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.
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.
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.
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.