SEC Sends Letter to ICI Warning About Misuse of 22c-2 Information

With an anti-market timing rule scheduled to go into effect October 16, 2007, Securities and Exchange Commission (SEC) regulators have warned the investment industry not to misuse investor data they may now have to gather.

In an August letter to Mary Podesta, Acting General Counsel of the Investment Company Institute, SEC Associate Director Robert Plaze reminded fund companies that a federal law, the Gramm-Leach-Bliley Act, forbids using investor information gathered under rule 22c-2 for marketing unless the consumers have been given notice and the opportunity to opt out of having their information shared.

Plaze said his letter was prompted by a May 2007 Wall Street Journal article quoting PricewaterhouseCoopers as asserting that the new rule might give fund companies “a treasure trove of data they can mine to market directly to customers.”

Under rule 22c-2. funds are mandated to work out agreements with their financial intermediaries – including those holding shares through omnibus accounts – under which the intermediaries must agree to provide funds with certain shareholder identity and transaction information upon request (See 22c-2 Is Here).

The SEC officials said the commission believes that 22c-2 information disclosures may be allowed under certain privacy exceptions including processing and servicing transactions at the consumer’s request and complying with applicable legal requirements.

Plaze asserted that privacy rules permit information sharing under the exceptions if financial institutions include in their privacy notices a statement that they make disclosures to “other nonaffiliated third parties as permitted by law’.”‘

“As a matter of routine practice, most financial institutions currently include this statement in their privacy notices,” Plaze wrote.

Also, Plaze wrote, funds getting 22c-2 information under the exceptions aren’t permitted to use or redisclose the information only for purposes of the exception, which does not include marketing purposes, unless permitted under the intermediary’s privacy policy.

The SEC letter is available here.