Compliance July 10, 2024

Swing Pricing, Predictive Analytics, Safeguarding SEC Proposals to be Re-Proposed

The SEC aims to try again with its rules on predictive analytics and safeguarding by year’s end and for swing pricing in 2025.

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The Securities and Exchange Commission announced in its spring 2024 agenda that it will likely re-propose its swing pricing proposal for open-end funds. According to the agenda, the target for a re-proposal is April 2025, though the timeline is is not binding.

First proposed in November 2022, the proposal would impose mandatory swing pricing on mutual funds. Swing pricing is a 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 featured a hard close of trading at 4 p.m. Eastern time, which widely criticized as inimical to retirement investors and to any investors in other time zones.

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The proposal also contained an alternative based on mandatory liquidity fees, which would impose a redemption fee if a certain net redemption threshold is met. This alternative was actually adopted for money market funds in July 2023. The initial MMF proposal also contained a provision on swing pricing that was dropped.

SEC Chairman Gary Gensler indicated at an Investment Company Institute conference in May that the SEC was considering a similar approach for mutual funds.

The SEC wrote in the agenda that “the Division is considering recommending that the Commission re-propose changes to regulatory requirements relating to open-end funds’ liquidity and dilution management.”

Predictive Analytics and Safeguarding

The SEC also announced it is likely to re-propose both the predictive analytics and safeguarding proposals. The target date for both is —October 2024—but is also not binding.

The predictive analytics proposal, proposed in July 2023, would require advisers to eliminate conflicts of interest related to their use of predictive technologies, defined as “analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor.”

Gensler indicated publicly twice in May that a re-proposal would be coming, but he has also indicated that the core purpose of the proposal—to address conflicts in the use of predictive technology—will not be abandoned.

The safeguarding proposal would replace the custody rule. Currently, advisers must keep assets with a qualified custodian if they have the right to obtain or control assets, including to draw from client assets to pay advisory fees. The custody rule applies to most securities.

The new proposal adds to these requirements. The first addition would require investment advisers to follow custody requirements if they have discretionary trading authority, even if they are not able to draw fees from the assets. Second, the proposal would require custodians to segregate client assets so the client is protected if the custodian goes bankrupt.

It would also address all assets, not just securities, including cash held by banks. Perhaps the most common criticism of the proposal is that it would be disruptive to ordinary commercial lending.

Data & Research July 10, 2024

Gen X, With Retirement “Around the Corner,” Not Confident in Income Replacement

Three distinct reports agree Gen X needs financial guidance via the workplace—with participants valuing transparency and honest dealing.

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“The grunge generation is going gray,” declares a new survey focused on Generation X that is backed by other recent reports on the generation born roughly from 1965 through 1980.

Members of Gen X are both most in need of strong retirement planning among the generations and the least confident in their financial futures, particularly when it comes to income replacement, according to the findings from three surveys conducted by financial services firm.

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In a report dedicated to Gen X, Corebridge Financial Inc. found that only 32% of its members are confident they can manage their retirement savings to provide enough income for as long as they live. Meanwhile, 72% cite “running out of money” as their greatest fear—outpacing fear of death at 28%.

“Retirement is just around the corner for this generation, so it’s top of mind, and many of them have a very pragmatic mindset about it,” says Terri Fiedler, president of retirement services for Corebridge.

Fiedler notes a theme in the research, which included 614 Gen Xers out of 2,284 working age people, of Gen Xers feeling less confident than other generations about their retirement. She attributes that to their time of life more than “thinking any differently” than other ages, but she also sees it as an opportunity for financial professionals.

“With Generation X, it can take more effort to gain their loyalty, but once you gain it, they are fiercely loyal and can be a long-time client,” she says.

In a separate retirement report released by BlackRock Inc. on Wednesday, the asset manager reported that 60% of Gen Xers feel on track for retirement, and 63% are worried about outliving their savings.

Here again, the majority (61%) of Gen X respondents said it was difficult to know how their retirement savings would translate into monthly retirement income, and 53% said they were not sure how to calculate how much spending they will do in retirement.

Prime Earners

In yet another survey, released Tuesday by Northwestern Mutual Life Insurance Co., the insurer touted the advantages of working with a financial professional to be more prepared for retirement: The survey of 4,588 U.S. adults found that 64% of Americans who work with an adviser feel financially secure, compared with 29% of those who manage their finances on their own.

Mark Mascarenhas, a private wealth adviser at Northwestern Mutual’s Haven Wealth Advisors, agrees that Gen X is set up to work with advisers, as they are in their “prime earning” years and have “more complex” financial situations, but they may also need a specific approach from advisers.

“We find that this generation, in particular, appreciates transparency and clear advice from our team, which has led to overall satisfaction and loyalty,” he says.

Mascarenhas also notes that Gen Xers, along with the older Baby Boomer generation, may be less familiar with financial tools and resources that can help them manage their finances.

“We believe the Gen X and Baby Boomer generations have engaged financial advisers later in life because technological innovation and global stock market transparency was not as publicized in the mainstream media as it is today,” he says. “The Millennial generation also has access to plentiful online resources and media that make it more top of mind for those individuals.”

Workplace Entry

In a summary of BlackRock’s survey, which went out to 2,616 workplace and independent savers, the firm noted that the majority (70%) of Gen Xers who use a financial adviser found them through the workplace.

Corebridge’s Fiedler also believes the workplace remains a leading spot to get Gen Xers’ attention for financial advisement. The firm breaks down the generation’s current savings situation, from workplace to individual retirement accounts to nothing, as such:

  • 65% of Gen Xers say they have a workplace retirement plan (401(k), 403(b), etc.);
  • 43% have an individual retirement account;
  • 28% have assets in a brokerage account;
  • 27% have a pension;
  • 10% have no retirement saving vehicles; and
  • 9% have an annuity.

Fiedler notes, in particular, the larger percentage of Gen Xers with a 401(k) to supplement Social Security in retirement, compared with just 27% who have a pension. Those workplace plans are, then, the best venue to reach participants with both financial education and advisement options.

“There are things that plan sponsors can do to help tailor the messages to the Gen X employee,” she says. “Knowing that retirement is around the corner, they can send messages about catch-up contributions, increasing their contribution rate, etc.”

Fiedler cites Cerulli Associates research noting that Gen X had some $14.2 trillion in investable assets as of 2022, and its members are also likely to be the largest inheritors of the $84.4 trillion wealth transfer expected from 2021 through 2045.

“There’s a real big need and incentive to want to work with Gen X,” she says.

Such guidance may be sought by Gen Xers who are afraid they will have to work much longer than anticipated. Corebridge’s survey also found that about half (51%) of Gen X respondents are worried about being able to retire when they want.

All of the firms who issued the surveys provide some combination of retirement-, investment-, financial wellness- and asset management-related services.

Correction: Fixes statistics that mixed up Gen Y findings with Gen X findings from the BlackRock research.

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