Compliance September 14, 2023

Swing Pricing Proposal on Shaky Ground as Bipartisan Opposition Solidifies

Of all the SEC proposals facing pushback, the swing pricing proposal for mutual funds is taking the most heat from Democrats.

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A total of 38 members of the House of Representatives from both parties used a September 5 open letter to call on the Securities and Exchange Commission to withdraw the agency’s proposal to require mutual funds to implement swing pricing and hold a higher proportion of liquid assets.

The letter was signed by representatives Anne Wagner, R-Missouri, and Brad Sherman, D-California, the chair and ranking member, respectively, of the House Subcommittee on Capital Markets.

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Swing pricing is a mechanism that permits open-end mutual funds to change the price of the fund during the day if outflows are too great and risk diluting the fund. The idea is that by decreasing the price, redeemers of the fund are penalized instead of those holding fund shares, which is intended to limit liquidity stress and the risk of panic selling.

Sherman, and many other Congressional Democrats, have expressed disapproval of the “hard close” element of the rule proposal, which would require a fund to receive an order by 4 p.m. ET to get that day’s price, instead of it merely needing to have been received by an intermediary by 4 p.m. ET.

Opponents of the proposal say this would unfairly discriminate against investors who live in time zones further west who would have to get their orders in earlier during morning hours to get that day’s price rather than the next day’s price. This concern was expressed in the open letter.

Though some of the SEC’s proposals under Gensler’s tenure have received limited opposition from Democrats—such as from those from agricultural districts who are concerned about the SEC’s climate disclosure rule’s impact on farmers—no other proposal has received this level of pushback from members of the Democratic Party.

The authors of the comment letter state that the proposal would create a “two-tiered market that would disadvantage retail and retirement investors.” Since these orders can take longer to process, they are less likely to get the same day’s price than orders from institutional investors.

The “two-tiered” refrain was also used by Senator Tim Scott, R-South Carolina, at a hearing of the Senate Banking, Housing and Urban Affairs Committee on September 12, when Gensler testified. Scott called on Gensler to withdraw the proposal, but the letter itself only is signed by members of the House.

The letter acknowledged that the SEC wants mutual funds to update their liquidity requirements and adopt swing pricing so that they are better prepared for conditions that place high stress on their liquidity, such as those experienced at the beginning of the COVID-19 pandemic in March 2020. Gensler has used this rationale to defend the rule in many instances.

The letter elaborated that despite these conditions, no mutual fund failed to meet its redemption obligations during the pandemic, an observation also made by industry actors.

However, this argument ignores the most common defense of the proposal that Gensler appeals to: that mutual fund managers frantically called representatives of the Federal Reserve asking for liquidity assistance so that they could satisfy redemptions and large net outflows.

Investment industry representatives deny that such calls for liquidity were made. Eric J. Pan, the CEO and president of the Investment Company Institute, said, “We have no knowledge of any such panicked calls having been made in March 2020” in an emailed statement.

When asked for clarification on these alleged calls, a spokesperson for the SEC declined to comment.

Gensler has repeated this defense of the proposal in public more than once, including during his September 12 testimony and most passionately at the ICI annual conference in Washington in May. At that event, he encouraged investors who oppose the proposal “to look in the mirror” when asking why the proposal is necessary.

Indeed, the Federal Reserve created the Money Market Mutual Fund Liquidity Facility to provide secured loans to money market funds during the pandemic so they could meet their obligations.

However, that lending facility was for money market mutual funds, not open-end mutual funds, the type of fund at issue here. Whether or not such panicked late night phone calls ever took place, the relief the mutual fund managers allegedly requested was not, in fact, granted by the Fed.

As for money market funds, the SEC finalized rules reforming their liquidity management in July. Though the initial proposal included swing pricing—as in the pending proposal for open-end funds—the final rule for money market funds did not. Instead, the SEC required money market funds to impose a fee on redeemers if daily net outflows exceed 5% of the fund’s value.

The comment period for the swing pricing proposal for mutual funds closed earlier this year. The SEC has not scheduled a vote on a final rule.
Client Service September 14, 2023

Affiliation Benefits Abound, but Independence Still Has Merits, Say Advisers Who Have Done Both

Many plan advisers have moved to affiliate models for reasons ranging from client service to career pathing, said advisers at the 2023 PLANADVISER National Conference.

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It’s no secret that the retirement plan advisement industry is moving toward increased merging and affiliation with larger firms.

But industries do ebb and flow over time. Take wealth management, where financial advisers are more frequently leaving national broker/dealers to join smaller registered investment advisories, according to tracking by consultancy Cerulli Associates.

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While being independent can have its advantages in retirement plan advising, the benefits to affiliation are numerous, including when considering the needs of the end client, according to two retirement plan advisers who spoke at the 2023 PLANADVISER National Conference.

“When we looked at the No. 1 criteria, [affiliating] was better for our clients,” said Kristi Baker, managing partner in CSi Advisory Services LLC, which joined Hub International Inc. in 2022. “There have been some significant opportunities to lower costs through the power of being with a larger organization. We had some opportunities to bring some new resources and investment tools to be able to drive costs down.”

Barbara Delaney, a principal in another Hub company, StoneStreet Renaissanceo, notes that another benefit of affiliation is not having to frequently renew contracts and other paperwork, a time-consuming process for both the team and her clients.

“I just got into the practice of telling my clients every other year we have to repaper, so they’’ve come to expect that,” she told the audience of advisers in Scottsdale, Arizona. “That’s one of the things people consider when leaving an independent and becoming part of a bigger group.”

Having the support of a large organization also allows her firm to better weather clients’ large staff turnover, Delaney said. She experienced one retirement plan committee that had 100% turnover during the pandemic, but having the tech and support of Hub was helpful.

“We really felt together that this is something we’re going to accomplish, we’re going to do this together, and we’re going to see it through together,” she said.

Baker also noted that affiliation has allowed her to provide career paths she otherwise would not be able to provide if she had stayed independent. She recounted when one of her staff members had hit a ceiling and was looking for a new job in order to gain more experience. Baker was able to call the Hub office and give that employee a new position within the firm.

“If that employee had walked into my office before, I would’ve had to say, ‘All right, let’s see what you can find, and best of luck,’” she said.

Baker sees an additional benefit of affiliation as outsourcing talent acquisition. “It’s hard to find good people, and that’s not my area of expertise,” she says. She now has someone who specializes in talent acquisition who she can call on to help backfill positions.

Delaney, who founded her advisory in 2008, admitted that most firms have moved to affiliate with larger organizations. “It was hard to find someone who’s not affiliated; thus it’s me and Kristi up here,” Delaney joked during the panel session. “The independent crowd has gotten much thinner.”

However, the affiliated advisers agree there are still advantages of staying independent.

“One of the key advantages is that you are still making all of the decisions relative to the business,” Baker said. “You get to determine your branding. You get to determine the direction of your business. I think that’s a huge appeal to stay independent.”

One of the other important upsides to being independent is getting to choose the company’s footprint and make budget decisions without supervision.

“Definitely, being in the corporate environment now, we have [protection and indemnity insurance], and we have some guidelines that we have to go by,” Baker said.

Ultimately, despite most advisers choosing to affiliate, she believes the model will not completely take over.

“I think there’s still a place for independents,” Baker said. “There always will be in the marketplace.”

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