On August 7, The Depository Trust & Clearing Corporation (DTCC) launched a new service designed to help the mutual fund industry comply with an impending deadline under a new Securities and Exchange Commission (SEC) rule designed to combat short-term trading and market timing.

The SEC’s Rule 22c-2 requires fund companies to create agreements with intermediaries in order to access shareholder data held in omnibus accounts (a pool of individual accounts combined into one account, usually in the name of an intermediary firm) and evaluate trading patterns for possible market-timing activity. Leveraging technology that already exists within Networking, one of several Mutual Fund Services provided by its National Securities Clearing Corporation (NSCC) subsidiary, DTCC has developed a solution that will allow funds to more accurately track and record instances of frequent trading in omnibus accounts and then use that information to impose short-term redemption fees, if applicable.

Networking is used by the mutual fund industry to exchange and reconcile customer account-level activity between fund companies and broker/dealers and other distributors, and offers centralized settlement of cash dividends and capital gains distributions. A new data stream in the service, created specifically to support the industry's compliance requirements, will provide fund companies with an automated, standardized and centralized method of requesting and receiving information through DTCC's secure and reliable infrastructure.

Service ready in advance of deadline

"With close collaboration from a working group of the Investment Company Institute, we've been able to deliver a solution two months ahead of schedule and provide the industry with ample time to program and test prior to the SEC's October 16 deadline," said Barbara Simon, DTCC vice president, Relationship Management.

Kathy Joaquin, director of Operations & Distribution, Investment Company Institute, explained that the group cooperated on multiple levels. "While the working group provided guidance in dealing with the requirements of the SEC ruling, three additional task forces dealt specifically with key initiatives we identified as critical to the development and implementation of a solution – communications, guidelines and technical design."

The Communications Task Force developed the Agreements Package, which includes a template for a standard agreement that can be used between funds and intermediaries, and worked with other industry groups to share this information across the industry. The Guidelines Taskforce produced a set of best practices for using the service - Networking for Standardized Data Reporting - and provided common definitions for data fields and other terminology. The Task Force also crafted guidelines on such issues as how far back in time a fund can request data; how many days’ worth of data a fund can request; and how quickly an intermediary should provide the data. The Technical Design Task Force outlined the business functionality and systems requirements and produced a concept paper, which led to the development of user guides. DTCC representatives worked particularly closely with the Guidelines and Technical Design Task Forces to develop their plans.

How it works

Networking for Standardized Data Reporting allows fund companies to request, and distributors to transmit, information at two levels:

• the summary level for super omnibus accounts (comprising multiple plans, trusts and/or investor omnibus accounts). Data can include account numbers, dollar amounts and numbers of buys and sells;
• the detail level, where a fund company uses summary level data to request more specific information, such as details on shareholders in a 401(k) or other retirement plan.

Service open to secondary intermediaries

Frequently, more than one firm exists in the intermediary chain, which can mean that the primary intermediary does not have the level of information that a secondary intermediary – a recordkeeper, for example – has. For firms using Networking, the information can be passed automatically through the service. For firms in the chain who are not Networking participants, NSCC offers a Data Services Only (DSO) membership, which has fewer requirements than a full-service Networking membership and allows for information-exchange only. In this case, a DSO member would be able to use Networking to pass information directly to the funds requesting it or to their transfer agents.

Other systems enhancements to support SEC rule

While the development of Networking for Standardized Data Reporting is by far the most ambitious service enhancement undertaken by DTCC in relation to Rule 22c-2, other earlier service extensions made to both Networking and Fund/SERV® give funds the ability to identify redemptions that are subject to redemption fees; process and settle the fees; and provide firms with detailed information on direct redemptions, which are distributor transactions handled outside of Fund/SERV.