Despite widespread industry and congressional opposition, the Securities and Exchange Commission (SEC) apparently has not given up on pursuing its proposal to require open-end funds to use “swing pricing” and require a daily “hard close” for relevant funds.
According to the SEC’s newly released Fall 2023 Unified Agenda of Regulatory and Deregulatory Actions, the proposal—officially titled the Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N–PORT Reporting—now has an April 2024 target date for finalization.[1]
The SEC released the proposed regulations in November 2022, while the comment period closed on Feb. 14, 2023.
The SEC maintains that the amendments, among other things, are “designed 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 (NAV) per share to pass on costs stemming from shareholder purchase or redemption activity to the shareholders engaged in that activity.” In addition, in order to help operationalize the proposed swing pricing requirement, and to improve order processing more generally, the Commission proposed a 4:00 p.m. (ET) “hard close" requirement for these funds.
The American Retirement Association (ARA) was among the various organizations and lawmakers that have opposed the proposed new requirements. “The ARA has serious concerns about the hard close and its impact on DC plans and participants,”ARA CEO Brian Graff and General Counsel Allison Wielobob wrote last February in the organization’s comment letter to SEC Chair Gary Gensler.
Not only would mandating a hard close require a complete overhaul of intermediaries’ systems and processes, vastly increasing costs to participants, “it would create inequities among investors in open-end fund and eventually, increased flows of investor money into less regulated vehicles and potentially, a push for many asset managers to create alternative funds instead,” they added.
What’s more, the ARA argued that such a hard-close requirement would create a two-tiered system for open-end fund investors and DC Plan investors, resulting in a disadvantage for retirement savings.
Rep. Brad Sherman (D-CA) was among the numerous lawmakers who have also raised concerns about the proposal, noting during a recent hearing that he believes the swing pricing rule doesn’t achieve its stated purpose, adding that it has been criticized in aletter signedby vast majority of the House Financial Committee Capital Markets Subcommittee members. Sherman also argued that the proposal would result in a competitive disadvantage for those who live on the West Coast.
All that being said, it’s still possible the proposal could be amended before it is finalized. In July, the SEC abandoned its proposed swing-pricing requirements for money market funds,[2] which has given industry stakeholders hope that the Commission may do the same for open-end funds. Chairman Gensler, however, has not tipped his hat either way, maintaining a public stance that the Commission is considering all comments.
Either way, time is getting short. The Commission’s regulatory agenda shows that it has 14 items at the proposed rule stage and nearly 30 at the final rule stage. The later it gets into 2024 before a rule is finalized, the more likely it could be challenged by the Congressional Review Act.
[1] The Spring 2023 regulatory agenda had an October 2023 target date for finalization.
[2] The SEC adopted a liquidity fee instead in what the Commission described was an effort to reduce operational burdens compared to swing pricing.
