SEC Floats Liquidity, ‘Swing’ Pricing Rules for Mutual Funds

The Securities and Exchange Commission yesterday proposed new liquidity and pricing rules to help better shelter mutual fund investors during times of market stress.

The proposals include a rule that would impose swing pricing on nearly all mutual funds.

Under swing pricing, funds would strike their net asset value daily, as they do now, but the price per share would change at times of great redemptions or new purchases. The practice aims to put the burden of the additional trading and other costs that large trades can trigger on the shareholders actually executing the transactions. Currently, those expenses are spread equally across all shareholders.

Liquidity and risk management rules adopted in 2016 and 2018 already allow U.S. mutual funds to use swing pricing, but operational challenges mean that none do, Financial Advisor IQ sister publication Ignites reports.

The market volatility of March 2020 again showed that redemptions and liquidity can rapidly worsen, the SEC said.

“Open-end funds […] have an underlying structural liquidity mismatch,” SEC Chair Gary Gensler said in an announcement accompanying the proposal. “We saw such systemic issues during the onset of the COVID-19 pandemic, when many investors sought to redeem their investments from open-end funds.”

The new rules would require mutual funds to ensure that at least 10% of their net assets are highly liquid.

The proposal also includes mandating a hard close of fund trading at 4 p.m. Eastern Time.

While the hard close is unpopular among providers in the United States, Division of Investment Management Director William Birdthistle noted on Wednesday that the practice is used successfully in Europe.

However, Clifford Chance partner, Vadim Avdeychik, told Ignites that in Europe the industry operates differently, including shorter trading days.

Money-market and exchange-traded funds would not be subject to swing pricing.

The proposal was approved by a vote of three to two, with commissioners Hester Peirce and Mark Uyeda dissenting.

The Investment Company Institute immediately issued a statement opposing the proposal. Eric Pan, the trade group’s chief executive, said swing pricing could have “an enormous negative impact” on U.S. mutual fund investors and cited “insurmountable operational hurdles.”

“The proposal to mandate swing price is unnecessary. Its rationale is built on minimizing dilution — yet the SEC’s assertions lack detail or supporting evidence,” he wrote. The change risks, “confusing investors, and upending mutual funds’ longstanding and equitable share pricing methodology.”

Part of the proposal also suggests reducing the proportion of a fund’s assets that can be considered illiquid and requiring funds to make holdings available on a monthly basis, rather than the quarterly basis currently required.

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