Compliance May 23, 2024

SEC’s Gensler Seeks to Clarify Mutual Fund Swing Pricing Proposal

The Chairman suggested that the regulator might opt for liquidity fees instead of swing pricing for open-end funds and also noted looking into regulatory rules around CITs.

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Securities and Exchange Commission Chairman Gary Gensler suggested that the SEC might choose mandatory liquidity fees over swing pricing for mutual funds in the open-end fund liquidity rule at the Investment Company Institute 2024 Leadership Summit in an interview with ICI CEO Eric Pan.

The rule, first proposed in November 2022, would impose mandatory swing pricing on mutual funds. Swing pricing is a pricing method whereby the costs of redeeming shares in a mutual fund are passed on to the redeemer, which can limit the effect of a panic sale in stressful times. The proposal also contained an alternative based on liquidity fees, which would impose a redemption fee if a certain net redemption threshold is met.

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The SEC adopted liquidity fees for money market funds in July 2023 in a separate rulemaking. This is relevant to its mutual funding approach because the initial proposal likewise contained swing pricing and liquidity fees as alternative options, and the SEC went with liquidity fees in the end.

For institutional prime and tax-exempt MMFs, if daily net outflows exceed 5% of the fund’s value, the fund must implement a fee for new redemptions that covers the cost of those redemptions. That rule also required MMFs to hold at least 50% of their assets in weekly liquid assets, up from the previous 30% requirement.

The swing pricing proposal received industry pushback in the past, including from the ICI, which argued that investor dilution was not a genuine risk for mutual fund holders.

Gensler stressed at the ICI Summit that the mutual fund proposal also described “liquidity fees as an alternative” to swing pricing, and expressed regret that commenters did not comment more on that aspect of the proposal. Pan answered that the proposal had “no description on how the fee would operate or what it would look like” and therefore did not see it as the “core” of the proposal or fit for detailed feedback.

Michael Hadley, a partner at Davis & Harman LLP, spoke to this issue of alternatives: “The SEC’s proposal had a few high-level ideas that could be alternatives, but they were not well-formed.  If the SEC is going to suggest an alternative, which I think they should, then it is appropriate to release a new proposal so that the industry can provide meaningful input.”

Gensler said he stands by and is proud of the MMF rule, which takes effect in October, “I think the system will be safer in October.” He added that “we heard from many people not to do swing pricing [for MMFs] and we went with liquidity fees.” The chairman left unsaid if similar popular opposition to swing pricing for mutual funds, including from Democratic members of Congress, would cause a similar response for mutual funds.

Gensler also spoke to mutual funds and liquidity issues at the SEC’s 2024 conference on emerging trends in asset management on May 16. He explained that mutual funds and MMFs present risk to the system because they can be redeemed daily but not everything in their portfolio can, which can be problematic in times of stress and high redemptions.

He then turned to a similar product regulated by banking regulators and not the SEC: collective investment trusts. Gensler expressed concern that “rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, requirement for regular reporting on holdings to investors, or requirement for an independent board.”

He added that “we know from history that financial fires can spread from regulatory gaps, including when regulations don’t treat like activities alike.”

Gensler said that he “asked staff to consult with bank regulators on how to best mitigate for regulatory gaps between collective investment funds and open-end funds.”

 

 

Practice Management May 23, 2024

Plan Sponsors Seeking Advisers with SECURE 2.0 Know-how

Many plan sponsors are in search of advisers and consultants who can help guide them through SECURE 2.0, UBS finds.

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Plan sponsors may be seeking to switch retirement plan advisers for a fairly straightforward reason: help navigating changes from SECURE 2.0, according to UBS’s recent Workplace Voice report.

In a survey of 1,200 senior level executives overseeing their firms’ retirement plans, around 80% expressed concern about needing additional resources to manage their retirement plans because of SECURE 2.0, with more than half reporting that they are highly likely to start working with a new financial adviser or retirement plan consultant within the next year. Large plan sponsors are the most likely to be evaluating their adviser options, according to UBS.

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Currently, 63% of plan sponsors said they are using their financial adviser for information about SECURE 2.0, but 53% said they are also relying on online resources as a main source of information.

In addition to looking for advisers or consultants who are more knowledgeable about SECURE 2.0, more than half (53%) of plan sponsors also said they are looking for better quality of service and 48% said they are seeking more comprehensive financial education for their employees in a new adviser or consultant.

Mike Griffin, head of workplace wealth solutions sales and relationship management at UBS, says the desire for more financial education assistance from advisers is a “huge change” from ten years ago when plan sponsors were not interested in having their advisers or consultants communicate with their participants.

“The tide has changed because of inflation and SECURE 2.0,” Griffin says. “[Plan sponsors] are saying they need help attracting and retaining employees … and they need service that goes all the way down to the employee, not just at the plan level… Almost half of [plan sponsors] are looking to change [advisers] because their current adviser does not help their employees with individual financial planning or individual wealth management.”

Plans More Likely

UBS also found that SECURE 2.0 had a positive impact on employers currently not offering retirement savings plans to their employees, as more than half (56%) said they are now more likely to offer this benefit.

Helping employees save more efficiently for retirement, attracting and retaining talent and contributing more to their own retirement were some of the reasons why plan sponsors now feel motivated to offer a plan. Around 31% of plan sponsors also said they want to offer a plan to take advantage of the tax breaks and deductions provided by SECURE 2.0.

UBS noted in its report that if employers do not currently offer a plan, they may soon be required to depending on what state they are in, as many states are now mandating that private employers offer some sort of retirement savings account. Employers can either enroll their employees into a state-sponsored plan or sponsor their own plan through the private market.

Good Reception, Education Needed

In general, SECURE 2.0 has been well-received by most plan sponsors, as more than eight in 10 expressed a positive view on the impact it will have on employees’ ability to save for retirement, especially among those that manage larger plans.

However, less than half of employers are “very familiar” with some of the provisions in SECURE 2.0. Specifically, many are not clear about the tax credits available to cover administrative costs and the distinction between which provisions are mandatory versus optional, according to the report.

“Not enough small employers know about the tax credits,” says Mike Griffin, head of workplace wealth solutions sales and relationship management at UBS. “And that’s exactly why the tax credits were put in place—to get more people to save and [for small plans] to implement them.”

In addition, less than half (48%) of plan sponsors said they were highly familiar with the timeline for when each provision will go into effect. SECURE 2.0 contains 90 provisions, and as a result, Griffin says many plan sponsors are overwhelmed by the “pure magnitude” of the legislation.

The Workplace Voice Survey included responses from 1,200 senior level executives and business owners responsible for overseeing their organization’s employer-sponsored retirement plans. Among this sample included 300 businesses owners who do not currently offer a retirement plan.

PLANADVISER worked with Groom Law Group, Chartered, on a list of SECURE 2.0 provisions advisers need to know in 2024.

 

 

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