Mutual Fund Redemption Fees, 58257-58273 [E6-16273]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 191 (Tuesday, October 3, 2006)]
[Rules and Regulations]
[Pages 58257-58273]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-16273]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release No. IC-27504; File No. S7-06-06; File No. 4-512]
RIN 3235-AJ51


Mutual Fund Redemption Fees

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is adopting amendments to a rule under the Investment Company 
Act. The rule, among other things, requires most open-end investment 
companies (``funds'') to enter into agreements with intermediaries, 
such as broker-dealers,

[[Page 58258]]

that hold shares on behalf of other investors in so called ``omnibus 
accounts.'' These agreements must provide funds access to information 
about transactions in these accounts to enable the funds to enforce 
restrictions on market timing and similar abusive transactions. The 
Commission is amending the rule to clarify the operation of the rule 
and reduce the number of intermediaries with which funds must negotiate 
shareholder information agreements. The amendments are designed to 
reduce the costs to funds (and fund shareholders) while still achieving 
the goals of the rulemaking.

DATES: Effective Date: December 4, 2006.
    Compliance Dates: Section III of this Release contains more 
information on applicable compliance dates.

FOR FURTHER INFORMATION CONTACT: Thoreau Bartmann, Staff Attorney, or 
C. Hunter Jones, Assistant Director, Office of Regulatory Policy (202) 
551-6792, Division of Investment Management, Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549-5041.

SUPPLEMENTARY INFORMATION: The Commission today is adopting amendments 
to rule 22c-2 \1\ under the Investment Company Act of 1940 \2\ (the 
``Investment Company Act'' or the ``Act'').\3\

    \1\ 17 CFR 270.22c-2.
    \2\ 15 U.S.C. 80a.
    \3\ Unless otherwise noted, all references to statutory sections 
are to the Investment Company Act, and all references to ``rule 22c-
2,'' ``the rule,'' or any paragraph of the rule will be to 17 CFR 
270.22c-2.
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Table of Contents

I. Background
II. Discussion
    A. Shareholder Information Agreements
    1. Small Intermediaries
    2. Intermediary Chains
    3. Effect of Lacking an Agreement
    B. Operation of the Rule
    C. Redemption Fees
III. Compliance Dates
IV. Cost-Benefit Analysis
V. Consideration of Promotion of Efficiency, Competition and Capital 
Formation
VI. Paperwork Reduction Act
VII. Final Regulatory Flexibility Analysis
VIII. Statutory Authority
Text of Amended Rule

I. Background

    On March 11, 2005, the Commission adopted rule 22c-2 under the 
Investment Company Act to help address abuses associated with short-
term trading of fund shares.\4\ Rule 22c-2 provides that if a fund 
redeems its shares within seven days,\5\ its board must consider 
whether to impose a fee of up to two percent of the value of shares 
redeemed shortly after their purchase (``redemption fee'').\6\ The rule 
also requires such a fund to enter into agreements with its 
intermediaries that provide fund management the ability to identify 
investors whose trading violates fund restrictions on short-term 
trading (``shareholder information agreements'').\7\
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    \4\ See Mutual Fund Redemption Fees, Investment Company Act 
Release No. 26782 (Mar. 11, 2005) [70 FR 13328 (Mar. 18, 2005)] 
(``Adopting Release'').
    \5\ Because the large majority of funds redeem shares within 
seven days of purchase, the practical effect of rule 22c-2, and 
these amendments, would be to require most funds to comply with the 
rule's requirements. Therefore, throughout this Release we may 
describe funds as being ``required to comply'' with a provision of 
the rule, when the actual requirement only applies if a fund redeems 
its shares within seven days. A fund that does not redeem its shares 
within seven days would not be required to comply with those 
provisions of rule 22c-2.
    \6\ Rule 22c-2(a)(1). Under the rule, the board of directors 
must either (i) approve a fee of up to 2% of the value of shares 
redeemed, or (ii) determine that the imposition of a fee is not 
necessary or appropriate. Id. A board, on behalf of the fund, may 
determine that the imposition of a redemption fee is unnecessary or 
inappropriate because, for example, the fund is not vulnerable to 
frequent trading or the nature of the fund makes it unlikely that 
the fund would be harmed by frequent trading. Indeed, a redemption 
fee is not the only method available to a fund to address frequent 
trading in its shares. As we have stated in previous releases, funds 
have adopted different methods to address frequent trading, 
including: (i) Restricting exchange privileges; (ii) limiting the 
number of trades within a specified period; (iii) delaying the 
payment of proceeds from redemptions for up to seven days (the 
maximum delay permitted under section 22(e) of the Act); (iv) 
satisfying redemption requests in-kind; and (v) identifying market 
timers and restricting their trading or barring them from the fund. 
See Adopting Release, supra note 4, at n.9; Disclosure Regarding 
Market Timing and Selective Disclosure of Portfolio Holdings, 
Investment Company Act Release No. 26287 (Dec. 11, 2003) [68 FR 
70402 (Dec. 17, 2003)] at text preceding and following n.14.
    \7\ Under the rule, the fund (or its principal underwriter) must 
enter into a written agreement with each of its financial 
intermediaries under which the intermediary agrees to (i) provide, 
at the fund's request, identity and transaction information about 
shareholders who hold their shares through an account with the 
intermediary, and (ii) execute instructions from the fund to 
restrict or prohibit future purchases or exchanges. The fund must 
keep a copy of each written agreement for six years. Rule 22c-
2(a)(2), (3).
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    After hearing concerns about the operation of the information 
sharing provisions of the rule from fund management companies, in March 
of this year we proposed amendments that would reduce the costs of 
compliance and clarify the rule's application in certain 
circumstances.\8\ The amendments are described in more detail below. We 
received 32 comment letters on the proposed amendments.\9\ Most 
commenters supported the proposal. Today we are adopting those 
amendments substantially as proposed, with some changes that reflect 
the comments we received.
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    \8\ See Mutual Fund Redemption Fees, Investment Company Act 
Release No. 27255 (Feb. 28, 2006) [71 FR 11351 (Mar. 7, 2006)] 
(``2006 Proposing Release'').
    \9\ Comment letters on the 2006 Proposing Release are available 
in File No. S7-06-06, which is accessible at https://www.sec.gov/
rules/proposed/s70606.shtml. Comment letters on the 2005 adoption 
are available in File No. S7-11-04, which is accessible at https://
www.sec.gov/rules/proposed/s71104.shtml. References to comment 
letters are to letters in those files.
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II. Discussion

A. Shareholder Information Agreements

    The amendments to rule 22c-2 we are adopting today (i) limit the 
types of intermediaries with which funds must enter into shareholder 
information agreements, (ii) address the rule's application when there 
are chains of intermediaries, and (iii) clarify the effect of a fund's 
failure to obtain an agreement with any of its intermediaries.
1. Small Intermediaries
    Rule 22c-2 prohibits a fund from redeeming shares within seven days 
unless, among other things, the fund enters into written agreements 
with its financial intermediaries (such as broker-dealers or retirement 
plan administrators) that hold shares on behalf of other investors.\10\ 
Under those agreements, the intermediaries must agree to provide, at 
the fund's request, shareholder identity (i.e., taxpayer identification 
number or ``TIN'' \11\) and transaction information,\12\ and carry out

[[Page 58259]]

instructions from the fund to restrict or prohibit further purchases or 
exchanges by a shareholder (as identified by the fund) who has engaged 
in trading that violates the fund's frequent trading (e.g. market 
timing) policies.\13\ We designed this provision to enable funds to 
obtain the information that they need to monitor short-term trading in 
omnibus accounts and enforce their market timing policies.
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    \10\ Rule 22c-2(a)(2). The rule excepts a fund from the 
requirement to enter into written agreements if, among other things, 
the fund ``affirmatively permits short-term trading of its 
securities.'' See rule 22c-2(b)(3). ``Financial intermediary'' is 
defined in rule 22c-2(c)(1).
    \11\ Some commenters noted that in the case of foreign 
shareholders, TINs may not always be available, and suggested that 
the rule permit alternate identifiers in those circumstances. See 
Comment Letter of the Investment Company Institute (``ICI'') (Apr. 
10, 2006). In order to accommodate the use of alternative 
identifiers in those circumstances, we have revised the rule to 
allow for the use of Individual Taxpayer Identification Numbers 
(``ITINs'') or other government issued identifiers to identify 
foreign shareholders if a TIN is unavailable. See rule 22c-
2(c)(5)(i).
    \12\ One comment letter submitted after the adoption of rule 
22c-2 expressed concern that the rule's contract provision, 
requiring that agreements with intermediaries mandate the disclosure 
of shareholder information at the fund's request, conflicts with 
Commission rules governing proxy solicitations. See Comment Letter 
of the American Bankers Assoc. (June 6, 2005). The Commission's 
proxy solicitation rules are set forth in Regulation 14A under the 
Securities Exchange Act of 1934, 17 CFR 240.14a-1 to 14b-2. The 
proxy rules govern the disclosure of information in the context of 
proxy solicitations, and do not prohibit banks, broker-dealers and 
other intermediaries from complying with agreements entered under 
rule 22c-2. See 2006 Proposing Release, supra note 8, at n.17.
    \13\ See rule 22c-2(c)(5) (defining ``shareholder information 
agreement,'' which is discussed further in Section II.B below).
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    After we adopted the rule in 2005, many fund managers expressed 
concern that the rule would require them to review a large number of 
their shareholder accounts in order to determine which shareholders are 
``financial intermediaries'' as defined under the rule.\14\ They noted 
that, because the definition encompassed any entity that holds 
securities in nominee name for other investors, it would include, for 
example, a small business retirement plan that holds mutual fund shares 
on behalf of only a few employees and that may not identify itself as a 
financial intermediary to the fund. These commenters emphasized that 
the task of identifying these intermediaries, as well as negotiating 
agreements with them, would be costly and burdensome.
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    \14\ See, e.g., Comment Letter of OppenheimerFunds, Inc. (May 9, 
2005).
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    To address these concerns, earlier this year we proposed to narrow 
the scope of the rule by excluding from the definition of ``financial 
intermediary'' those intermediaries that the fund treats as individual 
investors for purpose of the fund's frequent trading policies. Our 
proposal was premised on the understanding that when a fund places 
restrictions on transactions at the intermediary level (i.e., when the 
fund treats the intermediary itself as an individual investor), the 
fund is unlikely to need data about frequent trading by individual 
shareholders who hold shares through that intermediary, because abusive 
short-term trading by the individual shareholders holding through the 
omnibus account would ordinarily trigger application of those policies 
to the intermediary's trades.\15\ Therefore, transparency regarding 
underlying shareholder transactions executed through these accounts 
seemed unnecessary to achieve the goals of the rule. We believed that 
this new approach would substantially eliminate the need for funds to 
devote resources to identifying intermediaries, because the funds will 
have already identified the relevant intermediaries in the course of 
administering their policies on short-term trading. Commenters agreed 
with our analysis and urged that we adopt the amendments.\16 \
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    \15\ A fund typically exempts from its frequent trading policies 
the transactions of an intermediary that holds fund shares, on 
behalf of its customers, in an omnibus account with the fund. See, 
e.g., Mandatory Redemption Fees For Redeemable Fund Securities, 
Investment Company Act Release No. 26375A, at text accompanying n. 
39 (Mar. 5, 2004) [69 FR 11762 (Mar. 11, 2004)] (``2004 Proposing 
Release''). The fund exempts the intermediary because the daily 
changes in the intermediary's position, on behalf of its various 
customers' purchases and redemptions, result in a single purchase or 
redemption each day in the intermediary's omnibus account. If the 
intermediary were not exempt, its daily net trades would likely 
subject it to redemption fees or trading limitations. See The 
Coalition of Mutual Fund Investors, An Evaluation of the Redemption 
Fee and Market Timing Policies of the Largest Mutual Fund Groups 
(May 5, 2005) (available at https://www.investorscoalition.com/
CMFIMarketTimingStudy05.pdf.).
    \16\ See, e.g., Comment Letter of the Investment Company 
Institute (Apr. 10, 2006); Comment Letter of Charles Schwab & Co., 
Inc. (Apr. 10, 2006).
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    Today we are amending the definition of ``financial intermediary'' 
in rule 22c-2 to exclude from that definition any entity that the fund 
treats as an ``individual investor'' for purposes of the fund's 
policies intended to eliminate or reduce dilution of the value of fund 
shares, i.e., frequent trading and redemption fee policies.\17\ As a 
result, if a fund, for example, applies a redemption fee or exchange 
limits to transactions by a retirement plan (an intermediary) rather 
than to the purchases and redemptions of the employees in the plan, 
then the plan would not be considered a ``financial intermediary'' 
under the rule, and the fund would not be required to enter into an 
agreement with that plan.\18\
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    \17\ Rule 22c-2(c)(1)(iv). If a fund has not established 
frequent trading policies and thus has not determined which persons 
it does not treat as individual investors, this exclusion from the 
definition of ``financial intermediary'' would not apply, and the 
fund would need to identify those shareholder accounts that are 
``financial intermediaries.'' See 2006 Proposing Release, supra note 
8, at n.23.
    \18\ We have not, as recommended by some commenters, revised the 
rule to specify the circumstances under which a fund may treat an 
intermediary as an individual investor rather than an intermediary 
for purposes of its frequent trading policies. See, e.g., Comment 
Letter of Charles Schwab & Co., Inc. (Apr. 10, 2006). We continue to 
believe that funds are in the best position to determine the 
treatment of an account as an individual investor under their 
frequent trading policies. Moreover, we believe a fund will have 
little incentive to ``inappropriately'' treat any intermediary as an 
individual shareholder, because the intermediary is free to 
terminate its relationship with the fund.
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    The Commission is making one change from our proposal in response 
to commenters who pointed out that, in some cases, purchase and 
redemption orders are aggregated and submitted by agents of 
intermediaries on behalf of the intermediaries.\19\ These commenters 
stated that under the rule as proposed, it was unclear whether an order 
submitted by an agent of an intermediary would be covered by the rule. 
In order to clarify the rule in response to those comments, we have 
revised it to provide that funds must enter into agreements with ``each 
financial intermediary that submits orders, itself or through its 
agent, to purchase or redeem shares directly to the fund * * *'' 
(changes in italics).\20\ This revision clarifies that funds must enter 
into agreements with financial intermediaries or their agents even if 
the intermediaries submit orders through entities that do not qualify 
as financial intermediaries.
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    \19\ See, e.g., Comment Letter of Matrix Settlement & Clearing 
Services, L.L.C. (Apr. 10, 2006).
    \20\ Rule 22c-2(a)(2). We are also revising paragraph (a)(2)(i) 
of the rule to require that the fund enter into an agreement with 
each such ``intermediary (or its agent).'' Rule 22c-2(a)(2)(i).
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2. Intermediary Chains
    In some cases, an intermediary such as a broker-dealer may hold 
shares of a mutual fund not only on behalf of individual investors, but 
also on behalf of other financial intermediaries, such as pension plans 
or other broker-dealers (``indirect intermediaries'') through one or 
more layers of intermediaries or ``chains.'' After we adopted rule 22c-
2 in 2005, fund managers expressed uncertainty as to how the rule 
applied to these arrangements, and expressed concern how, as a 
practical matter, a fund could obtain shareholder information through 
multiple layers of intermediaries.\21\ In response to these concerns, 
we proposed and are now adopting amendments to clarify the operation of 
the rule as it applies to ``chains of intermediaries.''
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    \21\ See, e.g., Comment Letter of T. Rowe Price Associates, Inc. 
(May 24, 2005).
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    The revised rule requires that a fund (or, on the fund's behalf, 
its principal underwriter or transfer agent \22\) enter

[[Page 58260]]

into a shareholder information agreement \23\ only with those financial 
intermediaries \24\ that submit purchase or redemption orders directly 
to the fund, its principal underwriter or transfer agent, or a 
registered clearing agency (``first-tier intermediaries'').\25\ The 
rule does not require first-tier intermediaries to enter into 
shareholder information agreements with any indirect intermediaries.
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    \22\ When rule 22c-2 was adopted in 2005, it required a fund, or 
a principal underwriter acting on behalf of the fund, to enter into 
shareholder information agreements with intermediaries. In addition 
to the amendments described above, as proposed, we are also revising 
the rule to include a fund's transfer agent as an entity that may 
enter into a shareholder information agreement on the fund's behalf. 
As we noted when we proposed this change, the fund's transfer agent 
often has preexisting agreements with a fund's financial 
intermediaries, and thus permitting transfer agents to enter into 
information agreements may avoid potentially duplicative agreements 
or inefficiencies in the process. See 2006 Proposing Release, supra 
note 8, at text accompanying n.38. If a transfer agent enters into 
an agreement on behalf of the fund, the agreement must require the 
financial intermediary to provide the requested information to the 
fund upon the fund's request. See id. at n.37.
    We are not adopting the proposed revision that would have 
permitted a registered clearing agency to enter into shareholder 
information agreements on behalf of a fund. We received comment from 
the only registered clearing agency that receives orders for 
transactions in fund shares, noting that it does not have the 
capability to serve in this function (because it does not act as an 
agent for funds) and requesting that we revise the final rule to 
reflect this fact. See Comment Letter of the National Securities 
Clearing Corporation (Apr. 10, 2006). We agree with the commenter's 
concern that including this reference to clearing agencies might 
cause confusion.
    \23\ Rule 22c-2(c)(5). The agreement, which must be in writing, 
may be part of another contract or agreement, such as a distribution 
agreement.
    \24\ We understand that retirement plan administrators and other 
persons that maintain the plan's participant records typically 
submit fund shares transactions to the fund or its transfer agent, 
principal underwriter, or a registered clearing agency. The rule as 
we adopted it last year specifically includes these administrators 
and recordkeepers within the definition of a ``financial 
intermediary.'' See rule 22c-2(c)(1)(iii).
    \25\ Rule 22c-2(a)(2). We also considered, as an alternative to 
this requirement, that shareholder information agreements not 
require the collection of any shareholder information from indirect 
intermediaries. We did not take that approach because we are 
concerned that providing such an exception might encourage abusive 
short-term traders to conduct their activities through an indirect 
intermediary in order to avoid detection by the fund.
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    Under the proposed rule amendments, a shareholder information 
agreement would obligate a first-tier intermediary to, upon request of 
the fund, use its best efforts to identify any accountholders who are 
themselves intermediaries, and obtain and forward (or have forwarded) 
the underlying shareholder identity and transaction information from 
those indirect intermediaries farther down the chain.\26\ Some 
commenters expressed concern that shareholder information agreements 
might require first-tier intermediaries (and indirect intermediaries) 
to canvass all of their shareholder accounts to determine which 
accountholders are themselves intermediaries if a fund made a blanket 
request to identify all indirect intermediaries.\27\
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    \26\ See proposed rule 22c-2(c)(5)(iii) (discussed in 2006 
Proposing Release, supra note 8, at Section II.B).
    \27\ See Comment Letter of the Securities Industry Assoc. (Apr 
10, 2006); Comment Letter of Charles Schwab & Co., Inc. (Apr. 10, 
2006).
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    In light of these concerns, we have revised the rule text to 
clarify that a fund, after receiving initial transaction information 
from a first-tier intermediary, must make a specific further request to 
the first-tier intermediary for information on certain 
shareholders.\28\ As adopted, the amended rule defines ``shareholder 
information agreement'' as an agreement under which a financial 
intermediary agrees to ``[u]se best efforts to determine, promptly upon 
request of the fund, whether any specific person about whom it has 
received the identification and transaction information * * * [required 
by the rule], is itself a financial intermediary * * *'' (changes in 
italics).\29\ Under the revised rule, a shareholder information 
agreement need not obligate a first-tier intermediary to perform a 
complete review of its books and records to identify all indirect 
intermediaries. Instead, pursuant to a shareholder information 
agreement, a first-tier intermediary must use its best efforts to 
identify whether or not certain specific accounts identified by the 
fund are indirect intermediaries.\30\ If an indirect intermediary that 
holds an account with a first-tier intermediary does not provide 
underlying shareholder information, the agreement must obligate the 
first-tier intermediary to prohibit, upon the fund's request, that 
indirect intermediary from purchasing additional shares of the fund 
through the first-tier intermediary.\31\
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    \28\ See rule 22c-2(c)(5)(iii). For example, after receiving 
identity and transaction information from a first-tier intermediary, 
the fund could then request information from the first-tier 
intermediary concerning those frequent trading shareholders whose 
transactions were particularly active, in order to determine whether 
those shareholders are themselves intermediaries. Under the 
shareholder information agreement, the first-tier intermediary would 
then be required to use its best efforts to determine, on behalf of 
the fund, whether any of those shareholders are intermediaries 
(i.e., second-tier intermediaries). After the first-tier 
intermediary informs the fund which of the shareholders are second-
tier intermediaries, the fund could then request that the first-tier 
intermediary obtain underlying shareholder transaction information 
from any or all of those second-tier intermediaries.
    \29\ See rule 22c-2(c)(5)(iii).
    \30\ Rule 22c-2(a)(2). A first-tier intermediary also may choose 
to indicate to the fund, when the intermediary initially discloses 
transaction information requested by the fund, which shareholders it 
knows to be indirect intermediaries. This practice may reduce a 
fund's need to request further information about indirect 
intermediaries.
    \31\ Rule 22c-2(c)(5)(iii)(B). Under the rule, therefore, if, 
upon specific request of the fund, an indirect intermediary (such as 
a third-tier intermediary) does not provide information whether one 
or more of its shareholders is an intermediary, then upon further 
request by the fund, the first-tier intermediary would be required 
to restrict or prohibit that indirect intermediary from purchasing 
additional shares of the fund on behalf of other investors.
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3. Effect of Lacking an Agreement
    After we adopted the rule, some commenters expressed concern that 
the rule, which made it unlawful for a fund to redeem a security within 
seven days without entering into a shareholder information agreement, 
could be interpreted to prevent a fund from redeeming any of its shares 
if it failed to enter into an agreement with any intermediary. 
Therefore we proposed, and are today adopting, an amendment to the rule 
that clarifies and further limits the consequences of failing to enter 
into an information agreement.
    Under rule 22c-2, as amended, if a fund does not have an agreement 
with a particular intermediary, the fund thereafter must prohibit that 
intermediary from purchasing securities issued by the fund.\32\ The 
prohibition applies only to the intermediary with which the fund does 
not have an agreement; purchases from other intermediaries will not be 
affected.\33\ One commenter argued that the rule

[[Page 58261]]

should not prohibit purchases that are fully disclosed to the fund.\34\ 
We agree that the fund does not need further information under an 
agreement to scrutinize those purchases. Therefore, we have revised the 
final rule to provide that, if there is no shareholder information 
agreement with a particular intermediary, the fund must prohibit the 
intermediary from purchasing the fund's securities only ``in nominee 
name on behalf of other persons.'' \35\ We have also, for the same 
reason, revised this provision so that it does not apply to the 
intermediary's purchases of fund securities on behalf of the 
intermediary itself.\36\
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    \32\ Rule 22c-2(a)(2)(ii). One commenter suggested that we 
clarify that in these circumstances a ``purchase'' would not include 
the automatic reinvestment of dividends. See Comment Letter of the 
Investment Company Institute (Apr. 10, 2006). We agree that the 
reinvestment of dividends does not present the types of frequent 
trading risks that the rule is designed to help funds prevent. We 
therefore have revised the rule text to clarify that, for purposes 
of this provision, a ``purchase'' does not include the automatic 
reinvestment of dividends. See rule 22c-2(a)(2)(ii).
    \33\ A number of commenters expressed concerns about possible 
conflicts with the Employee Retirement Income Security Act of 1974, 
29 U.S.C. 1001 (``ERISA''), and Department of Labor rules under 
ERISA, in complying with rule 22c-2. They stated that those laws: 
(i) Require certain ``blackout'' disclosures before a plan sponsor 
may carry out a fund's request to prohibit future purchases; and 
(ii) provide a safe harbor under section 404(c) of ERISA from 
liability as a fiduciary only if the plan provides participants an 
adequate number of investment alternatives and the ability to trade 
among them with appropriate frequency, in light of the market 
volatility of those alternatives. See, e.g., Comment Letter of the 
American Bankers Assoc. (Apr. 14, 2006) (citing ERISA section 
101(i), ERISA section 404(c), 29 CFR 2520, and 29 CFR 2550.404c-1); 
Comment Letter of the American Benefits Council (Apr. 10, 2006). Our 
staff has conferred with representatives of the Department of Labor, 
who have advised us that these concerns have been addressed in 
guidance on the duties of employee benefit plan fiduciaries in light 
of alleged abuses involving mutual funds. See Statement of Ann L. 
Combs, Assistant Secretary, Department of Labor, Fiduciary 
Responsibilities Related to Mutual Funds, (Feb. 17, 2004) (available 
at https://www.dol.gov/ebsa/newsroom/sp021704.html) (reasonable 
redemption fees and reasonable plan or investment fund limits on the 
number of times a participant can move in and out of a particular 
investment within a particular period ``represent approaches to 
limiting market timing that do not, in and of themselves, run afoul 
of the `volatility' and other requirements set forth in the 
Department's regulation under section 404(c), provided that any such 
restrictions are allowed under the terms of the plan and clearly 
disclosed to the plan's participants and beneficiaries.'').
    \34\ See Comment Letter of the American Bankers Assoc. at 6 
(Apr. 14, 2006).
    \35\ A similar revision has been made to the same type of 
provision concerning chains of intermediaries. See rule 22c-
2(c)(5)(iii)(B).
    \36\ Rule 22c-2(a)(2)(ii), (c)(5)(iii)(B). One commenter 
requested that the Commission provide further guidance to financial 
intermediaries that attempt to carry out instructions from a fund, 
under rule 22c-2(c)(5)(ii), to ``restrict or prohibit further 
purchases or exchanges'' by a particular investor whom the fund has 
identified as violating its frequent trading policies. See Comment 
Letter of the Committee of Annuity Insurers (submitted by Sutherland 
Asbill & Brennan LLP) (Apr. 10, 2006). The commenter noted that an 
``exchange'' (or transfer) request is actually two simultaneous 
orders: an order to redeem shares of one fund and an order to 
purchase, with the proceeds of the redemption, shares of another 
fund. This commenter questioned whether the rule was meant to 
include both the redemption and purchase order. As noted, the rule 
permits a fund to restrict or prohibit ``exchanges.'' We agree with 
the commenter that an ``exchange'' request includes both a 
redemption order and purchase order, and if a fund instructs an 
intermediary to restrict an ``exchange'' (or a purchase), the 
intermediary may notify the investor that it will not effect the 
redemption portion of a request to exchange into the fund, as well 
as the purchase portion of the request.
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    Some commenters suggested alternative approaches that we have 
decided not to adopt. One recommended that the rule preclude 
intermediaries that lack an agreement with funds from redeeming shares 
within seven days of purchase, rather than prohibiting further 
purchases of fund shares.\37\ This approach is not acceptable to us 
because it would deny investors access to their funds for seven days 
after purchasing shares through such an intermediary, thereby 
penalizing investors for the inability or unwillingness of a fund and 
intermediary to enter into a shareholder information agreement. Another 
commenter argued that the rule should instead preclude a fund from 
making further payments under selling or dealer agreements to 
intermediaries that lack shareholder information agreements.\38\ 
However, all funds do not necessarily have selling or dealer agreements 
with all of their ``financial intermediaries'' as defined in the rule, 
and restricting the rule's scope to those intermediaries that have such 
agreements would likely seriously restrict a fund's ability to gather 
information and enforce its policies. After careful consideration of 
the suggested alternatives, we believe that barring future purchases by 
intermediaries best serves the purposes of the rule.
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    \37\ See Comment Letter of the American Benefits Council (Apr. 
10, 2006).
    \38\ See Comment Letter of Federated Investors, Inc. (submitted 
by ReedSmith LLP) (Apr. 6, 2006).
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B. Operation of the Rule

    When we adopted rule 22c-2, we explained that the shareholder 
information agreement requirement is designed to give fund managers 
(and their chief compliance officers) a compliance tool to monitor 
trading activity in order to detect frequent trading and to assure 
consistent enforcement of fund policies.\39\ But we also explained that 
the rule gives managers flexibility to request information periodically 
such as when circumstances suggested that abusive trading activity is 
occurring.\40\
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    \39\ Adopting Release, supra note 4, at text accompanying n.49.
    \40\ Id. at text following n.42.
---------------------------------------------------------------------------

    We recognize that in some cases, frequent use of this tool might be 
costly for funds and intermediaries. Commenters expressed concerns 
about these costs, and several commenters urged us to impose limits on 
the frequency of information requests made by funds pursuant to the 
information agreements.\41\ We are not imposing limits because, as we 
noted in the Adopting Release, we expect funds that are susceptible to 
market timing to use the tool regularly.\42\ Not all funds, however, 
are susceptible to market timing.
---------------------------------------------------------------------------

    \41\ See, e.g., Comment Letter of Massachusetts Mutual Life 
Insurance Company (Apr. 10, 2006); Supplemental Comment Letter of 
the SPARK Institute, Inc. (May 1, 2006).
    \42\ Adopting Release, supra note 4, at text accompanying n.50.
---------------------------------------------------------------------------

    A fund, in determining the frequency with which it should seek 
transaction information from its intermediaries, could consider: (i) 
Unusual trading patterns, such as abnormally large inflows or outflows, 
that may indicate the existence of frequent trading abuses; (ii) the 
risks that frequent trading poses to the fund and its shareholders in 
light of the nature of the fund and its portfolio; (iii) the risks to 
the fund and its shareholders of frequent trading in light of the 
amount of assets held by, or the volume of sales and redemptions 
through, the financial intermediary; and (iv) the confidence the fund 
(and its chief compliance officer \43\) has in the implementation by an 
intermediary of trading restrictions designed to enforce fund frequent 
trading policies or similar restrictions designed to protect the fund 
from abusive trading practices. In some cases, fund managers may seek 
transaction information only occasionally to determine whether the 
intermediary is, in fact, enforcing trading restrictions or imposing 
redemption fees on behalf of the fund.\44\
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    \43\ See, e.g., Compliance Programs of Investment Companies and 
Investment Advisors, Investment Company Act Release No. 26299, at 
n.69 and accompanying text (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 
2003)] (``[U]nder rule 38a-1, a fund must have procedures reasonably 
designed to ensure compliance with its disclosed policies regarding 
market timing. These procedures should provide for monitoring of 
shareholder trades or flows of money in and out of the funds in 
order to detect market timing activity, and for consistent 
enforcement of the fund's policies regarding market timing.'').
    \44\ Some commenters expressed concern about the ability of 
financial intermediaries to provide information to funds, in light 
of applicable privacy laws. See, e.g., Comment Letter of the 
American General Life Insurance Company, et al (submitted by 
O'Melveny & Myers LLP), (May 9, 2005); 15 U.S.C. 6801-09, 6821-27 
(privacy provisions of Gramm-Leach-Bliley Act); Regulation S-P, 17 
CFR Part 248 (Commission rules implementing privacy provisions for 
funds, broker-dealers, and registered investment advisers). Under 
those laws, financial institutions such as funds, broker-dealers, 
and banks must provide a notice describing the institution's privacy 
policies and an opportunity for consumers to opt out of the sharing 
of information with nonaffiliated third parties. These privacy laws 
also contain important exceptions to the notice and opt-out 
requirements. Under the Commission's privacy rules, for example, 
these requirements do not apply to the disclosure of information 
that is ``necessary to effect, administer, or enforce a transaction 
that a consumer requests or authorizes,'' which includes a 
disclosure that is ``[r]equired, or is a usual, appropriate, or 
acceptable method * * * [t]o carry out the transaction or the 
product or service business of which the transaction is a part * * 
*'' 17 CFR 248.14(a), (b)(2). See also 17 CFR 248.15(a)(7)(i) 
(notice and opt-out requirements not applicable to disclosure of 
information to comply with law). Financial privacy rules that are 
substantially identical to these rules apply to financial 
intermediaries other than broker-dealers, and contain comparable 
exceptions. See, e.g., 12 CFR Part 40 (rules applicable to national 
banks, adopted by the Comptroller of the Currency). We believe that 
the disclosure of information under shareholder information 
agreements, and the fund's request and receipt of information under 
those agreements, are covered by these exceptions. We also note that 
financial institutions often state in their privacy policy notices 
that the institution makes ``disclosures to other nonaffiliated 
third parties as permitted by law.'' See 17 CFR 248.6(b). Therefore 
we believe it will not be necessary for intermediaries such as 
broker-dealers and banks to provide new privacy notices or opt-out 
opportunities to their customers, in order to comply with rule 22c-
2. Commenters on the 2006 Proposing Release generally agreed that 
complying with rule 22c-2 should not require broker-dealers and 
banks to provide new privacy notices to their customers. See Comment 
Letter of the Investment Company Institute (Apr. 10, 2006); Comment 
Letter of the American Bankers Assoc. (Apr. 14, 2006).
    A fund that receives shareholder information for a purpose 
permitted by the privacy rules under the exceptions to consumer 
notice and opt out requirements may not disclose that information 
for other purposes, such as marketing, unless permitted under the 
intermediary's privacy policy. See Adopting Release, supra note 4, 
at n.47.

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[[Page 58262]]

    Some intermediaries have responded to market timing concerns by 
enforcing their own frequent trading policies, which may be different 
from policies established by fund boards. We believe that a fund in 
appropriate circumstances could reasonably conclude that an 
intermediary's frequent trading policies sufficiently protect fund 
shareholders, and could therefore defer to the intermediary's policies, 
rather than seek to apply the fund's policies on frequent trading to 
shareholders who invest through that intermediary. In those 
circumstances, the fund should describe in its prospectus that certain 
intermediaries through which a shareholder may own fund shares may 
impose frequent trading restrictions that differ from those of the 
fund, generally describe the types of intermediaries (e.g., broker-
dealers, insurance company separate accounts, and retirement plan 
administrators), and direct shareholders to any disclosures provided by 
the intermediaries with which they have an account to determine what 
restrictions apply to the shareholder. We note that a fund is required 
to disclose whether each restriction imposed by the fund to prevent or 
minimize frequent trading applies to trades that occur through omnibus 
accounts at intermediaries, and to describe with specificity the 
circumstances, if any, under which each such restriction will not be 
imposed.\45\
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    \45\ See Item 6(e) of Form N-1A [17 CFR 239.15A and 274.11A]; 
Item 8(e) of Form N-3 [17 CFR 239.17a and 274.11b]; Item 7(e) of 
Form N-4 [17 CFR 239.17b and 274.11c], Item 6(f) of Form N-6 [17 CFR 
239.17c and 274.11d]. These disclosure items would not require a 
fund to describe the frequent trading policies of each intermediary 
to whose policies the fund defers.
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C. Redemption Fees

    Rule 22c-2 requires fund directors to consider whether to adopt a 
redemption fee, but the rule neither requires funds to adopt such a fee 
nor specifies the terms under which such a fee should be assessed.\46\ 
A number of commenters raised concerns about redemption fees, and 
encouraged us to become involved in establishing the terms and 
conditions under which funds charge them.\47\ A number of commenters, 
for example, urged us to require that fund redemption fee policies 
waive fees that might be imposed as a result of transactions not 
initiated by investors.\48\
---------------------------------------------------------------------------

    \46\ The rule does, however, require that any redemption fee 
charged not exceed two percent and apply to redemptions no less than 
seven days after purchase. See rule 22c-2(a)(1)(i).
    \47\ See, e.g., Supplemental Comment Letter of the SPARK 
Institute, Inc. (May 1, 2006); Comment Letter of the American 
Council of Life Insurers (Apr. 10, 2006); Comment Letter of the 
Committee of Annuity Insurers (submitted by Sutherland Asbill & 
Brennan) (Apr. 10, 2006).
    \48\ See, e.g., Comment Letter of the American Society of 
Pension Professionals & Actuaries (Apr. 10, 2006); Supplemental 
Comment Letter of the SPARK Institute, Inc. (May 1, 2006). Non-
investor initiated transactions may include automatic asset 
rebalancing, automatic distributions, and prearranged periodic 
contributions.
---------------------------------------------------------------------------

    We appreciate the commenters' suggestions that standardizing the 
terms and conditions of redemption fee policies might reduce the costs 
that intermediaries and others (including funds themselves) will bear 
in implementing fund redemption fees. However, we have decided not to 
propose to standardize the terms or conditions to preserve the 
flexibility of each fund to fashion policies that are best suited to 
protect the investors in each fund. We have done this after receiving 
extensive comment on the matter and after observing a lack of consensus 
among industry participants on the appropriate terms of a uniform 
redemption fee.\49\ Although we may reconsider our decision at a later 
time, until then, the terms of redemption fee policies are a matter for 
fund boards to determine.\50\
---------------------------------------------------------------------------

    \49\ See 2006 Proposing Release, supra note 8, at text following 
n.12.
    \50\ Several commenters noted that a number of state insurance 
and contract law issues might arise in connection with a redemption 
fee charged to investors who invest in funds through insurance 
company separate accounts. See, e.g., Supplemental Comment Letter of 
the SPARK Institute, Inc. (May 1, 2006); Comment Letter of the 
American Council of Life Insurers (Apr. 10, 2006). As we stated in 
the 2006 Proposing Release, we believe that because redemption fees 
and frequent trading policies are imposed by the fund, and not the 
insurance company, enforcing those limits or fees with respect to 
these investors should not cause insurance companies to breach their 
contracts. See 2006 Proposing Release, supra note 8, at n.12. 
Moreover, nothing in this rule would preclude a fund that is 
concerned about the legality under existing contracts of imposing 
these limits or fees on certain insurance contractholders, from 
choosing not to impose them with regard to investors whose policies 
would not permit imposition of such limits or fees.
---------------------------------------------------------------------------

III. Compliance Dates

    When the Commission adopted rule 22c-2 in March 2005, we 
established a compliance date of October 16, 2006. In the 2006 
Proposing Release, we requested comment on whether we should extend 
that compliance date. Nearly every commenter requested an extension, 
pointing out the need for significant time to revise agreements with 
intermediaries and change systems to accommodate the transmission and 
receipt of trading information. Commenters requested a variety of 
compliance date extensions, ranging from 6 months to 18 months.
    Today we are extending the compliance date for the shareholder 
information agreement provisions of rule 22c-2. We are extending by 6 
months, until April 16, 2007, the date by which funds must enter into 
shareholder information agreements with their intermediaries.\51\ We 
also are extending by 12 months, until October 16, 2007, the date by 
which funds must be able to request and promptly receive shareholder 
identity and transaction information pursuant to shareholder 
information agreements. This latter extension is designed to allow 
additional time for funds, intermediaries, and others to revise their 
systems to accommodate the request, provision, and use of information 
from intermediaries after the negotiation of shareholder information 
agreements.
---------------------------------------------------------------------------

    \51\ See rule 22c-2(a)(2).
---------------------------------------------------------------------------

    We did not propose, nor did we receive comment on, an extension of 
the compliance date for section 22c-2(a)(1), which requires a fund's 
board to consider the adoption of a redemption fee policy. The 
compliance date for that provision, October 16, 2006, remains in 
effect.

IV. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. As discussed above, the amendments we are adopting today 
will (i) limit the types of intermediaries with which funds must enter 
into shareholder information agreements, (ii) address the rule's 
application when there are chains of intermediaries, and (iii) clarify 
the effect of a fund's failure to obtain an agreement with any of its 
intermediaries. These amendments are designed to respond to concerns 
that commenters identified during the course of implementing rule 22c-
2, and in response to our request for comment on these proposed 
amendments. We believe that the amendments will result in substantial 
cost savings to funds, financial intermediaries, and investors, and 
provide clarification of the rule's requirements.

A. Benefits

    We anticipate that funds, financial intermediaries, and investors 
will benefit from these amendments to rule 22c-2. As discussed more 
fully in the Adopting Release we issued in 2005, rule 22c-2 is designed 
to allow a fund to deter, and to provide the fund and its shareholders 
reimbursement for the costs of, short-term trading in fund shares.\52\
---------------------------------------------------------------------------

    \52\ See Adopting Release, supra note 4, at Section IV.A.

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[[Page 58263]]

    The amendments to rule 22c-2 that we are adopting today will likely 
result in additional benefits to funds, financial intermediaries, and 
investors. As discussed in the previous sections of this Release, some 
commenters on the Adopting Release argued that the rule's definition of 
``financial intermediary'' was too broad because it would have required 
funds to identify and enter into agreements with a number of 
intermediaries that may not pose a significant short-term trading risk 
to funds, and may have imposed unnecessary costs to market 
participants.\53\ For example, one large fund complex indicated that, 
under the rule as adopted, identifying their ``financial 
intermediaries'' could cost that fund complex $8.5 million or more.\54\ 
These amendments will modify the definition of financial intermediary 
to exclude entities that a fund treats as an individual investor for 
purposes of the fund's policies on market timing or frequent trading. 
We believe that these amendments will reduce the burden on funds of 
identifying those entities that might have qualified as financial 
intermediaries under the rule as adopted, because a fund should already 
know which entities it treats as intermediaries for purposes of its 
policies on market timing or frequent trading.\55\ As further discussed 
in the Paperwork Reduction Act Section below, for purposes of the 
Paperwork Reduction Act we have estimated that identifying the 
intermediaries with which a fund complex must enter into agreements may 
take the average fund complex a total of 250 hours of a service 
representative's time, at a cost of $40 per hour,\56\ for a total 
burden to all funds of 225,000 hours, at a total cost of $9 million. 
These amendments will likely provide a significant benefit because they 
should reduce the costs associated with the intermediary identification 
process.
---------------------------------------------------------------------------

    \53\ See Comment Letter of the Investment Company Institute at 3 
(May 9, 2005). The ICI stated in its 2005 comment letter that, under 
the rule as adopted in 2005, three large fund complexes alone would 
have to evaluate 6.5 million accounts that are ``not in the name of 
a natural person and thus could be held as an intermediary for 
purposes of the rule'' and might have to enter into agreements with 
a significant portion of those accounts that are held in nominee 
name. Id. The ICI noted that many of these accounts are likely 
associated with small retirement plans, small businesses, trusts, 
bank nominees and other entities that are unlike typical financial 
intermediaries such as broker-dealers. It added that funds typically 
do not have agreements with such small entities, other than 
agreements incidental to the opening of an account.
    \54\ See 2006 Proposing Release, supra note 8, at n.48.
    \55\ Under the revised rule, if the fund does not exempt an 
intermediary from its frequent trading policies, i.e. if the fund 
treats the intermediary as an individual investor for purposes of 
those policies, then the entity would not be a ``financial 
intermediary'' (with respect to that fund), and the fund would not 
have to enter into a shareholder information agreement with it. 
These intermediaries might include small retirement plans that do 
not identify themselves as intermediaries or omnibus accounts to the 
fund and request an exemption from the fund's frequent trading 
policies. These intermediaries will likely either have very few 
underlying investors, and/or restrict their transactions so that 
transactions by investors do not trigger application of a redemption 
fee or violate the fund's frequent trading policies.
    \56\ See infra note 95.
---------------------------------------------------------------------------

    By enabling funds to forego the cost of entering into agreements 
with omnibus accountholders that they treat as individual investors, we 
anticipate that the large majority of small omnibus accountholders will 
now fall outside the shareholder information agreement provisions of 
the rule. This will likely result in significant cost and time savings 
to funds and financial intermediaries through reduction of the expenses 
associated with these agreements. The reduction of these costs also may 
benefit fund investors and fund advisers, to the extent that these 
costs may have been passed on to them. We estimate that this will 
significantly reduce the burden on many entities that would otherwise 
have qualified as intermediaries under the rule as adopted, because the 
excluded entities would no longer need to enter into shareholder 
information agreements, or develop and maintain systems to provide the 
relevant information to funds. Commenters on the 2006 Proposing Release 
generally agreed that the rule amendments are likely to reduce costs to 
market participants.\57\
---------------------------------------------------------------------------

    \57\ See, e.g., Comment Letter of the Investment Company 
Institute (Apr. 10, 2006) (``[The proposed approach] should reduce 
the costs and burdens associated with the rules implementation while 
still providing funds access to underlying shareholder 
information.'')
---------------------------------------------------------------------------

    Commenters on the 2005 adoption were also concerned that the rule 
as adopted might have required funds to enter into agreements with 
intermediaries that hold fund shares in the name of other 
intermediaries (a ``chain of intermediaries''), potentially resulting 
in a fund having to enter into agreements with intermediaries with 
which it may not have a direct relationship (i.e., indirect 
intermediaries).\58\ These amendments further clarify and define the 
operation of the rule with respect to intermediaries that invest 
through other intermediaries. These amendments to rule 22c-2 define the 
term ``shareholder information agreement,'' and provide that funds need 
only enter into shareholder information agreements with intermediaries 
that directly submit orders to the fund, its principal underwriter, 
transfer agent, or to a registered clearing agency. Accordingly, funds 
will not need to enter into agreements with indirect intermediaries and 
may incur lower systems development costs related to the collection of 
underlying shareholder information, thereby reducing the costs of 
compliance.
---------------------------------------------------------------------------

    \58\ See Comment Letter of T. Rowe Price Associates, Inc. at 2 
(May 24, 2005); Comment Letter of OppenheimerFunds, Inc. at 3 (May 
9, 2005).
---------------------------------------------------------------------------

    Under the amendments adopted today, a first-tier intermediary, in 
its agreement with the fund, must agree to, upon further request by the 
fund: (i) Provide the fund with the underlying shareholder 
identification and transaction information of any other intermediary 
that trades through the first-tier intermediary (i.e., indirect 
intermediary); or (ii) prohibit the indirect intermediary from 
purchasing, on behalf of others, securities issued by the fund. This 
approach is designed to preserve the investor protection goals of the 
rule by ensuring that funds have the ability to identify short-term 
traders that may attempt to evade the reach of the rule by trading 
through chains of financial intermediaries.
    By defining minimum standards for what must be included in these 
shareholder information agreements, we intended to balance the need for 
funds to acquire shareholder information from indirect intermediaries 
who trade in fund shares, with practical concerns regarding the 
difficulty that funds might face in identifying these intermediaries 
and entering into agreements with them. Because an intermediary that 
trades directly with a fund already has a relationship with its second-
tier intermediaries (and is likely to have a closer relationship than 
the fund to any intermediary that is farther down the ``chain''), a 
first-tier intermediary appears to be in the best position to arrange 
for the provision of information to a fund regarding the transactions 
of shareholders trading through its indirect intermediaries. By 
providing a definition of the term ``shareholder information 
agreement,'' the amended rule clarifies the balance of duties and 
obligations between funds and financial intermediaries. Because first-
tier intermediaries may already have access to the shareholder 
transaction and identification information of their indirect 
intermediaries, they will likely be able to provide this information to 
funds at a minimal cost, especially compared to the significant costs 
that funds would incur if they were required to collect the same 
information from indirect intermediaries themselves. Although first-
tier intermediaries may

[[Page 58264]]

incur some costs in collecting and gathering this information from 
indirect intermediaries, there is a benefit in having the entity that 
has the easiest access to the relevant information have the 
responsibility for arranging for its delivery to funds.
    In general, commenters on the 2006 Proposing Release agreed that 
first tier intermediaries are in a better position than funds to 
collect data from indirect intermediaries,\59\ although one commenter 
disagreed and stated that intermediaries are not in a better position 
than funds to collect information from indirect intermediaries.\60\ We 
continue to believe that the amended rule's approach of having the 
agreements require first-tier intermediaries to identify and collect 
information from indirect intermediaries appears to be the most cost 
effective method of handling the chain of intermediaries issue while 
still effectuating the purposes of the rule. Funds and intermediaries 
are also likely to engage in negotiations that will distribute the 
costs of information sharing between the entities, resulting in 
incentives for funds to narrowly target their information requests.
---------------------------------------------------------------------------

    \59\ See Comment Letter of Massachusetts Mutual Life Insurance 
Company (Apr. 10, 2006); Comment Letter of the Investment Company 
Institute (Apr. 10, 2006).
    \60\ See Supplemental Comment Letter of the SPARK Institute, 
Inc. (May 1, 2006).
---------------------------------------------------------------------------

    As discussed in the previous sections, these amendments clarify the 
result if a fund lacks an agreement with a particular intermediary. In 
such a situation, the fund may continue to redeem securities within 
seven calendar days, but it must prohibit that financial intermediary 
from purchasing fund shares in nominee name, on behalf of any other 
person. Some commenters had stated that the rule, as adopted in 2005, 
could be interpreted to require a different approach to these 
situations.\61\ The amendments will provide the benefit of certainty 
regarding the duties of funds and financial intermediaries under the 
rule without imposing additional costs.
---------------------------------------------------------------------------

    \61\ See Comment Letter of the Investment Company Institute at 4 
(May 9, 2005).
---------------------------------------------------------------------------

B. Costs

    Many commenters expressed concerns about the costs of rule 22c-2 as 
adopted in 2005. As discussed above, we anticipate that the amendments 
adopted today will allow funds, financial intermediaries, and investors 
to incur significantly reduced costs. Although these amendments will 
reduce many of the costs of the rule, they should nonetheless maintain 
the investor protections afforded by the rule.
    One of the primary results of these amendments will be to reduce 
the number of financial intermediaries with which funds must enter into 
shareholder information agreements. This should reduce costs to all 
participants by allowing funds to enter into shareholder information 
agreements only with those intermediaries that hold omnibus accounts 
that are most likely to trade fund shares frequently. The rule's 
investor protections will be maintained because funds will continue to 
monitor the short-term trading activity of the rest of the fund's 
omnibus accounts as if they were individual investors in the fund, 
according to the fund's policies on short-term trading.
    The amendments will reduce the number of entities that will be 
considered financial intermediaries under the rule. Commenters in 2005 
raised concerns about the costs of identifying which accountholders are 
financial intermediaries.\62\ The costs related to this review will be 
greatly reduced under the rule as we have revised it, because we expect 
that a fund will generally already have identified those accountholders 
that it does not treat as an individual investor for purposes of its 
restrictions on short-term trading. As discussed above in the benefits 
section, for purposes of the Paperwork Reduction Act, we have estimated 
that completion of this identification process will cost all funds a 
total of approximately $9 million.
---------------------------------------------------------------------------

    \62\ As discussed above, the ICI noted that, between just three 
large fund complexes, 6.5 million accounts may need to be reviewed, 
and estimated that the total number of accounts which would be 
evaluated by all funds could be in the ``tens of millions.'' Comment 
Letter of the Investment Company Institute at 3 (May 9, 2005). 
OppenheimerFunds noted that, although it has more than 7.5 million 
shareholder accounts in its records, 137,000 or fewer of those 
accounts may qualify as financial intermediaries under the rule as 
adopted last spring. See Comment Letter of OppenheimerFunds, Inc. at 
8 (May 9, 2005). Neither commenter estimated the costs of performing 
this review.
---------------------------------------------------------------------------

    We also received a few comments on the 2005 adoption regarding the 
number of accounts maintained by funds that qualify as financial 
intermediaries.\63\ Commenters indicated that revising the rule to 
address concerns about the definition of financial intermediaries would 
significantly reduce the costs of entering into or modifying these 
agreements, as well as the costs of developing, maintaining and 
monitoring the systems that will collect the shareholder information 
related to these agreements for funds.\64\ Omnibus accountholders that 
previously would have qualified as financial intermediaries are also 
likely to realize substantial savings under the amended rule. When an 
omnibus accountholder is treated as an individual investor (or does not 
trade directly with the fund), such an omnibus account will no longer 
be treated as a financial intermediary and will not incur the costs of 
entering into or modifying agreements with that fund. There will also 
no longer be the start-up and ongoing costs of developing and 
maintaining