SEC Swing-Pricing Rule Would Make Participants Second-Class Investors

The president and COO of Nationwide Financial argues the rule would be bad for retirement plan and annuity product investors.

 


The Securities and Exchange Commission plays a critical role in the markets by seeking to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation. However, sometimes well-intended changes to the SEC’s regulatory framework can lead to unintended consequences that conflict with that mission.

One such proposal to amend the SEC’s current rules for “open-end-funds” regarding liquidity risk-management programs and swing pricing under the Investment Company Act of 1940 is receiving widespread resistance from retirement plan providers and advocates for American savers.

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And for good reason: These changes are bad for retail investors who invest through an employer-sponsored retirement plan or a variable life or annuity product. The proposal also runs counter to the bipartisan progress that Congress has made in recent years to make a secure retirement more accessible for average Americans. In other words: It does the opposite of supporting protection, fairness or efficacy.

Proposed Changes

John Carter.

The proposed amendments are intended to improve liquidity risk management programs to better prepare funds for stressed conditions and improve transparency in liquidity classifications. The amendments also are intended to mitigate dilution of shareholders’ interests in a fund by requiring any open-end fund, other than a money-market fund or exchange-traded fund, to use swing pricing to adjust a fund’s net asset value per share to pass on costs stemming from shareholder purchase or redemption activity to the shareholder engaged in that activity.

In addition, to support the proposed swing-pricing requirement, the SEC is proposing a “hard close” requirement for these funds, meaning that purchase or redemption orders could receive the current day’s price only if such orders are received by the mutual fund, its designated transfer agent or a registered securities clearing agency by the time the fund calculates its net asset value.

While I can understand concerns related to downstream impacts to shareholders resulting from trading activity during stressed conditions, the proposed changes will cause significantly more disruption and long-term negative impact to retail investors than the potential harm the SEC is seeking to address.

Second-Class Investors

The proposed changes will relegate employer-sponsored retirement plan participants and other retail investors to second-class investor status by removing access to the secure, fast and efficient systems they enjoy today.

Under the proposed rule, retirement plan participants will be forced to submit trades much earlier than the 4 p.m. ET deadline used today. For some living on the West Coast, trades and transaction requests could even be due before the start of business hours. This means they lose same-day pricing. Their trades and transaction will take days to complete, and their assets will be held ‘out of the market’ at various times throughout the process. That has the potential to significantly impact their ability to participate in market gains while their assets are sitting on the sidelines.

On the flip side, institutional investors and wealthy individuals trading directly with fund houses will have access to the market hours after retirement plan participants are locked out, putting the average 401(k) saver at an unfair disadvantage. While the SEC’s proposal is intended to protect the small investor, it instead creates a system in which the small investor will always be days behind.

Undoing Bipartisan Progress

In December, Congress passed a fabulous piece of legislation known as the SECURE 2.0 Act of 2022, which improved on the positive momentum created by the Setting Every Community up for Retirement Enhancement Act of 2019 and the Pension Protection Act. These laws were passed to expand access, increase savings and simplify plan administration. The SEC’s proposal will have the opposite effect. The overwhelmingly bipartisan support of these laws demonstrates Congress’ faith in the existing private retirement system. The SEC’s proposal would effectively dismantle that successful system.

While the SEC points to use of swing pricing in Europe, it is worth noting that the U.S. retail investor market has produced better financial security for individuals and families. Europe has a very small retail market, making it wrong to assume their approach is a fit for our country.

In the proposal, the SEC also acknowledges high costs and significant disruptions to retail investors caused by this change. Unfortunately, it does not quantify it or provide a sufficient cost-benefit analysis to support the cost or disruption. That’s a huge miss.

For all of these reasons, the proposal has received overwhelming opposition in the form of comment letters from industry and consumer groups, independent mutual fund boards and individual investors.

While Nationwide appreciates the important role the SEC plays and acknowledges its positive intentions with these proposed changes, it is important for us to stand together as an industry to flag these fatal flaws and stop these overwhelmingly detrimental unintended consequences.

Nationwide has shared its concerns with the SEC directly, urging it to withdraw and permanently abandon this proposal. I encourage plan sponsors, recordkeepers, firms, advisers and financial professionals to stand up and advocate for the American savers we exist to serve by encouraging the SEC to withdraw this proposal.  

John Carter is president and COO of Nationwide Financial.

Accelerate Retirement Spins Off From Aggregator NFP

As an independent advisory, the firm expects to be more ‘nimble’ in meeting both adviser and client needs.

Accelerate Retirement, a newly independent registered investment adviser focused on retirement plan consulting, is bucking the trend of consolidation in the space by spinning off from insurance brokerage and RIA aggregator NFP Corp.

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Accelerate Retirement had an “amicable” break with NFP after the team of about 15 investment advisers with just less than $2 billion in client assets felt it had reached the scale where it could go out on its own and grow, both organically and by bringing on more advisers, according to Chris Giovinazzo, managing director Accelerate Retirement. The Aliso Viejo, California-based firm will continue to serve both plan sponsors and individuals with retirement planning and wealth management.

Chris Giovinazzo.

“There’s no shortage of M&A out there, and because of all that consolidation, there are so few independent national aggregators left,” Giovinazzo says. “We have reached critical mass and decided it was time to be independent.”

Giovinazzo points out that NFP was a “phenomenal partner,” but the move to go independent will allow the firm to be nimbler in making decisions about technology, resources and how advisers are allowed to work with clients.

“We have spoken with so many advisers, even those acquired by larger organizations, who don’t feel they own their business or their clients,” Giovinazzo says. “Our goal as an RIA is to provide all the tools that advisers need, but to let them be the architect of their own day. … We want to give them all the technological advantage and support, but in a way that they can focus on their clients with their own preferences and style.”

Currently, about 95% of the firm’s revenue is derived from qualified retirement plans, according to Giovinazzo. But Accelerate Retirement will be looking to grow in the area of wealth management services to serve clients who, while not considered high-net-worth individuals, are seeking more personalized investment management advice, he says.

“We believe every American deserves access to fiduciary advice at a reasonable price,” he says. “We feel that there is a large population of underserved people who don’t meet the asset minimums of high-net-worth focused advisors, yet they need our help. We want to bridge the gap and provide guidance through our workplace financial wellness platform and tailored wealth management solutions.”

Accelerate Retirement will remain a member of the Retirement Plan Advisory Group, which provides a retirement plan practice management platform.

NFP is active in the M&A space for RIAs, and its businesses that include insurance, benefits consulting, retirement plan advisement and wealth management. The Los Angeles-based firm has more than 7,000 employees globally.

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