Redemption Fee Rule to Cost Industry $617.5M

Setting redemption fees in compliance with the SEC's new Rule 22c-2 is going to cost the mutual fund industry $617.5 million over the next three years, a new report from TowerGroup shows.

Although it does not automatically require funds to establish redemption fees, Rule 22c-2 requires boards of all funds--except money market, exchange-traded and funds specifically designed for active trading--to at least vote on whether redemption fees of up to 2% for shares exchanged within seven days would deter market timing. Funds that decide to establish a redemption fee must then set up policies with intermediaries to obtain shareholder trading information on a regular, consistent basis.

Finding those intermediaries, which Rule 22c-2 defines in a broader definition than previously, and then setting up procedures with them is what's going to be expensive, according to TowerGroup, as omnibus accounts representing 145 million shareholder accounts constitute 35% of all fund sales and it is likely that most long-term funds will adopt the rule.

The SEC voted on Rule 22c-2 on March 3, and it is set to take effect on or around August 2006.