The U.S. Securities and Exchange Commission has adopted a rule requiring mutual fund boards to either adopt short-term trading fees, or explicitly decide they are unnecessary.

The rule, which was adopted on March 11, requires the board of directors (including a majority of independent directors) of most funds to either approve a redemption fee of up to 2%, or determine that imposition of a redemption fee is not necessary or appropriate for the fund. The proceeds of the redemption fee must be paid to the fund itself.

The redemption fee is intended to allow funds to recoup some of the direct and indirect costs incurred as a result of short-term trading strategies, such as market timing.

The rule also requires most funds to enter into written agreements with their financial intermediaries (such as broker-dealers and retirement plan administrators) under which the intermediaries must, upon request, provide funds with certain shareholder identity and trading information and carry out certain instructions from the fund. The SEC says that this requirement will enable funds to obtain the information that they need to monitor the frequency of short-term trading in omnibus accounts and enforce their market timing policies.

The commission is also requesting additional comment to obtain further views on whether it should establish uniform standards for redemption fees charged under the rule.

The new rule will be effective on May 23. The compliance date of the rule is Oct. 16, 2006 to give funds and their financial intermediaries ample time to make needed contractual amendments and system enhancements.