To give you a sense of how fund shareholders are serviced, let’s follow a typical series of transactions beginning immediately after a prospective customer decides to purchase fund shares. In the first step, the customer completes and returns an application for opening a new account to the transfer agent. The application may be returned in a number of ways, including by mail, at a branch office (if one exists locally) or through the Internet. Once the transfer agent receives the application, the transfer agent determines whether it is in good order. Although the definition of “in good order” can vary somewhat among fund complexes, many core elements are consistent. The transfer agent always makes certain to obtain a social security number or taxpayer identification number (in the case of corporate accounts) for tax reporting purposes. The transfer agent also ensures that the initial funding amount complies with any account minimums specified in the fund’s prospectus. If there is any issue with the application, the application is considered to be “not in good order.” In that event, the establishment of the account and the purchase of fund shares may be delayed until the issue can be resolved with the customer.

Account setup via the Internet initially was complicated because the transfer agent needed a customer signature on paper. The passage of the Electronic Signatures in Global and National Commerce Act of 2000 simplified the establishment of new accounts through the Internet by enabling customers to use their social security number and personal identification number (PIN) in lieu of a physical signature on a piece paper. This procedure allows customers to complete the fund purchase process entirely on the Internet. Some fund complexes also allow customers t set up accounts and make purchases over the phone, with the final paperwork sent in later.

FundsOnce the account has been established and ownership properly assigned or registered (e.g., individual, joint or partnership account), the next servicing function is t complete the purchase of fund shares by processing the customer’s payment for the shares. Payment usually occurs by check, Federal Reserve wire, electronic funds transfer or exchange between the customer’s old fund and new fun choices. Transfer agents generally do not accept cash for fund purchases. When a customer purchases a fund by check, the checks are sent for clearance to a collecting Will Since the customer purchases fund shares at the next determined net asset value (NAV), the transfer agent must make certain that the fund actually has the cash available to invest promptly after the customer purchases the shares. The check clearance an collection process involves presenting the customer’s check to the financial institution which the check was drawn. Since fund shareholders often reside in many parts c the country in different Federal Reserve districts and time zones, the time needed for the transfer agent to “collect” the cash can range from less than a day to as long as a day or two. Because of these and other systemic delays in the national check clearing short tern, transfer agents are constantly looking for ways to speed up the collection of good funds” from locations all across the country. Recent enhancements to check imagine and electronic check transport technology are beginning to shorten the check collection period. Throughout the processing of a customer’s payment for shares, the fund‘ transfer agent monitors the flow of monies because it is responsible for computing the number of shares that are to be purchased from which funds and the amount of money to be sent to the fund’s bank account to pay for the purchase.

The opposite of a fund purchase is a redemption or sale of fund shares. The ability of a fund shareholder to redeem daily is one of the distinguishing characteristics of shares of a mutual fund versus other financial products (e.g., bank CDs or insurance policies). Although a mutual fund may close to purchases from new investors and may limit additional purchases from existing investors, it is still required to redeem its shares on every business day at one daily NA’V, usually set at 4 P.M. Eastern Standard Time. Most fund redemptions involve an exchange out of one fund into another—for example, from a stock fund into a money market fund against which checks may be written. A redemption may also involve a request for payment by check, wire or electronic funds transfer, which is accomplished by the transfer agent through a cash management bank. (See “A Fund Redemption Through a Broker-Dealer.”) Retirement distributions represent one of the more complicated redemption transactions because of numerous laws regarding the age at which distributions may start to occur (55), the age at which they must begin to occur (7011/2) and the minimum amounts that must be distributed from retirement accounts at various ages. In addition, there are detailed tax reporting rules with respect to various types of share redemptions from mutual funds. Accordingly, transfer agents have developed sophisticated systems that enable them to process and report all forms of fund redemptions accurately.

When customers effect a purchase by selling shares in one fund and using those sale proceeds to purchase shares in another fund, this is called an exchange. Exchanging shares from an existing fund to a new one in the same fund family is a relatively straightforward process. The customer gives the instruction to exchange shares to the fund’s transfer agent through a phone representative, automated telephone system or the Internet. The exchange typically is processed during the overnight transaction processing cycle following receipt of the customer’s request. Cash is transferred from one fund’s bank account to the other fund’s bank account early the next business day. Exchanges between funds, even within the same complex, are generally considered taxable events unless they occur within a qualified retirement plan or tax- deferred vehicle such as a variable annuity.

The requirement to allow for daily fund redemptions (including exchange redemptions) has substantial implications for mutual funds. Because of this redemption requirement, a mutual fund must invest most of its assets in liquid securities and must determine the NAV of its shares on each business day. In most fund complexes, the pricing and bookkeeping agent has the job of computing the NAV for each fund, and the transfer agent is responsible for disseminating the NAV. (See “Functions of the Pricing and Bookkeeping Agent.”) Since the redemption requirement can, at times, have significant effects on cash flows and thus the overall management of a fund, the fund’s portfolio manager closely monitors the velocity at which money is moving into and out of the fund.

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Fund Purchases, Redemptions and Exchanges