted under the higher costs could arise through higher plan [t]o carry out the transaction or the product or intermediary’s privacy policies. See 17 CFR administration costs * * * or higher mutual fund service business of which the transaction is a part 248.11(a) and 248.15(a)(7).’’). expenses.’’). ***’’ 17 CFR 248.14(a), (b)(2). See also 17 CFR 20 See, e.g., Comment Letter of 14 See Comment Letter of the Vanguard Group at 248.15(a)(7)(i) (notice and opt-out requirements not OppenheimerFunds, Inc. (May 9, 2005). At the 6 (June 1, 2005) (‘‘[M]andatory redemption fee applicable to disclosure of information to comply suggestion of several commenters, we broadened standards are not appropriate or necessary in the with law). Financial privacy rules that are the definition of ‘‘financial intermediary’’ in the context of a voluntary fee. We believe that substantially identical to these rules apply to final rule.

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name for other investors, it would transparency regarding underlying revisions? How much will it cost to therefore include, for example, a small shareholder transactions executed enter into a new agreement or modify an business retirement plan that holds through these accounts is unnecessary existing agreement to accommodate the mutual fund shares on behalf of only a to achieve the goals of the rule. Second, requirement of rule 22c–2? Are there few employees. These commenters our proposed approach would any other costs related to the agreement emphasized that the task of identifying substantially eliminate the need for requirement? these intermediaries, as well as funds to devote resources to identifying • Should the definition of negotiating agreements with them, will intermediaries, because the funds will ‘‘shareholder’’ be revised? 27 For be costly and burdensome. The effect of have already identified the relevant example, the definition excludes funds the rule with respect to these small intermediaries in the course of that rely on section 12(d)(1)(G) of the intermediaries was an unintended administering their policies on short- Act in order to invest in other funds in consequence of the rule, which we did term trading. the same fund complex.28 The not foresee when we modified the We request comment on this proposed Commission has proposed new rule definition of ‘financial intermediary’ in amendment to the definition of financial 12d1–2 which, if adopted as proposed, response to the concerns that intermediary. would expand the ability of funds to commenters raised with us. • Should additional entities be rely on section 12(d)(1)(G). In light of We propose to revise rule 22c–2 to excluded or included as financial this proposal, should the definition exclude from the definition of ‘‘financial intermediaries? Should funds be include these types of funds as intermediary’’ any intermediary that the required to enter into agreements with shareholders (i.e., should the exclusion fund treats as an individual investor for any other types of entities? Should the be deleted)? 29 Should the definition purposes of the fund’s policies intended definition of financial intermediary be provide for different circumstances in to eliminate or reduce dilution of the revised in any other way to further the which these types of funds will not be value of fund shares.21 These types of purposes of the rule or to reduce the considered shareholders? For example, policies include restrictions on frequent cost of its implementation in a manner should the definition be revised to limit purchases and redemptions, as well as consistent with these purposes? 26 the exclusion to funds that rely on a fund’s redemption fee program.22 As Should the rule contain additional (or section 12(d)(1)(G), but that do not rely a result, if a fund, for example, applies different) exclusions? on rule 12d1–2 (if adopted)? • Is the proposed approach of a redemption fee or exchange limits to B. Intermediary Chains transactions by a retirement plan (an allowing funds to determine which intermediary) rather than to the entities are financial intermediaries In some cases, a brokerage firm may purchases and redemptions of the practical? Will this result in funds being hold its shares of a mutual fund not employees in the plan, then the plan more (or less) likely to impose only on behalf of individual investors, would not be considered a ‘‘financial redemption fees and restrictions on but also on behalf of other intermediary’’ under the rule, and the inappropriate short-term trading? intermediaries, such as pension plans or 30 fund would not be required to enter into Would the revised definition of other broker-dealers. Fund an agreement with that plan.23 financial intermediary create an commenters said that they were Our proposed approach, which was incentive for funds to modify their uncertain how rule 22c–2 applied to suggested by several commenters,24 has market timing or redemption fee these arrangements, and expressed advantages over the rule as initially policies to treat more shareholders as concern how, as a practical matter, a adopted, while still achieving the goals individual investors? • 27 of the initial rulemaking. First, when a What are the costs to funds and See rule 22c–2(c)(4). 28 See Adopting Release, supra note 4, at n.55. fund places restrictions on transactions financial intermediaries of the requirement to enter into agreements? 29 See Fund of Funds Investments, Investment at the intermediary level (rather than the Company Act Release No. 26198 (Oct. 1, 2003) [68 individual shareholder level), the fund How many new agreements will funds FR 58226 (Oct. 8, 2003)] (proposing rule 12d1–2). is unlikely to need data about frequent need to enter into with their 30 One commenter questioned whether, in the intermediaries after the proposed context of insurance company separate accounts, a trading by individual shareholders, holder of a variable annuity contract is a because abusive short-term trading by ‘‘shareholder’’ of a mutual fund in which the corresponding transactions by the omnibus insurance company separate account invests. See the shareholders holding through the accounts with funds in which the plan invests on omnibus account would ordinarily Comment Letter of American General Life Insurance behalf of plan beneficiaries. In other words, when Co. at 12 (May 9, 2005) (submitted on behalf of the trigger application of those policies to a plan participant allocates an investment to Fund company and certain affiliated companies). The the intermediary’s trades.25 Therefore, A, the plan must buy an equivalent number of term ‘‘shareholder’’ does encompass these shares of Fund A. If the plan has not identified investors. See rule 22c–2(c)(4) (defining itself to the fund as an intermediary (so that a fund 21 ‘‘shareholder’’ to include, among others, ‘‘a holder Proposed rule 22c–2(c)(1)(iv). will not apply its redemption fee or market timing 22 The rule excepts a fund from the requirement of interests in a fund or unit investment trust that policies to plan transactions) even harmless has invested in the fund in reliance on section to enter into written agreements if, among other transactions by a number of participants (as well as things, the fund ‘‘affirmatively permits short-term 12(d)(1)(E) of the Act’’). We also noted, when we market timing transactions) will cause the plan to adopted rule 22c–2, that the term ‘‘shareholder’’ trading of its securities.’’ See rule 22c–2(b)(3). effect transactions with the fund that will trigger 23 includes, among others, ‘‘a holder of interests in Proposed rule 22c–2(c)(1)(iv) would exclude application of a fund’s redemption fee or market * * * an insurance company separate account from the definition of ‘‘financial intermediary’’ any timing policies to the plan. Plans that do not organized as a unit investment trust.’’ Adopting person the fund treats as an individual for purposes identify themselves as intermediaries will likely Release, supra note 4, at n.55. Insurance company of the fund’s policies on eliminating or reducing either have very few participants and/or restrict separate accounts are susceptible to many of the dilution in the value of fund shares. If a fund has their transactions so that transactions by same short-term trading abuses as mutual funds, not established such policies and thus determined participants do not trigger application of a and the investor protection goals of rule 22c–2 which persons it treats as individuals, this redemption fee or violate fund market timing apply equally to them as well. See In the Matter of exclusion would not apply, and the fund would policies. Millennium Partners, L.P., Investment Advisers Act need to identify those shareholder accounts that are 26 See, e.g., rule 17Ad–20 under the Securities Release No. 2453, Administrative Proceeding File ‘‘financial intermediaries.’’ Exchange Act of 1934 [17 CFR 240.17Ad–20] No. 3–12116 (Dec. 1, 2005) (ordering fees and 24 See, e.g., Comment Letter of the Securities (defining ‘‘securities intermediary’’ as a registered penalties of $180 million and finding that Industry Association (May 9, 2005). ‘‘clearing agency * * * or a person, including a Millennium Partners had, among other things, 25 Individual transactions (e.g., by plan bank, broker, or dealer, that in the ordinary course engaged in market timing trading through variable beneficiaries) in omnibus accounts (e.g., self- of its business maintains securities accounts for annuity contracts, employing a number of deceptive directed defined contribution plans) trigger others in its capacity as such.’’). practices to avoid detection as a market timer).

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fund could obtain shareholder of funds.37 In practice, it is often the therefore relies upon the initiative of the information through multiple layers of transfer agent that may have preexisting fund to determine whether to request intermediaries.31 They pointed out that agreements with a fund’s financial that first-tier intermediaries identify and the rule did not specify, in such a intermediaries, and to avoid potentially collect information from specific ‘‘chain of intermediaries,’’ how the duplicative agreements or inefficiencies indirect intermediaries, and to request written agreement requirement would in the process, we propose to permit that an indirect intermediary be apply to any second tier (or additional transfer agents to enter into agreements restricted from further trading in fund tiers) of financial intermediaries. Two of on behalf of the funds that they serve.38 shares due to its failure to provide these commenters recommended that The shareholder information requested information on shareholder the Commission revise the rule to limit agreement must obligate the first-tier transactions. We believe that this the written agreement requirement to intermediary to provide, promptly upon targeted approach would allow a fund to those entities that trade directly with the fund’s request, identification and collect and analyze the most relevant the fund.32 Two other commenters transaction information for any information from intermediaries and recommended that the rule mandate shareholder accounts held directly with enable it to efficiently and effectively that a fund’s contract with its the first-tier intermediary.39 If the first- enforce its short-term trading policies. intermediaries require them to provide tier intermediary maintains a This approach is also designed to permit information to the fund, and also shareholder account for another a fund to look through multiple levels require that those intermediaries financial intermediary, the shareholder of intermediaries to reach relevant contract with other intermediaries to information agreement must obligate the information about trading by ultimate agree to provide information to the first-tier intermediary to use its best shareholders.41 These proposed fund, through chains of agreements.33 efforts to identify, upon request by the amendments do not require first-tier fund, those accountholders who are intermediaries to enter into formalized In light of these comments, we themselves intermediaries, and obtain information-sharing agreements with propose to revise the rule to provide and forward (or have forwarded) the indirect intermediaries, although they that a fund must enter into a written underlying shareholder identity and would not prohibit any such agreement only with those financial transaction information from those agreements. intermediaries that submit orders to intermediaries farther down the chain We request comment on how we purchase or redeem shares directly to (i.e., second-or third-tier intermediaries, propose to address chains of the fund, its principal underwriter or or ‘‘indirect intermediaries’’). If an intermediaries. transfer agent, or a registered clearing intermediary that holds an account with • Would the proposed amendments agency 34 (‘‘first-tier intermediaries’’).35 a first-tier intermediary refuses to honor result in funds receiving enough We are proposing to define this written the request, the agreement must obligate information from intermediaries to agreement as a ‘‘shareholder the first-tier intermediary to prohibit, effectively address inappropriate short- information agreement.’’ 36 The upon the fund’s request, an indirect term trading? Should the shareholder proposed rule would include transfer intermediary from purchasing information agreement include any agents and registered clearing agencies additional shares of the fund through other requirements? among the entities that may enter into • the first-tier intermediary. Should the rule require that the shareholder information agreements These proposed rule amendments are agreement between the fund and each with financial intermediaries on behalf designed to enable funds to request the first-tier intermediary include a information they need to enforce their provision requiring first-tier 31 See, e.g., Comment Letter of T. Rowe Price market timing and redemption fee intermediaries to enter into explicit Associates, Inc. (May 24, 2005). agreements with all of their indirect 32 See id.; Comment Letter of the ICI (May 9, policies, while reducing the costs of 40 2005). complying with the rule. The rule intermediaries, or will the arrangements 33 See Comment Letter of American Society of envisioned by the proposed rule be Pension Professionals & Actuaries (May 9, 2005); 37 If a transfer agent or clearing agency enters into sufficient? Should the rule require funds Comment Letter of Charles Schwab & Co., Inc. (May an agreement on behalf of the fund, the agreement to collect information from indirect 9, 2005). must require the financial intermediary to provide intermediaries instead of having the 34 Currently, the National Securities Clearing the requested information to the fund upon the Corporation (‘‘NSCC’’) is the only registered fund’s request, as provided in the definition of shareholder information agreement clearing agency for funds. A ‘‘clearing agency’’ is a shareholder information agreement. require first-tier intermediaries to person that acts as an intermediary in making 38 We have also included registered clearing assume this role? Do the proposed payments or deliveries (or both) in connection with agencies as an entity that may enter into agreements amendments strike the proper balance transactions in securities, or that provides facilities on behalf of funds. This amendment could allow for comparing data with respect to the terms of funds and intermediaries to utilize the registered of duties and costs between funds and securities transactions to reduce the number of clearing agency as a central agreement repository, intermediaries? settlements or the allocation of securities settlement if such an arrangement is feasible. • Is there another approach that we responsibilities. See 15 U.S.C. 78c(a)(23)(A). A 39 As discussed further below, if a fund does not should take in addressing the chains of clearing agency is a self-regulatory organization, enter into a shareholder information agreement intermediaries issue? For example, and its rules of operation are subject to approval by with an intermediary, it must restrict future the appropriate federal regulatory agency. See 15 purchases of fund shares by the intermediary. See should the rule require that first-tier U.S.C. 78c(a)(26), 78s(b). infra Section II.C. 35 Proposed amendment to rule 22c–2(a)(2). We 40 A number of intermediaries have already redemption fees and access underlying shareholder understand that retirement plan administrators and developed or are developing systems that will allow identity and transaction information through other persons that maintain the plan’s participant for transmission of this information. For example, omnibus accounts). We also understand that the records typically submit transactions in fund shares Charles Schwab & Co. has developed a system that NSCC is developing enhancements to its Fund/ to the fund or to its transfer agent, principal allows fund companies to view and download SERV order processing and clearing systems that underwriter, or to a registered clearing agency. The information regarding the identity and transaction should allow members to request and transmit rule we adopted last spring specifically includes history of accountholders that trade through shareholder identity and transaction information. these administrators and recordkeepers within the Schwab. Julie Segal, Schwab Makes Omnibus Data 41 We anticipate that intermediaries may use a definition of a ‘‘financial intermediary.’’ See rule Available to Fund Companies, Fund Action (Dec. 2, variety of arrangements with indirect intermediaries 22c–2(c)(1)(iii). 2005). See also Tom Leswing, SunGard Creating to ensure that the requested information is provided 36 Proposed rule 22c–2(c)(5). The agreement may Redemption Fee Rule Service, Ignites (Sept. 30, to the fund, ranging from formalized contracts to be part of another contract or agreement, such as 2005) (discussing SunGard’s development of a informal communications in response to a specific a distribution agreement. similar system allowing funds to impose fund inquiry.

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intermediaries collect information only fund’s lacking a shareholder however, to monitor implementation of from second-tier intermediaries, without information agreement with a financial the rule, and accordingly we are addressing the need for further intermediary. interested in hearing on an ongoing information from more distant • Instead of restricting any further basis from funds with experience intermediaries? Would this approach purchases by a financial intermediary complying with the rule, and other allow investors to mask short-term that does not have an agreement with a interested parties, about any further trading activity by acting though fund, would precluding an intermediary implementation issues or developments. multiple layers of intermediaries? without an agreement from redeeming In this regard, we encourage fund • What steps are funds and purchased shares within seven days shareholders, funds and other interested intermediaries already taking to share serve the purposes of the rulemaking? parties to submit feedback as they information? Are there systems in place Would this alternative preclusion on develop experience with the rule. For (or in development) that could be used redemption within seven days example, we understand that the to reduce the costs of collecting and effectively encourage intermediaries to industry is developing a number of sharing this information? enter into agreements with funds? initiatives to streamline the flow of • What are the costs of collecting Would this alternative of precluding shareholder data between funds and shareholder information from redemption within seven days by intermediaries. If those initiatives are intermediaries? How often do funds intermediaries without agreements implemented, we would be interested in anticipate requesting shareholder impose hardships on shareholders in knowing whether they have assisted information from intermediaries? How financial emergencies, or implicate funds in complying with the rule. We much would it cost to establish and other shareholder redemption issues? also would be interested in hearing maintain systems to collect and transmit • Is there another approach available feedback with respect to issues such as the shareholder information between to us that would further the goals of this the following: funds and intermediaries? What would rulemaking? • How have the required board it cost for first-tier intermediaries to III. Compliance Date findings with respect to the necessity ensure that funds receive the and propriety of a redemption fee shareholder information from indirect When the Commission adopted rule worked in practice? intermediaries and restrict indirect 22c–2 in March 2005, we established a • How has the rule affected the use of intermediaries’ trading upon the fund’s compliance date of October 16, 2006. redemption fees by funds? request? Commenters pointed out that they • How has the rule affected the level • Under the proposed amendments, a would need significant time to revise of redemption fees and the percentage of fund could enter into a shareholder agreements with intermediaries and funds imposing redemption fees? information agreement through its change their systems to accommodate • How has the rule affected the length principal underwriter, transfer agent, or the transmission and receipt of trading of redemption periods? registered clearing agency. Should the information. That compliance date • Has the rule resulted in any rule include any other types of entities? remains in effect, although we may unexpected benefits or adverse C. Effect of Lacking an Agreement revise or extend that compliance date if consequences for fund shareholders? and when we adopt the amendments we Feedback may be provided to the Some commenters questioned the are proposing today. We request Commission by any of the following effect under the rule of a fund’s failure comment on whether additional time methods: (or inability) to obtain agreements with would be needed to comply with the 42 Electronic Submissions all of its intermediaries. The rule amendments. could be interpreted to mean that in • Use the Commission’s Internet such a circumstance, the fund would be IV. Current Industry Efforts Regarding submission form at http://www.sec.gov/ precluded from redeeming the shares of Shareholder Information rules/proposed.shtml; or any of its shareholders within seven We understand that representatives of • Send an e-mail to rule- days of purchase.43 In order to prevent mutual funds, transfer agents, and [email protected]. Please include File a fund’s lack of agreements with certain broker-dealers are currently engaged in Number 4–512 on the subject line. intermediaries from affecting the an effort, in order to implement the redeemability of shares that investors Paper Submissions information-sharing provisions of rule • own through other intermediaries, we 22c–2, to develop standardized Send paper submissions in propose to revise the rule to provide contractual terms and information triplicate to Nancy M. Morris, Secretary, that, if a fund does not have an exchange protocols.45 We support the Securities and Exchange Commission, agreement with a particular work of the representatives in 100 F Street, NE., Washington, DC intermediary, the fund must thereafter developing these standards, and urge 20549–9303. prohibit the intermediary from others involved with the distribution of All submissions should refer to File purchasing, on behalf of itself or other mutual fund shares to become involved Number 4–512. This file number should 44 persons, securities issued by the fund. in this effort. We direct our staff to be included on the subject line if e-mail We intend this change to focus the provide appropriate assistance. is used. To help us process and review remedy (prohibition of future your submissions more efficiently, purchases) on the particular V. Ongoing Monitoring please use only one method. The intermediary that fails to execute an As discussed above, this release Commission will post all submissions agreement with the fund. addresses only certain technical issues on the Commission’s Internet Web site We request comment on the proposed that have arisen to date. We intend, (http://www.sec.gov/rules/ amendment clarifying the effect of a proposed.shtml). Submissions are also 45 See Comment Letter of the Securities Industry available for public inspection and 42 See, e.g,. Comment Letter of T. Rowe Price Association (May 9, 2005) (noting that the SIA has copying in the Commission’s Public Associates, Inc. (May 24, 2005). been ‘‘exploring with ICI the possible development 43 Comment Letter of OppenheimerFunds, Inc. of prototype contractual terms and approved Reference Room, 100 F Street, NE., (May 9, 2005). methodologies for transmission of fund transactions Washington, DC 20549. All submissions 44 Proposed rule 22c–2(a)(2)(ii). data between intermediaries and funds’’). received will be posted without change;

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we do not edit personal identifying investors. The revenue that funds and on funds of identifying those entities information from submissions. You investors receive from redemption fees that might have qualified as financial should submit only information that reimburses long-term shareholders for intermediaries under the rule as you wish to make available publicly. some, if not all, of the costs caused by adopted, because a fund should already short-term traders. Many of the costs know which entities it treats as VI. Cost-Benefit Analysis associated with rule 22c–2 discussed intermediaries for purposes of its The Commission is sensitive to the below are incidental to this purpose of policies on market timing or frequent costs and benefits imposed by its rules. better enabling funds to collect trading. As further discussed in Section As discussed above, the amendments redemption fees from short-term traders VIII below, for purposes of the we are proposing today would (i) limit in order to reimburse investors for any Paperwork Reduction Act we have the types of persons with which funds dilution of the fund. In many cases, the estimated that, if these amendments are must negotiate agreements, (ii) address revenue received from redemption fee adopted, identifying the intermediaries the rule’s application to chains of proceeds may be enough to allow funds with which a fund complex must enter intermediaries, and (iii) clarify the effect to recoup both the direct and indirect into agreements may take the average of a fund’s failure to obtain an costs associated with short-term trading. fund complex a total of 250 hours of a agreement with any of its For example, based on conversations service representative’s time, at a cost of intermediaries. These proposed with fund representatives, we $40 per hour,49 for a total burden to all amendments are designed to respond to understand that one large fund complex funds of 225,000 hours, at a total cost concerns that commenters identified collected approximately $34 million in of $9 million. These amendments would during the course of implementing rule redemption fee revenue in 2004. Funds likely provide a significant benefit 22c–2. We believe that the changes that choose not to adopt redemption because they should reduce the costs would result in substantial cost savings fees would not collect these fees, but associated with the intermediary to funds, financial intermediaries, and would continue to realize the other identification process. investors, and provide clarification of benefits discussed below. By enabling funds to forego the cost the rule’s requirements. The amendments to rule 22c–2 that of entering into agreements with A. Benefits we are proposing today will likely result omnibus accountholders that they treat in additional benefits to funds, financial as individual investors, we anticipate We anticipate that funds, financial intermediaries, and investors. As that the large majority of small omnibus intermediaries, and investors will discussed in the previous sections of accountholders would now fall outside benefit from the proposed amendments this Release, some commenters argued the shareholder information agreement to rule 22c–2. As discussed more fully that the rule’s definition of ‘‘financial provisions of the rule. This would likely in the Adopting Release we issued in intermediary’’ was too broad because it result in significant cost and time 2005, rule 22c–2 is designed to allow a would have required funds to identify savings to funds and financial fund to deter, and to provide the fund and enter into agreements with a intermediaries through reduction of the and its shareholders reimbursement for number of intermediaries that may not expenses associated with these the costs of, short-term trading in fund pose a significant short-term trading risk agreements. The reduction of these costs shares.46 The general benefits of rule to funds, and may have imposed also may benefit fund investors and 22c–2 therefore include the deterrence unnecessary costs to market fund advisers, to the extent that these of short-term trading, in which short- participants.47 For example, one large costs would have been passed on to term traders cause the fund to incur fund complex asserted that, under the them. We estimate that this would expenses that are ultimately borne by rule as adopted, identifying their significantly reduce the burden on many the long-term shareholders in a fund. ‘‘financial intermediaries’’ could cost entities that would otherwise qualify as Short-term trading can disrupt funds’ that fund complex $8.5 million or intermediaries under the rule, since the stated portfolio management strategies, more.48 As discussed above, our excluded entities would no longer need increase funds’ transaction costs, proposed amendments would modify to enter into shareholder information- require the maintenance of elevated the definition of financial intermediary sharing agreements, or develop and cash positions (thereby reducing funds’ to exclude entities that a fund treats as maintain systems to provide the returns), and dilute the value of fund an individual investor for purposes of relevant information to funds. shares held by long-term shareholders. the fund’s policies on market timing or Commenters were also concerned that One benefit of discouraging short-term frequent trading. We believe that these the rule as adopted might have required trading is to increase the confidence of amendments would reduce the burden funds to enter into agreements with long-term investors in the capital intermediaries that hold fund shares in markets as a whole, and in funds in 47 Comment Letter of the ICI at 3 (May 9, 2005). the name of other intermediaries (a particular. Rule 22c–2 is also designed The ICI stated in its comment letter that, under the ‘‘chain of intermediaries’’), potentially to foster greater cooperation between rule as adopted last March, three large fund resulting in a fund having to enter into funds and their intermediaries, and may complexes alone would have to evaluate 6.5 million agreements with intermediaries with result in improved communication and accounts that are ‘‘not in the name of a natural person and thus could be held as an intermediary which it may not have a direct transparency of information between for purposes of the rule’’ and might have to enter relationship (i.e., indirect them. into agreements with a significant portion of those intermediaries).50 Rule 22c–2 explicitly allows funds to accounts that are held in nominee name. Id. at 3. The proposed adopt redemption fees of up to two The ICI noted that many of these accounts are likely amendments would further clarify and associated with small retirement plans, small percent as a means of recouping costs define the operation of the rule with businesses, trusts, bank nominees and other entities respect to intermediaries that invest associated with short-term trading in that are unlike typical financial intermediaries such fund shares. If a fund’s board adopts a as broker-dealers. It added that funds typically do through other intermediaries. As redemption fee, the resulting revenues not have agreements with such small entities, other than agreements incidental to the opening of an 49 See infra note 69. will be returned to the fund and its account. 50 See Comment Letter of T. Rowe Price 48 This estimate is based on telephone Associates, Inc. at 2 (May 24, 2005); Comment 46 See Adopting Release, supra note 4, at Section conversations with representatives of that fund Letter of OppenheimerFunds, Inc. at 3 (May 9, IV.A. complex. 2005).

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proposed, the amendments to rule 22c– rule would more clearly explain the into shareholder information 2 would define the term ‘‘shareholder balance of duties and obligations agreements only with those information agreement,’’ and provide between funds and financial intermediaries that hold omnibus that funds need only enter into intermediaries. Because first-tier accounts that are most likely to trade shareholder information agreements intermediaries may already have access fund shares frequently. The rule’s with intermediaries that directly submit to the shareholder transaction and investor protections will be maintained orders to the fund, its principal identification information of their because funds will continue to monitor underwriter, transfer agent, or to a indirect intermediaries, they will likely the short-term trading activity of the rest registered clearing agency. Accordingly, be able to provide this information to of the fund’s omnibus accounts as if funds would not need to enter into funds at a minimal cost, especially they were individual investors in the agreements with indirect intermediaries compared to the significant costs that fund, according to the fund’s policies on and may incur lower systems funds would incur if they were required short-term trading. development costs related to the to collect the same information from A number of costs are associated with collection of underlying shareholder indirect intermediaries themselves. the shareholder information agreement information, thereby reducing the costs Although first-tier intermediaries may provision of the rule, both as adopted of compliance. incur some costs in collecting and and as we propose to revise it. These Under the proposed amendments, a gathering this information from indirect costs are incurred by both funds and first-tier intermediary, in its agreement intermediaries, there is a benefit in financial intermediaries, and include: (i) with the fund, must agree, upon further having the entity that has the easiest Identifying those accounts that qualify request by the fund, to: (i) Provide the access to the relevant information have as financial intermediaries; (ii) fund with the underlying shareholder the responsibility for arranging for its modifying existing agreements with identification and transaction delivery to funds. intermediaries to cover the shareholder information of any other intermediary As discussed in the previous sections, collection requirements of the rule or, if that trades through the first-tier these proposed amendments clarify the no agreement exists, entering into a new intermediary (i.e., indirect result if a fund lacks an agreement with agreement; (iii) developing systems that intermediary); or (ii) prohibit the a particular intermediary. In such a assemble and transmit shareholder indirect intermediary from purchasing, situation, the fund may continue to information between funds and on behalf of itself or others, securities redeem securities within seven calendar intermediaries; and (iv) maintaining and issued by the fund. This approach is days, but it must prohibit that financial monitoring the systems and the designed to preserve the investor intermediary from purchasing fund shareholder information collected on an protection goals of the rule by ensuring shares, on behalf of itself or any other ongoing basis. The specific costs that funds have the ability to identify person. Some commenters had stated incurred by each fund and financial short-term traders that may attempt to that the rule, as adopted in 2005, could intermediary may vary widely. Among evade the reach of the rule by trading be interpreted to require a different other factors, these costs will vary based through chains of financial approach to these situations.51 The upon the size of each entity, the number intermediaries. We considered not proposed amendments would provide of accounts handled, the number of requiring the collection of shareholder the benefit of certainty regarding the shareholder agreements that must be information from indirect duties of funds and financial modified or entered into, the size and intermediaries at all, but are concerned intermediaries under the rule, and complexity of the systems developed to that providing such an exemption might clarity concerning the intent of the handle the information, whether or not encourage abusive short-term traders to Commission, without imposing a fund determines that it needs a conduct their activities through another additional costs. redemption fee, whether the fund has intermediary in order to avoid detection B. Costs policies on the intermediaries it treats as by the fund. individual investors, and the specific By defining minimum standards for Many commenters expressed policies on short-term trading that a what must be included in these concerns about the costs of rule 22c–2 fund has adopted. shareholder information agreements, we as we adopted it in 2005. As discussed The proposed amendments would have attempted to balance the need for above, we anticipate that the proposed reduce the number of entities that funds to acquire shareholder amendments would allow funds, would be considered financial information from indirect financial intermediaries, and investors intermediaries under the rule. intermediaries who trade in fund shares, to incur significantly reduced costs Commenters raised concerns about the with practical concerns regarding the under the rule as we propose to amend costs of identifying which difficulty that funds might face in it, compared to the rule as it was accountholders are financial identifying these intermediaries and originally adopted. Although these intermediaries, but did not identify entering into agreements with them. proposed amendments would reduce specific costs related to this review.52 In Because the intermediary that trades many of the costs of the rule, they any event, the costs related to this directly with the fund already has a should nonetheless maintain the relationship with second-tier investor protections afforded by the 52 As discussed above, the ICI noted that, between intermediaries, (and is likely to have a rule. just three large fund complexes, 6.5 million closer relationship than the fund to any The primary result of these proposed accounts may need to be reviewed, and estimated intermediary that is farther down the amendments would be to reduce the that the total number of accounts which would be ‘‘chain’’) the first-tier intermediary evaluated by all funds could be in the ‘‘tens of number of financial intermediaries with millions.’’ Comment Letter of the ICI at 3 (May 9, appears to be in the best position to which funds must enter into 2005). OppenheimerFunds noted that, although it arrange for the provision of information shareholder information agreements. has more than 7.5 million shareholder accounts in to the fund regarding the transactions of This should reduce costs to all its records, 137,000 or fewer of those accounts may shareholders trading through its indirect qualify as financial intermediaries under the rule as participants by allowing funds to enter adopted last spring. See Comment Letter of intermediaries. By providing a OppenheimerFunds, Inc. at 8 (May 9, 2005). Neither definition of the term ‘‘shareholder 51 See Comment Letter of the ICI at 4 (May 9, commenter estimated the costs of performing this information agreement,’’ the amended 2005). review.

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review would be greatly reduced under under the rule as adopted. We anticipate $53,550,000 to enter into and/or modify the rule as we propose to revise it, that if we adopt the proposed revisions, the agreements required under the because we expect that a fund will the large majority of the omnibus amended rule.58 This represents a generally already have identified those accountholders that would have significant cost reduction from the most accountholders that it does not treat as qualified as financial intermediaries recent estimates provided to us in an individual investor for purposes of under the rule as adopted, would response to the rule’s adoption.59 its restrictions on short-term trading. As instead be treated as individual There will also be some costs related discussed above in the benefits section, investors by funds, and therefore no to the amendments we are proposing to for purposes of the Paperwork new agreements would be required. make in the context of chains of Reduction Act, we have estimated that Based on conversations with fund intermediaries. By clearly defining the completion of this identification process representatives, we anticipate that in duties that a fund’s agreement must will cost all funds a total of most cases complying with the amended impose on intermediaries in the ‘‘chain approximately $9 million. rule will require a very limited number of intermediaries’’ context, the proposed We received a few comments of new agreements between funds and rule amendments may result in first-tier regarding the number of accounts intermediaries (in many cases virtually intermediaries incurring some costs that maintained by funds that qualify as no new agreements would be required). might otherwise have been borne by financial intermediaries.53 Commenters We understand that the number of funds. These may include costs related indicated that revising the rule in the existing agreements that funds have to negotiating agreements (if necessary) manner that we are proposing today with their intermediaries can vary with indirect intermediaries, processing would significantly reduce the costs of greatly, from less than 10 agreements for requests from funds to investigate entering into or modifying these a small direct-sold fund, to more than accounts, costs related to collecting and agreements, as well as the costs of 3000 for a very large fund sold through providing the underlying shareholder developing, maintaining and monitoring various channels. Although funds will information to funds from the indirect the systems that will collect the still need to modify the existing intermediaries and restricting further shareholder information related to these agreements that they have with their trading by indirect intermediaries if the agreements for funds.54 Omnibus intermediaries (i.e., distribution fund requests it. We believe that first- accountholders that previously would agreements), we believe that these tier intermediaries are in a better have qualified as financial proposed revisions would greatly position than funds to fulfill these intermediaries are also likely to realize reduce or eliminate the need for most obligations. Unlike funds, first-tier substantial savings under the amended funds to identify and negotiate new intermediaries have a direct relationship rule. When an omnibus accountholder agreements. Funds are also likely to with second-tier intermediaries (and is treated as an individual investor (or incur lower costs when modifying may be in a better position than funds does not trade directly with the fund), existing agreements than when entering to collect information from other such an omnibus account will no longer into new agreements, and the actual indirect intermediaries), and will thus be treated as a financial intermediary hours required to modify an existing be able to identify, communicate with, and will not incur the costs of entering agreement thus may be significantly less and collect information from these into or modifying agreements with that than the four hour figure suggested by indirect intermediaries at a lower cost fund. There will also no longer be the the commenter.56 Accordingly, under than if funds were to conduct such start-up and ongoing costs of developing the cost estimates provided by this activities. First-tier intermediaries are and maintaining shareholder commenter, the cost reduction that may also in a better position than funds to information-sharing systems for those result if the proposed amendments were identify and gather shareholder accountholders. adopted for a fund complex in a similar We received a few comments position as the commenter could be 58 See infra Section VIII. regarding the costs of modifying or 536,000 hours.57 59 However, this revised estimate is an increase entering into shareholder information Based on further information that our over the amount we estimated in the Adopting Release ($3,353,279) for funds and intermediaries to agreements. The only commenter that staff has obtained, for purposes of the enter into information-sharing agreements. See gave specific numbers indicated that it Paperwork Reduction Act as discussed Adopting Release, supra note 4, at n.108. In would take approximately four hours to below, we have estimated that it will response to our request for comment on any aspect modify and/or enter into, follow-up on, cost all funds and financial of the rule’s implementation, we received new and maintain an agreement on its information and updated estimates that noted that intermediaries a total of approximately the cost of entering into agreements for funds and systems for each account identified as a intermediaries would be significantly higher than financial intermediary.55 The same 56 See Section VIII below for a discussion, in the the estimate included in the Adopting Release. commenter indicated that it may have as context of the Paperwork Reduction Act, of some After reviewing the comments we received in many as 137,000 accounts that might of the estimated costs of the shareholder response to the Adopting Release, as well as other information agreement and information-sharing information received from fund representatives, we qualify as financial intermediaries system development and operations aspects of the now estimate that on average, a fund complex might rule as we propose to amend it. incur $250,000 or more in expenses related to 53 OppenheimerFunds estimated that it has 57 See Comment Letter of OppenheimerFunds, entering into or modifying the agreements required 137,000 omnibus accounts that might qualify as Inc. (May 9, 2005). This estimate is based on the under the rule as adopted. With approximately 900 financial intermediaries, USAA Investment following calculations: 137,000 potential accounts fund complexes currently operating, we now Management Company stated that it has times 4 hours per account equals 548,000 potential estimate that the agreement portion of the rule as ‘‘thousands’’ of these accounts, and T. Rowe Price hours. However, the proposed amendments might adopted could potentially cost all funds a total of estimated 1.3 million accounts that are not eliminate the burden of reviewing and modifying approximately $225,000,000. Despite the increase registered as natural persons. See Comment Letter those 137,000 potential accounts, and could limit in estimated costs for entering into agreements that of OppenheimerFunds, Inc. at 8 (May 9, 2005); the burden to a far reduced number, perhaps 3000 we have included here over the cost estimates Comment Letter of USAA Investment Management agreements for a very large fund. (3000 agreements included in the Adopting Release, we anticipate Company at 2 (May 9, 2005); Comment Letter of T. to be modified times 4 hours equals 12,000 hours.) that the proposed amendments would reduce the Rowe Price Associates, Inc. at 2 (May 24, 2005). Instead of potentially incurring 548,000 hours costs of the agreement portion of the rule as 54 See Comment Letter of USAA Investment complying with the agreement portion of the rule, adopted by approximately $171,450,000 Management Company at 2 (May 9, 2005); a similar fund might incur 12,000 hours in ($225,000,000 (updated cost estimate) minus Comment Letter of the ICI at 3 (May 9, 2005). modifying its existing agreements, for a savings of $53,550,000 (cost estimate after proposed 55 See Comment Letter of OppenheimerFunds, 536,000 hours. (548,000 potential hours minus amendments) equals $171,450,000 (total potential Inc. at 8 (May 9, 2005). 12,000 hours equals 536,000 hours saved). cost reduction)).

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information from more distant indirect As further described in connection agreements with omnibus accounts that intermediaries because of their with the Paperwork Reduction Act, we they already effectively monitor by relationships with second-tier estimate that all funds will incur a total treating as individual investors, and intermediaries. of approximately $47,500,000 in one- would not need to enter into agreements As further discussed in connection time capital costs to develop or upgrade with intermediaries that do not trade with the Paperwork Reduction Act, we their software and other technological directly with the fund. The proposed have estimated that the costs of entering systems to collect, store, and receive the amendments would promote efficiency into arrangements between first-tier and required identity and transaction in the capital markets by enabling funds more indirect intermediaries would be information from intermediaries, and a to focus their short-term trading approximately $63 million.60 We total of $21,515,000 each year thereafter deterrence efforts on those omnibus anticipate that intermediaries will in operation costs related to the accounts that could be used to disguise generally use the same systems that they transmission and receipt of the this type of trading. The amendments use to provide the required underlying information.62 We further estimate that would also promote efficiency by shareholder identity and transaction financial intermediaries may incur reducing the number of omnibus information directly to funds to process $227,500,000 in one-time capital costs accountholders that would otherwise the information that first-tier to develop or upgrade their software and incur the expenses of entering into intermediaries will forward (or have other technological systems to collect, agreements, and of establishing and forwarded) to funds from indirect store, and transmit the required identity maintaining systems for collecting and intermediaries, thus resulting in and transaction information to funds sharing shareholder information. significant cost efficiencies. and from other intermediaries, and a We do not anticipate that the Funds and intermediaries may also total of $140,000,000 each year proposed amendments would harm incur some costs related to drafting or thereafter in operation costs related to competition. They would apply to all revising terms for the agreements the transmission and receipt of the market participants and, as discussed in required by rule 22c–2. We have been information. the Cost-Benefit Analysis above, serve to informed that industry representatives For the reasons discussed above, we reduce cost burdens for large funds as well as small funds.65 Some are working together to develop a anticipate that the proposed commenters expressed concern that the uniform set of model terms, and amendments would not create rule as adopted may disproportionately anticipate that such model terms may additional costs beyond the rule as burden small intermediaries, and thus significantly reduce the costs related to adopted. In fact, we anticipate that the hinder competition. We anticipate that developing individualized agreement amendments may significantly reduce 63 under the proposed amendments, most terms for each fund and intermediary. costs to most market participants. omnibus accounts that are treated by the As further discussed in Section VIII, for C. Request for Comments fund as individual investors would be purposes of the Paperwork Reduction We request comment on the potential small intermediaries. By excluding Act, we estimate that a typical fund costs and benefits of the proposed these small intermediaries from the complex will incur a total of 5 hours of amendments to rule 22c–2. We rule’s requirements, the amendments legal time at $300 per hour in drafting encourage commenters to identify, would serve to alleviate potential anti- these agreement terms, for a total of discuss, analyze, and supply relevant competitive effects on small 4500 hours for all 900 fund complexes data regarding any additional costs and intermediaries. at a total cost of $1,350,000. benefits. For purposes of the Small Even if the proposed amendments are We understand that several service Business Regulatory Enforcement adopted, the competitive pressure of providers are developing systems to Fairness Act of 1996,64 we also request marketing funds, especially smaller accommodate the transmission and information regarding the potential funds, coupled with the costs of receipt of transaction information impact of the proposals on the U.S. imposing redemption fees in omnibus between funds and intermediaries economy on an annual basis. accounts, may deter some funds from pursuant to contracts negotiated to imposing redemption fees. comply with rule 22c–2.61 At least one VII. Consideration of Promotion of Intermediaries may use their market of these organizations is revising the Efficiency, Competition and Capital power to prevent funds from applying infrastructure that it already has in Formation the fees, or provide incentives for fund place, in order to facilitate the Section 2(c) of the Investment groups to waive fees. However, by communication of fund trades and other Company Act requires the Commission, reducing the costs of imposing ‘‘back office’’ information between when engaging in rulemaking that redemption fees for both funds and funds and financial intermediaries, requires it to consider or determine intermediaries, we believe that any such including the information required whether an action is necessary or anti-competitive effects will likely be under the rule. Based on information appropriate in the public interest, to reduced. from industry representatives, we consider whether the action will We anticipate that the proposed understand that, with the exception of promote efficiency, competition, and amendments will indirectly foster some smaller to mid-sized funds and capital formation. As discussed in the capital formation by continuing to intermediaries, the large majority of Cost-Benefit Analysis above, the bolster investor confidence, because the funds and intermediaries currently use proposed amendments to rule 22c–2 are rule is designed to permit funds to the organization’s existing infrastructure designed to reduce the burdens of the deter, and recoup the costs of, abusive to process fund trades. In addition, rule as adopted, while maintaining its short-term trading. To the extent that some funds and intermediaries may investor protections. Funds would no the rule enhances investor confidence in develop their own competing or longer be required to incur the expense funds, investors are more likely to make complementary information-sharing of modifying or entering into assets available through intermediaries systems. for investment in the capital markets. 62 See infra Section VIII. The proposed amendments may also 60 See infra Section VIII. 63 See infra note 105. 61 See supra note 40. 64 Pub. L. 104–121, Title II, 110 Stat. 857 (1996). 65 See supra Section IV.

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foster capital formation by reducing the here and those made in the Adopting have informed us that funds would costs of the rule for funds and Release. These cost estimates, hourly already know and have previously intermediaries. rate estimates, and the methodology identified the majority of their We request comments on whether the used to make these proposed estimates intermediaries. Therefore funds should proposed rule amendments, if adopted, are based on comments we received in expend a limited amount of time and would promote efficiency, competition, response to the Adopting Release, and costs related to the identification of and capital formation. Will the on information received from funds, such intermediaries. Our staff estimates proposed amendments or their resulting intermediaries, and other market that identifying the intermediaries with costs materially affect the efficiency, participants during conversations which a fund complex must enter into competition, and capital formation of conducted while preparing these agreements may take the average fund funds and other businesses? Comments proposed amendments. We request complex 250 hours of a service will be considered by the Commission comment on any aspect of our staff’s representative’s time at a cost of $40 per in satisfying its responsibilities under estimates regarding the costs of hour,69 for a total of 225,000 hours at a section 2(c) of the Investment Company complying with the rule as we propose cost of $9,000,000.70 Our staff estimates Act. Commenters are requested to to amend it. that for a fund complex to prepare the provide empirical data and other factual The amendments we are proposing to model agreement, or provisions support for their views to the extent rule 22c–2 include two distinct modifying a preexisting agreement, possible. ‘‘collections of information’’ for between the fund and the intermediaries, it will require a total of VIII. Paperwork Reduction Act purposes of the Paperwork Reduction Act. The first is related to shareholder 5 hours of legal time at $300 per hour, As discussed in the release in which information agreements, including the for a total of 4500 hours 71 at a total cost we adopted rule 22c–2,66 the rule costs and time related to identifying the of $1,350,000. includes ‘‘collection of information’’ relevant intermediaries, drafting the The Commission staff estimates that requirements within the meaning of the agreements, negotiating new agreements for a fund complex to enter into or Paperwork Reduction Act of 1995.67 or modifying existing ones, and modify a shareholder information The Commission is submitting the maintaining the agreements in an easily agreement with each existing proposed collections of information to accessible place. The second is related intermediary, it would require a total the Office of Management and Budget to the costs and time related to one-time expenditure of approximately (‘‘OMB’’) for review in accordance with developing, maintaining, and operating 2.5 hours of fund time and 1.5 hours of 44 U.S.C. 3507(d) and 5 CFR 1320.11. the systems to collect, transmit, and intermediary time for each agreement, The title for the collection of receive the information required under for a total of 4 hours expended per information requirements associated the shareholder information agreement.72 Therefore, for an average with the rule is ‘‘Rule 22c–2 under the agreements.68 fund complex to enter into shareholder Investment Company Act of 1940, Both collections of information are agreements, the fund complex and its Redemption fees for redeemable mandatory for funds that choose to intermediaries may expend securities.’’ An agency may not conduct redeem shares within seven days of approximately 1200 hours at a cost of or sponsor, and a person is not required purchase. These funds will use the $48,000,73 and all fund complexes and to respond to, a collection of information collected to ensure that intermediaries may incur a total one- information unless it displays a shareholders comply with the fund’s time burden of 1,080,000 hours at a cost currently valid control number. policies on abusive short-term trading of of $43,200,000.74 The Commission staff The proposed amendments would fund shares. There is a six year understands that there are efforts under reduce the burdens associated with the recordkeeping retention requirement for way (including an industry task force collections of information required by the shareholder information agreements the rule, and would not create new required under the rule. 69 The title and hourly cost of the person collections of information. The performing the intermediary identification and proposed amendments should reduce A. Shareholder Information Agreements entering into agreements may vary depending on the fund or financial intermediary. This $40 per the number of entities affected by the The Commission staff anticipates that hour cost is an average estimate for the hourly cost rule as adopted. We are therefore most shareholder information of employing the person doing the relevant work, proposing to revise our previous burden agreements will be entered into at the derived from conversations with industry estimates under the Paperwork representatives. fund complex level, and estimates that 70 This estimate is based on the following Reduction Act to reflect (i) new cost and there are approximately 900 fund calculations: 250 hours times 900 fund complexes time burden information that we have complexes. The Commission staff equals 225,000 hours, and 225,000 hours times $40 received from market participants, and understands that the number of equals $9,000,000. (ii) the revised number of entities that 71 This estimate is based on the following intermediaries that hold fund shares can calculation: 5 hours times 900 fund complexes would be affected by the amended rule. vary for each fund complex, from less This revised Paperwork Reduction equals 4500 hours of legal time. than 10 for some fund complexes to 72 The 4 hour figure represents time incurred by Act section contains a number of new more than 3000 for others. Based on both the fund and the financial intermediary for cost and hour estimates that are conversations with fund and financial each agreement. The Commission staff estimates that this 4 hour figure is comprised of significantly altered from the estimates intermediary representatives, our staff made in the Adopting Release. Some of approximately 2.5 hours of a fund service estimates that, on average, under the representative’s time at $40 per hour and 1.5 hours these estimates are based on different revised definition of financial of an intermediary representative’s time at $40 per methods, and different sources, from intermediary, each fund complex would hour. 73 those in the Adopting Release. have approximately 300 financial This estimate is based on the following Therefore there is not a strict calculations: 4 hours times 300 intermediaries intermediaries. Industry representatives equals 1200 hours; and 1200 hours times $40 comparability between the estimates dollars per hour equals $48,000. 68 This second collection of information does not 74 This estimate is based on the following 66 See Adopting Release, supra note 4, at Section include potential costs or time that funds or calculations: 1200 hours times 900 fund complexes VI. intermediaries might choose to incur in analyzing equals 1,080,000 hours; and 1,080,000 hours times 67 44 U.S.C. 3501–3520. or using the provided information. $40 per hour equals $43,200,000.

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devoted to the project) to produce and intermediaries will use these development cost for these 475 fund standardized shareholder information- systems, and will generally make minor complexes that are likely to use these sharing model agreements and terms. If changes to their back office systems to existing systems is $28,500,000 with fruitful, these efforts may reduce the comply with the rule requirements and annual operation costs of $15,675,000.85 costs associated with the agreement to match their systems to those of the There are approximately 900 fund provision of the rule for both funds and service providers. Our staff estimates complexes currently operating, of which intermediaries.75 Finally, the that most funds could adapt their in- approximately 475 may use these Commission staff does not anticipate house systems to utilize these service existing systems, leaving approximately that funds or intermediaries will incur providers’ systems at a one-time cost of 425 fund complexes possibly needing to any new costs in maintaining these approximately $10,000 or less.79 In develop specific systems to meet their agreements in an easily accessible place, general, our staff understands that fees own particular needs. Our staff because such maintenance is already averaging 25 cents for every 100 account understands that approximately 75 done as a matter of course. transactions requested may be charged percent of those fund complexes (or 319 The staff therefore estimates that, for when funds request information from complexes) are small to medium-sized purposes of the Paperwork Reduction intermediaries, and in response, direct-sold funds that have a very Act, the shareholder information intermediaries transmit the information limited number of intermediaries. Our agreement provision of the rule as back to funds. staff anticipates that those 319 fund proposed to be revised would require a As an example of the cost of using complexes would incur minimal system total of 1,309,500 hours at a total cost these services, if a fund complex development costs to comply with the of $53,550,000.76 requests information for 100,000 information-sharing provisions of the transactions each week, then it would B. Information-Sharing rule, due to the limited number of incur costs of $250 each week, or intermediaries with which they interact. Some funds and intermediaries would 80 $13,000 a year. Our staff estimates that Our staff estimates that system incur the system development costs approximately 475 fund complexes development costs for handling discussed in this section, but many would use these systems (including information under the rule for those 319 would not because they already process substantially all of the largest, and most fund complexes will be approximately all of their trades on a fully disclosed of the medium-sized, fund families). If $25,000 each, with annual operation basis, use a third party administrator to all of these complexes use these service costs of approximately $10,000, for a handle their back office work,77 or providers’ systems at the rate described total system development cost of already have systems in place that allow above, they would incur a one-time $7,975,000 86 and an annual operations intermediaries to transmit the system development cost of cost of $3,190,000.87 shareholder identity and transaction 81 $4,750,000 and an annual system use The remaining approximately 106 information to funds. Other funds and 82 cost of approximately $6,175,000. fund complexes may face additional intermediaries may have special Those 475 fund complexes may also circumstances that could increase the complexities or special circumstances in incur system development costs related developing their systems. Our staff costs they may face in developing and to the processing of information under operating systems to comply with the estimates that the start-up costs for the rule on trades that they receive those fund complexes will be rule. The estimates below represent the through other channels than these Commission staff’s understanding of the approximately $100,000 per fund service providers’ systems, which we complex and the annual costs for average costs that might be encountered estimate to cost approximately $50,000 handling the information will be by a typical fund complex or per fund complex, and $20,000 approximately $25,000, for a total start- intermediary in complying with the annually, for a total of $23,750,000 83 in up cost of $10,600,000 and an annual information-sharing aspect of the rule as system development costs and cost of $2,650,000 for these fund proposed to be amended. $9,500,000 annually.84 Our staff complexes.88 estimates that the total system 1. Funds For purposes of the Paperwork Reduction Act, our staff therefore The Commission staff understands 79 We expect that, in many cases, upgrades to that various organizations have fund transfer agents’ as well as fund complex’s estimates that the information-sharing developed, or are in the process of systems will take place, and the transfer agents’ provisions of the rule as proposed to be developing, enhancements to their costs will be charged back to the fund complex. amended would cost all fund complexes These system development and operation costs systems that will allow funds and include our staff’s estimates of the potential charges a total of approximately $47,075,000 in intermediaries to share the information by transfer agents, but do not include potential one-time capital costs to develop or required by the rule without developing charges by intermediaries for providing the upgrade their software and other or maintaining systems of their own.78 information. technological systems to collect, store, 80 This estimate is based on the following Our staff anticipates that most funds calculations: 100,000 transaction requests times one and receive the required identity and quarter of a cent (the charge is 25 cents per 100 75 See Tom Leswing, Redemption Rule Fuels transactions requested, or one quarter of a cent per 85 This estimate is based on the following Demand For New Standards, Ignites (Oct. 26 2005). transaction) equals $250; and $250 times 52 weeks calculations: $23,750,000 plus $4,750,000 (one-time 76 This estimate is based on the following equals $13,000. system development costs) equals $28,500,000 total calculation: 4,500 hours of legal drafting time plus 81 This estimate is based on the following start-up costs for fund complexes utilizing existing 1,080,000 hours of agreement negotiating time plus calculation: 475 fund complexes times $10,000 systems; and $6,175,000 plus $9,500,000 equals 225,000 hours of intermediary identification time (one-time system update costs) equals $4,750,000. $15,675,000 in annual costs. equals 1,309,500 total hours; and $43,200,000 plus 82 This estimate is based on the following 86 This estimate is based on the following $1,350,000 plus $9,000,000 equals $53,550,000. calculation: 475 fund complexes times $13,000 calculations: 319 funds times $25,000 equals 77 Third party administrators maintain accounts (annual costs) equals $6,175,000. $7,975,000. for many other intermediaries, and therefore incur 83 This estimate is based on the following 87 This estimate is based on the following the costs to develop a single system. calculation: 475 fund complexes times $50,000 calculations: 319 funds times $10,000 equals 78 These service providers systems include the system development cost per fund complex equals $3,190,000. NSCC’s Fund/SERV system, as well as other $23,750,000. 88 This estimate is based on the following systems being developed by a number of other 84 This estimate is based on the following calculations: 106 funds times $100,000 equals providers such as SunGard and Charles Schwab. calculation: 475 fund complexes times $20,000 $10,600,00; and 106 funds times $25,000 equals See supra note 40. annual costs per fund complex equals $9,500,000. $2,650,000.

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transaction information from Our staff understands that in general, $87,500,000 in system development intermediaries, and a total of the providers who have developed or costs and $35,000,000 in annual costs to $21,515,000 each year thereafter in are developing these information process data through non service operation costs related to the sharing systems charge the fund, and provider networks. Our staff therefore transmission and receipt of the not the intermediary for providing these estimates that these approximately 350 information.89 systems to transmit shareholder identity intermediaries will incur a total of and transaction information, or else 2. Intermediaries approximately $157,500,000 in start-up include access to such systems as a costs and $70,000,000 in annual costs The Commission staff estimates that complementary part of their other associated with the information-sharing there are approximately 7000 processing systems, and do not charge provisions of the rule.97 intermediaries that may provide additional fees to intermediaries for its The fund complexes and information pursuant to the utilization. These intermediaries may be intermediaries that do not use these information-sharing provisions of rule required to develop systems to ensure service providers’ systems to process 90 22c–2. Of those 7000 intermediaries, that they are able to transmit the records their trades would have to either our staff anticipates that approximately to these service providers in a develop their own systems to share 350 of these intermediaries are likely to standardized format.93 Our staff information under the rule or engage primarily use the existing systems that estimates that it may cost each of these some other third-party administrator to 91 are in place or under development. 350 intermediaries approximately process the information. Our staff The staff understands that these $200,000 to update its systems to record estimates that approximately 1400 approximately 350 intermediaries and transmit shareholder identity and intermediaries will not utilize these include several major ‘‘clearing brokers’’ transaction records to these service service provider systems to process this and third-party administrators that providers, and an additional $100,000 information, and estimates that each of aggregate trades and handle the back- each year to operate their own systems these intermediaries will incur $50,000 end work for thousands of other smaller for communicating with the service in system development costs and broker-dealers and intermediaries, providers, for a total start-up cost of $50,000 in annual costs in complying thereby likely providing access to these $70,000,000, and an annual cost of with the rule, for a total of $70,000,000 service providers’ information-sharing $35,000,000.94 We understand that in development costs and $70,000,000 systems to a significant majority of all these approximately 350 intermediaries in annual costs for those intermediaries in the marketplace. Our may also have to upgrade their systems intermediaries.98 We understand that staff estimates that these approximately to handle rule 22c–2 information on there is a task force that is in the process 350 intermediaries would provide trades that do not go through the service of developing industry standards for access to systems that will allow for the providers’ systems. Our staff estimates transmitting information under the rule transmission of information required by that it will cost each of those 350 between market participants that do not the rule and other processing for the 95 intermediaries an additional use these service provider systems.99 transactions of approximately 80 96 $250,000 to update their systems, and This is likely to reduce costs to both percent of the 7000 intermediaries (5600 $100,000 annually to process rule 22c– funds and intermediaries. intermediaries) effected by the rule, 2 information through non service Our staff estimates that the leaving 1400 intermediaries that do not provider networks, for a total cost of information-sharing provisions of the in some way utilize these systems, and that may need to develop their own rule will cost all intermediaries a total (the percentage of intermediaries do not use these of approximately $227,500,000 in one- systems.92 service providers systems or use the services of the those 350 intermediaries that do) equals 1400 time capital costs to develop or upgrade

89 intermediaries that do not use these service their software and other technological This estimate is based on the following providers’ systems. calculations: $28,500,000 ( funds’ that use service systems to collect, store, and transmit 93 Our staff anticipates that in most cases, first-tier providers start-up costs) plus $7,975,000 (direct- intermediaries will use the same or slightly the required identity and transaction traded funds’ start-up costs) plus $10,600,000 (other modified systems that they have developed to information to funds and from other funds’ start-up costs) equals $47,075,000 system identify and transmit shareholder identity and development costs; and $15,675,000 (funds’ that intermediaries, and a total of transaction information to funds when collecting use service providers start-up costs) plus $3,190,000 $140,000,000 each year thereafter in and transmitting this information from indirect (direct-traded funds’ annual costs) plus $2,650,000 intermediaries. Therefore, we have also included operation costs related to the (other funds’ annual costs) equals $21,515,000 the costs of developing and operating systems to transmission and receipt of the annual funds’ costs. collect information from indirect intermediaries information.100 90 This 7000 number is a rounded estimate, based and providing the information to funds in these on the number of intermediaries that may be estimates. 97 This estimate is based on the following affected by the rule as we propose to revise it. It 94 This estimate is based on the following consists of the following: 2203 broker-dealers calculation: 350 broker-dealer times $200,000 (start- calculations: $70,000,000 (intermediary start-up classified as specialists in fund shares, 196 up costs) equals $70,000,000; and 350 broker-dealer costs for processing information through service insurance companies sponsoring registered separate times $100,000 (start-up costs and annual costs) providers) plus $87,500,000 (intermediary start-up accounts organized as unit investment trusts, equals $35,000,000. costs for handling information through other channels) equals $157,500,000; and $35,000,000 approximately 2400 banks that sell funds or 95 The estimate includes higher costs for these variable annuities (the number of banks is likely 350 intermediaries in developing systems to handle (intermediary annual costs for processing over inclusive as it may include a number of banks non service provider information than for information through service providers) plus that do not sell registered variable annuities or remaining intermediaries to handle the same data $35,000,000 (intermediary annual costs for funds and/or banks that do their business through due to our staff’s understanding that, in general, handling information through other channels) a registered broker-dealer on the same premises), these 350 intermediaries that utilize the service equals $70,000,000. and approximately 2000 retirement plans, third- provider’s networks represent the largest 98 This estimate is based on the following party administrators, and other intermediaries (this intermediaries in the marketplace, and will face the calculation: 1400 intermediaries times $50,000 number may be either over or under inclusive, as highest costs in complying with the rule. (development costs) equals $70,000,000; and 1400 under the rule as we propose to revise it, the actual 96 Many of the costs that intermediaries incur in intermediaries times $50,000 (annual costs) equals number of intermediaries that funds have is developing and operating systems to handle this $70,000,000. dependent on the precise application of varying information may be recouped from fund complexes 99 See Tom Leswing, Redemption Rule Fuels fund policies on short-term trading). through a variety of methods. However, it is unclear Demand For New Standards, Ignites (Oct. 26 2005). 91 See supra note 40. what recoupment might take place, and therefore 100 This estimate is based on the following 92 This number is based on the following the cost estimates for funds and intermediaries are calculations: $157,500,000 (intermediaries that use calculation: 7000 total intermediaries times 20% made here prior to any potential recoupment. service providers’ start-up costs) plus $70,000,000

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Although the rule does not require expended by both funds and collections of information on those who first-tier intermediaries to enter into an intermediaries in complying with the are to respond, including through the agreement with their indirect amended rule would be a one-time use of automated collection techniques intermediaries to share the indirect expenditure of 2,429,500 hours at a total or other forms of information intermediaries’ underlying shareholder internal cost of $116,550,000.105 We technology. data to funds upon a fund’s request, we anticipate that there will be a total of Persons wishing to submit comments anticipate that in many cases approximately 7900 106 respondents, on the collection of information intermediaries will nonetheless enter with approximately 3,510,000 total requirements of the proposed into such agreements, or at least enter responses in the first year, and amendments should direct them to the into informal arrangements and design 3,240,000 annual responses each year Office of Management and Budget, methods by which to collect the thereafter.107 Attention Desk Officer of the Securities shareholder information. Our staff and Exchange Commission, Office of D. Request for Comments estimates that each of the 7000 Information and Regulatory Affairs, intermediaries potentially affected by We request comment on whether Room 10102, New Executive Office the rule will spend approximately 150 these estimates are reasonable. Pursuant Building, Washington, DC 20503, and hours of service representatives’ time at to 44 U.S.C. 3506(c)(2)(B), the should send a copy to Nancy M. Morris, $40 per hour, and 10 hours of legal Commission solicits comments in order Secretary, Securities and Exchange counsel time at $300 per hour, for a total to: (i) Evaluate whether the proposed Commission, 100 F Street, NE., of 1,050,000 hours of service collections of information are necessary Washington, DC 20549–0609 with representatives’ time at a cost of for the proper performance of the reference to File No. S7–06–06. OMB is $42,000,000, and 70,000 hours of in- functions of the Commission, including required to make a decision concerning house legal time at a cost of $21,000,000 whether the information will have the collections of information between to design and enter into these practical utility; (ii) evaluate the 30 and 60 days after publication of this arrangements with other accuracy of the Commission’s estimate Release; therefore a comment to OMB is intermediaries.101 The Commission staff of the burden of the proposed best assured of having its full effect if therefore estimates that intermediaries collections of information; (iii) OMB receives it within 30 days after will expend a total of approximately determine whether there are ways to publication of this Release. Requests for 1,120,000 hours at a cost of $63,000,000 enhance the quality, utility, and clarity materials submitted to OMB by the to enter into arrangements to ensure the of the information to be collected; and Commission with regard to these proper transmittal of information to (iv) minimize the burden of the collections of information should be in funds through chains of writing, refer to File No. S7–06–06, and intermediaries.102 $484,545,000 (3 years at $161,515,000 in total be submitted to the Securities and annual costs) equals $759,120,000 in total costs Exchange Commission, Records C. Total Costs and Hours Incurred over a three year period. $759,545,000 divided by three years, equals a weighted average cost of Management, Office of Filings and For purposes of the Paperwork $253,040,000 per year. Information Services. Reduction Act, our staff estimates that 105 This estimate is based on the following the amended rule would have a total calculations: 1,309,500 hours at a cost of IX. Initial Regulatory Flexibility collection of information cost in the first $53,550,000 in agreement time plus 1,120,000 hours Analysis at a cost of $63,000,000 in chain of intermediary year to both funds and intermediaries of arrangement time equals 2,429,500 hours at a cost This Initial Regulatory Flexibility $274,575,000 in one-time start-up costs, of $116,550,000. Analysis (‘‘IRFA’’) has been prepared in and annual operation costs of For purposes of the Paperwork Reduction Act, the accordance with 5 U.S.C. 603. It relates $161,515,000.103 Our staff estimates that Adopting Release included an estimate of the total to amendments to rule 22c–2 under the start up costs to funds and financial intermediaries the weighted average annual cost of the in complying with the collection of information Investment Company Act, which we are rule to funds and intermediaries for aspect of the rule of approximately $1,111,500,000. proposing in this Release. each of the first three years would be We estimate that if the proposed amendments are A. Reasons for the Proposed Action $253,040,000.104 The total hours adopted, for purposes of the Paperwork Reduction Act, funds and intermediaries would incur the Rule 22c–2 allows funds to recover reduced amount of $274,575,000 in start-up costs, (other intermediaries’ start-up costs) equals for a potential cost reduction of approximately some, if not all, of the direct and $227,500,000 in total intermediary start-up costs; $836,925,000. In the Adopting Release we also indirect (e.g., market impact and and $70,000,000 (intermediaries that use service estimated that the ongoing annual costs would be opportunity) costs incurred when providers annual costs) plus $70,000,000 (other $390,556,800. We estimate that if the proposed shareholders engage in short-term intermediaries’ annual costs) equals $140,000,000 amendments are adopted, for purposes of the in annual costs. Paperwork Reduction Act, funds and intermediaries trading of the fund’s shares, and to deter 101 This estimate is based on the following would incur the reduced amount of $161,515,000 this short-term trading. As discussed calculations: 7000 intermediaries times 150 service in total annual costs, for a potential ongoing annual more fully in Sections I and II of this representative hours at $40 per hour equals cost reduction of approximately $229,041,800. Release, the proposed amendments to 1,050,000 hours at a cost of $42,000,000; and 7000 106 This estimate is based on the following intermediaries times 10 hours of in-house legal time calculation: 7000 intermediaries plus 900 fund rule 22c–2 are necessary to clarify any at $300 per hour equals 70,000 hours at a cost of complexes equals 7900 respondents. potentially misleading interpretations of $21,000,000. 107 This estimate is based on the following 102 the rule, to enable funds and This estimate is based on the following calculation: 900 fund complexes with an average of intermediaries to reduce costs calculations: 1,050,000 service representative hours 300 intermediaries each, equals 270,000 one time at $42,000,000 plus 70,000 in-house counsel hours responses for the shareholder information portion associated with entering into at $21,000,000 equals 1,120,000 hours at of the collection (900 funds times 300 agreements under the rule, and to $63,000,000. intermediaries equals 270,000). Assuming that each enable funds to focus their short-term 103 This estimate is based on the following fund requests information from each of its trading deterrence efforts on the entities calculation: $47,075,000 (fund start-up costs) plus intermediaries once each month, the total number $227,500,000 (intermediary start-up costs) equals of annual responses would be 3,240,000 (270,000 most likely to violate fund policies. The $274,575,000 in total start-up costs; and fund intermediaries times 12 months equals proposed amendments would also set $21,515,000 (fund annual costs) plus $140,000,000 3,240,000 annual responses). Therefore, in the first forth the limitations on transactions (intermediary annual costs) equals $161,515,000 in year, there would be 3,510,000 total responses between a fund and an intermediary total annual costs. (3,240,000 monthly responses plus the 270,000 104 This estimate is based on the following initial responses required for the agreements) and with whom the fund does not have an calculation: $274,575,000 in total start-up costs plus 3,240,000 annual responses thereafter. agreement.

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B. Objectives of the Proposed Action small entities. In particular, we (including small funds) and on small As discussed more fully in Sections I anticipate that the changes we propose intermediaries. To establish special and II of this Release, the objective of to make to the definition of financial compliance requirements or timetables the proposed rule amendments is to intermediary would significantly reduce for small entities may in fact ensure that the investor protections of the number of small intermediaries that disadvantage small entities by funds must enter into agreements with, encouraging larger market participants rule 22c–2 are fully maintained, while and reduce the burden of complying to focus primarily on the needs of larger reducing costs to all participants, and with the rule for small funds and small entities when establishing the addressing certain issues with the rule intermediaries. We request that information-sharing systems envisioned as adopted. commenters address the costs of by the rule and these proposed C. Legal Basis complying with these amendments, amendments, and possibly ignoring the As indicated in Section X of this including specific data on costs when needs of smaller entities. Nevertheless, Release, these amendments to rule 22c– available and a description of the likely we request comment as to whether 2 are proposed pursuant to the authority technologies that may be used. establishing special timetables or set forth in sections 6(c), 22(c) and 38(a) compliance requirements would benefit E. Reporting, Recordkeeping, and Other small entities, while accomplishing the of the Investment Company Act.108 Compliance Requirements goals of the rulemaking. Would it D. Small Entities Subject to the The proposed amendments do not benefit small entities to have additional Proposed Rule and Amendments introduce any new mandatory reporting time to comply with these amendments? requirements. Rule 22c–2 already A small business or small Should we further revise the rule to contains a mandatory recordkeeping organization (collectively, ‘‘small reduce the compliance requirements for requirement for funds that redeem entity’’) for purposes of the Regulatory small entities? Are there other shares within seven days of purchase. Flexibility Act is a fund that, together compliance requirement alternatives? The fund must retain a copy of the With respect to further clarifying, with other funds in the same group of written agreement between the fund and consolidating, or simplifying the related investment companies, has net financial intermediary under which the compliance requirements of the rule, assets of $50 million or less as of the intermediary agrees to provide the using performance rather than design end of its most recent fiscal year.109 Of required shareholder information in standards, and exempting small entities approximately 3,925 funds (2,700 omnibus accounts.112 The proposed from coverage of these proposed registered open-end investment amendments reduce the number of amendments or any part of the rule, we companies and 825 registered unit small entities that would otherwise be believe such additional changes would investment trusts), approximately 163 subject to this recordkeeping be impracticable. These proposed are small entities.110 A broker-dealer is requirement. amendments would in effect except a considered a small entity if its total large number of smaller entities from capital is less than $500,000, and it is F. Duplicative, Overlapping, or the scope of the rule, by revising the not affiliated with a broker-dealer that Conflicting Federal Rules definition of financial intermediary. We 111 has $500,000 or more in total capital. The Commission has not identified have designed these proposed Of approximately 7,000 registered any federal rules that duplicate, overlap, amendments to reduce the cost and broker-dealers, approximately 880 are or conflict with the proposed rule compliance burden on small entities to small entities. amendments. the greatest extent practicable while still As discussed above, rule 22c–2 maintaining the investor protections of G. Significant Alternatives provides funds and their boards with the rule as adopted. the ability to impose a redemption fee The Regulatory Flexibility Act directs Small entities are as vulnerable to the designed to reimburse the fund for the the Commission to consider significant problems uncovered in recent direct and indirect costs incurred as a alternatives that would accomplish the enforcement actions and settlements as result of short-term trading strategies, stated objective, while minimizing any large entities. Therefore, shareholders of such as market timing. The proposed significant adverse impact on small small entities are equally in need of amendments are designed to maintain entities. Alternatives in this category protection from short-term traders. We these investor protections while would include: (i) Establishing different believe that the rule and these proposed reducing costs to market participants compliance or reporting standards that amendments will enable funds to more and clarifying the Commission’s intent take into account the resources available effectively discourage short-term trading as to the proper interpretation of the to small entities; (ii) clarifying, of all fund shares, including those held rule. While we expect that the rule and consolidating, or simplifying the in omnibus accounts. Further excepting these proposed amendments would compliance requirements under the rule small entities from coverage of the rule require some funds and intermediaries for small entities; (iii) using or any part of the rule could to develop or upgrade software or other performance rather than design compromise the effectiveness of the technological systems to enforce certain standards; and (iv) exempting small rule. We anticipate that the proposed market timing policies, or make trading entities from coverage of the rule, or any amendments would alleviate much of information available in omnibus part of the rule. the burden imposed by the rule on small accounts, the amendments we are The Commission does not presently entities, and result in a more cost proposing today are specifically believe that these proposed effective system for discouraging short- designed to reduce the costs incurred by amendments would require the term trading for all entities. Alternatives establishment of special compliance that we considered but are not 108 15 U.S.C. 80a–6(c), 80a–22(c) and 80a–37(a). requirements or timetables for small proposing included, among others, (i) 109 17 CFR 270.0–10. entities. These proposed amendments fully exempting all small entities from 110 Some or all of these entities may contain are specifically designed to reduce any complying with the information-sharing multiple series or portfolios. If a registered investment company is a small entity, the portfolios unnecessary burdens on all funds aspect of the rule, (ii) not requiring that or series it contains are also small entities. the information-sharing agreement 111 17 CFR 240.0–10. 112 Rule 22c–2(a)(3). obligate first-tier intermediaries to assist

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in providing information from indirect X. Statutory Authority fund (or on the fund’s behalf, the intermediaries to funds, and (iii) The Commission is proposing principal underwriter, transfer agent, or extending the compliance date for small amendments to rule 22c–2 pursuant to registered clearing agency), must either: entities. the authority set forth in sections 6(c), (i) Enter into a shareholder In light of the above discussion, we 22(c) and 38(a) of the Investment information agreement with the request comment on whether it is Company Act [15 U.S.C. 80a–6(c), 80a– financial intermediary; or feasible or necessary to make additional 22(c) and 80a–37(a)]. (ii) Prohibit the financial intermediary or different accommodations for small from purchasing, on behalf of itself or entities for compliance with the List of Subjects in 17 CFR Part 270 other persons, securities issued by the proposed rule amendments. Should the Investment companies, Reporting and fund. proposed rule amendments be further recordkeeping requirements, Securities. (3) Recordkeeping. The fund must altered in order to ease the regulatory maintain a copy of the written Text of Proposed Rule burden on small entities, without agreement under paragraph (a)(2)(i) of sacrificing its effectiveness? Are there For reasons set out in the preamble, this section that is in effect, or at any additional alternatives that we have not Title 17, Chapter II of the Code of time within the past six years was in considered? Federal Regulations is proposed to be effect, in an easily accessible place. amended as follows: (b) Excepted funds. The requirements H. Solicitation of Comments of paragraph (a) of this section do not The Commission encourages the PART 270—RULES AND apply to the following funds, unless submission of comments with respect to REGULATIONS, INVESTMENT they elect to impose a redemption fee any aspect of this IRFA. Comment is COMPANY ACT OF 1940 pursuant to paragraph (a)(1) of this specifically requested on the number of 1. The authority citation for part 270 section: small entities that would be affected by continues to read in part as follows: (1) Money market funds; the proposed rule, and the likely impact (2) Any fund that issues securities Authority: 15 U.S.C. 80a–1 et seq., 80a– of the proposals on small entities. that are listed on a national securities 34(d), 80a–37, and 80a–39, unless otherwise exchange; and Commenters are asked to describe the noted. nature of any impact and provide (3) Any fund that affirmatively * * * * * empirical data supporting its extent. permits short-term trading of its 2. Section 270.22c–2 is revised to read These comments will be considered in securities, if its prospectus clearly and as follows: connection with any adoption of the prominently discloses that the fund proposed rule and amendments, and § 270.22c–2 Redemption fees for permits short-term trading of its will be reflected in the Final Regulatory redeemable securities. securities and that such trading may Flexibility Analysis. (a) Redemption fee. It is unlawful for result in additional costs for the fund. Comments may be submitted by any any fund issuing redeemable securities, (c) Definitions. For the purposes of of the following methods: its principal underwriter, or any dealer this section: in such securities, to redeem a (1) Financial intermediary means: Electronic Comments redeemable security issued by the fund (i) Any broker, dealer, bank, or other • Use the Commission’s Internet within seven calendar days after the person that holds securities issued by comment form (http://www.sec.gov/ security was purchased, unless it the fund, in nominee name; rules/proposed.shtml); or complies with the following (ii) A unit investment trust or fund that invests in the fund in reliance on • Send an e-mail to rule- requirements: section 12(d)(1)(E) of the Act (15 U.S.C. [email protected]. Please include File (1) Board determination. The fund’s 80a–12(d)(1)(E)); and Number S7–06–06 on the subject line; board of directors, including a majority (iii) In the case of a participant- or of directors who are not interested persons of the fund, must either: directed employee benefit plan that • Use the Federal eRulemaking Portal (i) Approve a redemption fee, in an owns the securities issued by the fund, (http://www.regulations.gov). Follow the amount (but no more than two percent a retirement plan’s administrator under instructions for submitting comments. of the value of shares redeemed) and on section 3(16)(A) of the Employee Paper Comments shares redeemed within a time period Retirement Income Security Act of 1974 • (but no less than seven calendar days), (29 U.S.C. 1002(16)(A)) or any person Send paper comments in triplicate that in its judgment is necessary or that maintains the plan’s participant to Nancy M. Morris, Securities and appropriate to recoup for the fund the records. Exchange Commission, 100 F Street, costs it may incur as a result of those (iv) Financial intermediary does not NE., Washington, DC 20549–9303. redemptions or to otherwise eliminate include any person that the fund treats All submissions should refer to File or reduce so far as practicable any as an individual investor with respect to Number S7–06–06. This file number dilution of the value of the outstanding the fund’s policies established for the should be included on the subject line securities issued by the fund, the purpose of eliminating or reducing any if e-mail is used. To help us process and proceeds of which fee will be retained dilution of the value of the outstanding review your comments more efficiently, by the fund; or securities issued by the fund. please use only one method. The (ii) Determine that imposition of a (2) Fund means an open-end Commission will post all comments on redemption fee is either not necessary or management investment company that the Commission’s Internet Web site not appropriate. is registered or required to register (http://www.sec.gov/rules/ (2) Shareholder information. With under section 8 of the Act (15 U.S.C. proposed.shtml). Comments are also respect to each financial intermediary 80a–8), and includes a separate series of available for public inspection and that submits orders to purchase or such an investment company. copying in the Commission’s Public redeem shares directly to the fund, its (3) Money market fund means an Reference Room, 100 F Street, NE., principal underwriter or transfer agent, open-end management investment Washington, DC 20549. or to a registered clearing agency, the company that is registered under the

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Act and is regulated as a money market POSTAL SERVICE Having all mixed ADC mail prepared fund under § 270.2a–7. uniformly allows us to establish a 39 CFR Part 111 (4) Shareholder includes a beneficial consistent network and operating procedure for handling this mail across owner of securities held in nominee New Preparation for Periodicals Flats name, a participant in a participant- our processing facilities. Processing in Mixed Area Distribution Center some Periodicals mail with the existing directed employee benefit plan, and a Bundles and Sacks holder of interests in a fund or unit outgoing First-Class Mail at investment trust that has invested in the AGENCY: Postal Service. approximately 330 locations will have fund in reliance on section 12(d)(1)(E) of ACTION: Proposed rule. little impact on the operations at these the Act. A shareholder does not include offices but will relieve the 34 locations SUMMARY: a fund investing pursuant to section The Postal Service currently currently processing this consolidated 12(d)(1)(G) of the Act (15 U.S.C. 80a– allows Periodicals mailers to prepare volume of a significant amount of work. 12(d)(1)(G)), a trust established pursuant two types of mixed area distribution Finally, splitting the mixed ADC mail to section 529 of the Internal Revenue center (ADC) bundles and sacks, currently prepared in one or more sacks Code (26 U.S.C. 529), or a holder of an including a new type of optional mixed into two separations will have minimal interest in such a trust. ADC bundle and sack that improves or, in some cases, no impact on the service for Periodicals without adding number of containers that are prepared (5) Shareholder information processing costs. We are proposing to in Periodicals mailings. agreement means a written agreement make this optional separation a Although we are exempt from the under which a financial intermediary requirement beginning July 6, 2006. notice and comment requirements of the agrees to: DATES: We must receive comments on Administrative Procedure Act [5 U.S.C. (i) Provide, promptly upon request by our proposed standards on or before of 553(b), (c)] regarding proposed a fund, the Taxpayer Identification April 6, 2006. rulemaking by 39 U.S.C. 410(a), we Number of all shareholders who have ADDRESSES: Mail or deliver written invite comments on the following purchased, redeemed, transferred, or comments to the Manager, Mailing proposed revisions to Mailing Standards exchanged fund shares held through an Standards, U.S. Postal Service, 475 of the United States Postal Service, account with the financial intermediary, L’Enfant Plaza SW., Room 3436, Domestic Mail Manual (DMM), and the amount and dates of such Washington DC 20260–3436. You may incorporated by reference in the Code of shareholder purchases, redemptions, inspect and photocopy all written Federal Regulations. See 39 CFR 111.1. transfers, and exchanges; comments between 9 a.m. and 4 p.m., List of Subjects in 39 CFR Part 111 Monday through Friday, at USPS (ii) Execute any instructions from the Postal Service. fund to restrict or prohibit further Headquarters Library, 475 L’Enfant purchases or exchanges of fund shares Plaza SW., 11th Floor North, Accordingly, 39 CFR part 111 is by a shareholder who has been Washington DC 20260. proposed to be amended as follows: identified by the fund as having engaged FOR FURTHER INFORMATION CONTACT: PART 111—[AMENDED] in transactions of fund shares (directly Donald Lagasse, 202–268–7269. or indirectly through the intermediary’s SUPPLEMENTARY INFORMATION: On 1. The authority citation for 39 CFR account) that violate policies October 27, 2005, the Postal Service part 111 continues to read as follows: established by the fund for the purpose provided Periodicals mailers an option Authority: 5 U.S.C. 552(a); 39 U.S.C. 101, of eliminating or reducing any dilution to separate their residual mail prepared 401, 403, 404, 414, 416, 3001–3011, 3201– of the value of the outstanding securities in mixed area distribution center (ADC) 3219, 3403–3406, 3621, 3626, 5001. issued by the fund; and bundles and sacks and to create a new 2. Amend Mailing Standards of the (iii) Use best efforts to determine, type of mixed ADC bundle and sack. We United States Postal Service, Domestic promptly upon the request of the fund, offered this option because it improves Mail Manual (DMM) as follows: whether any other person that holds service for some Periodicals without 705 Advanced Preparation and fund shares through the financial adding processing costs. The new Special Postage Payment Systems intermediary is itself a financial separation allows us to integrate intermediary (‘‘indirect intermediary’’) Periodicals flats into the First-Class * * * * * and, upon further request by the fund, mailstream for Periodicals addressed to destinations within the First-Class Mail 9.0 Preparation for Cotraying and (A) Provide (or arrange to have surface transportation reach of the office Cosacking Bundles of Automation and provided) the identification and of entry. Presorted Flats transaction information set forth in Under the new preparation, mailers * * * * * paragraph (c)(5)(i) of this section separate some mixed ADC mail regarding shareholders who hold an according to the destination ZIP Codes 9.2 Periodicals account with an indirect intermediary; in new labeling list L201. Pieces * * * * * or prepared according to L201 are 9.2.5 Sack Preparation and Labeling (B) Restrict or prohibit the indirect processed with First-Class Mail by the intermediary from purchasing, on behalf entry office. The remaining mixed ADC * * * * * of itself or other persons, securities mail destined for ZIP Codes farther from [Revise the bundle labeling issued by the fund. the office of entry is sent to one of the requirements in item f for origin mixed ADC mail.] Dated: February 28, 2006. 34 origin facilities designated in labeling list L009 for consolidated f. Origin mixed ADC. Required for any By the Commission. processing. remaining pieces for destinations in Nancy M. Morris, To fully benefit from this new L201, Column C, of the origin ZIP Code Secretary. preparation, Periodicals mailers should in Column A. There is no minimum for [FR Doc. E6–3164 Filed 3–6–06; 8:45 am] begin preparing Periodicals mail under the number of pieces in the sack, but BILLING CODE 8010–01–P these standards as soon as possible. bundles of fewer than six pieces at 5-

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