The Securities and Exchange Commission’s (SEC) decision on Wednesday to abandon “swing pricing” requirements for money market funds has industry pundits and professionals predicting the same fate for its controversial rule regarding open-end funds.
Under the latter, the SEC would require an open-end mutual fund 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.
It would also require a “hard close” for the fund. 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, something industry advocates said would place operational burdens on stakeholders.
“SEC Chairman Gary Gensler’s opening statement, tucked in right at the end, said they made this change for operational concerns,” Robert Plaze, a partner at the Proskauer law firm. “From my perspective, the operational concerns created for money market funds were nothing compared to the operational concerns of non-money market mutual funds.”
For this reason, advocacy groups that would typically align on different sides of a regulatory issue were united in opposition to the SEC’s open-end mutual fund proposal, including investor and consumer advocacy groups traditionally in favor of increased industry regulation.
“It is very unusual in my experience to see something like this,” Plaze added. “That’s important. The other important issue is that the decision with money market funds involved many more significant issues; global economic issues involving systemic risk that do not exist with non-money market mutual funds.”
He explained that it was more complex and challenging for the SEC to decide with money market funds and, therefore, easier to “back off” what’s proposed for non-money market (open-end) mutual funds.
Which is good news overall for the retirement plan industry.
“The ARA’s Government Affairs Committee did a lot of work educating about the challenges that plan sponsors, advisors, recordkeepers, and participants face if swing pricing is implemented as proposed because of the hard close,” American Retirement Association (ARA) CEO Brian Graff said. “We’re optimistic the SEC will realize that the operational challenges with the original proposal for the retirement plan system are significant.”
Alternative Requirement
To prevent significant and immediate money market fund outflows, the SEC instead aims to impose a liquidity fee for funds with daily net redemptions exceeding 5% of their assets. An open-end mutual fund hasn’t had a money market-style run like those seen in the economic crisis of 2008, therefore making it unnecessary, critics say.
And any now question whether the SEC should have instead re-proposed the rule with the change included rather than simply replacing swing pricing with an outflow fee.
“The SEC’s actions give us reason for optimism about a similar step for the hard close proposal—one that would not throw an expensive wrench in the way that DC plans do business, as the current proposal would,” ARA General Counsel Allison Wielobob said. “It’s notable that two of the commissioners voiced objection to the steps taken to modify the rule yesterday. They think additional notice and comment is needed for the type of change that was introduced.”
Which means a potential legal challenge in the future.
“They open themselves up to a [legal] challenge,” Plaze concluded. “But they’re also open themselves up to being wrong.”
