Industry Pushes Back on SEC Swing Pricing Proposal

In November, the Securities and Exchange Commission (SEC) proposed significant revisions that would require, among other reforms, the adoption of swing pricing and a “hard close” for transacting in fund shares. The proposals apply to all open-end funds, excluding money market funds and exchange-traded funds (ETFs).

According to the SEC, the proposed rules are intended to enhance liquidity within open-end funds and reduce dilution of shareholder interests due to significant redemption activity, particularly in times of market stress or significant market disruptions.

If adopted as proposed, these revisions would fundamentally alter the way investors have bought and sold mutual funds for decades.

Swing Pricing and a Hard Close

Swing pricing uses a “swing factor,” expressed as a percentage of the fund’s NAV and intended to represent an estimate of the transaction costs, to adjust the NAV per share.

Under the new rules, mandatory swing pricing would apply to any net redemptions exceeding 1% of the fund’s assets or any net purchases exceeding 2% of net assets. If net inflow is higher than outflow by a set threshold, then the redemption price would swing upwards, while it swings downwards if outflows exceed inflows.

Investors would no longer receive the net asset value (NAV) per share for their transactions but instead could receive a price more or less than the NAV depending on whether a “swing factor” was applied to their transaction.

A “hard close” would require funds to receive a purchase and redemption order by 4 p.m. ET for the investor to receive that day’s price. This would be a stark change from current practice, where an investor can receive that day’s price if an intermediary receives the order by 4 p.m. ET, even if the fund itself, or the DTCC, receives the order information later.

Industry Pushback

But many in the mutual fund industry have expressed concern and alarm with the SEC’s proposed rules on swing pricing, citing a plethora of fallacies in the agency’s reasoning and questioning the basis for such a proposal.

Shortly after the proposal was released by the SEC in November, Investment Company Institute (ICI) president and CEO, Eric Pan, stated that mandatory swing pricing could have an “enormous negative impact” on mutual fund investors, labeling it as an unnecessary proposal that would introduce “insurmountable operational hurdles.”[1]

Delta Data’s Burton Keller expressed similar sentiments in a comment letter, arguing that the proposed changes would have “untold consequences for the industry.” He warned that the potential harm to retirement plan participants is “incalculable,” as the proposal would “virtually eliminate mutual funds from 401k plans, as there would be a major shift to CITs and ETFs.”

Keller also noted the enormous financial expense, as funds will face considerable compliance costs and burdens associated with implementing these policies and procedures, as well as ongoing costs associated with monitoring and administering swing pricing. But the greater costs will be borne by the intermediaries when 25 years of historical late day trading is swept away if the 4PM hard close on trading is implemented. Twenty-five years of systems development, processes and workflows will be turned upside down along with shareholder expectations.

What’s Next?

It’s clear that these proposed changes reflect significant, fundamental changes to core aspects of the open-end fund industry and may have a substantial impact on fund management and certain investment strategies.

If adopted, the swing pricing and hard close proposals will come into effect 24 months after the effective date. The public has 60 days to respond to the SEC proposal after its publication in the Federal Register.

Read Burton Keller’s full comment letter in opposition to the SEC’s swing pricing proposal here.

Contact Delta Data to learn more about how the SEC’s swing pricing mandate and ‘hard close’ proposal could impact the mutual fund industry.

 

[1] Isenberg, David, Fund Boards ‘Alarmed’ by SEC’s Swing Pricing Proposal, Ignities (Feb. 14, 2023), https://www.ignites.com/c/3935314/509364/fund_boards_alarmed_swing_pricing_proposal.