SEC Proposes Amendments to Redemption Fee Rule

On February 28, the Securities and Exchange Commission (SEC) proposed amendments to Rule 22c-2 under the Investment Company Act of 1940. In addition to permitting mutual funds to charge redemption fees, Rule 22c-2 provides that a mutual fund may not allow redemption of its shares within seven days of purchase unless the fund (or its principal underwriter) has entered into a written agreement with each of its “financial intermediaries” under which the intermediary agrees: (1) to provide the identity of and transaction information about shareholders who hold their shares through the intermediary, and (2) to restrict or prohibit purchases or exchanges by shareholders whose trading violates the fund’s restrictions on short-term trading. These agreements are known as information-sharing agreements.

The SEC’s proposal would amend the requirements of Rule 22c-2 regarding information-sharing agreements, and is intended to address issues that commenters brought to the SEC’s attention after Rule 22c-2 was adopted. More specifically, the proposed amendments would reduce the number of financial intermediaries with which funds must enter into information-sharing agreements, limit the scope of the information-sharing agreement requirement to so-called “first-tier intermediaries”, and clarify the effect of a fund's inability to obtain information-sharing agreements with all of its first-tier intermediaries.

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