(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

SEC Adopts Fund Redemption Fee Rule

The SEC adopted new Rule 22c-2 under the Investment Company Act. The rule will allow registered open-end investment companies to impose a redemption fee, not to exceed two percent of the amount redeemed, to be retained by the fund.

The rule will require the boards of mutual funds that redeem shares within seven days to adopt a redemption fee of no more than two percent of the amount of the shares redeemed or determine that a redemption fee is not necessary or appropriate for the fund. According to the SEC, the rule is designed to permit 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. Unlike the rule as originally proposed, the final rule is voluntary rather than mandatory, and does not set the amount of the fee.

The agency noted that 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 rule also will 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. The purpose of this requirement is to allow funds to identify shareholders who violate fund market timing policies and to oversee the assessment of any redemption fees by the intermediary. Unlike the proposal, the rule will permit fund managers to determine how frequently the fund asks for this information and will include a provision requiring that the agreement obligate the intermediary to respond to directions from the fund to enforce the fund's market timing policies.

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 requested additional comment on whether it should revise Rule 22c-2 to require that any redemption fee conform to certain uniform standards. The agency stated that the adoption of a voluntary, uniform redemption fee might substantially reduce the cost of fee collection. This could encourage more intermediaries to participate in redemption fee programs. As seen by the SEC, without intermediary participation, funds may continue to be unable, as a practical matter, to impose redemption fees in order to protect their shareholders against abusive short term trading.

SEC Chairman William Donaldson said he was pleased that the final rule had evolved the way it had, since redemption fees do not lend themselves to a " one size fits all "approach. Paul Roye, the director of the Division of Investment Management, also noted that most investors who commented on the initial proposal were opposed to a mandatory redemption fee, fearing that many shareholders would be penalized who were not engaging in market timing. Mr. Roye advised that many funds currently rely on staff no-action positions to impose a redemption fee. The rule adopted yesterday does not simply codify those letters, he said, since it requires fund boards to affirmatively decide whether a redemption fee is appropriate to protect the fund's investors.

The compliance date for the rule is 18 months after Federal Register publication of the release. The deadline for comments on the issues raised by the release is 45 days after Federal Register publication.

Other Commission Action

The SEC also voted to propose a rule that would define the term " nationally recognized statistical rating organization" or NRSRO. The proposing release also will include interpretations with respect to the elements of the proposed NRSRO definition. In addition, the SEC announced that it has designated a new NRSRO, A.M. Best Co., Inc., through the no-action letter process. Comments concerning this proposal should be received by the Commission within 45 days of its publication in the Federal Register. Finally, the SEC voted to approve the budget of the Public Company Accounting Oversight Board and reviewed the FASB annual accounting support fee under Section 109 of the Sarbanes-Oxley Act.

The adopting and proposing releases will be published in a forthcoming report