The National Securities Clearing Corp. (NSCC) plans to have a solution in place by mid-August to help mutual fund companies comply with the Securities and Exchange Commission's Rule 22c-2. The rule, scheduled to take effect on Oct. 16, requires funds to monitor accounts for market timing and set up agreements with intermediaries to respond to inquiries about questionable trades.
Fund companies have complained this would create a potential logistical nightmare, as they deal with multiple intermediaries, each with different data formats and transmission approaches. "If there's no data standard, [the fund] is going to have to negotiate what [the data] layout will be, and someone will have to program it" for each intermediary that a fund deals with, explained Tim O'Sullivan, a senior manager in Deloitte & Touche's national regulatory compliance practice.
The solution from NSCC, a unit of Depository Trust & Clearing Corp. (DTCC) of New York, resolves many of those issues by establishing data standards. "It provides a standardized format, so industry participants now have the same protocol in terms of data fields - the account holder's name goes here, the volume of shares goes there, etc.," said Peter Delano, an analyst with the TowerGroup unit of MasterCard International in Needham, Mass.
The protocol was designed by a cross-industry working group sponsored by the Investment Company Institute and chaired by Stuart J. Bateman, senior vice president at Franklin Templeton Investments of San Mateo, Calif.
However, large brokerage firms such as Charles Schwab have the technology in place to provide mutual fund companies with much of the data they need, and it may be more cost-effective for them to continue providing the data themselves.
Delano described Schwab's trade activity portal as "pull" technology that requires funds to actively retrieve the necessary data. The NSCC system, on the other hand, will allow funds to "push their requests to intermediaries," Delano said.
He expects that Schwab's clout in the market and the technology investment it has already made will factor into its decision. "Schwab may do an analysis and realize there's a greater cost-benefit providing data through its portal compared to transmitting the data through the NSCC," Delano said.
While the original rule heaped responsibility for monitoring trades on mutual funds, subsequent amendments would require intermediaries to take responsibility for trades by firms they do business with, Delano said. In such situations, a "first-tier" intermediary holding an omnibus account at the mutual fund or a transfer agent may process order activity not only for its own accounts but also for other firms it does business with, such as registered investment advisors and their 401(k) customers. The first-tier entity would be responsible for sending the details of the entire intermediary chain's account activity to the mutual funds and answering the funds' inquiries about those accounts.
The SEC's amendments do not require first-tier intermediaries to receive data from other intermediaries further down the chain, Deloitte & Touche's O'Sullivan noted. However, funds must stop taking orders from intermediaries that do not provide the requested information or that do not enter into data-exchange agreements with them.
The NSCC views its enhanced service as purely an information-exchange facility that provides a means to pass non-order-related information about mutual fund customers between intermediaries and funds. The NSCC currently has several hundred members, mainly comprising large clearing-type entities on the intermediary side. But there are thousands of intermediaries of various kinds that send orders to mutual funds, and the industry must work out how they will participate.
"A first-tier intermediary can get info from a second-tier one and pass it through to us," explained Barbara Simon, DTCC vice president. "Or, if the second-tier is an NSCC member, it could go through the networking system." One alternative, Simon explained, is membership in NSCC for data services only, whereby firms do not settle orders through NSCC but simply use its infrastructure to transmit data. The costs are a monthly $200 participation fee and $0.0025 per transaction. It would permit second- and third-tier intermediaries to transmit data directly to funds or transfer agents and respond to their information requests.
Meanwhile, vendors such as SunGard Data Systems of Wayne, Pa., and Access Data of Pittsburgh are also developing solutions to help funds and intermediaries comply.
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