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Compliance August 29, 2024
Mutual Fund Managers ‘Dodge Bullet’ on Swing Pricing
The SEC decided not to move ahead with what the mutual fund industry had argued would be a costly proposal to manage market volatility.
Reported by Alex Ortolani
The Securities and Exchange Commission this week opted not to pass a controversial proposal that would have implemented mandatory swing pricing and a related hard close pricing for mutual funds that are popular in employer-sponsored retirement plans.
In voting Wednesday, the SEC did approve by a 3-to-2 margin amendments to monthly, instead of quarterly, filing for open-end and closed-end funds, as well as exchange-traded funds. It did not move ahead with previously related swing pricing and hard close mandates for open-end funds. Though it also did not say it would never implement them, mutual fund managers and 401(k) investment providers should be feeling relief, according to Jay Baris, a partner in Sidley Austin LLP’s investment funds group.
“The headline here is what they didn’t do,” Baris says of the ruling. “In that sense, the industry dodged a bullet.”
Baris notes widespread industry opposition to the proposal and both letters and pushback the SEC received throughout its information-gathering process. The swing pricing proposal would have required funds to report pricing information related to the size and frequency of price adjustments with the goal of protecting investors from major swings, along with implementing a hard close of trading for funds at 4 p.m. ET.
Opponents of the proposal included the Investment Company Institute and the U.S. Chamber of Commerce, both of which noted that the proposal would significantly limit investment management discretion and be both costly and challenging for mutual funds and intermediaries to implement—costs that would then be passed on to investors.
The SEC and its chairman, Gary Gensler, however, have argued for the provisions to protect investors from market volatility. Gensler has noted that the 2020 market hit from the COVID-19 pandemic caused concern that funds might not be able to meet redemption requests due to the heavy flow of traffic.
Gensler has also suggested in public remarks, however, that the SEC may opt for a liquidity fee to be imposed for open-end funds, instead of the swing pricing and hard close proposal. The regulator instituted a liquidity fee on money markets in 2023, going into effect in October, to combat runs on those investments.
Pushback Noticed
Baris says the industry pushback was so widespread that the SEC may have been “surprised by the intensity of the opposition.” While the proposals were not taken off the table, Baris notes it is telling that the SEC specifically said it was avoiding implementation in its 136-page final ruling.
“We also are not adopting proposed reporting amendments relating to funds’ use of swing pricing or to liquidity classifications in this release, as we are not adopting amendments to the underlying rules at this time,” the regulators wrote.
Baris said he would be “surprised” if the SEC moved ahead with the proposals again without some kind of public comment period.
In Wednesday’s voting, the SEC opted to amend the requirements for filings known as Form N-PORT and N-CEN, which will go into effect on November 17, 2025.
The Form N-PORT amendments require funds to report monthly within 30 days of the end of the month, as opposed to within 60 days of the end of each quarter. Form N-PORT also now requires funds’ monthly reports be made available to the public within 60 days of the end of each month, as opposed to on a quarterly basis.
More Information
This reporting will give the SEC more information on funds, particularly during times of market volatility, according to Douglas McCormack, a counsel in Sidley Austin’s investments funds group. That will add additional time and cost for fund managers.
“It requires more filings and less time to file,” McCormack says. “The point is to give the staff more information to respond quicker to market events. … The question is whether the benefit will outweigh all of the extra cost.”
In addition to that amendment, the SEC adopted amendments to Form N-CEN for open-end funds to report information about service providers used to fulfill liquidity risk management requirements. This will allow the SEC to track certain liquidity risk management practices.
“Reliable, accessible data benefits everyone,” Gensler said in a statement accompanying the ruling. “These amendments will benefit investors through greater transparency of funds’ investment portfolios and improve the Commission’s oversight of the asset management industry.”
McCormack says more than a year should be enough time for the industry to prepare for the changes. He notes that, while the changes may not be desired, they are far less onerous than the alternative of seeing the swing pricing proposal passed.“In the scheme of things, if you are going to fight the SEC on something, fight them on swing pricing,” McCormack says. “It’s better to choose your battles.”
