Rule 22c-2 and the impact on TPAs, Trust Companies and RIAs October 26, 2006

1. Rule 22c-2 and the impact on TPAs, Trust Companies and RIAs October 26, 2006 Gail Weiss & Associates, Inc. 828 South Charles Street Baltimore, MD 21230 (410) 230-2693 http://www.gailweiss.com

2. Agenda • Market Timing Overview • History of the SEC Rule 22c-2 • Industry Response • Practical Concerns • Questions and Answers

3. Market Timing Defined • Refers to the practice of buying and selling mutual fund shares over the short term to exploit potential pricing inefficiencies • Usually market timing is contrary tothe stated policies of a mutual fund set forth in the prospectus • Not illegal

4. Market Timing Impact • Market timing is detrimental because: • Incurs additional trading costs • Loss of investment opportunity • Shareholder dilution • Tax consequences

5. Market Timing Concerns • Market timing can be done with orwithout the consent of the mutual fund • Industry standard trading practices have made market timing difficult and in some cases impossible to detect

6. Market Timing Reform

7. Market Timing Reform • Consistent themes: • Protecting the long-term investor from market timers • Trading transparency

8. Proposed Rule 22c-2 • Mandatory 2% Short-Term Redemption Fee for shares purchased within the previous five business days • Fee to be retained by the fund

9. Proposed Rule 22c-2 • Exceptions: • Money Market Funds • Exchange Traded Funds (ETFs) • Funds that adopt a policy to permit short-term trading and disclose this policy in the prospectus with comments about the potential additional costs to the fund

10. Proposed Rule 22c-2 • Operational Considerations: • Funds are not precluded from instituting a longer holding period • Fee determined using the “First in, first out” or FIFO method • De minimis provision permits funds the discretion to forego the assessment of redemption fees if the redemption proceeds are $2,500 or less

11. Proposed Rule 22c-2 • Operational Considerations continued: • Mandatory fee waivers for unanticipated financial emergencies on redemptions of $10,000 or less upon written request • Funds have the discretion to waive the fee on financial emergency transactions in excess of $10,000

12. Proposed Rule 22c-2 • Investor Transparency Alternatives: • Intermediary account number must be included with each transaction; or • Intermediary agrees in writing to identify redemptions that are subject to redemption fees and transmit sufficient information to the fund to allow the fund to assess the redemption fee; or • Intermediary agrees in writing to impose redemption fee and remit the proceeds to the fund.

13. Proposed Rule 22c-2 • Investor Transparency Required Reporting: • Tax Identification Numbers • Amounts and dates of all purchases, redemptions and exchanges within an omnibus account • Weekly or more frequent basis

14. Final Rule 22c-2 • Voluntary redemption fee not to exceed 2% for shares purchased within the previous seven calendar days • Redemption fees must be determined by each fund board of directors including a majority of independent directors • Fee to be retained by the fund • Written agreements are required with all “financial intermediaries” regarding information sharing and responsibility to restrict or prohibit trading under certain circumstances • Money market and ETFs are excluded

15. Final Rule 22c-2 • Written agreement requirement: • With each financial intermediary regardless of whether a redemption fee is imposed • Includes requirement that the financial intermediary must provide upon request information about the identity of shareholders and their transactions in fund shares • Contains provision requiring the financial intermediary to restrict or prohibit further purchases or exchanges of a specified shareholder as identified by the fund

16. Final Rule 22c-2 • Financial Intermediaries Defined: • Broker, dealer or any other entity that holds securities in nominee name; and • Insurance companies that sponsors a registered separate account organized as a unit investment trust, master-feeder funds and certain fund of fund arrangements not specifically excepted from the rule; and • In the case of an employee benefit plan, the plan administrator or plan record keeper

17. Final Rule 22c-2 • Concerns with the final Rule 22c-2: • Redemption fees will vary greatly • Amount assessed • Time period • Accounting method • Obtaining agreements with each “financial intermediary” will be a significant burden for both the funds and firms • Data reporting requests will vary greatly • Restricting or prohibiting future purchases will be a technological challenge for some

18. Final Rule 22c-2 • Consequences for noncompliance: • Funds are prohibited from redeeming shares within seven days

19. Proposed Amendments • Limit the types of intermediaries with which funds must negotiate written agreements • Address situations when there are chains of intermediaries • Clarify the effect of a fund’s failure to obtain agreements with any of its intermediaries

20. Proposed Amendments • Proposed Small Intermediaries Exclusion: • Excludes any intermediary that the fund treats as an individual investor for purposes of the fund’s policies intended to eliminate or reduce the dilution of the value of fund shares • Concern that many small retirement plans covering only a few employees would be deemed a “financial intermediary”

21. Proposed Amendments • Proposed Intermediary Chain Exclusion: • Limits the requirement of the funds to obtain written agreements with only the first-tier intermediary that trades directly with the fund, its principal underwriter or transfer agent or a registered clearing agency • Concern that many intermediaries are actually holding shares on behalf of other another intermediaries and the underlying transaction data and investor identification was not readily available

22. Proposed Amendments • Proposed “Shareholder Information Agreements” must include an obligation to: • Provide, promptly upon the fund’s request, identification and transaction information for any shareholder accounts held directly with the first-tier intermediary • Use its best efforts to obtain and forward or have forwarded the information from underlying intermediaries • Prohibit future purchases due to failure to remit the requested data

23. Proposed Amendments • Proposed change to the effect of lacking an agreement: • Initially the lack of an agreement meant an intermediary would be precluded from redeeming the shares within seven days of purchase • Proposed change to revise the rule so that if a fund does not have an agreement with a particular intermediary, the fund must prohibit future purchases

24. Industry Response • Variety of working groups have formed including representatives of: • American Bankers Association (ABA) • American Society of Pension Professionals and Actuaries (ASPPA) • Depository Trust & Clearing Corporation (DTCC) • Investment Company Institute (ICI) • Securities Industry Association (SIA) • Society of Professional Administrators and Record keepers (SPARK)

25. Industry Response • ICI’s Standardized Data Reporting Working Group: • Guidelines Taskforce • Technical DesignTaskforce • Communications Taskforce

26. Guidelines Taskforce • Definitions • Best Practices • Examples

27. Guidelines Taskforce • Significant Definitions: • First-tier and underlying intermediary • Participant/Shareholder • Omnibus Accounts • Transaction Categories

28. Guidelines Taskforce • Intermediaries defined: • First Tier – an intermediary that has an existing contractual relationship with the fund to act as a conduit for executing transactions • Underlying – a related entity that transacts with the funds through services provided by a first-tier intermediary

29. Guidelines Taskforce • Participant/Shareholder defined: • Individual investors including participants in retirement plans or shareholders in an omnibus account. • Participants/Shareholders are usually identified by SSN or TIN to the extent they are available.

30. Guidelines Taskforce • Omnibus Account Defined: • Represents assets for multiple investors and usually registered in the name of the intermediary • Plan Account – one account for single retirement plan with multiple participants • Investor Omnibus Account – one account for multiple retail accounts, IRAs, etc. • Super Omnibus Account – includes assets of more than one omnibus account

31. Guidelines Taskforce • Transaction categories: • Category 1– actively directed by investor or their agent with sufficient control to perform market timing activities • Purchases and redemptions • Fund Transfers, exchanges, rebalancing • Non-participant directed transactions if the participant receives the benefit • Category 2 – transactions that are considered systematic or non-directed • Periodically scheduled purchases or redemptions • Payroll deductions, loan repayments, earnings

32. Guidelines Taskforce • Best Practices: • Typical Request: • Date range not to exceed 90 days • Limited to previous year • Acknowledgement within one business day • Data provided within three business days from first tier intermediary and five days with underlying intermediaries

33. Technical Design Taskforce • Processing Flow • Critical Data Elements • Data Definitions • Common Terms • Record Layouts

34. Technical Design Taskforce • Processing Flow: • Day One – Fund initiates request • Day Two – Intermediary confirms receipt • Day Three – Intermediary responds • Day Four – Fund analyzes the data • Day Five – Fund requests additional information with respect to super omnibus accounts and the process starts all over again

35. Technical Design Taskforce

36. Technical Design Taskforce • Critical Data Elements: • CUSIP • Fund Account Number • Plan Identifier/Omnibus Account Number • SSN/TIN or other identifier • From/to Dates • Transaction amounts with Type and Category • Threshold Amount • Rep ID, branch and firm

37. Technical Design Taskforce • Additional information regarding: • Data Definitions • Common Terms • Record layouts Can be found in the handouts

38. Communications Taskforce • Model Language • Agreement to provide information • Period covered by the request • Form and timing of response • Agreement to restrict trading • Sample Communication Package

39. Practical Concerns • How will Rule 22c-2 impact my business? • What do I need to do from a legal agreements perspective? • What do I need to do from an operational perspective? • Do I need to change any of my policies and procedures?

40. Practical Concerns • Evaluate Exposure • Identify each mutual fund that is in a client account • Understand the market timing rules for each mutual fund • Determine how each mutual fund is traded

41. Practical Concerns • Evaluate need for Shareholder Information Agreements • If you trade directly with funds, you need to get an agreement • If you trade through an intermediary, you need to confirm that the chain of intermediaries in which you participate has executed all necessary documents • If you trade through an intermediary, you need to sign a agreement with each intermediary

42. Practical Concerns • Evaluate required technology enhancements • A placeholder for SSN/TINs • Trade tracking to access applicable redemption fees • Indicator to restrict future trades at the investor level • Responding to data requests in a secure manner • Processing turnaround times

43. Practical Concerns • Evaluate the compatibility of your legal agreements’ obligations with your technological capabilities

44. Practical Concerns • Privacy concerns vs. contractual obligations • Applicable federal and state privacy laws permit the disclosure of confidential customer information if the disclosure is necessary to comply with applicable legal requirements. • Privacy policies as stated may have to be amended. • Contracts between intermediaries, participant record keepers and plan sponsors may have to be amended.

45. Practical Concerns • Evaluate impact on policies and procedures • Adding a new fund • Executing rebalance/reallocation routines • Fulfilling client request for cash • Processing turnaround times

46. Practical Concerns • Gotchas • Executing redemptions to pay fees • Managing client expectations with respect to requests for cash • Corrections processing • Trading restriction applied to investor due to trading activity at another institution and now you must also restrict that investor • Staff unwittingly responds to data request in an unsecured manner (i.e. email)

47. Conclusion • Reforms have been deemed necessary • All parties involved in mutual fund trading will be impacted • The next steps are unfolding quickly • Be proactive

48. Conclusion • Questions