The Depository Trust & Clearing Corporation (DTCC) is helping to move the mutual fund industry toward compliance with a new Securities and Exchange Commission rule designed to combat short-term trading and market timing.
The solution will expand the functionality of Networking, a core mutual fund service provided by National Securities Clearing Corporation (NSCC), a subsidiary of DTCC, and support the operational needs of industry members that are required to comply with SEC Rule 22c-2, which goes into effect Oct.16, 2006.
By creating a robust data stream within Networking for fund companies to request and obtain shareholder identity and trading information from intermediaries, Networking will help fund companies better monitor trading frequency by investors whose transactions are housed in omnibus accounts (a pool of individual accounts combined into one account, usually in the name of an intermediary), and ensure that a fund's market-timing policies are being enforced.
"The regulators have pressed for a solution, and we are pleased that we have the technology to be able to develop a solution to meet the October timetable," Barbara Simon, DTCC vice president, Product Management, said.
"This an extraordinarily efficient and cost-effective way for the industry to gain access to a level of transparency necessary to ensure compliance with funds' market timing policies," explained Kathy Joaquin, director of Operations & Distribution, Investment Company Institute. "A key benefit is that funds and intermediaries can use technology that already exists to request and transmit data needed in standardized formats through a secure industry facility."
Intermediaries can pass information in two stages. "The first is at the summary data level, where information will be passed for super omnibus accounts, those composed of multiple plans, trusts and/or investor omnibus accounts," explained Paul Bucaoto, DTCC director, Product Management. This information may include account numbers, dollar amount and number of buys and sells, and it will help fund companies identify where trading is occurring frequently.
The second stage is at the detail data level, where the fund company may use the data from the summary level to request more specific information. "That would narrow an inquiry to additional details on shareholders in a particular 401(k) or retirement plan, for example, or to information on a financial rep, or to Fund/SERV control numbers," Bucaoto added. (NSCC's Fund/SERV is the industry standard for fund purchases, redemptions, exchanges and money settlement.)
Established in 1988, Networking is recognized as the industry standard for automating and centralizing customer account information, allowing for full reconciliation of this information on the records and customer statements of both fund companies and intermediaries.
In designing the changes to Networking, DTCC worked in partnership with the Investment Company Institute's Standardized Data Reporting Working Group and several task forces on the technical design of the processing flow, data elements and data definitions, and also to ensure that the design met industry best practices.
Stuart J. Bateman, senior vice president, Franklin Templeton Investments, chaired the working group. "This enhancement to Networking required close coordination and cooperation among members of the overall working group and the various task forces involved. Our goal was to create a solution that addressed the need for funds and firms to be able to request and supply data in a standardized manner, and yet had the flexibility to be expanded in the future as needed," he said.
Last September, DTCC went live with an initial set of enhancements to Networking and Fund/SERV that automated the processing of short-term redemption fees, charges to investors who rapidly roll in and out of funds before a predetermined holding period has elapsed.
New fields were added to Fund/SERV to allow customers to process and settle the actual fees, as well as identify redemptions that are subject to fees and those where the fee is to be waived.
Enhancements made to Networking enable funds to indicate fees applied to short-term redemptions and send to firms detailed information on direct redemptions, which are intermediary transactions handled with the fund using communication methods other than Fund/SERV.