Advisers prepare for SEC rule on redemptions

Financial advisers may get read the riot act if any glitches occur when new technical systems that govern mutual-fund-redemption fees are put in place next month.
While most advisers won’t be charged with keeping track of individual trades, they will hear from their plan sponsor or participant clients if the systems have problems, said Fred Barstein, chief executive of 401kExchange Inc. The Greenacres, Fla.-based 401(k) service provider focuses on small and midsize companies.
Most intermediaries are prepared to meet Securities and Exchange Commission Rule 22c-2, which goes into effect Oct. 16 and requires intermediaries such as registered investment advisory firms and record keepers to enforce restrictions on market timing.
However, “there’s fallout when things don’t work out right,” Mr. Barstein said. “If the systems aren’t working properly, advisers will get the fallout from that.”
Advisers may also receive complaints if participants are charged redemption fees or flagged as having traded too often, particularly if they weren’t aware of the rule changes, said Mark M. Gutrich, president and chief executive of ePlan Services Inc. of Denver.
Under the new system, anyone who completes four “round-trip sales” or a purchase and sale of the same fund within a year technically could be flagged.
However, some fund companies have stricter policies while others are more lenient. Loans from a 401(k) plan would be considered exempt.
Participants who violate these policies could be forced to pay redemption fees, which can be as high as 2% of their assets, and they could also be prevented from purchasing assets in that fund.

Mr. Gutrich said that his RIA and record-keeping firm has already started keeping tabs on investors’ trades by using new technology, and one investor was recently flagged for trading too frequently. Mr. Gutrich said that once the firm looked into the incident, however, it was clear that the investor was simply re-balancing his accounts quarterly.
Advisers said the intent of the law isn’t to penalize investors who are re-balancing their funds, but some investors won’t like having their activity limited.
“For your individual-plan investor, they’ll believe this doesn’t benefit them; it inhibits them,” Mr. Gutrich said. “It’s meant to protect investors, but investors don’t feel the need to be protected.”
The average 401(k) participant usually doesn’t trade actively, but the rule still creates more work for advisers, who will need to explain new procedures to participants, Mr. Gutrich said.
Inconsistency the norm
His company spent $60,000 to install a new system meant to notify fund companies about investors who might be overstepping the number of funds that they are allowed to buy and sell.
Mr. Gutrich said that fund companies are inconsistent in their approach to the rule.
“Some are strict … and are sticking to the prospectus,” he said. “Others are being very liberal and very vague so they can interpret it how they want.”
“We have to jump through the hoops, and at the end of the day, they benefit by getting redemption fees,” he said.
Some record keepers have already been using systems to track redemption fees, said Harris Nydick, managing director of CFS Investment Advisory Services LLC of Totowa, N.J.
He said that most participants haven’t been affected by the rule.
“We’re seeing very few of our participants engage in this activity,” Mr. Nydick said.
“I think this rule has achieved its intended affect,” he said. “It was only a small percentage of participants who were engaging in this at all.”
Most record keepers are prepared to track the data, said Larry H. Goldbrum, general counsel for The Society of Professional Administrators and Recordkeepers in Simsbury, Conn.
“If this were a looming problem, my members would be reaching out to me,” he said.
“But with any computer- or technology-based system, until you really stress the system, you don’t know where the glitches are,” Mr. Goldbrum said. “Until you get it in practice and work out the kinks, you won’t know.”
Companies that have created systems for fund companies feel that there will be few glitches, if any.
Jeff Cook, director of regulatory compliance at DST Systems Inc. in Kansas City, Mo., said that his company has created systems to assist fund companies.

He said that some have begun using the systems, and others are taking a wait-and-see approach.
“We’ve had a number of years to get ready for this,” Mr. Cook said. “We already had a solution in place last year that would allow clients to do a number of different things with data.”
Maureen Quill, executive vice president of UMB Fund Services Inc., a division of UMB Financial Corp. in Milwaukee, said that her company is also providing software for fund companies.
Market timing has traditionally been an issue with international funds, she said.
“For international funds, you’ll see more-strict rules, because they are a target,” Ms. Quill said.
Lisa Shidler can be reached at [email protected].

Related Topics: Securities and Exchange Commission