As the mutual fund industry wrestles with the details of SEC's Rule 22c-2, it's important that we as an industry don't miss a significant opportunity. Rule 22c-2 presents the industry with the ability - and arguably, the obligation - to ensure that trades within omnibus accounts are held not only to a fund's short-term trading rules, but to all fund prospectus policies and procedures.

In enabling fund companies to request and receive omnibus account data from their intermediaries, 22c-2 gives funds a tool to oversee shareholder account detail that was previously inaccessible to them. Narrowly interpreted, 22c-2 addresses short-term trading. We at DST Systems view the 22c-2 opportunity more broadly. It is our position that, with this new transparency, funds should provide the same level of oversight of omnibus accounts that they provide for fully disclosed accounts.

Rule 22c-2 does not mandate how often omnibus account data should be shared. This ambiguity has caused some companies to lean toward a "macro," risk-based approach of receiving data relatively infrequently, conducting macroanalyses of the aggregated data in search of turnover or redemption anomalies, and investigating individual trades only when a potential problem is detected. The argument for this ad-hoc, in-arrears approach to oversight is the perceived cost of storing, managing and analyzing the data if it were received daily.

We at DST believe that the only effective way to monitor for short-term trading - and for other fund prospectus provisions - is to provide continuous oversight of trades within omnibus accounts. And the operationally prudent way to do this is to incorporate daily trade data from omnibus accounts into a fund company's standard review, detection and remediation processes, which are performed on a daily basis. As the industry's largest provider of third-party recordkeeping technology, we anticipate many problems associated with a less vigilant, ad-hoc approach to oversight.

The assumption that fund companies actually are able to detect irregularities within an omnibus trade is clearly questionable. Conducting macroanalytics of omnibus accounts hasn't worked in the past - as seen in the trading problems that brought the industry here in the first place. Looking at redemption-to-purchase ratios and watching for aggregate-level turnover in omnibus accounts will usually identify only net trade activity, not the detailed gross trade activity that is monitored on fully disclosed customer accounts.

Another questionable assumption is that receiving data on request and running queries in arrears in a data warehouse environment is efficient and cost-effective. This entails creating separate information management systems to query intermediaries for account data, and then artificially re-creating the fund rules and the daily processing environments for analysis. It would ultimately be more efficient and less expensive to receive the data daily and integrate it with the fund's direct accounts for standard daily review against the common fund rules, rather than attempting to replicate the rules.

These direct trades are already monitored for short-term trading and breakpoints, along with the fund's other policies. From the intermediary perspective, it should be much easier to send trade data daily than to custom reply to every request as it happens to come along.

Funds and intermediaries have an obligation to ensure that shareholders are treated equitably under the terms of fund prospectuses and policies. Data warehouse environments introduce possibilities for inconsistencies between the fund's fully disclosed data and the periodic review of omnibus data, which means that the two populations are treated differently. The approach of relying on macroanalytics to flag potential problems also essentially amounts to selective enforcement of policies and procedures.

While 22c-2 explicitly addresses short-term trading, it is reasonable to assume that the SEC is still concerned with the other issues that came out of the mutual fund scandals, including rights of accumulation and fair pricing. Once omnibus account data is accessible to fund companies, it should be checked against all of the terms in their prospectuses. The question is, when will the other shoe drop? Will the SEC find it acceptable if funds do not utilize their access to omnibus detailed transaction activity to ensure that all customers are treated equally and equitably under the terms of their prospectuses?

The ostrich strategy rarely works with regulators. If a fund firm has access to omnibus account data via 22c-2 and fails to use it to monitor, for example, for proper breakpoint determination, will the SEC view the oversight obligation as fulfilled? Fund companies were able to point to the lack of transparency within omnibus accounts as the reason for their inability to monitor for improper activity before. That defense now doesn't appear to be applicable.

DST's technology and range of solutions will support a fund company's business strategy, regardless of which approach it takes. But we urge the industry to strongly consider taking the long-term view with regard to utilizing 22c-2 as an oversight and enforcement tool.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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