Member Article

EDGAR Identifiers for Series and Classes Last July, the Securities and Exchange Commission adopted amendments to Regulation S-T to require mutual funds and insurance company separate accounts issuing variable annuity contracts or variable life insurance products to obtain identifiers and electronically identify in their filings made through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system to which of their series or classes the filing relates. See Rel. No. 33-8590, IC-26990, July 18, 2005, printed at 70 FR 43558, July 27, 2005. By February 6, 2006, all Funds must have entered their existing series and class (and contract) information onto the “Series and Classes (Contracts) Information Page” of the EDGAR Filing Web Site (https://www.edgarfiling.sec.gov) and obtained identifiers for such series and classes. Each Fund will be required to provide series name, class (or contract) names and ticker symbols, if any. Once this information is entered, identifiers will be issued by the SEC and sent to the Fund via e-mail. These identifiers will be available to the public and will be searchable by the public and the SEC staff. Filings made after February 6 that do not have the required series and class identifiers will not be accepted by the SEC. After February 6, the SEC will post notice on the “Information for EDGAR filers” page of the SEC’s website (http://www.sec.gov) as to the date on which it will close the Series and Classes (Contracts) Information Page for entry of information concerning existing series and classes. After that date, the Information Page will be used only for retrieving and editing series and class (or contract) information, and a fund that has failed to enter its information and obtain identifiers may be required to file a post-effective amendment to generate identifiers. Only information on series or classes currently in existence must be entered. Those series or classes that come into existence after February 6 will enter their information in a separate section of the EDGAR submission template of the registration statement (or post-effective amendment) filing by which the new series or class is added. Each fund must enter a unique name for each of its series, using the name by which that series is most commonly known. A fund or separate account that is not organized as a series and has no separate classes will by deemed to have one series and one class and must obtain a series identifier. For insurance company separate accounts, only separate accounts registered as management investment companies (on Form N-3) with multiple series within the separate account will be able to have more than one series. A separate account organized as a unit investment trust (registered on Forms N-4 or N-6) will be deemed to have a single series, notwithstanding any division of the separate account into sub-accounts. In addition, a separate account will be deemed to have multiple classes corresponding to the different contracts issued by the separate account and will be required to obtain class (contract) identifiers for each contract. On or after February 6, 2006, all Funds must electronically identify for which series and classes (or contracts) certain filings are made.1 Filings requiring series and class (or contract) identifiers will be suspended if the identifiers are not included in the EDGAR filing or if the identifiers are not those associated with the CIK (central index key) of the fund, necessitating a resubmission of the filing. Each fund also has a duty to update and keep current its series and class (or contract) information. For example, filers will be required to update for name changes of series or classes (or contracts), addition of ticker symbols, or deactivation (if a series is never offered or no longer makes filings because of a merger, liquidation or other means of elimination of if the fund has deregistered). In connection with merger-related filings on Form N-14, under Rule 425 and under the proxy rules, funds will also be required to supply electronic information in the EDGAR template concerning the acquiring fund and the target (and their series and classes (contracts) in existence, if any). Nonregistrant third parties making proxy filings with respect investment companies will be required to designate the type of investment company and include series and/or class (contract) identifiers in designated proxy submission types. Additional Mandatory EDGAR Filings In August 2004, EDGAR was modified to permit investment companies to make filings of fidelity bonds and any claims or settlement under Section 17(g), sales literature filed with the SEC under Section 24(b) and litigation material filed under Section 33 of the Investment Company Act either in paper or electronically. Effective February 6, 2006, documents filed with the SEC under Section 33 of the Investment Company Act of 1940 (“1940 Act”) relating to litigation against an investment company or any affiliate of the investment company must be filed electronically through EDGAR. Effective June 12, 2006, filings of fidelity bonds and any claims or settlements under Section 17(g) of the 1940 Act or filings of and sales literature under Section 24(b) of the 1940 Act must be filed electronically through EDGAR. Rule 22c-2 Allows Redemption Fees, Requires Agreements with Financial Intermediaries Last March, the SEC adopted new Rule 22c-2 under the Investment Company Act that allows mutual funds to impose redemption fees, not to exceed 2% of the amount redeemed. The new rule also requires funds to enter into written agreements with financial intermediaries that hold shares on behalf of other investors in order to obtain information about the investors’ trading practices. See Rel.No. IC-26782, March 11, 2005, printed at 70 FR 13328, March 18, 2005. Redemption Fees The SEC’s original proposal would have mandated redemption fees. Instead, the SEC adopted a rule that authorizes fund directors to impose a redemption fee when they determine the fee is in the fund’s best interest. The release notes that the new rule “permits each board to take steps it concludes are necessary to protect its investors, and provides the board flexibility to tailor the redemption fee to meet the needs of the fund.” Rule 22c-2 requires each fund board of directors (including a majority of independent directors) to either: 1. “approve a redemption fee that in its judgment is necessary or appropriate to recoup costs a fund may incur as a result of redemptions, or to otherwise eliminate or reduce dilution of the fund’s outstanding securities”; or 2. “determine that imposition of a redemption fee is not necessary or appropriate.” Each fund’s board must consider these alternatives and come to a decision prior to October 16, 2006, the compliance date. This requirement does not apply to money market funds, exchange traded funds or funds that affirmatively permit market timing and other forms of active trading of their fund shares. For funds that permit active trading, such a policy need not be a fundamental policy (i.e., one for which any change requires shareholder approval), and a fund’s board may decide to stop allowing active trading at any time, in which event the board should also consider the alternatives mandated by Rule 22c-2. The rule provides that a redemption fee may not exceed 2% of the amount redeemed (although a fund may set a redemption fee of less than 2%). The amount of a redemption fee need not be specifically tied to a fund’s administrative and processing costs associated with redeeming fund shares, which are difficult to estimate and may vary from time to time. Instead, the redemption fee should be based on the judgment of the fund and its board, and can take into consideration other factors, such as the indirect costs to the fund of having to keep a greater portion of its assets in liquid securities in order to meet redemption requests. Rule 22c-2 authorizes redemption fees on shares redeemed within seven or more calendar days after the shares were purchased. The rule permits a board to determine, in its judgment, whether a longer period is necessary or appropriate to protect shareholders. This also permits a board to consider different combinations of holding periods and redemption fee levels for funds within a single family of funds that have varying vulnerability to market timing or active trading abuses. Information on Shareholder Transactions Rule 22c-2 also requires funds to enter into written agreements with financial intermediaries by no later than October 16, 2006, under which such intermediaries must, upon request, provide funds with certain shareholder identity and trading information. The purpose of this requirement is to enable funds to obtain information needed in order to monitor the frequency of short-term trading in omnibus accounts and to enforce market timing policies. The definition of “financial intermediary” in the rule includes: • a broker, dealer, bank or any other entity that holds securities in nominee name; • an insurance company that sponsors a registered separate account organized as a unit investment trust, master-feeder funds, and certain fund-of-funds arrangements not specifically excepted from the rule; and • in the case of an employee benefit plan, the plan administrator or the keeper of a plan’s participant records. The requirements of Rule 22c-2(a)(2)(ii) for agreements with financial intermediaries applies to a fund regardless of whether or not the fund imposes a redemption fee. Funds have the flexibility to request information periodically or when circumstances suggest that an intermediary is not assessing redemption fees or that abusive market timing activity is occurring. The SEC states that “[w]e expect funds that are susceptible to market timing will use it regularly.” In addition, for funds that do not impose a redemption fee, this information may be useful in determining whether the imposition of redemption fees is necessary. Under Rule 22c-2, the written agreement with each financial intermediary must contain a provision under which the intermediary agrees to (a) provide promptly upon request the TIN of all shareholders that purchased, redeemed, transferred or exchanged shares of the fund held through the financial intermediary and the amount and dates of such transactions, and (b) execute the fund’s instructions to restrict or prohibit further purchases or exchanges by a specific shareholder who has been identified by the fund as having engaged in trading that violates the fund’s market timing policies. The purpose of this requirement is to make sure that financial intermediaries enforce fund market timing policies. Expanded Filing Requirements for Investment Advisers Announced by Department of Labor In June2 and November3 of last year, the Department of Labor (“DOL”) released guidance indicating its intent to expand enforcement of the reporting duties of “employers” under the Labor-Management Reporting Disclosure Act (LMRDA). The guidance is effective for all fiscal years of an “employer” beginning on or after January 1, 2005. Reports are due within 90 days after an employer’s fiscal year end, which means the first reports by employers are due by March 31, 2006 for employers on a year ending on December 31, 2005. The LMRDA defines both “employer” and “payment” very broadly: “Employer” includes any business with employees, regardless of whether the employees are unionized or regardless of what industry it is engaged in. The DOL states in its November guidance that “every private sector business or organization within the United States that has one or more employees is considered an employer under this definition.” A “payment” is defined as any payment or loan, direct or indirect, of money or other thing of value (including reimbursed expenses), or any promise or agreement of such payment or loan and includes contributions to unionsponsored charities, golf outings, tickets to theater or sporting events, meals, and travel reimbursements, among others. The LMRDA requires an employer (including an investment adviser) to disclose annually to the DOL on Form LM-10 any payments made to labor organizations or union officials, or certain payments made to labor relations consultants or its own employees. For example, payments made to any employee or labor relations consultant for the purpose of (1) causing them to persuade other employees with regard to the exercise of employee rights under the National Labor Relations Act or (2) obtaining information related to the activities of employees regarding a labor dispute. The DOL’s guidance specifically includes as an “employer” any entity that buys from, or sells or leases directly or indirectly to, or otherwise deals with a trust in which a recipient’s labor organization has an interest. Reports of payments on Form LM-10 are required whether or not the recipient is a trustee, officer or person controlling the management of the trust. Although the disclosure requirements have existed for over four decades, the DOL in the past has not taken an aggressive approach to enforcement. With the release of its recent guidance and with an increase in its budget, the DOL will likely hire additional investigators to actively enforce the disclosure requirements. The LMRDA also requires union individuals to file Form LM- 30, which report payments they have received from employers. The DOL is expected to compare information reported in Form LM-10 with that in Form LM-30. Filings of both forms are available for public viewing on the Department of Labor web site (www.dol.gov).Filing Form LM-10 Within 90 days of the close of an employer’s fiscal year, the employer must file a Form LM-10 reporting: • the date and amount of each payment; • the name, address and position of the person to whom each payment was made; and • an explanation of the circumstances of each payment made. The employer’s president and treasurer, or corresponding principal officers, are required to sign the completed Form LM-10. The employer is responsible for retaining the information necessary to verify its reports on Form LM-10 for five years. Willfully violating reporting requirements or knowingly making a false statement may subject the individual or the employer to civil prosecution and criminal penalties up to $10,000 in fines and one year imprisonment. Examples Examples of situations that require a financial advisor to report expenditures on a Form LM-10 include the following (unless the amount involved is de minimis — see below): • Paying a pension plan trustee’s entrance fee in a charity golf outing; • Sponsoring a reception at an educational or trade association conference to which pension trustees are invited and which cost more than $25 per person; • Taking pension trustees to lunch, dinner or entertainment events, or providing them with free tickets to such events; • Inviting a union officer to a golf outing and dinner where the company/employer is a service provider or financial advisor to a benefit fund for which the union officer is a trustee; • In general, any business development and client relations expenses by employers for marketing are not exempt and must be reported. De minimis Payments and Other Exceptions Payments are considered de minimis and need not be disclosed if they: • have a value of $250 or less; • are sporadic or occasional; and • are given under circumstances unrelated to the recipient’s status in a labor organization. When evaluating the de minimis exception, the $250 threshold amount is applied to the cumulative amount of gifts or payments made to a person during the employer’s entire fiscal year. The test for evaluating if a gift is unrelated to the recipient’s status as a union official is “whether the employer ordinarily provides such consideration to people in similar circumstances who are not union officials.” Another exception is for “payments made in the regular course of business to a class of people determined without regard to whether they are, or are identified with, a labor organization and whose relationship to labor organizations is not ordinarily known to or readily ascertainable by the payor.” The example given by the DOL states that no report is required by an employer that provides brokerage services to a union official on account of payments to the official of dividends and interest on securities issued by the employer. Another example related to charitable contributions by an employer; these are generally not reportable, even if the donation was made at the direction or request of a union official or the union official sits on the board of the charity. A report of payments is required if the union official would directly benefit from the donation, as would be true if the union official’s child received a scholarship from the charitable organization.