Despite the industry's best efforts, it doesn't appear that the haze surrounding the Securities and Exchange Commission's controversial redemption fee rule is about to clear.

Officially known as Rule 22c-2 and an amendment to the Investment Company Act of 1940 adopted last March, the mandate is meant to sniff out instances of market timing that might be illegal or costly to long-term fund shareholders. At its core, the provision would allow funds to impose a 2% redemption fee on shareholders that sell their stakes within seven days of purchase.

But it also requires that funds draft and enter into legally binding, information-sharing agreements with literally thousands of financial intermediaries, many of which could be buried in huge omnibus accounts at a fund's brokerage house. That would include, for instance, tiny employer-sponsored 401(k) accounts. The cost of complying with this aspect of the rule, fund complexes have argued, is much too burdensome.

So earlier this month, the SEC indicated that it would like to narrow the rule's definition of financial intermediary to exclude those investors that a fund might treat as an individual investor, such as those tiny 401(k) accounts. Then late last week, the Investment Company Institute began offering its members a Rule 22c-2 agreement package.

By itself, the narrowing of the definition of financial intermediary could slash literally hundreds of millions of dollars off the price tag of the rule, experts say. The 28-page model agreement package from the ICI, meanwhile, should help alleviate the legal costs associated with drafting individual agreements, as well as educate financial intermediaries about their obligations to the rule and ease their concerns about sharing vital client information, such as Social Security numbers and tax identification numbers.

But Victor Siclari, a partner with Reed Smith in Pittsburgh, said the industry is nowhere nearer to getting its arms around the rule than it was 12 months ago.

"The whole approach the SEC has taken with this rule has been very disruptive to the fund industry," said Siclari, a former fund attorney and SEC regulator. "There are a lot of operations and technology problems that accompany this rule. The SEC just doesn't understand this industry as well as it should. It took an entire year for them to provide additional clarity to the rule, and there's still this Oct. 16 deadline out there.

"Fund complexes have been left scratching their heads," he said.

For its part, the SEC has indicated that it would consider pushing the compliance deadline ahead, but a decision isn't likely until sometime after the amendment's comment period closes next month.

Without a detailed rule, Siclari said, it's been very difficult to advise fund boards on whether they should consider adopting a redemption fee policy. For starters, he said, it's impossible to determine an exact cost for rule. Some funds have already implemented comprehensive measures to police market timing, so it might be more cost effective for them to ignore redemption fees.

The SEC's proposed amendment also puts an additional burden on funds, rather than alleviating one, Siclari observed. Although the amendment narrows the SEC's definition of financial intermediary, the regulator has left it to the funds to determine who they should police.

"Isn't that exactly what got them into trouble in the first place?" he remarked. "Things are just getting cloudier, and time is running out."

The ICI hopes its model agreement package might help. The package includes an introductory note from its authors and a pair of cover letters. One is an execution agreement and the other is a negative consent form. The package also includes a list of the various documents that a financial intermediary would receive from a fund and an explanation of what would be needed in return. Accompanying that list is a packet of documents that includes model agreements, a summary of Rule 22c-2, a legal outline of potential privacy issue and information regarding a recent data exchange solution from the Depository Trust Clearing Corp.

"Rather than have all of these fund complexes out there come up with their own agreements, their own cover letters, their own packages, we hoped that by providing some uniformity to the process, a package they could tailor to their individual needs, we would greatly facilitate their ability to begin communicating with their intermediaries about the rule," explained Tami Salmon, senior associate counsel with the Washington-based trade group.

Extending a comprehensive package to intermediaries, she added, would also give them the opportunity to prepare for data requests from funds.

"They'll know the kinds of information funds are going to be expecting them to provide, and what their role and responsibilities are under the rule," Salmon said.

Salmon expects that an executive summary covering privacy issues will be particularly helpful to financial intermediaries, which have been concerned that state and Federal law might preclude them from sharing customer information.

"The disclosures of Social Security numbers and other information about individual shareholders mandated by the rule are consistent with applicable Federal and state law," a six-page analysis from the Washington law firm Alston & Bird concludes.

Kathy Joaquin, director of operations and distribution at the ICI, said the package's information regarding the DTCC technology solution for transmitting that customer data should further alleviate concerns among financial intermediaries.

"Making financial intermediaries aware that a low-cost, secure method for transmitting that data exists is certainly important," she said.

Testing of the solution, which leverages existing technology, will begin this summer.

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

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