HomeBlogFinanceSEC proposes mutual fund-pricing rule to protect long-term investors

SEC proposes mutual fund-pricing rule to protect long-term investors

Wall Street’s top regulator has proposed changes to the way stock and bond mutual funds set their daily prices in order to protect buy-and-hold investors from having to bear the cost of rapid inflows or outflows, a move that drew immediate pushback from asset managers.

Gary Gensler, chair of the US Securities and Exchange Commission, said the proposal would “build resiliency” for US open-end funds, which faced a liquidity squeeze in March 2020 as investors scrambled to redeem shares at the start of the pandemic.

“A goal of today’s proposal is to ensure that redeeming shareholders, rather than remaining shareholders, bear the cost of redemptions, particularly during stress times,” he said.

The SEC proposal would require US funds that together hold more than $16tn in assets to adopt so-called swing pricing, a practice common among European funds. Essentially, fund administrators must wait until they know exactly how much money has come in or out before calculating the daily “net asset value” (NAV). That way the cost to the fund of having to buy or sell securities during a volatile trading session can be included in the per-share price that departing and arriving customers receive.

In Europe, funds that use swing pricing tend to require purchase and sale orders to arrive well before the deadline for setting the NAV. In the US, all funds set their NAV at 4pm New York time. Fund clients must place buy and sell orders before that time to receive that day’s price, but their brokers do not have to transmit the orders to the fund until later.

A 2017 Bank for International Settlements study found funds that used swing pricing had better returns during the 2013 “taper tantrum” — when the Federal Reserve shook markets by signalling a change in monetary stimulus — than those that did not. The practice did not substantially reduce volatility, however.

The SEC said an optional swing pricing rule existed, but no funds had used it because they lacked a timely flow of information.

The agency on Wednesday officially proposed the new requirements with a 3-2 vote of its commissioners. The measure will move to a public comment period before coming back to the SEC for final approval and implementation.

The SEC’s two Republican commissioners voted against the proposal. Hester Peirce criticised the commission’s “hubris”, saying its efforts to “redesign open-ended funds to eliminate their purported flaws has only revealed our own flaws”.

Adding swing pricing would force US fund managers to substantially revamp their procedures and would probably make it more costly to run mutual funds. If the proposal was enacted, brokers and other intermediaries would need to make changes to meet the 4pm deadline, and most brokers would be likely to set earlier cut-off times for placing orders, the SEC said.

This will be unwelcome news to a fund industry that is experiencing substantial fee compression as well as a shift by investors to exchange traded funds because they change prices more frequently and offer lower fees. The proposed rules would not apply to ETFs or money market funds.

Eric Pan, chief executive of the Investment Company Institute, the main industry lobby group, said the swing pricing rule “faces insurmountable operational hurdles, risks confusing investors and upending mutual funds’ longstanding and equitable share pricing methodology”.

He added that there was “strong evidence” funds did not “cause or amplify” the market turmoil of March 2020 and that the adoption of swing pricing “could have an enormous negative impact on the more than 100mn Americans who invest in funds, especially retirement savers”.

The SEC is also proposing to require mutual funds to hold at least 10 per cent of their assets in highly liquid securities, which would be subject to stricter definitions to make sure they are easy to sell. Many equity funds already exceed this threshold, but the requirement could prove more of a challenge for bond funds.

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