4.15.2009 The SEC issued a no-action letter to the law firm Seward & Kissell taking the position that an open-end investment company does not have deduct redemption fees when calculating the "price of securities redeemed or repurchased" in item 5(ii) of Form 24F-2. Section 24(f)(1) of the Investment Company Act of 1940 (“1940 Act”) provides that a mutual fund is deemed to have registered an indefinite amount of shares upon the effective date of its registration statement under the Securities Act of 1933 ("1933 Act"). Section 24(f)(2) requires a mutual fund to pay a registration fee to the SEC based upon the aggregate sales price of shares sold during its fiscal year, reduced by the aggregate price of shares redeemed or repurchased during its fiscal year.
To calculate the registration fee owed to the SEC, a mutual fund must determine the aggregate sales price of shares sold and the aggregate price of shares redeemed or repurchased. The term "price" is not defined in Section 24(f), Rule 24f-2 or Form 24F-2, but is used in Rule 22c-1. Under that Rule, the term price equates to current net asset value of the fund. Sales loads, redemption fees, and other similar charges do not affect the price, or current net asset value, at which an order for fund shares is effected. Sales loads, redemption fees, and other similar charges apply after the price is determined and affect the amount a shareholder must pay in connection with purchases or redemptions of fund shares.
The incoming letter noted that Rule 22c-2 requires the board of directors of a mutual fund to approve a redemption fee for the fund or to determine that imposition of a redemption fee is not necessary or appropriate.& Mutual funds charge redemption fees to discourage short-term trading in their shares and to deter market timing of their shares. These fees help mutual funds recoup the costs or mitigate dilution associated with short-term trading and market timing. It further noted that requiring mutual funds to calculate the Item S(ii) Amount by deducting the Redemption Fee Amount from the Net Asset Value Amount would cause mutual funds to pay registration fees on redemption fees. This would limit the effectiveness of Rule 22c-2 and hinder the ability of mutual funds to recoup the costs arising from short-term trading and market timing.
The SEC staff was persuaded by these arguments and granted no-action relief to any investment company that deduct redemption fees when calculating the "price of securities redeemed or repurchased" in item 5(ii) of Form 24F-2.
Click http://www.sec.gov/divisions/investment/noaction/2009/sewardandkissel041509.htm to access the no-action letter.