February 6, 2004

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Re: Proposed Amendments to Rule 22c-1
Relating to Pricing of Fund Shares
File No. S7-27-03

Dear Mr. Katz:

PFPC Inc. ("PFPC") appreciates the opportunity to comment on the revisions recently proposed by the Securities and Exchange Commission (the "Commission") to Rule 22c-1 under the Investment Company Act of 1940 (the "Act"). The proposed revisions to Rule 22c-1, which governs the pricing of shares of registered investment companies (the "Rule"), are designed to prevent unlawful late trading in redeemable shares of registered investment companies ("mutual funds"). The proposed revisions to the Rule would provide that an order to purchase or redeem mutual fund shares would receive the current day's price only if the mutual fund, its designated transfer agent, or a registered securities clearing agency receives the order by the time that has been established by the mutual fund for calculating the net asset value of its shares (the "Proposed Revisions") (68 Fed. Reg. 242) (December 17, 2003).

PFPC is a wholly-owned subsidiary of The PNC Financial Services Group, Inc. ("PNC"), Pittsburgh, Pennsylvania, which is one of the largest diversified financial services organizations in the United States. PNC's major businesses include regional community banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management, and global fund processing services. As PNC's primary global fund processing services affiliate, PFPC provides a full range of services to investment companies, including transfer agency and shareholder support services. PFPC is the largest full-service mutual fund transfer agent in the United States.

PFPC supports the Proposed Revision's fundamental goals of ensuring the integrity of mutual fund pricing and increasing investor confidence by enhancing controls to prevent unlawful late trading in fund shares.

In response to the Commission's request for comments, PFPC does have specific suggestions for modification of certain aspects of the Proposed Revisions to enhance their effectiveness in practical application. Our comments address the following: (1) considerations relating to the role of mutual fund service companies in receipt and recordkeeping of mutual fund purchase and redemption orders; (2) application of the "conduit" exception to Section 529 college savings programs ("529 Programs"); (3) treatment of orders received by mail; and (4) clarification of certain aspects of when orders are timely received.

1. Fund Service Company Receipt and Recordkeeping of Orders

The Proposed Revisions would require orders to be received by the mutual fund, its designated transfer agent, or a registered clearing agency prior to the mutual fund's pricing time in order for such transactions to receive the fund's net asset value ("NAV") for that day. PFPC suggests that limiting mutual funds to the designation of a single transfer agent for purposes of receiving orders is overly restrictive. The designation of multiple servicing agents, subject to the establishment of appropriate safeguards, would provide the flexibility for mutual funds to maintain their current service provider relationships without compromising the intent and effectiveness of the Proposed Revisions to deter late trading abuses.

In today's operating environment, it is not uncommon for a mutual fund to rely on multiple servicing companies to receive shareholder orders on behalf of the mutual fund. Moreover, transfer agents and sub-transfer agents may have further arrangements with servicing companies to provide order receipt and recordkeeping functions. For example, a single mutual fund family may have arrangements with a transfer agent, a sub-transfer agent, and a 529 Program recordkeeper. Each of these mutual fund service companies ("Service Agents") acts on behalf of the mutual fund, rather than on behalf of a financial intermediary or investor, and is typically registered as a transfer agent subject to oversight by the Commission.

Whether acting as the mutual fund's transfer agent or in a comparable order receipt and recordkeeping capacity for the mutual fund, Service Agents observe the mutual fund's order cut-off and pricing times, but typically require additional time to process the orders prior to forwarding them to the mutual fund or its designee to complete and record the transactions. Service Agents have the same processing issues that are encountered by the mutual fund, its "designated" transfer agent, or a registered clearing agency. They receive orders via transmissions from the National Securities Clearing Corporation, bulk mail from the post office, telephone calls and fax transmissions. The label placed upon their respective roles does not alter the reality that these Service Agents have the same responsibilities as the mutual fund's primary transfer agent. However, under the Proposed Revisions, Service Agents that are registered transfer agents acting in the order receipt and recordkeeping capacity of a transfer agent for a mutual fund would be treated differently and be unfairly disadvantaged because they are not the single "designated" transfer agent.

PFPC urges the Commission to consider broadening the Proposed Revisions' requirements to provide that orders will receive the current day's NAV if they are received by the pricing time by any registered transfer agent that conducts order receipt and recordkeeping capacity services for a mutual fund, regardless of whether the transfer agent is the fund's "designated" transfer agent. In addition, PFPC recommends that certain conditions should be established in order to maintain the protections intended in the Proposed Revisions. Specifically, such safeguards might include requiring each of the fund's Service Agents to:

  • Maintain a record of the date and time of orders in accordance with the requirements of the Proposed Revisions;

  • Be registered with the Commission or other appropriate regulatory agency as a transfer agent; and

  • Have a formal, written agreement with the mutual fund, its registered transfer agent, or its registered sub-transfer agent, which itself has an agreement with the mutual fund, to provide order receipt and recordkeeping services, and that this agreement incorporate the observance of the fund's pricing time.

2. Exception for 529 Plans

The Proposed Revisions provide an exception for "conduit" funds, which invest all their assets in another mutual fund and must calculate their NAV on the basis of that other mutual fund's NAV. The exception is limited to those conduit funds that are "registered investment companies, and subject to regulation and oversight by the Commission." For the reasons discussed below, PFPC recommends that the Commission expand this exception to include 529 Programs (i.e., qualified tuition programs under Section 529 of the Internal Revenue Code of 1986, as amended)1, or establish a separate exception for 529 Programs.

529 Programs are generally structured like mutual fund conduit funds. In the 529 Program context, a state typically establishes a trust and the interests of the trust are sold to investors that desire to save for the college education of a beneficiary. Like a mutual fund conduit fund, the trust receives purchase and redemption (withdrawal) orders throughout the day. The 529 trust then aggregates those purchase and redemption orders and places corresponding aggregated orders with the underlying investment vehicles, which are typically mutual funds.

Unlike mutual fund conduit funds, the Commission does not have direct oversight of 529 Programs. Nonetheless, the Commission does have direct oversight of the registered transfer agents that have responsibility for the trade receipt and recordkeeping functions for 529 Programs. That oversight stems from the fact that the Commission and Municipal Securities Rulemaking Board ("MSRB") have concluded that MSRB rules apply to the sale of the securities of 529 Programs ("municipal fund securities"), which means the MSRB has direct regulatory authority over municipal brokers that sell municipal fund securities. In conjunction with the MSRB's oversight, the Commission has oversight over, among other things, municipal fund security trade receipt and related recordkeeping functions. The MSRB rules specifically permit a broker selling municipal fund securities to rely on the records maintained by a registered transfer agent.2 As a result, most, if not all, 529 Programs utilize a registered transfer agent to perform the trade order receipt and recordkeeping functions3 that relate to late trading issues. Thus, through its oversight of registered transfer agents, the Commission would have the ability to curb late trading abuses involving 529 Programs to the same extent as it has for mutual fund conduit funds.

Given the similarities between the trade order receipt and recordkeeping functions for 529 Programs and mutual fund conduit funds when performed by a registered transfer agent, PFPC urges the Commission to consider expanding the proposed exception for conduit funds to 529 Programs, or establish a comparable exception for such Programs.

3. Treatment of Orders Received by Mail

The Proposed Revisions would require a mutual fund's transfer agent to record the date and time that an order is received. PFPC recognizes the importance of making and retaining such a record to document compliance with this requirement. However, PFPC urges the Commission to permit orders received through the mail or overnight delivery service to be time-stamped at the time of processing, rather than at the time received, by the Service Agent because such orders do not pose a risk for late trading abuses.

Service Agents typically receive large volumes of mail, both through the United States Postal Service ("USPS") and other couriers, that contain orders as well as other types of correspondence from investors and financial intermediaries. Depending on the size of the Service Agency and the time of year, the volume of mail may number in the thousands of items per day. This mail is typically delivered in batches, and each item is subject to a number of operational processes prior to being recognized as an order that must be entered on the books and records of the mutual fund. These processes include opening the envelope, conducting an initial assessment as to whether the letter contains an order, and electronic imaging of documentation relating to the order.

In today's environment, Service Agents typically time stamp mail orders as they are processed, rather than time stamp each item of mail when it is physically received from the post office or courier. Nonetheless, absent extraordinary circumstances, mail orders received on a particular day are time-stamped before that day's pricing time. A requirement to create and maintain another time stamp to record when each item of mail is received by the Service Agent would necessitate duplicative efforts without any corresponding benefit. This, in turn, would increase operational costs that mutual funds would likely pass on to investors.

PFPC also suggests that mail orders do not present a late trading concern. The receipt of these transactions by the Service Agent is not directly controlled by the shareholder or financial intermediary, but rather the USPS or courier. The implementation of a rule requiring a time of receipt time stamp for mail orders would significantly increase the cost of processing such transactions without any corresponding regulatory or compliance benefit. Therefore, PFPC urges the Commission to permit mail orders to be time stamped at the time of processing, rather than at the time of receipt, in the final version of the Proposed Revisions.

4. Request for Clarification

PFPC recommends that the Commission provide clarification concerning the Proposed Revisions to ensure consistent application in the mutual fund industry. Specifically, PFPC suggests that the Commission assist the mutual fund industry with determining the appropriate standard for compliance by clarifying how orders "in progress" at the fund's pricing time should be treated in the following situations.

A. Telephone Orders

Many shareholders and financial intermediaries place orders via telephone calls to the mutual fund's Service Agent. In large Service Agent operations, these calls are typically received in a telephone queue and subsequently answered by a call center representative. Accordingly, there may be times when a call is in queue prior to the mutual fund's pricing time but not yet answered. Once answered by a telephone representative, the call itself may take a few minutes, during which time the caller is authenticated and the order is received.

PFPC suggests that the Commission clarify at what point in this telephone order process a transaction is considered to be received for purposes of pricing: (1) the call is in queue prior to the pricing time; (2) the call is answered by the mutual fund or Service Agent's call center representative and in progress, but not fully completed, prior to the pricing time; or (3) the call has been fully completed.

B. Fax Orders

Service Agents also receive orders by facsimile transmission ("fax"). PFPC notes that the time stamp electronically printed on the fax printout is typically the time programmed into the transmitter's equipment, rather than the receiver's machine. Therefore, PFPC suggests that the time stamp on a faxed order is not a reliable record for purposes of documenting the time it is received by the Service Agent.

Additionally, there is necessarily a short delay between the time a fax order is received and the time that the Service Agent time stamps it. This delay is caused by the need for the Service Agent to review the faxed item, determine that it is an order, and affix the time stamp. PFPC suggests that the Commission clarify how Service Agents should treat fax orders received just prior to the mutual fund's pricing time, but not physically time stamped until after the mutual fund's pricing time.

C. Data Transmissions

Some financial intermediaries receive orders throughout the day, then batch and deliver the orders to the Service Agent in a data transmission. In order to deliver the transmission to the Service Agent, the financial intermediary must first close its system to additional orders, collect the orders into a batch, and then execute electronic transmission protocols. As long as appropriate safeguards are in place to prevent transmissions from being modified while in progress, it would appear that there is no risk of late trades being introduced to data transmissions which start transmitting prior to the fund's pricing time, but which are not fully completed until after the fund's pricing time. PFPC therefore seeks clarification that such orders would be considered received before the pricing time if the transmission begins before the pricing time.


PFPC appreciates the opportunity to express its views regarding the Proposed Revisions. Should you have any questions or require additional information, please do not hesitate to contact me.


Michael DeNofrio
Executive Vice President -Senior Managing Director
Investing Services- Transfer Agency

cc: James S. Keller
Chief Regulatory Counsel
The PNC Financial Services Group

1 To be clear, we are seeking an exception for 529 Programs that are structured similarly to conduit funds and established and maintained by states. We are not seeking an exception for pre-paid 529 Programs or private 529 Programs.
2 See MSRB Rule G-8(g)(i).
3 From a transfer agent perspective, the operational environment and recordkeeping responsibilities for 529 plan orders are analogous to that of mutual fund conduit funds.