The Securities and Exchange Commission has come up with a new rule aimed at curbing market timing abuses in mutual funds. It is called the "22c-2 rule". It goes into effect Oct 16, 2006. This rule is designed to help long term mutual fund shareholders.
Market timing involves having favored investors rapidly trading in and out of mutual funds to profit from price differences. This hurts long term shareholders by diluting shares and increasing management fees.
The 22c-2 rule is designed to create a financial penalty for Sharks trying to profit at the expense of long term shareholders. It directs the mutual fund boards (who are supposed to be looking out for the shareholders) to consider imposing a "redemption fee" of up to 2% on any redemptions that take place within one week of buying the shares. Since nearly all long term investors will hold shares for longer than one week, they will not have to pay this fee. Actually, any proceeds of the fee are paid to the other shareholders.
According to today's Wall Street Journal, at least one third of mutual funds will not ready to meet all the requirements of 22c-2. They are having trouble with the requirement to have written agreements with brokers to receive information about potential short term trading.
So there are a few kinks; but overall this is a positive step forward for the average mutual fund shareholder.
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