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Clock Ticking on SEC’s Controversial Swing-Pricing Proposal

Regulatory Agencies

A proposal by the Securities and Exchange Commission that stands to upend current trading practices for 401(k) plans has now been published in the Federal Register with an official comment due date. 

When the proposal was first released,  it noted that a comment period will remain open for 60 days after publication in the Federal Register. As such, with the proposal being published on Dec. 16, the proposed guidance now specifies that public comments should be received no later than Feb. 14, 2023.

To some observers, the proposal appears to be flying under the radar in terms of its potential negative consequences. The SEC says the proposed amendments are “designed to improve liquidity risk management programs to better prepare funds for stressed conditions and improve transparency in liquidity classifications”—and to “mitigate dilution of shareholders’ interests in a fund.” But under the proposed requirements, an order to purchase or redeem a fund’s shares would be executed at the current day’s price only if the fund, its designated transfer agent, or a registered securities clearing agency receives the order BEFORE the pricing time as of which the fund calculates its net asset value (NAV). That would be a significant change from current practices that permit that receipt by a qualifying intermediary—like a recordkeeper.

In fact, the Investment Company Institute (ICI) had cautioned that the SEC’s proposed “hard close” is likely to make it impossible for 401(k) plans to place trade orders for their participants. And certainly not at the market close timing currently employed by most.  

Under the proposal, an open-end fund—other than an MMF or ETF—would be required to adjust its NAV so that the transaction price effectively passes on costs stemming from inflows or outflows to the investors engaged in that activity, rather than diluting other shareholders.

The proposal would also require funds to adopt policies and procedures to adjust a fund’s NAV per share by a swing factor when the fund experiences net redemptions or when net purchases exceed a threshold. The swing factor would reflect bid-ask spread and certain other costs of selling or purchasing a vertical slice of the fund’s portfolio. It would also include an estimate of market impact costs when net redemptions or net purchases exceed a threshold.

Further, the proposal would require a “hard close” for these funds. An investor’s order to purchase or redeem a fund’s shares would be eligible for a given day’s price only if the fund, its transfer agent, or a registered clearing agency receives the order before the time as of which the fund calculates its NAV, typically 4 p.m., ET.

Comments Requested

The SEC is asking for comments on numerous aspects of the proposed amendments, including whether the Commission should require funds to implement the hard close requirement and whether there are alternatives to the proposal that should be implemented.

Moreover, the SEC asks whether its efforts to modernize fund order processing are supported by the proposed hard close requirement; what steps would intermediaries be required to take to operationalize the proposed hard close requirement; and whether there are any operational impediments for intermediaries, transfer agents, and/or registered clearing agencies in implementing the proposed hard close requirement.

To that end, the SEC also seeks comments on whether retirement plan providers would need to make changes to plan rules to accommodate compliance with a hard close. “Are plan rules able to be altered for plans that are currently owned, or would alterations only be feasible on a going forward basis? If a change in plan rules would be necessary, how would plan rules need to be altered? How would plan participants be affected by changes to plan rules?,” the SEC asks.

The SEC also asks whether the proposed hard close requirement would help retirement plan recordkeepers to reduce their batch processing cycles and, if so, how.

The American Retirement Association has been in discussions with SEC staff about this proposal and its implications for the trillions of 401(k) dollars currently invested in mutual funds, and expects to comment on this proposal as well.