In a move that could signal what’s to come for traditional open-end funds, the Securities and Exchange Commission has removed the swing pricing proposal from the money market fund reforms package.
The Commission stripped the proposal from the rules amendments it originally floated in late 2021, in the face of stiff industry opposition. Instead, it now includes a mandatory liquidity fee that the funds must pay when they face redemptions greater than 5% of their assets.
In his explanation of the Commission’s about-face, SEC Chair Gary Gensler said that liquidity fees offer many of the same anti-dilutive benefits as swing pricing with fewer operational burdens.
There had been growing doubts over whether swing pricing would survive the Commission’s final rules package, as the SEC made no mention of it in its announcement of the meeting.
Swing pricing has been strongly criticized by industry participants as unworkable, expensive, and the cause of more problems than it would solve.
A Tale of Two Rules
In 2021, the SEC proposed a rule that would require swing pricing for money market funds before following up with the most recent proposal that would require most other traditional open-end funds to adopt swing pricing, as well.
The November 2022 swing pricing proposal for traditional open-end funds is similar to the mandatory requirements that the SEC proposed for institutional money market funds in 2021, but they also differ in important ways.
The money market fund swing pricing proposal, which was just abandoned by the SEC, related only to net reductions, whereas the swing pricing proposal for traditional open-end funds relates to both purchases and reductions. In addition, the money market fund proposal had different thresholds than the traditional open-end fund proposal.
In any event, implementing the swing pricing procedures in the SEC’s November 2022 proposal in its current form would require daunting fundamental changes in fund companies’ operating procedures.
Swing pricing uses a “swing factor,” expressed as a percentage of the fund’s net asset value (NAV) and intended to represent an estimate of the transaction costs, to adjust the NAV per share. Funds could use this mechanism to change the NAV for redeeming shares during periods of market stress, where the cost is borne by shareholders that decide to redeem, not those that remain invested in the fund.
In its defense of the proposal, the SEC previously claimed swing pricing is necessary because it would protect investors during periods of mass redemptions, but mutual fund industry leaders say implementing the mechanism would be an operational burden.
What Does It Mean for Traditional Open-End Funds?
While significant, this SEC ruling on swing pricing only applies to money market funds. It has no relation to the swing pricing rule proposed in the 2022 liquidity rule, which the SEC has yet to move on.
While there’s no formal conclusion to draw or definitive future implications, mutual fund industry leaders are hopeful that this is a leading indicator of how the SEC will proceed with swing pricing on traditional open-end, non-money market funds.
The industry has been collectively vocal in its opposition to any swing pricing proposal. Without substantial changes to the way funds and intermediaries transact purchases and redemptions, the implementation of swing pricing by funds presents significant challenges and operational changes by traditional open-end funds and intermediaries. If adopted in their proposed form, these new rules would have a far-reaching impact on the mutual funds industry.
The money market fund reforms rule will go into effect 60 days after it is published in the Federal Register. Money funds will have up to 12 months from then to comply with the various provisions.
As the industry awaits the SEC’s next action on swing pricing as it relates to traditional open-end funds, contact Delta Data to learn more about how these rules could affect your firm.