On March 3, 2005, the Securities and Exchange Commission voted to adopt a rule concerning mutual fund redemption fees. (Release 2005-28) The rule will require the boards of mutual funds that redeem shares within 7 days to adopt a redemption fee of no more than 2 percent of the amount of the shares redeemed or determine that a redemption fee is not necessary or appropriate for the fund. The rule is designed to permit (but not require) funds to impose a redemption fee if they determine that the fee is necessary or appropriate to recoup the costs that short term trading can impose on funds and their long term shareholders.
The rule also will require funds that redeem shares within seven days to enter into agreements with their intermediaries (such as broker-dealers and retirement plan administrators) obligating them to provide funds with shareholder trading information. This information will permit funds to identify shareholders who violate the funds’ market timing policies, and oversee the intermediaries’ assessment of any redemption fees. Unlike the rule the Commission proposed last year, the rule will permit fund managers to determine how frequently the fund asks for this information, and will include a provision requiring that the agreement obligate the intermediary to respond to directions from the fund to enforce the fund’s market timing policies.
See also remarks made about the rule by SEC Chairman William H. Donaldson and Paul Roye, Director, Division of Investment Management, before the Open Meeting held March 3, 2005.