Speaking July 25 at the NAPA D.C. Fly-In Forum, Securities and Exchange Commissioner Hester Peirce said she is hopeful a controversial new swing pricing requirement for open-end mutual funds that could have a detrimental impact on retirement savers will be tabled.
The proposal, first released in November 2022, would require an open-end mutual fund to adjust its NAV so the transaction price effectively passes on costs stemming from inflows or outflows to the investors engaged in that activity rather than diluting other shareholders. It also would require a “hard close” for the fund, such that an investor’s order to purchase or redeem shares would be eligible for a given day’s price only if received before 4 p.m. (ET).
Joining the stage with Peirce was ARA General Counsel Allison Wielobob. “The thing that stuck out for me in that rulemaking is reading that basically the way retirement plans do business, the way defined contribution plans trade—that's an obstacle to swing pricing. So, it’s not really a policy matter driving changes to the way we would do business, but rather in order to facilitate swing pricing, and so that's how I came to understand it,” Wielobob observed in kicking off the discussion.
“In terms of swing pricing, we're doing a lot of what I would describe as unnecessary and strange things at the SEC right now and the swing pricing proposals I would put in that category,” added Peirce.
The SEC Commissioner explained that the apparent “motivation” for swing pricing—whether it's in the money market fund context or the open-end fund context—is this concern that when people are redeeming out of funds, they're leaving the remaining shareholders with some sort of cost that needs to be made up and swing pricing is one option for doing that.
Swing pricing was one of the pieces of the money market funds proposal, but it was dropped before being finalized on July 12 and replaced with a mandatory liquidity fee for certain types of money market funds. “I think it was a good thing that we didn't move forward with the swing pricing; there had been a lot of commentary that we had gotten around how that would not be wise in the money market fund context,” Peirce noted. In its place, however, was the mandatory liquidity fee, which she observed was designed without having the benefit of comments around how to design it, arguing that the SEC should have taken a more iterative approach.
Turning to the question of what the SEC is going to do in the open-end fund context, the SEC Commissioner said she found it “rather strange” that, when the proposal came out, it included a swing pricing piece, given the reaction that the SEC had gotten on the money market fund swing pricing.
“Now open-end funds are different, so you can make that argument, but in any event, we have gotten similar negative commentary on that piece of the proposal, as well as on other pieces, and I think one of the points that people have made is, ‘look, you can use swing pricing in the U.S., but no one's chosen to use it.’ The response to that has been, ‘well, yeah, but there are a lot of operational issues, and you sort of have to have everyone do it or no one is going to do it.’”
According to Peirce, another point that proponents of the proposal make is that swing pricing is available in Europe. She adds, however, that the European market is quite different, observing that some of the operational problems that would happen in the U.S. are less problematic in Europe.
“I think the idea behind [swing pricing] is really just brute force. If we say, ‘it has to be, so it'll be so,’ and all these changes that will need to be made to the operations of retirement plan providers of all the different distribution mechanisms are going to have to make adjustments. And I think the cost of doing that—the potential consequences could be operational failures and the anticipated consequences for the end investor will radically change as a result of swing pricing. I just don't think we've taken those into account as much as we should,” Peirce explained.
On a positive note, the SEC Commissioner observed that because they’ve received so much negative commentary on the proposal that her hope is that her SEC colleagues will take that into account and think about whether they really want to put that in the final rule.
Meanwhile, whether the mandatory liquidity fee will be challenged because the SEC apparently didn’t follow the proper notice and comment period in designing the new fee is a topic for another day. Peirce did observe, however, that she’s not sure whether the issue will go to court, but added that there are ways to do this through proper channels.
“The securities markets are treasures, whatever your political views are, the capital markets are a treasure, and we have to preserve them. We have to take care of them and that means that we have to be very careful about changes that we make. We have to, of course—the rules require constant maintenance and updating, and those are things we have to do, but we can do those collaboratively,” she concluded.
