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complete description of each SIAP and/ regulatory evaluation as the anticipated Butler, GA, Butler Muni, RNAV (GPS) RWY or Weather Takeoff Minimums impact is so minimal. For the same 18, Orig contained in FAA form documents is reason, the FAA certifies that this Butler, GA, Butler Muni, RNAV (GPS) RWY unnecessary. The provisions of this amendment will not have a significant 36, Orig amendment state the affected CFR Butler, GA, Butler Muni, Takeoff Minimums economic impact on a substantial and Textual DP, Orig sections, with the types and effective number of small entities under the Davenport, IA, Davenport Muni, RNAV (GPS) dates of the SIAPs and/or Weather criteria of the Regulatory Flexibility Act. RWY 15, Amdt 1 Takeoff Minimums. This amendment List of Subjects in 14 CFR Part 97 Topeka, KS, Philip Billard Muni, RNAV also identifies the airport, its location, (GPS) RWY 18, Amdt 1 the procedure identification and the Air Traffic Control, Airports, Topeka, KS, Philip Billard Muni, RNAV amendment number. Incorporation by reference, and (GPS) RWY 22, Amdt 1 Navigation (Air). Oakdale, LA, Allen Parish, RNAV (GPS) The Rule RWY 36, Amdt 1 This amendment to 14 CFR part 97 is Issued in Washington, DC on September Oakdale, LA, Allen Parish, NDB RWY 36, 22, 2006. effective upon publication of each Amdt 1 separate SIAP and/or Weather Takeoff James J. Ballough, Oakdale, LA, Allen Parish, Takeoff Minimums as contained in the Director, Flight Standards Service. Minimums and Textual DP, Orig Kalispell, MT, Glacier Park Intl, ILS OR LOC transmittal. Some SIAP and/or Weather Adoption of the Amendment RWY 2, Amdt 5 Takeoff Minimums amendments may Austin, TX, Austin-Bergstrom Intl, Takeoff I have been previously issued by the FAA Accordingly, pursuant to the authority Minimums and Textual DP, Amdt 1 in a Flight Data Center (FDC) Notice to delegated to me, under Title 14, Code of Big Lake, TX, Reagan County, RNAV (GPS) Airmen (NOTAM) as an emergency Federal Regulations, Part 97 (14 CFR RWY 16, Orig action of immediate flight safety relating part 97) is amended by establishing, Big Lake, TX, Reagan County, GPS RWY 16, directly to published aeronautical amending, suspending, or revoking Orig, CANCELLED charts. The circumstances which Standard Instrument Approach Big Lake, TX, Reagan County, Takeoff created the need for some SIAP, and/or Procedures and Weather Takeoff Minimums and Textual DP, Amdt 1 Weather Takeoff Minimums Minimums effective at 0901 UTC on the Paris, TX, Cox Field, RNAV (GPS) RWY 17, Orig amendments may require making them dates specified, as follows: Paris, TX, Cox Field, RNAV (GPS) RWY 35, effective in less than 30 days. For the PART 97—STANDARD INSTRUMENT Orig remaining SIAPs and/or Weather Paris, TX, Cox Field, VOR RWY 35, Amdt 2 Takeoff Minimums, an effective date at APPROACH PROCEDURES Paris, TX, Cox Field, Takeoff Minimums and least 30 days after publication is I 1. The authority citation for part 97 Textual DP, Orig provided. continues to read as follows: The FAA published an Amendment Further, the SIAPs and/or Weather in Docket No. 30513, Amdt No. 3184 to Takeoff Minimums contained in this Authority: 49 U.S.C. 106(g), 40103, 40106, Part 97 if the Federal Aviation amendment are based on the criteria 40113, 40114, 40120, 44502, 44514, 44701, Regulations (Vol 71, FR No. 179, Page contained in the U.S. Standard for 44719, 44721–44722. 54405; dated Friday, September 15, Terminal Instrument Procedures I 2. Part 97 is amended to read as 2006) under section 97.33 effective 23 (TERPS). In developing these SIAPs follows: November 2006, which is hereby and/or Weather Takeoff Minimums, the rescinded: TERPS criteria were applied to the Effective 26 October 2006 conditions existing or anticipated at the Fort Myers, FL, Southwest Florida Intl, St. George, UT, St George Muni, RNAV (GPS) affected airports. Because of the close RADAR–2, Orig RWY 34, Amdt 1A and immediate relationship between Fort Myers, FL, Southwest Florida Intl, [FR Doc. E6–16093 Filed 10–2–06; 8:45 am] these SIAPs and/or Weather Takeoff Takeoff Minimums and Textual DP, Orig BILLING CODE 4910–13–P State College, PA, University Park, RNAV Minimums and safety in air commerce, (GPS) RWY 6, Orig–A I find that notice and public procedure before adopting these SIAPs and/or Effective 23 November 2006 SECURITIES AND EXCHANGE Weather Takeoff Minimums are Mekoryuk, AK, Mekoryuk, RNAV (GPS) RWY COMMISSION impracticable and contrary to the public 5, Orig interest and, where applicable, that Mekoryuk, AK, Mekoryuk, RNAV (GPS) RWY 17 CFR Part 270 23, Orig good cause exists for making some [Release No. IC–27504; File No. S7–06–06; Mekoryuk, AK, Mekoryuk, NDB–B, Orig SIAPs and/or Weather Takeoff File No. 4–512] Mekoryuk, AK, Mekoryuk, NDB/DME–A, Minimums effective in less than 30 Amdt 4 RIN 3235–AJ51 days. Mekoryuk, AK, Mekoryuk, GPS RWY 23, Conclusion Orig, CANCELLED Mutual Fund Redemption Fees Mekoryuk, AK, Mekoryuk, NDB RWY 23, The FAA has determined that this Amdt 2, CANCELLED AGENCY: Securities and Exchange regulation only involves an established Mekoryuk, AK, Mekoryuk, Takeoff Commission. body of technical regulations for which Minimums and Textual DP, Amdt. 1 ACTION: Final rule. frequent and routine amendments are Mekoryuk, AK, Mekoryuk, DF RWY 23, necessary to keep them operationally Amdt 1 SUMMARY: The Securities and Exchange current. It, therefore—(1) is not a Butler, AL, Butler-Choctaw County, RNAV Commission (‘‘Commission’’ or ‘‘SEC’’) ‘‘significant regulatory action’’ under (GPS) RWY 11, Orig is adopting amendments to a rule under Butler, AL, Butler-Choctaw County, RNAV Executive Order 12866; (2) is not a (GPS) RWY 29, Orig the Investment Company Act. The rule, ‘‘significant rule’’ under DOT Butler, AL, Butler-Choctaw County, NDB OR among other things, requires most open- Regulatory Policies and Procedures (44 GPS RWY 11, Amdt 2B, CANCELLED end investment companies (‘‘funds’’) to FR 11034; February 26, 1979); and (3) Butler, AL, Butler-Choctaw County, Takeoff enter into agreements with does not warrant preparation of a Minimums and Textual DP, Orig intermediaries, such as broker-dealers,

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that hold shares on behalf of other 2 provides that if a fund redeems its letters on the proposed amendments.9 investors in so called ‘‘omnibus shares within seven days,5 its board Most commenters supported the accounts.’’ These agreements must must consider whether to impose a fee proposal. Today we are adopting those provide funds access to information of up to two percent of the value of amendments substantially as proposed, about transactions in these accounts to shares redeemed shortly after their with some changes that reflect the enable the funds to enforce restrictions purchase (‘‘redemption fee’’).6 The rule comments we received. also requires such a fund to enter into on market timing and similar abusive II. Discussion transactions. The Commission is agreements with its intermediaries that amending the rule to clarify the provide fund management the ability to A. Shareholder Information Agreements operation of the rule and reduce the identify investors whose trading violates The amendments to rule 22c–2 we are number of intermediaries with which fund restrictions on short-term trading adopting today (i) limit the types of funds must negotiate shareholder (‘‘shareholder information intermediaries with which funds must 7 information agreements. The agreements’’). enter into shareholder information amendments are designed to reduce the After hearing concerns about the agreements, (ii) address the rule’s costs to funds (and fund shareholders) operation of the information sharing application when there are chains of while still achieving the goals of the provisions of the rule from fund intermediaries, and (iii) clarify the effect rulemaking. management companies, in March of of a fund’s failure to obtain an this year we proposed amendments that DATES: agreement with any of its Effective Date: December 4, 2006. would reduce the costs of compliance Compliance Dates: Section III of this intermediaries. and clarify the rule’s application in Release contains more information on certain circumstances.8 The 1. Small Intermediaries applicable compliance dates. amendments are described in more Rule 22c–2 prohibits a fund from FOR FURTHER INFORMATION CONTACT: detail below. We received 32 comment Thoreau Bartmann, Staff Attorney, or C. redeeming shares within seven days Hunter Jones, Assistant Director, Office unless, among other things, the fund 5 Because the large majority of funds redeem enters into written agreements with its of Regulatory Policy (202) 551–6792, shares within seven days of purchase, the practical Division of Investment Management, effect of rule 22c–2, and these amendments, would financial intermediaries (such as broker- Securities and Exchange Commission, be to require most funds to comply with the rule’s dealers or retirement plan 100 F Street, NE., Washington, DC requirements. Therefore, throughout this Release administrators) that hold shares on we may describe funds as being ‘‘required to behalf of other investors.10 Under those 20549–5041. comply’’ with a provision of the rule, when the agreements, the intermediaries must SUPPLEMENTARY INFORMATION: The actual requirement only applies if a fund redeems agree to provide, at the fund’s request, Commission today is adopting its shares within seven days. A fund that does not redeem its shares within seven days would not be shareholder identity (i.e., taxpayer amendments to rule 22c–2 1 under the required to comply with those provisions of rule identification number or ‘‘TIN’’ 11) and Investment Company Act of 1940 2 (the 22c–2. transaction information,12 and carry out ‘‘Investment Company Act’’ or the 6 Rule 22c–2(a)(1). Under the rule, the board of ‘‘Act’’).3 directors must either (i) approve a fee of up to 2% of the value of shares redeemed, or (ii) determine 9 Comment letters on the 2006 Proposing Release Table of Contents that the imposition of a fee is not necessary or are available in File No. S7–06–06, which is appropriate. Id. A board, on behalf of the fund, may accessible at http://www.sec.gov/rules/proposed/ I. Background determine that the imposition of a redemption fee s70606.shtml. Comment letters on the 2005 II. Discussion is unnecessary or inappropriate because, for adoption are available in File No. S7–11–04, which A. Shareholder Information Agreements example, the fund is not vulnerable to frequent is accessible at http://www.sec.gov/rules/proposed/ 1. Small Intermediaries trading or the nature of the fund makes it unlikely s71104.shtml. References to comment letters are to 2. Intermediary Chains that the fund would be harmed by frequent trading. letters in those files. 3. Effect of Lacking an Agreement Indeed, a redemption fee is not the only method 10 Rule 22c–2(a)(2). The rule excepts a fund from B. Operation of the Rule available to a fund to address frequent trading in the requirement to enter into written agreements if, C. Redemption Fees its shares. As we have stated in previous releases, among other things, the fund ‘‘affirmatively permits funds have adopted different methods to address short-term trading of its securities.’’ See rule 22c– III. Compliance Dates frequent trading, including: (i) Restricting exchange 2(b)(3). ‘‘Financial intermediary’’ is defined in rule IV. Cost-Benefit Analysis privileges; (ii) limiting the number of trades within 22c–2(c)(1). V. Consideration of Promotion of Efficiency, a specified period; (iii) delaying the payment of 11 Some commenters noted that in the case of Competition and Capital Formation proceeds from redemptions for up to seven days foreign shareholders, TINs may not always be VI. Paperwork Reduction Act (the maximum delay permitted under section 22(e) available, and suggested that the rule permit VII. Final Regulatory Flexibility Analysis of the Act); (iv) satisfying redemption requests in- alternate identifiers in those circumstances. See VIII. Statutory Authority kind; and (v) identifying market timers and Comment Letter of the Investment Company Text of Amended Rule restricting their trading or barring them from the Institute (‘‘ICI’’) (Apr. 10, 2006). In order to fund. See Adopting Release, supra note 4, at n.9; accommodate the use of alternative identifiers in Disclosure Regarding Market Timing and Selective those circumstances, we have revised the rule to I. Background Disclosure of Portfolio Holdings, Investment allow for the use of Individual Taxpayer On March 11, 2005, the Commission Company Act Release No. 26287 (Dec. 11, 2003) [68 Identification Numbers (‘‘ITINs’’) or other FR 70402 (Dec. 17, 2003)] at text preceding and government issued identifiers to identify foreign adopted rule 22c–2 under the following n.14. shareholders if a TIN is unavailable. See rule 22c– Investment Company Act to help 7 Under the rule, the fund (or its principal 2(c)(5)(i). address abuses associated with short- underwriter) must enter into a written agreement 12 One comment letter submitted after the term trading of fund shares.4 Rule 22c– with each of its financial intermediaries under adoption of rule 22c–2 expressed concern that the which the intermediary agrees to (i) provide, at the rule’s contract provision, requiring that agreements fund’s request, identity and transaction information with intermediaries mandate the disclosure of 1 17 CFR 270.22c–2. about shareholders who hold their shares through shareholder information at the fund’s request, 2 15 U.S.C. 80a. an account with the intermediary, and (ii) execute conflicts with Commission rules governing proxy 3 Unless otherwise noted, all references to instructions from the fund to restrict or prohibit solicitations. See Comment Letter of the American statutory sections are to the Investment Company future purchases or exchanges. The fund must keep Bankers Assoc. (June 6, 2005). The Commission’s Act, and all references to ‘‘rule 22c–2,’’ ‘‘the rule,’’ a copy of each written agreement for six years. Rule proxy solicitation rules are set forth in Regulation or any paragraph of the rule will be to 17 CFR 22c–2(a)(2), (3). 14A under the Securities Exchange Act of 1934, 17 270.22c–2. 8 See Mutual Fund Redemption Fees, Investment CFR 240.14a–1 to 14b–2. The proxy rules govern 4 See Mutual Fund Redemption Fees, Investment Company Act Release No. 27255 (Feb. 28, 2006) [71 the disclosure of information in the context of Company Act Release No. 26782 (Mar. 11, 2005) [70 FR 11351 (Mar. 7, 2006)] (‘‘2006 Proposing proxy solicitations, and do not prohibit banks, FR 13328 (Mar. 18, 2005)] (‘‘Adopting Release’’). Release’’). broker-dealers and other intermediaries from

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instructions from the fund to restrict or Therefore, transparency regarding some cases, purchase and redemption prohibit further purchases or exchanges underlying shareholder transactions orders are aggregated and submitted by by a shareholder (as identified by the executed through these accounts agents of intermediaries on behalf of the fund) who has engaged in trading that seemed unnecessary to achieve the goals intermediaries.19 These commenters violates the fund’s frequent trading (e.g. of the rule. We believed that this new stated that under the rule as proposed, market timing) policies.13 We designed approach would substantially eliminate it was unclear whether an order this provision to enable funds to obtain the need for funds to devote resources submitted by an agent of an the information that they need to to identifying intermediaries, because intermediary would be covered by the monitor short-term trading in omnibus the funds will have already identified rule. In order to clarify the rule in accounts and enforce their market the relevant intermediaries in the course response to those comments, we have timing policies. of administering their policies on short- revised it to provide that funds must After we adopted the rule in 2005, term trading. Commenters agreed with enter into agreements with ‘‘each many fund managers expressed concern our analysis and urged that we adopt financial intermediary that submits that the rule would require them to the amendments.16 orders, itself or through its agent, to review a large number of their Today we are amending the definition purchase or redeem shares directly to shareholder accounts in order to of ‘‘financial intermediary’’ in rule 22c– the fund * * *’’ (changes in italics).20 determine which shareholders are 2 to exclude from that definition any This revision clarifies that funds must ‘‘financial intermediaries’’ as defined entity that the fund treats as an enter into agreements with financial under the rule.14 They noted that, ‘‘individual investor’’ for purposes of intermediaries or their agents even if the because the definition encompassed any the fund’s policies intended to eliminate intermediaries submit orders through entity that holds securities in nominee or reduce dilution of the value of fund entities that do not qualify as financial name for other investors, it would shares, i.e., frequent trading and intermediaries. include, for example, a small business redemption fee policies.17 As a result, if retirement plan that holds mutual fund a fund, for example, applies a 2. Intermediary Chains shares on behalf of only a few redemption fee or exchange limits to In some cases, an intermediary such employees and that may not identify transactions by a retirement plan (an as a broker-dealer may hold shares of a itself as a financial intermediary to the intermediary) rather than to the mutual fund not only on behalf of fund. These commenters emphasized purchases and redemptions of the individual investors, but also on behalf that the task of identifying these employees in the plan, then the plan of other financial intermediaries, such intermediaries, as well as negotiating would not be considered a ‘‘financial as pension plans or other broker-dealers agreements with them, would be costly intermediary’’ under the rule, and the (‘‘indirect intermediaries’’) through one and burdensome. fund would not be required to enter into or more layers of intermediaries or To address these concerns, earlier this an agreement with that plan.18 ‘‘chains.’’ After we adopted rule 22c–2 year we proposed to narrow the scope The Commission is making one in 2005, fund managers expressed of the rule by excluding from the change from our proposal in response to uncertainty as to how the rule applied definition of ‘‘financial intermediary’’ commenters who pointed out that, in to these arrangements, and expressed those intermediaries that the fund treats concern how, as a practical matter, a as individual investors for purpose of position, on behalf of its various customers’ fund could obtain shareholder purchases and redemptions, result in a single the fund’s frequent trading policies. Our information through multiple layers of proposal was premised on the purchase or redemption each day in the intermediary’s omnibus account. If the intermediary intermediaries.21 In response to these understanding that when a fund places were not exempt, its daily net trades would likely concerns, we proposed and are now restrictions on transactions at the subject it to redemption fees or trading limitations. adopting amendments to clarify the See The Coalition of Mutual Fund Investors, An intermediary level (i.e., when the fund operation of the rule as it applies to treats the intermediary itself as an Evaluation of the Redemption Fee and Market Timing Policies of the Largest Mutual Fund Groups ‘‘chains of intermediaries.’’ individual investor), the fund is (May 5, 2005) (available at http:// The revised rule requires that a fund unlikely to need data about frequent www.investorscoalition.com/ (or, on the fund’s behalf, its principal CMFIMarketTimingStudy05.pdf.). trading by individual shareholders who underwriter or transfer agent 22) enter hold shares through that intermediary, 16 See, e.g., Comment Letter of the Investment Company Institute (Apr. 10, 2006); Comment Letter because abusive short-term trading by of Charles Schwab & Co., Inc. (Apr. 10, 2006). 19 See, e.g., Comment Letter of Matrix Settlement the individual shareholders holding 17 Rule 22c–2(c)(1)(iv). If a fund has not & Clearing Services, L.L.C. (Apr. 10, 2006). through the omnibus account would established frequent trading policies and thus has 20 Rule 22c–2(a)(2). We are also revising ordinarily trigger application of those not determined which persons it does not treat as paragraph (a)(2)(i) of the rule to require that the policies to the intermediary’s trades.15 individual investors, this exclusion from the fund enter into an agreement with each such definition of ‘‘financial intermediary’’ would not ‘‘intermediary (or its agent).’’ Rule 22c–2(a)(2)(i). apply, and the fund would need to identify those 21 See, e.g., Comment Letter of T. Rowe Price complying with agreements entered under rule 22c– shareholder accounts that are ‘‘financial Associates, Inc. (May 24, 2005). 2. See 2006 Proposing Release, supra note 8, at intermediaries.’’ See 2006 Proposing Release, supra 22 When rule 22c–2 was adopted in 2005, it n.17. note 8, at n.23. required a fund, or a principal underwriter acting 13 See rule 22c–2(c)(5) (defining ‘‘shareholder 18 We have not, as recommended by some on behalf of the fund, to enter into shareholder information agreement,’’ which is discussed further commenters, revised the rule to specify the information agreements with intermediaries. In in Section II.B below). circumstances under which a fund may treat an addition to the amendments described above, as 14 See, e.g., Comment Letter of intermediary as an individual investor rather than proposed, we are also revising the rule to include OppenheimerFunds, Inc. (May 9, 2005). an intermediary for purposes of its frequent trading a fund’s transfer agent as an entity that may enter 15 A fund typically exempts from its frequent policies. See, e.g., Comment Letter of Charles into a shareholder information agreement on the trading policies the transactions of an intermediary Schwab & Co., Inc. (Apr. 10, 2006). We continue to fund’s behalf. As we noted when we proposed this that holds fund shares, on behalf of its customers, believe that funds are in the best position to change, the fund’s transfer agent often has in an omnibus account with the fund. See, e.g., determine the treatment of an account as an preexisting agreements with a fund’s financial Mandatory Redemption Fees For Redeemable Fund individual investor under their frequent trading intermediaries, and thus permitting transfer agents Securities, Investment Company Act Release No. policies. Moreover, we believe a fund will have to enter into information agreements may avoid 26375A, at text accompanying n. 39 (Mar. 5, 2004) little incentive to ‘‘inappropriately’’ treat any potentially duplicative agreements or inefficiencies [69 FR 11762 (Mar. 11, 2004)] (‘‘2004 Proposing intermediary as an individual shareholder, because in the process. See 2006 Proposing Release, supra Release’’). The fund exempts the intermediary the intermediary is free to terminate its relationship note 8, at text accompanying n.38. If a transfer agent because the daily changes in the intermediary’s with the fund. Continued

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into a shareholder information In light of these concerns, we have 3. Effect of Lacking an Agreement 23 agreement only with those financial revised the rule text to clarify that a After we adopted the rule, some 24 intermediaries that submit purchase fund, after receiving initial transaction commenters expressed concern that the or redemption orders directly to the information from a first-tier rule, which made it unlawful for a fund fund, its principal underwriter or intermediary, must make a specific to redeem a security within seven days transfer agent, or a registered clearing further request to the first-tier without entering into a shareholder 25 agency (‘‘first-tier intermediaries’’). intermediary for information on certain information agreement, could be The rule does not require first-tier shareholders.28 As adopted, the interpreted to prevent a fund from intermediaries to enter into shareholder amended rule defines ‘‘shareholder redeeming any of its shares if it failed information agreements with any information agreement’’ as an agreement to enter into an agreement with any indirect intermediaries. under which a financial intermediary intermediary. Therefore we proposed, Under the proposed rule agrees to ‘‘[u]se best efforts to and are today adopting, an amendment amendments, a shareholder information determine, promptly upon request of the to the rule that clarifies and further agreement would obligate a first-tier fund, whether any specific person about limits the consequences of failing to intermediary to, upon request of the whom it has received the identification enter into an information agreement. fund, use its best efforts to identify any and transaction information * * * Under rule 22c–2, as amended, if a accountholders who are themselves [required by the rule], is itself a financial fund does not have an agreement with intermediaries, and obtain and forward intermediary * * *’’ (changes in a particular intermediary, the fund (or have forwarded) the underlying italics).29 Under the revised rule, a thereafter must prohibit that shareholder identity and transaction shareholder information agreement need intermediary from purchasing securities information from those indirect not obligate a first-tier intermediary to 32 26 issued by the fund. The prohibition intermediaries farther down the chain. perform a complete review of its books applies only to the intermediary with Some commenters expressed concern and records to identify all indirect which the fund does not have an that shareholder information agreements intermediaries. Instead, pursuant to a agreement; purchases from other might require first-tier intermediaries shareholder information agreement, a intermediaries will not be affected.33 (and indirect intermediaries) to canvass first-tier intermediary must use its best One commenter argued that the rule all of their shareholder accounts to efforts to identify whether or not certain determine which accountholders are specific accounts identified by the fund 32 Rule 22c–2(a)(2)(ii). One commenter suggested themselves intermediaries if a fund are indirect intermediaries.30 If an that we clarify that in these circumstances a made a blanket request to identify all indirect intermediary that holds an ‘‘purchase’’ would not include the automatic indirect intermediaries.27 reinvestment of dividends. See Comment Letter of account with a first-tier intermediary the Investment Company Institute (Apr. 10, 2006). does not provide underlying We agree that the reinvestment of dividends does enters into an agreement on behalf of the fund, the not present the types of frequent trading risks that agreement must require the financial intermediary shareholder information, the agreement the rule is designed to help funds prevent. We to provide the requested information to the fund must obligate the first-tier intermediary upon the fund’s request. See id. at n.37. therefore have revised the rule text to clarify that, to prohibit, upon the fund’s request, that for purposes of this provision, a ‘‘purchase’’ does We are not adopting the proposed revision that indirect intermediary from purchasing not include the automatic reinvestment of would have permitted a registered clearing agency dividends. See rule 22c–2(a)(2)(ii). to enter into shareholder information agreements on additional shares of the fund through 33 behalf of a fund. We received comment from the the first-tier intermediary.31 A number of commenters expressed concerns only registered clearing agency that receives orders about possible conflicts with the Employee Retirement Income Security Act of 1974, 29 U.S.C. for transactions in fund shares, noting that it does 28 See rule 22c–2(c)(5)(iii). For example, after 1001 (‘‘ERISA’’), and Department of Labor rules not have the capability to serve in this function receiving identity and transaction information from (because it does not act as an agent for funds) and under ERISA, in complying with rule 22c–2. They a first-tier intermediary, the fund could then request stated that those laws: (i) Require certain requesting that we revise the final rule to reflect this information from the first-tier intermediary fact. See Comment Letter of the National Securities ‘‘blackout’’ disclosures before a plan sponsor may concerning those frequent trading shareholders Clearing Corporation (Apr. 10, 2006). We agree with carry out a fund’s request to prohibit future whose transactions were particularly active, in the commenter’s concern that including this purchases; and (ii) provide a safe harbor under order to determine whether those shareholders are reference to clearing agencies might cause section 404(c) of ERISA from liability as a fiduciary themselves intermediaries. Under the shareholder confusion. only if the plan provides participants an adequate information agreement, the first-tier intermediary 23 Rule 22c–2(c)(5). The agreement, which must number of investment alternatives and the ability to would then be required to use its best efforts to be in writing, may be part of another contract or trade among them with appropriate frequency, in determine, on behalf of the fund, whether any of agreement, such as a distribution agreement. light of the market volatility of those alternatives. those shareholders are intermediaries (i.e., second- 24 We understand that retirement plan See, e.g., Comment Letter of the American Bankers tier intermediaries). After the first-tier intermediary Assoc. (Apr. 14, 2006) (citing ERISA section 101(i), administrators and other persons that maintain the informs the fund which of the shareholders are plan’s participant records typically submit fund ERISA section 404(c), 29 CFR 2520, and 29 CFR second-tier intermediaries, the fund could then shares transactions to the fund or its transfer agent, 2550.404c–1); Comment Letter of the American request that the first-tier intermediary obtain principal underwriter, or a registered clearing Benefits Council (Apr. 10, 2006). Our staff has underlying shareholder transaction information agency. The rule as we adopted it last year conferred with representatives of the Department of from any or all of those second-tier intermediaries. specifically includes these administrators and Labor, who have advised us that these concerns 29 recordkeepers within the definition of a ‘‘financial See rule 22c–2(c)(5)(iii). have been addressed in guidance on the duties of intermediary.’’ See rule 22c–2(c)(1)(iii). 30 Rule 22c–2(a)(2). A first-tier intermediary also employee benefit plan fiduciaries in light of alleged 25 Rule 22c–2(a)(2). We also considered, as an may choose to indicate to the fund, when the abuses involving mutual funds. See Statement of alternative to this requirement, that shareholder intermediary initially discloses transaction Ann L. Combs, Assistant Secretary, Department of information agreements not require the collection of information requested by the fund, which Labor, Fiduciary Responsibilities Related to Mutual any shareholder information from indirect shareholders it knows to be indirect intermediaries. Funds, (Feb. 17, 2004) (available at http:// intermediaries. We did not take that approach This practice may reduce a fund’s need to request www.dol.gov/ebsa/newsroom/sp021704.html) because we are concerned that providing such an further information about indirect intermediaries. (reasonable redemption fees and reasonable plan or exception might encourage abusive short-term 31 Rule 22c–2(c)(5)(iii)(B). Under the rule, investment fund limits on the number of times a traders to conduct their activities through an therefore, if, upon specific request of the fund, an participant can move in and out of a particular indirect intermediary in order to avoid detection by indirect intermediary (such as a third-tier investment within a particular period ‘‘represent the fund. intermediary) does not provide information approaches to limiting market timing that do not, 26 See proposed rule 22c–2(c)(5)(iii) (discussed in whether one or more of its shareholders is an in and of themselves, run afoul of the ‘volatility’ 2006 Proposing Release, supra note 8, at Section intermediary, then upon further request by the and other requirements set forth in the II.B). fund, the first-tier intermediary would be required Department’s regulation under section 404(c), 27 See Comment Letter of the Securities Industry to restrict or prohibit that indirect intermediary provided that any such restrictions are allowed Assoc. (Apr 10, 2006); Comment Letter of Charles from purchasing additional shares of the fund on under the terms of the plan and clearly disclosed Schwab & Co., Inc. (Apr. 10, 2006). behalf of other investors. to the plan’s participants and beneficiaries.’’).

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should not prohibit purchases that are However, all funds do not necessarily chief compliance officer 43) has in the fully disclosed to the fund.34 We agree have selling or dealer agreements with implementation by an intermediary of that the fund does not need further all of their ‘‘financial intermediaries’’ as trading restrictions designed to enforce information under an agreement to defined in the rule, and restricting the fund frequent trading policies or similar scrutinize those purchases. Therefore, rule’s scope to those intermediaries that restrictions designed to protect the fund we have revised the final rule to provide have such agreements would likely from abusive trading practices. In some that, if there is no shareholder seriously restrict a fund’s ability to cases, fund managers may seek information agreement with a particular gather information and enforce its transaction information only intermediary, the fund must prohibit the policies. After careful consideration of occasionally to determine whether the intermediary from purchasing the fund’s the suggested alternatives, we believe intermediary is, in fact, enforcing securities only ‘‘in nominee name on that barring future purchases by trading restrictions or imposing behalf of other persons.’’ 35 We have intermediaries best serves the purposes redemption fees on behalf of the fund.44 also, for the same reason, revised this of the rule. provision so that it does not apply to the 43 See, e.g., Compliance Programs of Investment B. Operation of the Rule intermediary’s purchases of fund Companies and Investment Advisors, Investment When we adopted rule 22c–2, we Company Act Release No. 26299, at n.69 and securities on behalf of the intermediary accompanying text (Dec. 17, 2003) [68 FR 74714 36 itself. explained that the shareholder (Dec. 24, 2003)] (‘‘[U]nder rule 38a–1, a fund must Some commenters suggested information agreement requirement is have procedures reasonably designed to ensure alternative approaches that we have designed to give fund managers (and compliance with its disclosed policies regarding decided not to adopt. One their chief compliance officers) a market timing. These procedures should provide for monitoring of shareholder trades or flows of money recommended that the rule preclude compliance tool to monitor trading in and out of the funds in order to detect market intermediaries that lack an agreement activity in order to detect frequent timing activity, and for consistent enforcement of with funds from redeeming shares trading and to assure consistent the fund’s policies regarding market timing.’’). within seven days of purchase, rather enforcement of fund policies.39 But we 44 Some commenters expressed concern about the ability of financial intermediaries to provide than prohibiting further purchases of also explained that the rule gives information to funds, in light of applicable privacy fund shares.37 This approach is not managers flexibility to request laws. See, e.g., Comment Letter of the American acceptable to us because it would deny information periodically such as when General Life Insurance Company, et al (submitted investors access to their funds for seven circumstances suggested that abusive by O’Melveny & Myers LLP), (May 9, 2005); 15 U.S.C. 6801–09, 6821–27 (privacy provisions of 40 days after purchasing shares through trading activity is occurring. Gramm-Leach-Bliley Act); Regulation S–P, 17 CFR such an intermediary, thereby We recognize that in some cases, Part 248 (Commission rules implementing privacy penalizing investors for the inability or frequent use of this tool might be costly provisions for funds, broker-dealers, and registered unwillingness of a fund and for funds and intermediaries. investment advisers). Under those laws, financial institutions such as funds, broker-dealers, and intermediary to enter into a shareholder Commenters expressed concerns about banks must provide a notice describing the information agreement. Another these costs, and several commenters institution’s privacy policies and an opportunity for commenter argued that the rule should urged us to impose limits on the consumers to opt out of the sharing of information instead preclude a fund from making frequency of information requests made with nonaffiliated third parties. These privacy laws also contain important exceptions to the notice and further payments under selling or dealer by funds pursuant to the information opt-out requirements. Under the Commission’s agreements to intermediaries that lack agreements.41 We are not imposing privacy rules, for example, these requirements do shareholder information agreements.38 limits because, as we noted in the not apply to the disclosure of information that is Adopting Release, we expect funds that ‘‘necessary to effect, administer, or enforce a transaction that a consumer requests or authorizes,’’ 34 See Comment Letter of the American Bankers are susceptible to market timing to use which includes a disclosure that is ‘‘[r]equired, or Assoc. at 6 (Apr. 14, 2006). 42 35 the tool regularly. Not all funds, is a usual, appropriate, or acceptable method * * * A similar revision has been made to the same [t]o carry out the transaction or the product or type of provision concerning chains of however, are susceptible to market service business of which the transaction is a part intermediaries. See rule 22c–2(c)(5)(iii)(B). timing. ***’’ 17 CFR 248.14(a), (b)(2). See also 17 CFR 36 Rule 22c–2(a)(2)(ii), (c)(5)(iii)(B). One A fund, in determining the frequency 248.15(a)(7)(i) (notice and opt-out requirements not commenter requested that the Commission provide with which it should seek transaction applicable to disclosure of information to comply further guidance to financial intermediaries that with law). Financial privacy rules that are attempt to carry out instructions from a fund, under information from its intermediaries, substantially identical to these rules apply to rule 22c–2(c)(5)(ii), to ‘‘restrict or prohibit further could consider: (i) Unusual trading financial intermediaries other than broker-dealers, purchases or exchanges’’ by a particular investor patterns, such as abnormally large and contain comparable exceptions. See, e.g., 12 whom the fund has identified as violating its inflows or outflows, that may indicate CFR Part 40 (rules applicable to national banks, frequent trading policies. See Comment Letter of the Committee of Annuity Insurers (submitted by the existence of frequent trading abuses; adopted by the Comptroller of the Currency). We Sutherland Asbill & Brennan LLP) (Apr. 10, 2006). (ii) the risks that frequent trading poses believe that the disclosure of information under The commenter noted that an ‘‘exchange’’ (or to the fund and its shareholders in light shareholder information agreements, and the fund’s transfer) request is actually two simultaneous request and receipt of information under those orders: an order to redeem shares of one fund and of the nature of the fund and its agreements, are covered by these exceptions. We an order to purchase, with the proceeds of the portfolio; (iii) the risks to the fund and also note that financial institutions often state in redemption, shares of another fund. This its shareholders of frequent trading in their privacy policy notices that the institution commenter questioned whether the rule was meant light of the amount of assets held by, or makes ‘‘disclosures to other nonaffiliated third to include both the redemption and purchase order. parties as permitted by law.’’ See 17 CFR 248.6(b). As noted, the rule permits a fund to restrict or the volume of sales and redemptions Therefore we believe it will not be necessary for prohibit ‘‘exchanges.’’ We agree with the through, the financial intermediary; and intermediaries such as broker-dealers and banks to commenter that an ‘‘exchange’’ request includes (iv) the confidence the fund (and its provide new privacy notices or opt-out both a redemption order and purchase order, and opportunities to their customers, in order to comply if a fund instructs an intermediary to restrict an with rule 22c–2. Commenters on the 2006 39 ‘‘exchange’’ (or a purchase), the intermediary may Adopting Release, supra note 4, at text Proposing Release generally agreed that complying notify the investor that it will not effect the accompanying n.49. with rule 22c–2 should not require broker-dealers redemption portion of a request to exchange into 40 Id. at text following n.42. and banks to provide new privacy notices to their the fund, as well as the purchase portion of the 41 See, e.g., Comment Letter of Massachusetts customers. See Comment Letter of the Investment request. Mutual Life Insurance Company (Apr. 10, 2006); Company Institute (Apr. 10, 2006); Comment Letter 37 See Comment Letter of the American Benefits Supplemental Comment Letter of the SPARK of the American Bankers Assoc. (Apr. 14, 2006). Council (Apr. 10, 2006). Institute, Inc. (May 1, 2006). A fund that receives shareholder information for 38 See Comment Letter of Federated Investors, 42 Adopting Release, supra note 4, at text a purpose permitted by the privacy rules under the Inc. (submitted by ReedSmith LLP) (Apr. 6, 2006). accompanying n.50. Continued

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Some intermediaries have responded urged us to require that fund Today we are extending the to market timing concerns by enforcing redemption fee policies waive fees that compliance date for the shareholder their own frequent trading policies, might be imposed as a result of information agreement provisions of which may be different from policies transactions not initiated by investors.48 rule 22c–2. We are extending by 6 established by fund boards. We believe We appreciate the commenters’ months, until April 16, 2007, the date that a fund in appropriate circumstances suggestions that standardizing the terms by which funds must enter into could reasonably conclude that an and conditions of redemption fee shareholder information agreements intermediary’s frequent trading policies policies might reduce the costs that with their intermediaries.51 We also are sufficiently protect fund shareholders, intermediaries and others (including extending by 12 months, until October and could therefore defer to the funds themselves) will bear in 16, 2007, the date by which funds must intermediary’s policies, rather than seek implementing fund redemption fees. be able to request and promptly receive to apply the fund’s policies on frequent However, we have decided not to shareholder identity and transaction trading to shareholders who invest propose to standardize the terms or information pursuant to shareholder through that intermediary. In those conditions to preserve the flexibility of information agreements. This latter circumstances, the fund should describe each fund to fashion policies that are extension is designed to allow in its prospectus that certain best suited to protect the investors in additional time for funds, intermediaries through which a each fund. We have done this after intermediaries, and others to revise their shareholder may own fund shares may receiving extensive comment on the systems to accommodate the request, impose frequent trading restrictions that matter and after observing a lack of provision, and use of information from differ from those of the fund, generally consensus among industry participants intermediaries after the negotiation of describe the types of intermediaries on the appropriate terms of a uniform shareholder information agreements. (e.g., broker-dealers, insurance company redemption fee.49 Although we may We did not propose, nor did we separate accounts, and retirement plan reconsider our decision at a later time, receive comment on, an extension of the administrators), and direct shareholders until then, the terms of redemption fee compliance date for section 22c–2(a)(1), to any disclosures provided by the policies are a matter for fund boards to which requires a fund’s board to intermediaries with which they have an determine.50 consider the adoption of a redemption account to determine what restrictions III. Compliance Dates fee policy. The compliance date for that apply to the shareholder. We note that provision, October 16, 2006, remains in a fund is required to disclose whether When the Commission adopted rule effect. each restriction imposed by the fund to 22c–2 in March 2005, we established a prevent or minimize frequent trading compliance date of October 16, 2006. In IV. Cost-Benefit Analysis applies to trades that occur through the 2006 Proposing Release, we The Commission is sensitive to the omnibus accounts at intermediaries, and requested comment on whether we costs and benefits imposed by its rules. to describe with specificity the should extend that compliance date. As discussed above, the amendments circumstances, if any, under which each Nearly every commenter requested an we are adopting today will (i) limit the such restriction will not be imposed.45 extension, pointing out the need for types of intermediaries with which significant time to revise agreements C. Redemption Fees funds must enter into shareholder with intermediaries and change systems information agreements, (ii) address the Rule 22c–2 requires fund directors to to accommodate the transmission and rule’s application when there are chains consider whether to adopt a redemption receipt of trading information. of intermediaries, and (iii) clarify the fee, but the rule neither requires funds Commenters requested a variety of effect of a fund’s failure to obtain an to adopt such a fee nor specifies the compliance date extensions, ranging agreement with any of its terms under which such a fee should be from 6 months to 18 months. intermediaries. These amendments are 46 assessed. A number of commenters designed to respond to concerns that 48 raised concerns about redemption fees, See, e.g., Comment Letter of the American commenters identified during the and encouraged us to become involved Society of Pension Professionals & Actuaries (Apr. 10, 2006); Supplemental Comment Letter of the course of implementing rule 22c–2, and in establishing the terms and conditions SPARK Institute, Inc. (May 1, 2006). Non-investor in response to our request for comment 47 under which funds charge them. A initiated transactions may include automatic asset on these proposed amendments. We number of commenters, for example, rebalancing, automatic distributions, and prearranged periodic contributions. believe that the amendments will result 49 See 2006 Proposing Release, supra note 8, at in substantial cost savings to funds, exceptions to consumer notice and opt out text following n.12. requirements may not disclose that information for financial intermediaries, and investors, 50 other purposes, such as marketing, unless permitted Several commenters noted that a number of and provide clarification of the rule’s under the intermediary’s privacy policy. See state insurance and contract law issues might arise requirements. Adopting Release, supra note 4, at n.47. in connection with a redemption fee charged to investors who invest in funds through insurance 45 See Item 6(e) of Form N–1A [17 CFR 239.15A A. Benefits company separate accounts. See, e.g., Supplemental and 274.11A]; Item 8(e) of Form N–3 [17 CFR Comment Letter of the SPARK Institute, Inc. (May We anticipate that funds, financial 239.17a and 274.11b]; Item 7(e) of Form N–4 [17 1, 2006); Comment Letter of the American Council intermediaries, and investors will CFR 239.17b and 274.11c], Item 6(f) of Form N–6 of Life Insurers (Apr. 10, 2006). As we stated in the [17 CFR 239.17c and 274.11d]. These disclosure 2006 Proposing Release, we believe that because benefit from these amendments to rule items would not require a fund to describe the redemption fees and frequent trading policies are 22c–2. As discussed more fully in the frequent trading policies of each intermediary to imposed by the fund, and not the insurance Adopting Release we issued in 2005, whose policies the fund defers. company, enforcing those limits or fees with respect rule 22c–2 is designed to allow a fund 46 The rule does, however, require that any to these investors should not cause insurance redemption fee charged not exceed two percent and companies to breach their contracts. See 2006 to deter, and to provide the fund and its apply to redemptions no less than seven days after Proposing Release, supra note 8, at n.12. Moreover, shareholders reimbursement for the purchase. See rule 22c–2(a)(1)(i). nothing in this rule would preclude a fund that is costs of, short-term trading in fund 47 See, e.g., Supplemental Comment Letter of the concerned about the legality under existing shares.52 SPARK Institute, Inc. (May 1, 2006); Comment contracts of imposing these limits or fees on certain Letter of the American Council of Life Insurers insurance contractholders, from choosing not to (Apr. 10, 2006); Comment Letter of the Committee impose them with regard to investors whose 51 See rule 22c–2(a)(2). of Annuity Insurers (submitted by Sutherland policies would not permit imposition of such limits 52 See Adopting Release, supra note 4, at Section Asbill & Brennan) (Apr. 10, 2006). or fees. IV.A.

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The amendments to rule 22c–2 that which a fund complex must enter into shareholder information agreements we are adopting today will likely result agreements may take the average fund with intermediaries that directly submit in additional benefits to funds, financial complex a total of 250 hours of a service orders to the fund, its principal intermediaries, and investors. As representative’s time, at a cost of $40 underwriter, transfer agent, or to a discussed in the previous sections of per hour,56 for a total burden to all registered clearing agency. Accordingly, this Release, some commenters on the funds of 225,000 hours, at a total cost funds will not need to enter into Adopting Release argued that the rule’s of $9 million. These amendments will agreements with indirect intermediaries definition of ‘‘financial intermediary’’ likely provide a significant benefit and may incur lower systems was too broad because it would have because they should reduce the costs development costs related to the required funds to identify and enter into associated with the intermediary collection of underlying shareholder agreements with a number of identification process. information, thereby reducing the costs intermediaries that may not pose a By enabling funds to forego the cost of compliance. significant short-term trading risk to of entering into agreements with Under the amendments adopted funds, and may have imposed omnibus accountholders that they treat today, a first-tier intermediary, in its unnecessary costs to market as individual investors, we anticipate agreement with the fund, must agree to, participants.53 For example, one large that the large majority of small omnibus upon further request by the fund: (i) fund complex indicated that, under the accountholders will now fall outside the Provide the fund with the underlying rule as adopted, identifying their shareholder information agreement shareholder identification and ‘‘financial intermediaries’’ could cost provisions of the rule. This will likely transaction information of any other that fund complex $8.5 million or result in significant cost and time intermediary that trades through the more.54 These amendments will modify savings to funds and financial first-tier intermediary (i.e., indirect the definition of financial intermediary intermediaries through reduction of the intermediary); or (ii) prohibit the to exclude entities that a fund treats as expenses associated with these indirect intermediary from purchasing, an individual investor for purposes of agreements. The reduction of these costs on behalf of others, securities issued by the fund’s policies on market timing or also may benefit fund investors and the fund. This approach is designed to frequent trading. We believe that these fund advisers, to the extent that these preserve the investor protection goals of amendments will reduce the burden on costs may have been passed on to them. the rule by ensuring that funds have the funds of identifying those entities that We estimate that this will significantly ability to identify short-term traders that might have qualified as financial reduce the burden on many entities that may attempt to evade the reach of the intermediaries under the rule as would otherwise have qualified as rule by trading through chains of adopted, because a fund should already intermediaries under the rule as financial intermediaries. know which entities it treats as adopted, because the excluded entities By defining minimum standards for intermediaries for purposes of its would no longer need to enter into what must be included in these policies on market timing or frequent shareholder information agreements, or shareholder information agreements, we trading.55 As further discussed in the develop and maintain systems to intended to balance the need for funds Paperwork Reduction Act Section provide the relevant information to to acquire shareholder information from below, for purposes of the Paperwork funds. Commenters on the 2006 indirect intermediaries who trade in Reduction Act we have estimated that Proposing Release generally agreed that fund shares, with practical concerns identifying the intermediaries with the rule amendments are likely to regarding the difficulty that funds might reduce costs to market participants.57 face in identifying these intermediaries 53 See Comment Letter of the Investment Commenters on the 2005 adoption and entering into agreements with them. Company Institute at 3 (May 9, 2005). The ICI stated were also concerned that the rule as Because an intermediary that trades in its 2005 comment letter that, under the rule as adopted might have required funds to directly with a fund already has a adopted in 2005, three large fund complexes alone would have to evaluate 6.5 million accounts that enter into agreements with relationship with its second-tier are ‘‘not in the name of a natural person and thus intermediaries that hold fund shares in intermediaries (and is likely to have a could be held as an intermediary for purposes of the the name of other intermediaries (a closer relationship than the fund to any rule’’ and might have to enter into agreements with a significant portion of those accounts that are held ‘‘chain of intermediaries’’), potentially intermediary that is farther down the in nominee name. Id. The ICI noted that many of resulting in a fund having to enter into ‘‘chain’’), a first-tier intermediary these accounts are likely associated with small agreements with intermediaries with appears to be in the best position to retirement plans, small businesses, trusts, bank which it may not have a direct arrange for the provision of information nominees and other entities that are unlike typical financial intermediaries such as broker-dealers. It relationship (i.e., indirect to a fund regarding the transactions of added that funds typically do not have agreements intermediaries).58 These amendments shareholders trading through its indirect with such small entities, other than agreements further clarify and define the operation intermediaries. By providing a incidental to the opening of an account. of the rule with respect to definition of the term ‘‘shareholder 54 See 2006 Proposing Release, supra note 8, at n.48. intermediaries that invest through other information agreement,’’ the amended 55 Under the revised rule, if the fund does not intermediaries. These amendments to rule clarifies the balance of duties and exempt an intermediary from its frequent trading rule 22c–2 define the term ‘‘shareholder obligations between funds and financial policies, i.e. if the fund treats the intermediary as information agreement,’’ and provide intermediaries. Because first-tier an individual investor for purposes of those that funds need only enter into intermediaries may already have access policies, then the entity would not be a ‘‘financial intermediary’’ (with respect to that fund), and the to the shareholder transaction and fund would not have to enter into a shareholder 56 See infra note 95. identification information of their information agreement with it. These intermediaries 57 See, e.g., Comment Letter of the Investment indirect intermediaries, they will likely might include small retirement plans that do not Company Institute (Apr. 10, 2006) (‘‘[The proposed be able to provide this information to identify themselves as intermediaries or omnibus approach] should reduce the costs and burdens accounts to the fund and request an exemption from associated with the rules implementation while still funds at a minimal cost, especially the fund’s frequent trading policies. These providing funds access to underlying shareholder compared to the significant costs that intermediaries will likely either have very few information.’’) funds would incur if they were required underlying investors, and/or restrict their 58 See Comment Letter of T. Rowe Price to collect the same information from transactions so that transactions by investors do not Associates, Inc. at 2 (May 24, 2005); Comment trigger application of a redemption fee or violate the Letter of OppenheimerFunds, Inc. at 3 (May 9, indirect intermediaries themselves. fund’s frequent trading policies. 2005). Although first-tier intermediaries may

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incur some costs in collecting and investor protections afforded by the definition of financial intermediaries gathering this information from indirect rule. would significantly reduce the costs of intermediaries, there is a benefit in One of the primary results of these entering into or modifying these having the entity that has the easiest amendments will be to reduce the agreements, as well as the costs of access to the relevant information have number of financial intermediaries with developing, maintaining and monitoring the responsibility for arranging for its which funds must enter into the systems that will collect the delivery to funds. shareholder information agreements. shareholder information related to these In general, commenters on the 2006 This should reduce costs to all agreements for funds.64 Omnibus Proposing Release agreed that first tier participants by allowing funds to enter accountholders that previously would intermediaries are in a better position into shareholder information have qualified as financial than funds to collect data from indirect agreements only with those intermediaries are also likely to realize intermediaries,59 although one intermediaries that hold omnibus substantial savings under the amended commenter disagreed and stated that accounts that are most likely to trade rule. When an omnibus accountholder intermediaries are not in a better fund shares frequently. The rule’s is treated as an individual investor (or position than funds to collect investor protections will be maintained does not trade directly with the fund), information from indirect because funds will continue to monitor such an omnibus account will no longer intermediaries.60 We continue to believe the short-term trading activity of the rest be treated as a financial intermediary that the amended rule’s approach of of the fund’s omnibus accounts as if and will not incur the costs of entering having the agreements require first-tier they were individual investors in the into or modifying agreements with that intermediaries to identify and collect fund, according to the fund’s policies on fund. There will also no longer be the information from indirect short-term trading. start-up and ongoing costs of developing intermediaries appears to be the most The amendments will reduce the and maintaining shareholder cost effective method of handling the number of entities that will be information-sharing systems for those chain of intermediaries issue while still considered financial intermediaries accountholders. effectuating the purposes of the rule. under the rule. Commenters in 2005 In 2005, we received a few comments Funds and intermediaries are also likely raised concerns about the costs of regarding the costs of modifying or to engage in negotiations that will identifying which accountholders are entering into shareholder information distribute the costs of information financial intermediaries.62 The costs agreements. One of the few commenters sharing between the entities, resulting related to this review will be greatly that gave specific numbers indicated in incentives for funds to narrowly reduced under the rule as we have that it would take approximately four target their information requests. revised it, because we expect that a fund hours to modify and/or enter into, As discussed in the previous sections, will generally already have identified follow up on, and maintain an these amendments clarify the result if a those accountholders that it does not agreement on its systems for each fund lacks an agreement with a treat as an individual investor for account identified as a financial particular intermediary. In such a purposes of its restrictions on short-term intermediary.65 The same commenter situation, the fund may continue to trading. As discussed above in the indicated that it may have as many as redeem securities within seven calendar benefits section, for purposes of the 137,000 accounts that might qualify as days, but it must prohibit that financial Paperwork Reduction Act, we have financial intermediaries under the rule intermediary from purchasing fund estimated that completion of this as adopted. We anticipate that the large shares in nominee name, on behalf of identification process will cost all funds majority of the omnibus accountholders any other person. Some commenters a total of approximately $9 million. that would have qualified as financial had stated that the rule, as adopted in We also received a few comments on intermediaries under the rule as initially 2005, could be interpreted to require a the 2005 adoption regarding the number adopted, will now be treated as different approach to these situations.61 of accounts maintained by funds that individual investors by funds, and 63 The amendments will provide the qualify as financial intermediaries. therefore no new agreements will be benefit of certainty regarding the duties Commenters indicated that revising the required. As discussed in the 2006 of funds and financial intermediaries rule to address concerns about the Proposing Release, we anticipate that in under the rule without imposing most cases, complying with the 62 additional costs. As discussed above, the ICI noted that, between amended rule will require a very limited just three large fund complexes, 6.5 million number of new agreements between B. Costs accounts may need to be reviewed, and estimated that the total number of accounts which would be funds and intermediaries (in many cases Many commenters expressed evaluated by all funds could be in the ‘‘tens of virtually no new agreements would be concerns about the costs of rule 22c–2 millions.’’ Comment Letter of the Investment required).66 We understand that the Company Institute at 3 (May 9, 2005). as adopted in 2005. As discussed above, OppenheimerFunds noted that, although it has number of existing agreements that we anticipate that the amendments more than 7.5 million shareholder accounts in its funds have with their intermediaries adopted today will allow funds, records, 137,000 or fewer of those accounts may can vary greatly, from less than 10 financial intermediaries, and investors qualify as financial intermediaries under the rule as agreements for a small direct-sold fund, adopted last spring. See Comment Letter of to incur significantly reduced costs. OppenheimerFunds, Inc. at 8 (May 9, 2005). Neither to 3,000 or more agreements for a very Although these amendments will reduce commenter estimated the costs of performing this large fund complex sold through various many of the costs of the rule, they review. channels.67 Although funds will still should nonetheless maintain the 63 OppenheimerFunds estimated that it has need to modify the existing agreements 137,000 omnibus accounts that might qualify as financial intermediaries, USAA Investment 64 59 See Comment Letter of Massachusetts Mutual Management Company stated that it has See Comment Letter of USAA Investment Life Insurance Company (Apr. 10, 2006); Comment ‘‘thousands’’ of these accounts, and T. Rowe Price Management Company at 2 (May 9, 2005); Letter of the Investment Company Institute (Apr. estimated 1.3 million accounts that are not Comment Letter of the ICI at 3 (May 9, 2005). 10, 2006). registered as natural persons. See Comment Letter 65 See Comment Letter of OppenheimerFunds, 60 See Supplemental Comment Letter of the of OppenheimerFunds, Inc. at 8 (May 9, 2005); Inc. at 8 (May 9, 2005). SPARK Institute, Inc. (May 1, 2006). Comment Letter of USAA Investment Management 66 See 2006 Proposing Release, supra note 8, at 61 See Comment Letter of the Investment Company at 2 (May 9, 2005); Comment Letter of T. text following n.55. Company Institute at 4 (May 9, 2005). Rowe Price Associates, Inc. at 2 (May 24, 2005). 67 See id.

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that they have with their intermediaries There will also be some costs related informed that industry representatives (i.e., distribution agreements), we to the amendments we are adopting to are working together to develop a believe that these amendments will the rule regarding chains of uniform set of model terms, and greatly reduce or eliminate the need for intermediaries. By clearly defining the anticipate that such model terms may most funds to identify and negotiate duties that a fund’s agreement must significantly reduce the costs related to new agreements. Funds are also likely to impose on intermediaries in the ‘‘chain developing individualized agreement incur lower costs when modifying of intermediaries’’ context, the proposed terms for each fund and intermediary.73 existing agreements than when entering rule amendments may result in first-tier As further discussed in the Paperwork into new agreements, and the actual intermediaries incurring some costs that Reduction Act section of this release, for hours required to modify an existing might otherwise have been borne by purposes of the Paperwork Reduction agreement thus may be less than the funds. These may include costs related Act, we estimate that a typical fund four hour figure suggested by the to negotiating agreements (if necessary) complex will incur a total of 5 hours of commenter.68 Accordingly, based on the with indirect intermediaries, processing legal time at $300 per hour in drafting cost data provided by this commenter, requests from funds to investigate these agreement terms, for a total of we estimate that the cost reduction that accounts, costs related to collecting and 4,500 hours for all 900 fund complexes may result from the amendments for a providing the underlying shareholder at a total cost of $1,350,000. fund complex in a similar position as information to funds from the indirect We understand that several service the commenter could be approximately intermediaries and restricting further providers are developing systems to 69 536,000 hours. trading by indirect intermediaries if the accommodate the transmission and For purposes of the Paperwork fund requests it. We believe that first- receipt of transaction information Reduction Act as discussed below, we tier intermediaries are in a better between funds and intermediaries have estimated that it will cost all funds position than funds to fulfill these pursuant to contracts negotiated to and financial intermediaries a total of obligations. Unlike funds, first-tier comply with rule 22c–2. At least one of approximately $53,550,000 to enter into intermediaries have a direct relationship these organizations is revising the and/or modify the agreements required with second-tier intermediaries (and infrastructure that it already has in under the amended rule.70 This may be in a better position than funds place, in order to facilitate the represents a significant cost reduction to collect information from other communication of fund trades and other from the estimates provided to us in indirect intermediaries), and will thus ‘‘back office’’ information between response to the rule’s adoption.71 be able to identify, communicate with, funds and financial intermediaries, and collect information from these including the information required 68 See Comment Letter of OppenheimerFunds, indirect intermediaries at a lower cost under the rule. We understand that, Inc. (May 9, 2005). Section VI below contains a than if funds were to conduct such discussion, in the context of the Paperwork with the exception of some smaller to activities. First-tier intermediaries are Reduction Act, of some of the estimated costs of the mid-sized funds and intermediaries, the also in a better position than funds to shareholder information agreement and large majority of funds and information-sharing system development and identify and gather shareholder intermediaries currently use the operations aspects of the rule. information from more distant indirect 69 See Comment Letter of OppenheimerFunds, organization’s existing infrastructure to Inc. (May 9, 2005). This estimate is based on the intermediaries because of their 74 relationships with second-tier process fund trades. In addition, some following calculations: 137,000 potential accounts funds, intermediaries, or third party times 4 hours per account equals 548,000 potential intermediaries. hours. However, the amendments might eliminate As further discussed in connection vendors may develop their own the burden of reviewing and modifying those with the Paperwork Reduction Act, we competing or complementary 137,000 potential accounts, and could limit the information-sharing systems.75 burden to a far reduced number, perhaps 3,000 have estimated that the costs of entering agreements for a very large fund. (3,000 agreements into arrangements between first-tier and Commenters on the 2006 Proposing to be modified times 4 hours equals 12,000 hours.) more indirect intermediaries will be Release suggested that in complying Instead of potentially incurring 548,000 hours approximately $63 million.72 We with the amended rule, funds and complying with the agreement portion of the rule, a similar fund might incur 12,000 hours in anticipate that intermediaries will intermediaries may choose to incur modifying its existing agreements, for a savings of generally use the same systems that they certain additional costs in analyzing 536,000 hours (548,000 potential hours minus use to provide the required underlying data received under shareholder 12,000 hours equals 536,000 hours saved). shareholder identity and transaction information agreements, including costs 70 See infra Section VII. 71 information directly to funds to process for additional staffing, third-party However, this revised estimate is a significant 76 increase over the amount we estimated in the the information that first-tier vendors, and data repositories. Adopting Release ($3,353,279) for funds and intermediaries will forward (or have Generally, any such potential costs intermediaries to enter into shareholder information forwarded) to funds from indirect would be a consequence of the initial agreements. See Adopting Release, supra note 4, at n.108. In response to our request for comment on intermediaries, thus resulting in rule adoption, and are not a result of any aspect of the rule’s implementation, we significant cost efficiencies. these rule amendments. These potential received new information and updated estimates Funds and intermediaries may also costs are also likely to vary significantly that noted that the cost of entering into agreements incur some costs related to drafting or among entities depending on their size, for funds and intermediaries would be significantly revising terms for the agreements higher than the estimate included in the Adopting the services they use, and the frequency Release. After reviewing the comments we received required by rule 22c–2. We have been with which they request and analyze in response to the Adopting Release, as well as information, among other factors. other information received from fund $225,000,000. Despite the increase in estimated representatives prior to the 2006 Proposing Release, costs for entering into agreements that we have 73 we estimated in the 2006 Proposing Release that on included here over the cost estimates included in See Supplemental Comment Letter of the average, a fund complex might incur $250,000 or the Adopting Release, we anticipate that the SPARK Institute, Inc. (May 1, 2006). more in expenses related to entering into or amendments will reduce the costs of the agreement 74 See 2006 Proposing Release, supra note 8, at modifying the agreements required under the rule portion of the rule as adopted by approximately text following n.61. as adopted. See 2006 Proposing Release, supra note $171,450,000 ($225,000,000 (updated cost estimate) 75 See id. at n.40. 8, at n.59. With approximately 900 fund complexes minus $53,550,000 (cost estimate after proposed 76 See, e.g., Comment Letter of T. Rowe Price currently operating, we therefore estimate that the amendments) equals $171,450,000 (total potential Associates, Inc. (Apr. 10, 2006); Supplemental agreement portion of the rule as adopted could cost reduction)). Comment Letter of the SPARK Institute, Inc. (May potentially cost all funds a total of approximately 72 See infra note 131 and accompanying text. 1, 2006).

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One commenter on the 2006 additional staff, the number of which are not related to collections of Proposing Release noted that, as a large additional staff that might be hired, or information required by the rule. For fund complex, it had received estimates the likelihood that more staff would be example, the Paperwork Reduction Act of up to $730,000 a year for a third party needed. In some circumstances, funds estimates do not include all potential to provide information transmittal or intermediaries might choose to hire staffing costs, outside vendor analysis of systems, certain data analysis, and data additional staff to process information information to discern trading patterns, repository services for the information received under the rule, but funds and or data repository costs that funds and requested under shareholder intermediaries are likely to have intermediaries may incur in analyzing information agreements.77 Such third- sufficient staff in place to monitor the information that they may collect party vendor systems costs will vary frequent trading abuses that violate fund under the agreements required by the significantly depending on the size of policies, and therefore are unlikely to rule. Although these are costs that funds the fund complex, the frequency that need more staff under the amended and intermediaries may choose to incur, information is requested, the length of rule.81 The rule, by requiring funds to they are not required by the rule, and time the information is stored, any set up formalized information-sharing may vary significantly between every analysis performed, a fund’s preexisting networks with their intermediaries, fund and intermediary depending on internal resources, and many other might also result in more efficient the frequency of data requests, their factors. In the Paperwork Reduction Act monitoring of frequent trading by funds policies on frequent trading, their ability section below, we have estimated the and possible opportunities to reduce to analyze information, and many other costs we believe an average fund will staff. factors. incur in building these systems In response to comments received on For the reasons discussed above, we internally, or in using a third party the 2006 Proposing Release, we have anticipate that these amendments will vendor to provide these services. The revised certain of our cost estimates not create additional costs beyond the same commenter also suggested that upwards over those discussed in the rule as adopted. In fact, we anticipate intermediaries might incur third party 2006 Proposing Release. As further that the amendments will significantly vendor costs to store and process data, described in Section VI below, for reduce costs to most market and make it available to funds, with purposes of the Paperwork Reduction participants.86 Act, we have estimated that all funds such costs possibly ranging up to V. Consideration of Promotion of will incur a total of approximately $170,000 in start up costs, and $360,000 Efficiency, Competition and Capital 78 $47,500,000 82 in one-time capital costs a year in annual costs. We have Formation incorporated the estimates provided by to develop or upgrade their software and commenters on the 2006 Proposing other technological systems to collect, Section 2(c) of the Investment Release into the cost calculations we store, and receive the required identity Company Act requires the Commission, made for purposes of the Paperwork and transaction information from when engaging in rulemaking that Reduction Act, and as a result have intermediaries, and a total of requires it to consider or determine increased the cost estimates made in $22,655,000 each year thereafter in whether an action is necessary or this release over the estimates provided operation costs related to the appropriate in the public interest, to in the 2006 Proposing Release.79 transmission and receipt of the consider whether the action will One commenter also suggested that information.83 We have also estimated promote efficiency, competition, and funds and intermediaries might choose that financial intermediaries may incur capital formation. As discussed in the to hire additional staff to process $280,000,000 84 in one-time capital costs Cost-Benefit Analysis above, these information received under the rule, to develop or upgrade their software and amendments to rule 22c–2 are designed although it noted that if the current other technological systems to collect, to reduce the burdens of the rule as volume of transactions continues, a store, and transmit the required identity adopted in 2005, while maintaining its fund in its position probably would not and transaction information to funds investor protections. Funds will no need to hire additional staff.80 Other and from other intermediaries, and a longer be required to incur the expense commenters did not estimate the total of $192,500,000 85 each year of modifying or entering into potential costs related to hiring thereafter in operation costs related to agreements with omnibus accounts that the transmission and receipt of the they already effectively monitor by 77 See Comment Letter of T. Rowe Price information. These estimates were made treating as individual investors, and Associates, Inc. (Apr. 10, 2006). The commenter has for purposes of the Paperwork would not need to enter into agreements informed our staff that the latest estimates it has Reduction Act, and do not include with intermediaries that do not trade received have been revised downwards to $620,000 certain costs, discussed above, that directly with the fund. These a year for these services. amendments will promote efficiency in 78 Id. funds and intermediaries may incur 79 See infra Section VI. the capital markets by enabling funds to 81 80 See Comment Letter of T. Rowe Price See, e.g., Compliance Programs of Investment focus their short-term trading deterrence Associates, Inc. (Apr. 10, 2006). During further Companies and Investment Advisers, supra note 43 efforts on those omnibus accounts that discussions with the commenter, it noted that the at n.75 and surrounding text. could be used to disguise this type of 82 This estimate, as well as many other estimates cost of hiring one additional analyst to monitor trading. These amendments will also information received under rule 22c–2 and these in this section may differ from the estimates made amendments could be approximately $35,000– in the 2006 Proposing Release. These differences promote efficiency by reducing the 40,000 a year, exclusive of overhead. Although we reflect new information provided to us by number of omnibus accountholders that believe that most funds will not need to hire commenters, and are further discussed in Section would otherwise incur the expenses of VI. additional staff to comply with rule 22c–2, we entering into agreements, and of estimate that the cost of hiring one additional senior 83 See infra Section VI. compliance examiner could be $347,000 a year, 84 We estimate a total of approximately establishing and maintaining systems inclusive of overhead and other expenses (based on $327,500,000 in one time start-up costs for collecting and sharing shareholder compensation estimates for a Senior Compliance ($280,000,000 + $47,500,000 = $327,500,000) for information. Examiner, from the Securities Industry Assoc., purposes of the Paperwork Reduction Act. We do not anticipate that these Report on Management & Professional Earnings in 85 We estimate a total of approximately the Securities Industry (2005), multiplied by 5.35 to $215,155,000 in ongoing annual costs ($192,500,000 amendments will harm competition. account for bonuses, firm size, employee benefits, + $22,655,000 = $215,155,000) for purposes of the and overhead). Paperwork Reduction Act. 86 See infra note 135.

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They apply to all market participants (‘‘OMB’’) for review in accordance with Rule 22c–2 includes two distinct and, as discussed in the Cost-Benefit 44 U.S.C. 3507(d) and 5 CFR 1320.11, ‘‘collections of information’’ for Analysis above, serve to reduce cost and OMB approved these collections of purposes of the Paperwork Reduction burdens for large funds as well as small information under control number Act. The first is related to shareholder funds.87 Some commenters expressed 3235–0620 (expiring 06/30/2009). The information agreements, including the concern that the rule as adopted may title for the collection of information costs and time related to identifying the disproportionately burden small requirements associated with the rule is relevant intermediaries, drafting the intermediaries, and thus hinder ‘‘Rule 22c–2 under the Investment agreements, negotiating new agreements competition.88 We anticipate that under Company Act of 1940, Redemption fees or modifying existing ones, and these amendments, most omnibus for redeemable securities.’’ An agency maintaining the agreements in an easily accounts that are treated by the fund as may not conduct or sponsor, and a accessible place. The second is related individual investors will be small person is not required to respond to, a to the costs and time related to intermediaries. By excluding these collection of information unless it developing, maintaining, and operating small intermediaries from the rule’s displays a currently valid control the systems to collect, transmit, and requirements, the amendments should number. receive the information required under serve to alleviate potential anti- In response to the 2006 Proposing the shareholder information competitive effects on small Release, we received a number of agreements.93 intermediaries. comments on the estimates made in the Both collections of information are These amendments are designed to Paperwork Reduction Act section, and mandatory for funds that choose to reduce the costs of imposing which provided additional cost redeem shares within seven days of redemption fees for both funds and estimates and other information.91 In purchase. These funds will use the intermediaries. Even after these light of those comments, we have information collected to ensure that amendments, the competitive pressure revised upwards several of the per-fund shareholders comply with the fund’s of marketing funds, especially smaller estimates made in this section. policies on abusive short-term trading of funds, coupled with the costs of However, because these amendments fund shares. There is a six year imposing redemption fees in omnibus reduce the number of shareholder recordkeeping retention requirement for accounts, may deter some funds from information agreements required, we the shareholder information agreements imposing redemption fees. estimate that the amendments should, required under the rule. Any responses Intermediaries may use their market in general, reduce the aggregate burden that are provided in the context of the power to prevent funds from applying associated with the collections of Commission’s examination and the fees, or provide incentives for fund information required by the rule, and oversight program are generally kept groups to waive fees. However, by will not create new collections of confidential.94 reducing the costs of imposing information. We have revised our A. Shareholder Information Agreements redemption fees, we believe that these previous burden estimates under the amendments will likely reduce such Paperwork Reduction Act to reflect (i) The Commission staff anticipates that anti-competitive effects. new cost and time burden information most shareholder information We anticipate that these amendments that we have received from market agreements will be entered into at the may indirectly foster capital formation participants, and (ii) the revised number fund complex level, and estimates that by reducing the costs of the rule for of entities that will be affected by the there are approximately 900 fund funds and intermediaries. If these cost amended rule. complexes. The Commission staff savings are passed on to investors, they This revised Paperwork Reduction understands that the number of may increase investment in funds, Act section contains a number of new intermediaries that hold fund shares can thereby promoting capital formation. cost and hour estimates that are vary for each fund complex, from less These amendments also may foster significantly altered from the estimates than 10 for some fund complexes to capital formation by improving the made in the Adopting Release. Some of more than 3000 for others. Based on beneficial effect of the rule on investor these estimates are based on different conversations with fund and financial confidence, because the rule is designed methods, and different sources, from intermediary representatives that took to permit funds to deter, and recoup the those in the Adopting Release. place prior to the 2006 Proposing costs of, abusive short-term trading. To Therefore there is not a strict Release, our staff estimates that, on the extent that the amended rule comparability between the estimates average, under the revised definition of enhances investor confidence in funds, made here and those made in the financial intermediary, each fund investors are more likely to make assets Adopting Release. These cost estimates, complex has 300 financial available through intermediaries for hourly rate estimates, and the intermediaries. We understand that investment in the capital markets. methodology used to make these most funds already know and previously identified the majority of VI. Paperwork Reduction Act proposed estimates are based on comments we received in response to their intermediaries that they do not As discussed in the Adopting the Adopting Release and the 2006 treat as individual investors. Therefore, Release,89 the rule includes ‘‘collection Proposing Release, as well as funds should expend a limited amount of information’’ requirements within the information received from funds, meaning of the Paperwork Reduction intermediaries, and other market provided during conversations with industry Act of 1995.90 The Commission representatives that took place prior to the 2006 participants.92 submitted the collections of information Proposing Release, combined with the additional to the Office of Management and Budget information submitted by commenters on that 91 See, e.g., Comment Letter of T. Rowe Price release. Associates, Inc. (Apr. 10, 2006); Supplemental 93 This second collection of information does not 87 See supra Section IV. Comment Letter of the SPARK Institute, Inc. (May include potential costs or time that funds or 88 See, e.g., Comment Letter of the Investment 1, 2006). intermediaries might incur in analyzing or using the Company Institute (May 9, 2005). 92 See 2006 Proposing Release, supra note 8, at provided information. 89 See Adopting Release, supra note 4, at Section Sections VI and VIII. In general, the cost estimates 94 For a discussion of restrictions on the V. provided in this section are derived from rounded disclosure of information under applicable privacy 90 44 U.S.C. 3501–3520. and weighted averages of the cost estimates laws, see supra note 44.

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of time and costs related to the These efforts may reduce the costs changes to their back office systems to identification of such intermediaries. associated with the agreement provision comply with the rule requirements and Our staff estimates that identifying the of the rule for both funds and to match their systems to those of the intermediaries with which a fund intermediaries.102 Finally, the service providers. Our staff estimates complex must enter into agreements Commission staff does not anticipate that most funds could adapt their in- may take the average fund complex 250 that funds or intermediaries will incur house systems to utilize these service hours of a service representative’s time any new costs in maintaining these providers’ systems at a one-time cost of at a cost of $40 per hour,95 for a total agreements in an easily accessible place, approximately $10,000 or less.106 of 225,000 hours at a cost of because such maintenance is already Although the costs that systems $9,000,000.96 Our staff estimates that for done as a matter of course. providers will charge may vary, one a fund complex to prepare the model The staff therefore estimates that, for large provider has indicated that it plans agreement, or provisions modifying a purposes of the Paperwork Reduction to charge a monthly fee of $200 and fees preexisting agreement, between the fund Act, the shareholder information of 25 cents for every 100 account and the intermediaries, it will require a agreement provision of the rule as transactions requested through the total of 5 hours of legal time at $300 per revised will require a total of 1,309,500 service.107 hour, for a total of 4500 hours 97 at a hours at a total cost of $53,550,000.103 As an example of the cost of using these services, if a fund complex total cost of $1,350,000. B. Information-Sharing The Commission staff estimates that requests information for 100,000 for a fund complex to enter into or Some funds and intermediaries will transactions each week,108 then it would modify a shareholder information incur the system development costs incur costs of $250 each week, or agreement with each existing discussed in this section, but many will $13,000 a year, plus the monthly fee of intermediary, it will require a total one- not because they already process all of $200, equaling $2,400 a year, for a total time expenditure of approximately 2.5 their trades on a fully disclosed basis, cost of $15,400 a year.109 Our staff hours of fund time and 1.5 hours of use a third party administrator to handle estimates that approximately 475 fund intermediary time for each agreement, their back office work,104 or already complexes would use these systems for a total of 4 hours expended per have systems in place that allow (including substantially all of the agreement.98 Therefore, for an average intermediaries to transmit the largest, and most of the medium-sized, fund complex to enter into shareholder shareholder identity and transaction fund complexes). If all of these agreements, the fund complex and its information to funds. Other funds and complexes use these service providers’ intermediaries may expend intermediaries may have special systems at the rate described above, they approximately 1200 hours at a cost of circumstances that may increase the would incur a one-time system $48,000,99 and all fund complexes and costs they face in developing and development cost of $4,750,000 110 and intermediaries may incur a total one- operating systems to comply with the an annual system use cost of time burden of 1,080,000 hours at a cost rule. The estimates below represent the approximately $7,315,000.111 Those 475 of $43,200,000.100 The Commission staff Commission staff’s understanding of the fund complexes may also incur system understands that there are efforts under average costs that might be encountered development costs related to the way (including an industry task force by a typical fund complex or processing of information under the rule devoted to the project) to produce intermediary in complying with the on trades that they receive through other standardized shareholder information- information-sharing aspect of the rule as channels than these service providers’ sharing model agreements and terms.101 amended. systems, which we estimate to cost an average approximately $50,000 per fund 1. Funds 95 The title and hourly cost of the person performing the intermediary identification and The Commission staff understands 106 We expect that, in many cases, upgrades to entering into agreements may vary depending on that various organizations have fund transfer agents’ as well as fund complex’s the fund or financial intermediary. This $40 per developed, or are in the process of systems will take place, and the transfer agents’ hour cost is an average estimate for the hourly cost costs will be charged back to the fund complex of employing the person doing the relevant work, developing, enhancements to their 107 See National Securities Clearing Corporation, derived from conversations with industry systems that will allow funds and Networking Service to Support SEC Rule 22c–2, representatives that took place prior to the 2006 intermediaries to share the information Important Notice A #6228, P&S #5798 (Apr. 12, Proposing Release. 2006) (available at http://www.nscc.com/impnot/ 96 This estimate is based on the following required by the rule without developing 105 notices/notice2006/a6228.pdf.) calculations: 250 hours times 900 fund complexes or maintaining systems of their own. 108 The number of transactions and weekly equals 225,000 hours, and 225,000 hours times $40 Our staff anticipates that most funds request used here is an example, and is not equals $9,000,000. and intermediaries will use these intended to be a guideline as to how often a fund 97 This estimate is based on the following systems, and will generally make minor should request information under the rule. The calculation: 5 hours times 900 fund complexes frequency of information requests could vary equals 4500 hours of legal time. significantly based on a wide variety of factors, as 98 The 4 hour figure represents time incurred by 102 See, e.g., Supplemental Comment Letter of the discussed in Section II.C above. both the fund and the financial intermediary for SPARK Institute, Inc. (May 1, 2006). 109 This estimate is based on the following each agreement. The Commission staff estimates 103 This estimate is based on the following calculations: 100,000 transaction requests times one that this 4 hour figure is comprised of calculations: 4500 hours of legal drafting time plus quarter of a cent (the charge is 25 cents per 100 approximately 2.5 hours of a fund service 1,080,000 hours of agreement negotiating time plus transactions requested, or one quarter of a cent per representative’s time at $40 per hour and 1.5 hours 225,000 hours of intermediary identification time transaction) equals $250; $250 times 52 weeks of an intermediary representative’s time at $40 per equals 1,309,500 total hours; and $43,200,000 plus equals $13,000; $200 monthly charges times 12 hour. $1,350,000 plus $9,000,000 equals $53,550,000. months equals $2,400; and $13,000 plus $2,400 99 This estimate is based on the following 104 Third party administrators maintain accounts equals $15,400. The costs of utilizing these services calculations: 4 hours times 300 intermediaries for many other intermediaries, and therefore incur may vary widely, based on the frequency funds equals 1200 hours; and 1200 hours times $40 the costs to develop a single system. make information sharing requests, and the number dollars per hour equals $48,000. 105 These service providers systems include the of accounts requested. 100 This estimate is based on the following National Securities Clearing Corporation’s Fund/ 110 This estimate is based on the following calculations: 1200 hours times 900 fund complexes SERV system, as well as other systems being calculation: 475 fund complexes times $10,000 equals 1,080,000 hours; and 1,080,000 hours times developed by a number of other providers such as (one-time system update costs) equals $4,750,000. $40 per hour equals $43,200,000. SunGard, BISYS, AccessData, and Charles Schwab. 111 This estimate is based on the following 101 See 2006 Proposing Release, supra note 8, at See, e.g., Comment Letter of AccessData Corp. (Apr. calculation: 475 fund complexes times $15,400 text accompanying n.45. 10, 2006). (annual costs) equals $7,315,000.

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complex, and $20,000 annually,112 for a total system development cost of our staff anticipates that approximately total of $23,750,000 113 in system $7,975,000 116 and an annual operations 350 of these intermediaries are likely to development costs and $9,500,000 cost of $3,190,000.117 primarily use the existing systems that annually.114 Our staff estimates that the The remaining approximately 106 are in place or under development. The total system development cost for these fund complexes may face additional staff understands that these 475 fund complexes that are likely to complexities or special circumstances in approximately 350 intermediaries use these existing systems is developing their systems. Our staff include several major ‘‘clearing brokers’’ $28,500,000 with annual operation costs estimates that the start-up costs for and third-party administrators that of $16,815,000.115 those fund complexes will be aggregate trades and handle the back- There are approximately 900 fund approximately $100,000 per fund end work for thousands of other smaller complexes currently operating, of which complex and the annual costs for broker-dealers and intermediaries, approximately 475 may use these handling the information will be thereby providing access to these existing systems, leaving approximately approximately $25,000, for a total start- service providers’ information-sharing 425 fund complexes possibly needing to up cost of $10,600,000 and an annual systems to a significant majority of all develop specific systems to meet their cost of $2,650,000 for these fund intermediaries in the marketplace. Our own particular needs. Our staff complexes.118 staff estimates that these approximately understands that approximately 75 For purposes of the Paperwork 350 intermediaries will provide access percent of those fund complexes (or 319 Reduction Act, our staff therefore to systems that will allow for the complexes) are small to medium-sized estimates that the information-sharing transmission of information required by direct-sold funds that have a very provisions of the rule as amended will the rule and other processing for the limited number of intermediaries. Our cost all fund complexes a total of transactions of approximately 80 staff anticipates that those 319 fund approximately $100,625,000 in one-time percent of the 7,000 intermediaries complexes would incur minimal system capital costs to enter into agreements (5,600 intermediaries) affected by the development costs to comply with the and develop or upgrade their software rule, leaving 1,400 intermediaries that information-sharing provisions of the and other technological systems that do not in some way utilize these rule, due to the limited number of allows them to collect, store, and systems, that may need to develop their intermediaries with which they interact. receive the required identity and own systems.121 Our staff estimates that system transaction information from Our staff understands that in general, development costs for handling intermediaries, and a total of the providers who have developed or information under the rule for those 319 $22,655,000 each year thereafter in are developing these information fund complexes will be approximately operation costs related to the sharing systems charge the fund, and $25,000 each, with annual operation transmission and receipt of the not the intermediary, for providing costs of approximately $10,000, for a information.119 these systems to transmit shareholder 2. Intermediaries identity and transaction information, or 112 In response to the 2006 Proposing Release, else include access to such systems as many commenters discussed the difficulty of The Commission staff estimates that a complementary part of their other estimating the costs of creating and operating there are approximately 7000 information-sharing systems. As a result, very few processing systems, and do not charge monetary cost estimates were submitted by intermediaries that may provide additional fees to intermediaries for its commenters. One fund commenter did provide information pursuant to the utilization. These intermediaries may be some monetary estimates, and noted that although information-sharing provisions of rule required to develop systems to ensure it agreed that many of the cost estimates made in 22c–2.120 Of those 7000 intermediaries, the 2006 Proposing Release were reasonable, it that they are able to transmit the records believed that the Commission may have to these service providers in a underestimated some of the costs it will likely 116 This estimate is based on the following standardized format.122 Our staff encounter when designing and operating calculation: 319 funds times $25,000 equals estimates that it will cost each of these information sharing systems. See Comment Letter of $7,975,000. T. Rowe Price Associates, Inc. (Apr. 10, 2006). The 117 This estimate is based on the following 350 intermediaries approximately commenter noted that additional staffing, data calculation: 319 funds times $10,000 equals $200,000 to update its systems to record repository, and intermediary vendor costs related to $3,190,000. 118 information sharing systems may result in costs This estimate is based on the following do their business through a registered broker-dealer significantly higher than those estimated in the calculations: 106 funds times $100,000 equals on the same premises), and approximately 2,000 Paperwork Reduction Act section of the 2006 $10,600,00; and 106 funds times $25,000 equals retirement plans, third-party administrators, and Proposing Release. We agree that these may be $2,650,000. other intermediaries (this number may be either significant costs, but note that the estimates made 119 This estimate is based on the following over or under inclusive, because under the rule as in this section are limited to the scope of the calculations: $28,500,000 (funds that use service we are amending it, the actual number of Paperwork Reduction Act, and therefore do not providers start-up costs) plus $7,975,000 (direct- intermediaries that funds have is dependent on the include all of the costs encountered by funds and traded funds’ start-up costs) plus $10,600,000 (other precise application of varying fund policies on intermediaries in implementing the rule that are not funds’ start-up costs) equals $47,075,000 system short-term trading). related to a ‘‘collection of information’’ as defined development costs; $47,075,000 (system 121 This number is based on the following under that Act. 44 U.S.C. 3501–3520. Other costs development costs) plus $53,550,000 (agreement calculation: 7,000 total intermediaries times 20% and benefits of the rule, including the costs costs) equals $100,625,000 total fund start-up costs; (the percentage of intermediaries that do not use mentioned by that and other commenters, are and $16,815,000 (funds that use service providers these service providers systems or use the services discussed in Section IV of this Release. annual costs) plus $3,190,000 (direct-traded funds’ of those 350 intermediaries that use those service 113 This estimate is based on the following annual costs) plus $2,650,000 (other funds’ annual provider systems) equals 1,400 intermediaries that calculation: 475 fund complexes times $50,000 costs) equals $22,655,000 annual funds’ costs. do not use service providers’ systems. system development cost per fund complex equals 120 This number is a rounded estimate, based on 122 Our staff anticipates that in most cases, first- $23,750,000. the number of intermediaries that may be affected tier intermediaries will use the same or slightly 114 This estimate is based on the following by the rule. The number consists of the following: modified systems that have been developed to calculation: 475 fund complexes times $20,000 2,203 broker-dealers classified as specialists in fund identify and transmit shareholder identity and annual costs per fund complex equals $9,500,000. shares, 196 insurance companies sponsoring transaction information to funds when collecting 115 This estimate is based on the following registered separate accounts organized as unit and transmitting this information from indirect calculations: $23,750,000 plus $4,750,000 (one-time investment trusts, approximately 2,400 banks that intermediaries. Therefore, we have also included system development costs) equals $28,500,000 total sell funds or variable annuities (the number of the costs of developing and operating systems to start-up costs for fund complexes utilizing existing banks is likely over inclusive because it may collect information from indirect intermediaries systems; and $7,315,000 plus $9,500,000 equals include a number of banks that do not sell and providing the information to funds in these $16,815,000 in annual costs. registered variable annuities or funds, or banks that estimates.

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and transmit shareholder identity and with the information-sharing provisions proper transmittal of information to transaction records to these service of the rule.128 funds through chains of providers, and an additional $100,000 The fund complexes and intermediaries.131 each year to operate their own systems intermediaries that do not use these Our staff estimates that the for communicating with the service service providers’ systems to process information-sharing provisions of the providers, for a total start-up cost of their trades will have to either develop rule will cost all intermediaries a total $70,000,000, and an annual cost of their own systems to share information of approximately $343,000,000 in one- $35,000,000.123 We understand that under the rule or engage some other time capital costs to enter into these approximately 350 intermediaries third-party administrator to process the agreements and develop or upgrade may also have to upgrade their systems information. Our staff estimates that their software and other technological to handle rule 22c–2 information on approximately 1,400 intermediaries will systems to collect, store, and transmit trades that do not go through the service not utilize these service provider the required identity and transaction providers’ systems. Our staff estimates systems to process this information, and information to funds and from other that it will cost each of those 350 estimates that each of these intermediaries, and a total of intermediaries 124 an additional intermediaries will incur $50,000 in $192,500,000 each year thereafter in $400,000 125 to update their systems, system development costs and $50,000 operation costs related to the and $250,000 126 annually to process in annual costs in complying with the transmission and receipt of the this information through non-service rule, for a total of $70,000,000 in information.132 development costs and $70,000,000 in provider networks, for a total cost of C. Total Costs and Hours Incurred $140,000,000 in system development annual costs for those intermediaries.129 costs and $87,500,000 in annual costs to Although the amended rule does not For purposes of the Paperwork process data through non-service require first-tier intermediaries to enter Reduction Act, our staff estimates that provider networks.127 We have into agreements with their indirect the amended rule will have a total increased these estimates over those intermediaries to share the indirect collection of information cost in the first made in the 2006 Proposing Release in intermediaries’ underlying shareholder year to both funds and intermediaries of light of the new cost information data to funds upon a fund’s request, we $443,625,000 in one-time start-up costs, provided to us by the commenters in anticipate that in many cases, and annual operation costs of 2006. Our staff therefore estimates that intermediaries will nonetheless enter $215,155,000.133 Our staff estimates that these approximately 350 intermediaries into such agreements, or at least enter the weighted average annual cost of the will incur a total of approximately into informal arrangements and design rule to funds and intermediaries for $210,000,000 in start-up costs and methods by which to collect the each of the first three years would be $122,500,000 in annual costs associated shareholder information. Our staff $363,030,000.134 The total hours estimates that each of the 7,000 expended by both funds and 123 This estimate is based on the following intermediaries potentially affected by intermediaries in complying with the calculations: 350 broker-dealer times $200,000 the rule will spend approximately 150 amended rule will be a one-time (start-up costs) equals $70,000,000; and 350 broker- hours of service representatives’ time at expenditure of 2,429,500 hours at a total dealer times $100,000 (start-up costs and annual 135 costs) equals $35,000,000. $40 per hour, and 10 hours of legal internal cost of $116,550,000. We 124 The estimate includes higher costs for these counsel time at $300 per hour, for a total 350 intermediaries in developing systems to handle of 1,050,000 hours of service 131 This estimate is based on the following non-service provider information than for representatives’ time at a cost of calculations: 1,050,000 service representative hours remaining intermediaries to handle the same data at $42,000,000 plus 70,000 in-house counsel hours due to our staff’s understanding that, in general, $42,000,000, and 70,000 hours of in- at $21,000,000 equals 1,120,000 hours at these 350 intermediaries that utilize the service house legal time at a cost of $21,000,000 $63,000,000. provider’s networks represent the largest to design and enter into these 132 This estimate is based on the following intermediaries in the marketplace, and will face the arrangements with other calculations: $210,000,000 (intermediaries that use highest costs in complying with the rule. intermediaries.130 The Commission staff service providers start-up costs) plus $70,000,000 125 Many of the costs that intermediaries incur in (other intermediaries’ start-up costs) plus developing and operating systems to handle this therefore estimates that intermediaries $63,000,000 (intermediary agreement costs) equals information may be recouped from fund complexes will expend a total of approximately $343,000,000 in intermediary start-up costs; and through a variety of methods. However, it is unclear 1,120,000 hours at a cost of $63,000,000 $122,500,000 (annual costs of intermediaries that what recoupment might take place, and therefore use service providers) plus $70,000,000 (other the cost estimates for funds and intermediaries are to enter into arrangements to ensure the intermediaries’ annual costs) equals $192,500,000 made here prior to any potential recoupment. in annual costs. 126 In response to the 2006 Proposing Release, a 128 This estimate is based on the following 133 This estimate is based on the following few commenters provided additional cost estimates calculations: $70,000,000 (intermediary start-up calculations: $100,625,000 (fund start-up costs) plus regarding the costs intermediaries may face in costs for processing information through service $343,000,000 (intermediary start-up costs) equals designing and operating information sharing providers) plus $140,000,000 (intermediary start-up $443,625,000 in total start-up costs; and systems under the amended rule. One commenter costs for handling information through other $22,655,000 (fund annual costs) plus $192,500,000 estimated that some intermediary system start-up channels) equals $210,000,000; and $35,000,000 (intermediary annual costs) equals $215,155,000 in costs may range from approximately $125,000 to (intermediary annual costs for processing total annual costs. $2,300,000, and that ongoing annual costs may information through service providers) plus 134 This estimate is based on the following range from $150,000 to approximately $1,000,000. $87,500,000 (intermediary annual costs for calculations: $443,625,000 in total start-up costs See Supplemental Comment Letter of the SPARK handling information through other channels) plus $645,465,000 (3 years at $215,155,000 in total Institute, Inc. (May 1, 2006). Another commenter equals $122,500,000. annual costs) equals $1,089,090,000 in total costs estimated that for some insurance company 129 This estimate is based on the following over a three-year period. $1,089,090,000 divided by intermediaries, the cost to comply with all aspects calculations: 1,400 intermediaries times $50,000 three years, equals a weighted average cost of of the redemption fee rule could exceed $2,000,000 (development costs) equals $70,000,000; and 1,400 $363,030,000 per year. per company. See Comment Letter of the National intermediaries times $50,000 (annual costs) equals 135 This estimate is based on the following Association for Variable Annuities (Apr. 7, 2006). $70,000,000. calculations: 1,309,500 hours at a cost of We have incorporated this additional information 130 This estimate is based on the following $53,550,000 in agreement time plus 1,120,000 hours into our calculations for our revised estimates. calculations: 7,000 intermediaries times 150 service at a cost of $63,000,000 in chain of intermediary 127 This estimate is based on the following representative hours at $40 per hour equals arrangement time equals 2,429,500 hours at a cost calculations: 350 broker-dealers times $400,000 1,050,000 hours at a cost of $42,000,000; and 7,000 of $116,550,000. (start-up costs) equals $140,000,000; and 350 intermediaries times 10 hours of in-house legal time For purposes of the Paperwork Reduction Act, broker-dealers times $250,000 (annual costs) equals at $300 per hour equals 70,000 hours at a cost of Section VI of the Adopting Release, supra note 4, $87,500,000. $21,000,000. included an estimate of the total start-up costs to

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anticipate that there will be a total of These amendments also set forth the and suggested that the rule allow for the approximately 7900 136 respondents, limitations on transactions between a use of alternate forms of identification with approximately 14,310,000 total fund and an intermediary with whom in those cases.140 To reduce the costs of responses in the first year, and the fund does not have an agreement. compliance, alleviate any confusion, 14,040,000 annual responses each year and provide flexibility to funds and B. Significant Issues Raised By Public thereafter.137 Comment intermediaries, we have revised the rule to allow for the use of Individual VII. Final Regulatory Flexibility We requested comment on the IRFA. Analysis Taxpayer Identification Numbers or We specifically requested comment on other government issued identifiers This Final Regulatory Flexibility the number of small entities that would when a TIN is not available. Analysis (‘‘FRFA’’) has been prepared in be affected by the rule amendments, and We also received many comments accordance with 5 U.S.C. 604. It relates the likely effect of the amendments on requesting an extension of the to amendments to rule 22c–2 under the small entities, the nature of any impact, compliance date. Commenters noted Investment Company Act, which we are and any empirical data supporting the that with the uncertainty accompanying adopting in this Release. The Initial extent of the impact. We received a the exact requirements of the rule, the Regulatory Flexibility Analysis number of comments discussing the significant technical challenges (‘‘IRFA’’) which was prepared in impact that the rule amendments will associated with compliance, and the accordance with 5 U.S.C. 603 was have on small entities in the mutual current unsettled state of contracting published in the 2006 Proposing fund marketplace. Generally, these and information sharing standards in Release. comments supported the rule the marketplace it would be very A. Need For and Objectives of Rule amendments, and agreed that the beneficial to provide an extended amendments would reduce the costs of compliance date. We agree, and are Rule 22c–2 allows funds to recover compliance with the rule for small some, if not all, of the direct and extending the compliance date for all entities, and would reduce the number entities.141 indirect (e.g., market impact and of small entities that would be required opportunity) costs incurred when to comply with the rule.138 They C. Small Entities Subject to the Rule shareholders engage in short-term indicated that the rule amendments A small business or small trading of the fund’s shares, and to deter would reduce costs for all mutual fund organization (collectively, ‘‘small this short-term trading. As discussed marketplace participants and would entity’’) for purposes of the Regulatory more fully in Sections I and II of this alleviate many of the concerns they had Flexibility Act is a fund that, together Release, the amendments to rule 22c–2 expressed with the rule as it was with other funds in the same group of are necessary to clarify the operation of originally adopted. the rule, to enable funds and related investment companies, has net Although most commenters supported assets of $50 million or less as of the intermediaries to reduce costs the rule amendments, some commenters 142 associated with entering into end of its most recent fiscal year. Of also suggested other changes that may approximately 3,925 funds (2,700 agreements under the rule, and to reduce the costs of compliance. A few enable funds to focus their short-term registered open-end investment commenters noted that as proposed, the companies and 825 registered unit trading deterrence efforts on the entities amended rule might have posed some most likely to violate fund policies. investment trusts), approximately 163 difficulties to funds (including small are small entities.143 A broker-dealer is funds) in contracting with certain funds and financial intermediaries in complying considered a small entity if its total with the collection of information aspect of the rule entities that do not qualify as financial capital is less than $500,000, and it is of approximately $1,111,500,000. We now estimate intermediaries under the rule, but who not affiliated with a broker-dealer that that funds and intermediaries will incur the nevertheless submit trades directly to has $500,000 or more in total capital.144 reduced amount of $443,625,000 in start-up costs, funds on behalf of financial Of approximately 7,000 registered for a potential cost reduction of approximately 139 $667,875,000 resulting from the amendments. In the intermediaries. In light of this broker-dealers, approximately 880 are Adopting Release we also estimated that the concern, we have clarified the amended small entities. ongoing annual costs will be $390,556,800. We now rule to require that if a financial As discussed above, rule 22c–2 estimate that after these amendments funds and intermediary submits orders directly, intermediaries will incur the reduced amount of provides funds and their boards with $215,155,000 in total annual costs, for a potential itself or through its agent, the fund must the ability to impose a redemption fee ongoing annual cost reduction of approximately enter into a shareholder information designed to reimburse the fund for the $175,401,800 resulting from the amendments. agreement with that financial direct and indirect costs incurred as a 136 This estimate is based on the following intermediary. This clarification should calculation: 7,000 intermediaries plus 900 fund result of short-term trading strategies, complexes equals 7,900 respondents. eliminate any confusion and attendant such as market timing. These 137 This estimate is based on the following costs to small entities in determining amendments are designed to maintain calculation: 900 fund complexes with an average of whether and with which entities funds these investor protections while 300 intermediaries each, equals 270,000 one time must enter into shareholder information responses for the shareholder information portion reducing costs to market participants of the collection (900 funds times 300 agreements. and clarifying the operation of the rule. intermediaries equals 270,000). Assuming that each Some commenters noted that in some While we expect that the rule and these fund requests information from each of its cases (such as foreign shareholders) intermediaries once each week (we have revised our Taxpayer Identification Numbers 140 See Comment Letter of the Investment initial monthly assumption to a weekly assumption, (‘‘TINs’’) may not always be available, Company Institute (Apr. 10, 2006); Supplemental although we expect that the frequency of requests Comment Letter of the SPARK Institute, Inc. (May will vary significantly between funds depending on 1, 2006). their circumstances), the total number of annual 138 See, e.g., Comment Letter of the Investment 141 responses would be 14,040,000 (270,000 fund Company Institute (Apr. 10, 2006); Comment Letter See supra Section III. intermediaries times 52 weeks equals 14,040,000 of Charles Schwab & Co., Inc. (Apr. 10, 2006). 142 17 CFR 270.0–10. annual responses). Therefore, in the first year, there 139 See, e.g., Comment Letter of T. Rowe Price 143 Some or all of these entities may contain would be 14,310,000 total responses (14,040,000 Associates, Inc. (Apr. 10, 2006); Comment Letter of multiple series or portfolios. If a registered weekly responses plus the 270,000 initial responses Matrix Settlement & Clearing Services, L.L.C. (Apr. investment company is a small entity, the portfolios required for the agreements) and 14,040,000 annual 10, 2006); and Comment Letter of the Investment or series it contains are also small entities. responses thereafter. Company Institute (Apr. 10, 2006). 144 17 CFR 240.0–10.

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amendments will require some funds encouraging larger market participants Text of Amended Rule and intermediaries to develop or to focus primarily on the needs of larger I upgrade software or other technological entities when establishing the For reasons set out in the preamble, systems to enforce certain market timing information-sharing systems envisioned Title 17, Chapter II of the Code of policies, or make trading information by the rule and these proposed Federal Regulations is amended as available in omnibus accounts, the amendments, and possibly ignoring the follows: amendments we are adopting today are needs of smaller entities. PART 270—RULES AND specifically designed to reduce the costs With respect to further clarifying, REGULATIONS, INVESTMENT incurred by small entities. In particular, consolidating, or simplifying the COMPANY ACT OF 1940 we anticipate that the changes we are compliance requirements of the rule, making to the definition of financial using performance rather than design I 1. The authority citation for part 270 intermediary will significantly reduce standards, and exempting small entities continues to read in part as follows: the number of small intermediaries that from coverage of these amendments or Authority: 15 U.S.C. 80a–1 et seq., 80a– funds must enter into agreements with, any part of the rule, we believe 34(d), 80a–37, and 80a–39, unless otherwise and reduce the burden of complying additional such changes would be noted. with the rule for small funds and small impracticable. These amendments in * * * * * intermediaries. effect except a large number of smaller I 2. Section 270.22c–2 is revised to read D. Reporting, Recordkeeping, and Other entities from the scope of the rule, by as follows: Compliance Requirements revising the definition of financial intermediary. We have designed these § 270.22c–2 Redemption fees for These amendments do not introduce redeemable securities. any new mandatory reporting amendments to reduce the cost and requirements. Rule 22c–2 already compliance burden on small entities to (a) Redemption fee. It is unlawful for contains a mandatory recordkeeping the greatest extent practicable while still any fund issuing redeemable securities, requirement for funds that redeem maintaining the investor protections of its principal underwriter, or any dealer shares within seven days of purchase. the rule as adopted. in such securities, to redeem a The fund must retain a copy of the Small entities are as vulnerable to the redeemable security issued by the fund written agreement between the fund and problems uncovered in recent within seven calendar days after the financial intermediary under which the enforcement actions and settlements as security was purchased, unless it intermediary agrees to provide the large entities. Therefore, shareholders of complies with the following required shareholder information in small entities are equally in need of requirements: omnibus accounts.145 The amendments protection from short-term traders. We (1) Board determination. The fund’s reduce the number of small entities that believe that the rule and these board of directors, including a majority would otherwise be subject to this amendments will enable funds to more of directors who are not interested recordkeeping requirement. effectively discourage short-term trading persons of the fund, must either: of all fund shares, including those held (i) Approve a redemption fee, in an E. Commission Action to Minimize amount (but no more than two percent Effect on Small Entities in omnibus accounts. Further excepting small entities from coverage of the rule of the value of shares redeemed) and on The Regulatory Flexibility Act directs or any part of the rule could shares redeemed within a time period the Commission to consider significant compromise the effectiveness of the (but no less than seven calendar days), alternatives that would accomplish the rule. We anticipate that the amendments that in its judgment is necessary or stated objective, while minimizing any will alleviate much of the burden appropriate to recoup for the fund the significant adverse impact on small imposed by the rule on small entities, costs it may incur as a result of those entities. Alternatives in this category and result in a more cost effective redemptions or to otherwise eliminate would include: (i) Establishing different system for discouraging short-term or reduce so far as practicable any compliance or reporting standards that trading for all entities. Alternatives that dilution of the value of the outstanding take into account the resources available we considered but are not adopting securities issued by the fund, the to small entities; (ii) clarifying, included, among others, (i) fully proceeds of which fee will be retained consolidating, or simplifying the exempting all small entities from by the fund; or compliance requirements under the rule complying with the information-sharing (ii) Determine that imposition of a for small entities; (iii) using aspect of the rule, (ii) not requiring that redemption fee is either not necessary or performance rather than design the information-sharing agreement not appropriate. standards; and (iv) exempting small obligate first-tier intermediaries to assist (2) Shareholder information. With entities from coverage of the rule, or any in providing information from indirect respect to each financial intermediary part of the rule. intermediaries to funds, and (iii) that submits orders, itself or through its The Commission does not presently extending the compliance date for small agent, to purchase or redeem shares believe that these amendments would entities. directly to the fund, its principal require the establishment of special underwriter or transfer agent, or to a compliance requirements or timetables VIII. Statutory Authority registered clearing agency, the fund (or for small entities. These amendments on the fund’s behalf, the principal are specifically designed to reduce any The Commission is amending rule underwriter or transfer agent) must unnecessary burdens on all funds 22c–2 pursuant to the authority set forth either: (including small funds) and on small in sections 6(c), 22(c), and 38(a) of the (i) Enter into a shareholder intermediaries. To establish special Investment Company Act [15 U.S.C. information agreement with the compliance requirements or timetables 80a–6(c), 80a–22(c) and 80a–37(a)]. financial intermediary (or its agent); or for small entities may in fact List of Subjects in 17 CFR Part 270 (ii) Prohibit the financial intermediary disadvantage small entities by from purchasing in nominee name on Investment companies, Reporting and behalf of other persons, securities issued 145 Rule 22c–2(a)(3). recordkeeping requirements, Securities. by the fund. For purposes of this

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paragraph, ‘‘purchasing’’ does not fund in reliance on section 12(d)(1)(E) of DEPARTMENT OF ENERGY include the automatic reinvestment of the Act. A shareholder does not include dividends. a fund investing pursuant to section Federal Energy Regulatory (3) Recordkeeping. The fund must 12(d)(1)(G) of the Act (15 U.S.C. 80a– Commission maintain a copy of the written 12(d)(1)(G)), a trust established pursuant agreement under paragraph (a)(2)(i) of to section 529 of the Internal Revenue 18 CFR Part 388 this section that is in effect, or at any Code (26 U.S.C. 529), or a holder of an [Docket No. RM06–24–000; Order No. 683] time within the past six years was in interest in such a trust. effect, in an easily accessible place. (5) Shareholder information Critical Energy Infrastructure (b) Excepted funds. The requirements agreement means a written agreement Information of paragraph (a) of this section do not under which a financial intermediary apply to the following funds, unless Issued September 21, 2006. agrees to: they elect to impose a redemption fee AGENCY: Federal Energy Regulatory pursuant to paragraph (a)(1) of this (i) Provide, promptly upon request by Commission. a fund, the Taxpayer Identification section: ACTION: Final rule. (1) Money market funds; Number (or in the case of non U.S. (2) Any fund that issues securities shareholders, if the Taxpayer SUMMARY: The Federal Energy that are listed on a national securities Identification Number is unavailable, Regulatory Commission (Commission) is exchange; and the International Taxpayer issuing this final rule amending its (3) Any fund that affirmatively Identification Number or other regulations for gaining access to Critical permits short-term trading of its government issued identifier) of all Energy Infrastructure Information (CEII). securities, if its prospectus clearly and shareholders who have purchased, The definition of CEII is being clarified prominently discloses that the fund redeemed, transferred, or exchanged to exclude information that the permits short-term trading of its fund shares held through an account Commission never intended to be securities and that such trading may with the financial intermediary, and the deemed as containing critical result in additional costs for the fund. amount and dates of such shareholder infrastructure information. In addition, (c) Definitions. For the purposes of purchases, redemptions, transfers, and procedural changes are being made this section: exchanges; based on over three years experience (1) Financial intermediary means: (ii) Execute any instructions from the processing CEII requests. These changes (i) Any broker, dealer, bank, or other fund to restrict or prohibit further simplify the procedures for obtaining person that holds securities issued by purchases or exchanges of fund shares access to CEII without increasing the fund, in nominee name; by a shareholder who has been vulnerability of the energy (ii) A unit investment trust or fund infrastructure. that invests in the fund in reliance on identified by the fund as having engaged section 12(d)(1)(E) of the Act (15 U.S.C. in transactions of fund shares (directly DATES: Effective Date: The rule will 80a–12(d)(1)(E)); and or indirectly through the intermediary’s become effective November 2, 2006. account) that violate policies (iii) In the case of a participant- FOR FURTHER INFORMATION CONTACT: established by the fund for the purpose directed employee benefit plan that Teresina A. Stasko, Office of the General of eliminating or reducing any dilution owns the securities issued by the fund, Counsel, GC–13, Federal Energy of the value of the outstanding securities a retirement plan’s administrator under Regulatory Commission, 888 First issued by the fund; and section 3(16)(A) of the Employee Street, NE., Washington, DC 20426; Retirement Income Security Act of 1974 (iii) Use best efforts to determine, 202–502–8317. (29 U.S.C. 1002(16)(A)) or any person promptly upon request of the fund, SUPPLEMENTARY INFORMATION: that maintains the plan’s participant whether any specific person about records. whom it has received the identification Before Commissioners: Joseph T. Kelliher, (iv) Financial intermediary does not and transaction information set forth in Chairman; Suedeen G. Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff. include any person that the fund treats paragraph (c)(5)(i) of this section, is as an individual investor with respect to itself a financial intermediary (‘‘indirect 1. It has been over three years since the fund’s policies established for the intermediary’’) and, upon further the Commission issued its final order on purpose of eliminating or reducing any request by the fund: Critical Energy Infrastructure Information (CEII). See Critical Energy dilution of the value of the outstanding (A) Provide (or arrange to have Infrastructure Information, Order No. securities issued by the fund. provided) the identification and 630, 68 FR 9857 (Mar. 3, 2003), FERC (2) Fund means an open-end transaction information set forth in Stats. & Regs. ¶ 31,140 (2003); order on management investment company that paragraph (c)(5)(i) of this section reh’g, Order No. 630–A, 68 FR 46456 is registered or required to register regarding shareholders who hold an (Aug. 6, 2003), FERC Stats. & Regs. under section 8 of the Act (15 U.S.C. account with an indirect intermediary; ¶ 31,147 (2003). Since the issuance of 80a–8), and includes a separate series of or such an investment company. Order No. 630, the Commission has (3) Money market fund means an (B) Restrict or prohibit the indirect continually monitored and evaluated open-end management investment intermediary from purchasing, in the effectiveness of the CEII process. company that is registered under the nominee name on behalf of other The most recent review indicates that Act and is regulated as a money market persons, securities issued by the fund. changes are needed to assure the rules fund under § 270.2a–7. Dated: September 27, 2006. work in the manner intended. (4) Shareholder includes a beneficial By the Commission. 2. As explained below, the owner of securities held in nominee Commission makes strictly procedural name, a participant in a participant- Nancy M. Morris, changes in this instant and final rule. In directed employee benefit plan, and a Secretary. a notice of proposed rulemaking in holder of interests in a fund or unit [FR Doc. E6–16273 Filed 10–2–06; 8:45 am] Docket No. RM06–23–000, which is investment trust that has invested in the BILLING CODE 8010–01–P being issued concurrently with this final

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