The U.S. Securities and Exchange Commission has voted to adopt a rule concerning mutual fund redemption fees.

The rule will require the boards of mutual funds that redeem shares within seven days to:

  • adopt a redemption fee of no more than 2% of the amount of the shares redeemed; or,
  • determine that a redemption fee is not necessary or appropriate for the fund.

The rule is designed to permit (but not require) funds to impose a redemption fee if they determine that the fee is necessary or appropriate to recoup the costs that short term trading can impose on funds and their long term shareholders. Many funds have adopted redemption fees as a tool to combat market timing and other abusive short term trading in fund shares. The rule will not prevent funds from taking other steps to address such abusive trading.

The fund itself will retain the proceeds from the redemption fees. Unlike the rule that the commission proposed last year, the rule will not require funds to impose redemption fees, or set the amount of the fee (other than limiting the fee to 2% or less). Many commenters emphasized that short-term trading may not impose the same costs on all types of funds.

The rule will also require funds that redeem share within seven days to enter into agreements with their intermediaries (such as broker-dealers and retirement plan administrators) obligating them to provide funds with shareholder trading information. This information will permit funds to identify shareholders who violate the funds’ market timing policies, and oversee the intermediaries’ assessment of any redemption fees.

The rule will not apply to money market funds and exchange traded funds. It also will not apply to mutual funds that encourage active trading and disclose to investors in the prospectus that such trading will likely impose costs on the fund.

The SEC also voted to propose a rule that would define the term “nationally recognized statistical rating organization” or “NRSRO.” And, it voted to approve the budget of the Public Company Accounting Oversight Board, and reviewed the FASB annual accounting support fee, under the Sarbanes-Oxley Act.