SEC Chairman Mary Schapiro recently announced that the SEC is looking to curb high-frequency trading in stocks, a practice commonly referred to as day trading. The SEC previously attempted to address market timing or rapid trading in mutual funds when it issued amendments to rule 22c-2 in 2006. Rule 22c-2 permitted mutual funds to impose redemption fees for rapid trading or to stop rapid trades. While this rule has been in place for some time, plans may want to consider verifying how the record keepers for their plans and the mutual funds in their participant directed investment account plan are monitoring and complying with the restrictions imposed by the mutual funds and what redemption fees the mutual funds might impose for a violation not stopped by the record keeper or custodian of the funds.
As plan fiduciaries prepare for receiving the disclosures on fees from their plan's service providers under ERISA 408(b)(2) on July 1 and prepare for the additional disclosures they must make to comply with the requirements on fee and investment disclosure to participants in participant directed investment account plans, they should also consider how to verify (and document that verification) their plan's vendor's procedures for avoiding violations are actually being applied. Violation of the SEC rule 22c-2 rule with too rapid trading, permits the mutual fund to impose redemption fees on such trading activity and such fee may be imposed on plans. While redemption fees are not included in the service provider fee disclosures required under the ERISA 408(b)(2) regulations, redemption fees and restrictions or limitations on investment instructions are required to be included in the disclosures to the participants about the various investment alternatives that must be complied with beginning August 29 under the ERISA 404a-5 regulations. Such redemption fees and transaction restrictions could be easily overlooked because they are frequently buried in the prospectus and not crystal clear, yet plan fiduciaries may need to disclose the redemption fees are assessed to the participant accounts or if the custodian of the plan's funds will impose the transfer restriction on the individual participant account.
Once the SEC's develops and finalized rules on rapid trading in stocks, plans will need to consider whether such rules will impact required disclosures if they offer brokerage windows as an option in their plans.
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