This document on Rule 22c-2 provides an overview of the regulation, what it means for your firm, and its costs and risks. But it also delves further, revealing ways mutual fund companies can leverage client relationship management (CRM) systems to facilitate compliance and uncovering an overlooked upside to 22c-2 compliance: unprecedented insight into sources of profitability.

1. ExEcutivE BriEf
uncovering the Opportunity
in 22c-2 compliance
Executive Summary
Many mutual fund wholesalers are currently struggling with the expensive and time-
consuming challenge of complying with SEC Rule 22c-2—a task that may appear to
be all cost with no resulting benefit. This executive brief provides an overview of the
regulation, what it means for your firm, and its costs and risks. But it also delves further,
revealing ways mutual fund companies can leverage client relationship management
(CRM) systems to facilitate compliance and uncovering an overlooked upside to 22c-2
compliance: unprecedented insight into sources of profitability.

2. Introduction Omnibus Accounts
The basis for Rule 22c-2 is simple and decent: It’s As part of the investigations into market timing, a further
founded on the notion that all mutual fund shareholders issue was revealed: a fund’s inability to monitor individual
deserve fair and equal treatment. Smaller long-term investor activities in omnibus accounts. Omnibus transac-
mutual fund shareholders using the instruments as they tions register with a fund distributor as a single purchase
were intended should not be placed at a disadvantage by a financial intermediary, though they in fact represent
due to manipulation of the system by larger players an aggregate of multiple underlying shareholder accounts.
looking for short-term gains. The fund lacks knowledge of the underlying shareholders’
identities and transactions. Because only the financial
Responding to this regulation, however, is proving intermediary (broker-dealer, bank, retirement plan
anything but simple for many mutual fund wholesalers. administrator, or similar body) knows the sub-account
The costs, complexities, phases, and deadlines for com- information, the fund is unable to effectively monitor for
pliance have many mutual fund wholesalers throwing up market-timing activities and other violations. Since 35% of
their hands in exasperation. As with a lot of compliance mutual fund accounts are held in omnibus positions, this
initiatives, compliance with Rule 22c-2 feels to many like represents a significant “blind spot” for fund companies
a grudging necessity: a drain on resources that raises that could be taken advantage of by those involved in
the cost and difficulty of doing business with little visible illicit trades.
upside for the complying firm.
In response, Rule 22c-2 requires funds to enter into agree-
But is it? This executive brief looks at the nature and ments (known as “shareholder information agreements”)
impact of 22c-2 and examines how a flexible client with their intermediaries that enable fund management
relationship management system can assist in managing to identify investors whose trades contravene the fund’s
some aspects of 22c-2 compliance. Furthermore, it short-term trading policies. Under these agreements,
uncovers a silver lining that a firm can find in 22c-2 which must be made with each first-tier intermediary, the
compliance using the right CRM solution: for the first time intermediary must agree to provide shareholder identity
ever, total insight into sources of profitability. (the taxpayer identification number or “TIN”) and transac-
tion information at the fund’s request and to comply
with the fund’s instructions regarding the restriction or
22c-2: The Basics prohibition of future purchases or exchanges related to
shareholders found to have violated the fund’s policies.
Rule 22c-2 is the Securities and Exchange Commission’s
These agreements must be kept on file for six years.
response to the market-timing scandals that rocked the
industry in late 2003 and 2004, as then New York State
Attorney General Eliott Spitzer began to act on fraudulent
and illegal activities turned up by his office’s investigation
What Does It Mean for You?
of the mutual fund industry. The industry’s traditionally In a nutshell, Rule 22c-2 means a lot of work for mutual
spotless image was tarnished by a series of scandals, fund companies. In addition to board decisions regarding
which centered on market-timing activities such as late redemption fees (which should by now be complete,
trading and time-zone arbitrage. given the October 6, 2006, deadline), fund companies
must identify all of the bodies they interact with that fit
In response, the SEC first proposed prospectus disclo- the SEC’s definition of intermediaries for the purposes of
sure of funds’ market-timing policies and procedures and this rule—a formerly broad category that was mercifully
later proposed mandatory redemption fees. In March narrowed in amendments to the rule that took effect late
2005, this culminated in the creation of Rule 22c-2 under in 2006.2 Fund companies must then ensure that they
the Investment Company Act of 1940. have negotiated and signed shareholder information
agreements with each intermediary and keep them
Redemption Fees readily accessible for six years. And that’s just the
beginning—after that they must figure out how to receive
One of the industry’s primary tools for deterring market- omnibus account information from these intermediaries
timing activities is the use of redemption fees, which raise and how to effectively monitor this data for compliance
the cost of holding short-term positions in funds, render- with their market-timing rules.
ing them less attractive and profitable for prospective
market-timers. While Rule 22c-2 ultimately did not make
redemption fees mandatory, it does require that if a fund
redeems shares within seven days (which most do), its Delano, Peter. “Rule 22c-2, the SEC's Response to Market Timing:
board must consider whether to impose redemption fees Implications for the Mutual Fund Industry.” TowerGroup, August 2005.
of up to 2% of the value of the shares redeemed. 2 See Securities and Exchange Commission, 7 CFR Part 270, [Release
No. IC-27504; File No. S7-06-06; File No. 4-52] for full details of the
amendments: http://www.sec.gov/rules/final/2006/ic-27504.pdf.
Pivotal CRM | Executive Brief

3. The original date for fund companies to have negotiated be $67.8 million—far higher than the SEC estimate of
these agreements for compliance with 22c-2 was October $86.7 million.6 And evidence from individual fund compa-
6, 2006, but the SEC extended it to April 6, 2007, in nies and intermediaries appears to confirm that the SEC
response to widespread requests. They also extended grossly underestimated compliance costs—Oppenheimer
by a full year (until October 6, 2007) the date by which Funds put the figure of $672,000 on its initial build and
funds “must be able to request and promptly receive $3.7 million on its annual maintenance costs, and interme-
shareholder identity and diary First Trust Corp. estimates its annual administration
transaction information pursu- costs at four times the SEC’s figure.7
Mutual fund companies can ant to shareholder information
expect that the SEC will be agreements.”3 These exten-
The Risk: Multi-Million-Dollar Fines
taking non-compliance with sions were a brief reprieve,
but mutual fund companies Since the deadlines for many components of Rule
Rule 22c-2 very seriously— 22c-2 compliance have been extended and it has not
are still scrambling to meet
and imposing fines 22c-2’s requirements. yet come into full effect, no fines have yet been laid
accordingly. for non-compliance. But if evidence from before the
The technical demands are introduction of the new rule is any indication, fines will be
daunting. To monitor activities substantial. Fines levied by the SEC for market timing and
and identities in omnibus accounts, mutual fund compa- late trading before the implementation of 22c-2 included
nies need to be able to receive a massive influx of data $675 million for Bank of America/FleetBoston Financial,
from in many cases a large number of intermediaries, all $600 million for Alliance Capital Management, $350
of which can have different data standards and systems. million for Massachusetts Financial Services, and $40
million for Capital Canary Partners.8 Now that a stricter
A variety of technical solutions to this problem rule is in place, clarifying some of the previously existing
have arisen. For example, some of the larger plan gray areas, mutual fund companies can expect that the
administrators, including Fidelity, Charles Schwab, and SEC will be taking non-compliance with Rule 22c-2 very
TD Ameritrade are offering portals into their omnibus seriously—and imposing fines accordingly.
accounts that allow fund companies to view trade
activities in real time.4 In addition, the Depository Trust
Clearing Corp. (DTCC) added functionality to its What Role Can CRM Play in Helping You
“Networking” service in 2006. The new features, devel- Meet the Challenges of 22c-2?
oped in conjunction with the Investment Company Institute
With the staggering costs and complexities of Rule 22c-2
(ICI), provide a standardized data format for the exchange
compliance, mutual fund companies need to look at what
of individual account trade activity from omnibus transac-
systems they may already have in place that can assist in
tions between intermediaries and fund companies. Other
managing the compliance process—or at ways they can
software vendors have also developed rule-engine tools
justify the purchase of systems that will assist in compli-
for monitoring trade data and outsourcing options for
ance initiatives while also delivering additional benefits.
firms that want to fully offload 22c-2 compliance.
The problem with 22c-2 compliance initiatives, like many
The Costs compliance projects, is that they focus a firm’s efforts,
resources, and technology expenditures on meeting
Whatever solution mutual fund wholesalers choose for certain very specific regulatory requirements. Of course,
22c-2 compliance, the bottom line is a sizeable cost. The this is not optional: the requirements are mandated
SEC estimated the bill for 22c-2 compliance as a one-time and firms must move quickly to comply or face severe
cost of $00,000 and annual ongoing maintenance penalties. But what this does tend to do is focus the firm’s
of slightly more than $6500 per fund company, with efforts narrowly on technology solutions and processes
intermediaries incurring an initial cost of $50,000 and that will meet the regulatory requirements alone, rather
ongoing annual costs of $60,000 each. Many other than on larger solutions that address business issues
groups disagree with the SEC’s estimates. The ICI feels beyond just compliance. This sort of mindset can prevent
the SEC’s figures underestimate the costs of ongoing firms from seeing larger opportunities in their compliance
systems maintenance.5 TowerGroup estimates the full activities—or how other kinds of technology initiatives can
three-year cost of compliance with 22c-2 (2005-2008) to play a role in meeting these demands.
3 Ibid. 6 TowerGroup, “Rule 22c-2 Costs to Mutual Funds: SEC Estimates
vs. TowerGroup Estimates (2005-2008),” Exhibit #44: 5M-E7
4 Levine, Cory. “Get On the Omnibus: The Mutual Fund Industry Gears up
August 0, 2005.
for 22c-2.” Wall Street Technology, August 22, 2006.
URL: http://www.wallstreetandtech.com/story/showArticle.jhtml?articleID 7 Levine, Cory. “Get On the Omnibus: The Mutual Fund Industry Gears up
=9220285pgno=. for 22c-2.” Wall Street Technology, August 22, 2006.
5 Ibid. 8 Atkinson, James. “The Mutual Fund Industry Scandal and What Is Being
Done to Correct It,” April 22, 2004.
Pivotal CRM | Executive Brief 2

4. Client relationship management (CRM) systems are a information hubs, CRM systems can be integrated with
case in point. CRM systems, however robust, are not the fund company’s portfolio valuation systems, market-
compliance solutions and never will be, and it often timing rule engines, back-office systems, and more to
makes sense, given the complexities of meeting the provide a single point of information access for users,
requirements of regulations such as 22c-2, to implement offering a holistic view that provides insight beyond just
a purpose-built system for compliance. But a good CRM compliance data.
system can nonetheless
be instrumental in meeting
With aCRM system designed aspects of 22c-2 compliance.
The Opportunity: Better Insight into
to aggregate the kinds of Broker-Dealer Profitability
As centralized repositories of
information that are most all a mutual fund firm’s rela-
With all the costs and complexities of complying with Rule
valuable to fund wholesalers, 22c-2, it’s no wonder most mutual funds see no upside
tionship data, CRM systems
to their 22c-2 compliance initiatives. But if they look a little
fund companies have an are the perfect resource for
harder—and have the right CRM system in place—there’s
unprecedented opportunity identifying which intermediar-
a compelling opportunity underlying compliance with
ies a mutual fund company
to achieve 360-degree insight Rule 22c-2.
must enter into shareholder
into sources of profitability, information agreements with. Because mutual fund companies sell to investors through
unfettered by the lack of Now that the SEC has intermediaries, their intermediaries are effectively their
transparency of omnibus narrowed and redefined this sales force. As with any sales force, the fund company
accounts. group to include only first-tier needs insight into which broker-dealers are perform-
intermediaries and to exclude ing—who’s making them money, who’s costing them—so
small intermediaries that the they can focus their efforts on maximizing their advantage
fund treats as individual investors, the number of interme- with their most profitable broker-dealers and attempting
diaries with which funds have to enter into agreements new strategies with those that aren’t performing. But the
has dropped, but the importance of determining the lack of transparency due to omnibus and super-omnibus
relationship type has increased. Not only does the CRM positions has traditionally stood in the way of true insight
system house this kind of information, but a flexible CRM into broker-dealer profitability. Once in compliance with
system should allow fund companies to easily classify 22c-2, however, mutual fund companies have all the raw
an account as an intermediary and to clearly identify the information they need to fully assess their sources of
account’s status with regard to shareholder information profitability—if they have the right tools.
agreements. Similarly, with a wealth of contact information
for each account, the CRM system should enable the fund This is where the right CRM system can be indispens-
to easily identify the right contacts within each account to able. With a CRM system designed to aggregate the
engage in the process of negotiating a shareholder infor- kinds of information that are most valuable to fund
mation agreement, which can otherwise be difficult given wholesalers, fund companies have an unprecedented
the many layers of relationships that exist between a fund opportunity to achieve 360-degree insight into sources
company and the many arms of larger intermediaries. of profitability, unfettered by the lack of transparency of
omnibus accounts. The right CRM system will show fund
Mutual fund companies can use flexible CRM systems to wholesalers exactly how much they’re spending on each
flag accounts that do not have shareholder information broker-dealer, and how much each one is bringing in.
agreements in place, referencing this flag in decisions Sophisticated CRM systems will allow fund companies
about whether to process omnibus trades from particular to analyze this information at multiple levels, rolling it
intermediaries. They can also put in place a detailed up to the firm level or drilling down to assess individual
milestone-based action plan for engaging the intermediary branches and specific brokers. This gives fund company
in a shareholder information agreement, ensuring the executives exactly the kind of information they need to
process is quickly and effectively carried out. A copy analyze trends, top sources of profitability, and the effec-
of the agreement can then be housed within the CRM tiveness of different sales and marketing expenditures, as
system for easy reference and retrieval in response to well as to forecast sales pipelines and growth.
SEC inquiries.
Furthermore, fund companies for the first time have the
Another important role CRM systems can play in comply- transparency and information they need to gain insight
ing with Rule 22c-2 is as information aggregators. As firms into their end investors. Even if all they have is a taxpayer
move to put multiple point-systems in place for different identification number and trade activity records, they have
aspects of their business and disparate compliance initia- a new wealth of data to mine to learn more about how,
tives, information can become fragmented and siloed, when, and in what quantifies different investors are choos-
with users needing to reference multiple systems to get a ing to buy and sell their funds.
clear picture of any given issue or relationship. As natural
Pivotal CRM | Executive Brief 3

5. Conclusion: Think Outside the (Regulatory) Box
Complying with SEC Rule 22 c-2 poses undeniable challenges and costs for mutual fund companies. But as
you work to find the most effective way to comply, don’t limit your opportunities by falling prey to tunnel vision.
Ultimately, Rule 22c-2 boils down to a reconfiguration of the relationships that underpin fund wholesaling. This
means that client relationship management can play an important role both in making these changes and in
deriving optimum value from the new insights they provide.
About Pivotal crM for financial Services
Pivotal CRM for Financial Services enables clear, competitive differentiation by addressing the customer-facing
needs of financial services enterprises in the capital markets, commercial and private banking, institutional
asset management, and mutual fund wholesaling industries. With distinct solutions tailored to the needs of
each of these lines of business, Pivotal CRM offers financial services companies superior client relationship
management (CRM) software that reflects industry processes out of the box, while also providing the flexibility
to easily model each company’s unique business practices. The Pivotal CRM software suite includes a
powerful application platform and solutions for marketing, sales force automation, customer service, analytics,
mobile CRM, partner management, and more.
Designed to produce meaningful increases in revenues, margins, and client loyalty, Pivotal CRM is used by
more than 2,000 companies around the world, including Allianz Dresdner Asset Management, Farm Credit
Services of America, Federal Home Loan Bank of Atlanta, Julius Baer Investment Management, Mellon Asset
Management, Morgan Keegan Company, Vantage Credit Union, and The Ziegler Companies. For more
information about Pivotal CRM for Financial Services, please visit http://www.pivotal.com/financialservices.
For more information or a complete list of our worldwide offices, please visit www.pivotal.com.
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