The SEC Might Mandate Swing Pricing for Most Funds
The SEC might mandate swing pricing for most funds, which would be a boon for investors and fund managers. However, some impediments to this type of pricing in the U.S. should be watched closely. For example, there are various transition periods in which funds must adjust their pricing to comply with the rules. Also, there are concerns about the hard-close provisions and whether funds can maintain liquidity during the transition period.
Impediments to swing pricing in the U.S
The Securities and Exchange Commission has begun to explore the use of swing pricing for open-ended funds. Swing pricing is a liquidity management tool that allows funds to adjust the net asset value of a fund when net redemptions occur. Funds must maintain a record of the NAV adjustment. This allows the fund to reduce dilution to existing shareholders and improve returns for longer-term investors.
In the United States, several issues make swing pricing difficult. Specifically, the SEC acknowledged operational and institutional challenges in the U.S., including a mismatch between the information that fund managers provide and the flows that investors experience.
Funds also face a substantial volume of investor redemptions. Swing pricing can minimize money market mutual funds’ risks to financial stability. However, swing pricing will require significant changes to the current operational processes.
Transition periods for liquidity rule amendments and 24 months for swing pricing and the hard close also bear-watching
The Securities and Exchange Commission (SEC) has proposed dramatic revisions to its liquidity rule. This would fundamentally overhaul the way most open-end investment companies (OECs) operate. Although a few product types are unaffected, the proposed changes should be a must-watch for industry stakeholders.
One of the most intriguing elements of the proposal is the proposed transition periods. These would apply to most funds but not to exchange-traded fund share classes. For example, a money market fund (MMF) would not be subject to the rules.
Another change worth noting is the inclusion of a “hard close” requirement for fund share transactions. This replaces the existing flexible trade process. A “hard close” only applies to trades received at the firm’s trade cutoff time. It could be a couple of hours after the pricing time. However, this may allow for the application of swing pricing.
The compliance date for all other aspects of the Proposals
The compliance and citation-related regulatory pitfalls associated with a small number of highly hazardous manufacturing and warehousing operations have been addressed with several standards and regulations promulgated. In the latest round of revisions, the agency aims to improve the quality of life for workers and their families by reducing the risks of accidents and injuries at the workplace. As part of its statutory duties, OSHA proposes several minor revisions to existing standards. It releases an informational bulletin detailing these changes to assist in the process. In addition, it calls for public comment on the proposed ancillary measures.
Among the changes, OSHA proposes a slight re-organization of the existing definitions of ancillary measures. Specifically, the proposed rule will not re-classify many ancillary requirements nor introduce any new ancillary measures. While this may seem like a daunting task, it is a manageable one.
Form N-1A requires the fund to describe how it prices its shares
A Form N-1A is used by mutual funds and exchange-traded funds (ETFs) to file a registration statement with the Securities and Exchange Commission. The SEC has issued a proposal for several amendments to this form.
One proposed change would require Funds to disclose the principal risks of the fund’s investments. This would give investors more information on how the funds invest. Investing in more volatile assets would involve a greater risk to the fund.
Another proposed change would eliminate the fee table. A simplified fee summary will be required instead. It will not be allowed to include footnotes.
Funds must also disclose the number of portfolio holdings and the turnover rate. They must also explain how swing pricing affects annual total returns. Swing pricing is a method of allocating redemption costs to shareholders by adjusting the net asset value of a security when a net redemption occurs.