DTCC's Networking for Standardized Data Reporting (SDR) - a solution developed in 2006 to help mutual fund companies comply with the Securities and Exchange Commission (SEC) Rule 22c-2 under the Investment Company Act of 1940 - is now gaining traction with the insurance industry, which is also subject to requirements under this rule.

Over the past several months, DTCC's Insurance Services business has been working with customers to enhance Networking for SDR to meet their Rule 22c-2 needs.

What is required
Rule 22c-2 is known as the "redemption fee rule. Under this rule, mutual fund companies must be able to request and obtain certain shareholder data for positions held in omnibus accounts from their distribution intermediaries, including insurance companies, by October 16, 2007.

Last year, DTCC moved to help the mutual fund industry comply with this rule by expanding the functionality of its Networking service. Networking, created in 1988, has been used by mutual funds to exchange account-level information, balance their records with the same information, and provide customers with monthly statements that accurately reflect their investment activities.

With the expanded service, fund companies gained access to a new data stream to request and obtain the information relating to Rule 22c-2. Funds can then evaluate this information for patterns of market timing and frequent-trading activity to enforce their market-timing policies, which could result in restricting the account for purchases, and to impose redemption fees, if applicable.

Now DTCC is applying this service's capabilities to the insurance companies that must supply the information to mutual funds.

Insurance industry perspective
Robin Pikor, assistant director, U.S. Wealth Management, at The Hartford, recently talked about the progress being made to enhance Networking for SDR for the insurance industry.

Pikor is a member of the Investment Company Institute/NAVA Variable Annuity SDR work group that was formed to initially look at the viability of using the service and that is now developing with DTCC an application that meets the specialized requirements of insurance carriers and distributors of variable annuity, life insurance and retirement products.

Q: Why is the insurance industry interested in using Networking for SDR?

A: It will allow insurance companies to communicate with fund companies using DTCC's secure, consistent pipeline for data sharing across recordkeeping systems and fund partners. Protecting our customers' information is crucial to our company and the industry, and using a proven channel is an important benefit to us.

Q: What will carriers need to do to program for SDR?

A: Many insurance companies are faced with a number of recordkeeping systems to consider as they perform their comprehensive reviews. One of the challenges is the ability to standardize the data in the various systems and also maintain a link to the source system, which will make it easy to communicate back and forth systematically and provide more transparency. The committee performed a review of the SDR formats and discovered that we need a few more data fields to help the recordkeepers respond quickly to fund companies.

For example, we require an identifier - a contract or participant number - that will facilitate our ability to map any follow-up request back to the source system. Carriers also use a unit value versus a share amount in their recordkeeping systems, and the share amount would need to be calculated outside of the recordkeeping systems. So we've recommended a unit value indicator.

The Hartford is creating a warehouse of all transactions from their various recordkeeping systems. The warehouse holds the history for many of our admin systems and will interface with Networking for SDR to respond promptly to fund company requests.

Q: What needs to be done to translate "fund language to "insurance language in the data dictionary?

A: The working group found areas that needed to be redefined or that required more information. We used Insurance Services' Financial Activity Reporting* transaction codes to translate from insurance transactions to fund transactions and identified additional transaction codes to facilitate the communication of data between fund and insurance companies.

For instance, "free-look transactions give customers buying variable annuities the right to cancel a contract within a certain period of time, and fund companies thought it was important to be able to identify this particular type of transaction. We also identified annuitization transactions, whether they are partial or full withdrawals of money from an annuity; and credits, which are transactions used by the variable annuity and variable life products.

Corrections are also handled differently from the way broker/dealers may process, so we had to ensure that the funds could recognize a correction easily and not misinterpret the activity as frequent trading. Some recordkeeping systems used in the insurance industry require several days to correct a misapplied purchase by reversing or redeeming the original purchase and reprocessing.

Q: How will Networking for SDR be introduced to the insurance industry?

A: Our first steps will be to revise the Technical and Best Practices Guides, obtain comments from the work group and then go to the larger SDR group for final comments. After that, it will be distributed to the industry at large. @

[* Financial Activity Reporting (FAR) transmits pertinent financial transaction information about an annuity or life insurance contract from carriers to distributors. This information includes free looks, cancelled contracts, large investments followed by immediate withdrawals and loans on variable contracts. FAR is a tool that helps the insurance industry comply with the anti-money-laundering provisions of the USA PATRIOT Act and general suitability regulations.]