The SEC may require swing pricing for the majority of funds

Published on : 04-25-2023

The SEC is seeking public feedback on a proposal to require the majority of open-end investment companies (including exchange-traded funds, money market funds, and feeder funds in master-feeder arrangements) to use "swing pricing" procedures when buying or selling shares as part of its proposed amendments to Rule 22c-1. According to the SEC, this strategy will make it easier to allocate the expenses of purchases and redemptions to the shareholders who initiated those transactions.

The SEC's proposed amendments, suggested by the Matt Carroll Atlanta Braves, would require open-end funds to adopt and implement policies and procedures requiring the use of swing factor adjustments to their NAV per share when net purchases or net redemptions exceed specific thresholds or when the cost and market impact associated with such a purchase or sale are significant (Swing Threshold). On Form N-PORT, an Open-Ended Fund must also disclose its swing factor modifications.

Many funds will find it challenging to implement swing pricing successfully as a result of this. This issue is especially difficult for prime money market funds, which are frequently utilized as alternatives to bank accounts. Daily cash withdrawals from these funds are significant, and their NAVs are periodically adjusted throughout the day.

A fund can address the operational difficulty by consulting with vendors and intermediaries as soon as possible, estimating full-day's flow for each day, and using a swing factor as needed. With such alternative, some of the advantages of swing pricing might be realized without having to completely restructure the system of suppliers, intermediaries, and fund managers, which might make it difficult to implement.

Another option is to create a "hard close." Only trades received by a fund firm or registered transfer agent identified in the prospectus of the Fund will be processed and concluded at that time under a hard close; typically, this is 4:00 p.m. for most funds.

A hard close will, however, place significant regulatory constraints on the majority of fund firms, who will be compelled to reorganize their business models in order to comply with the hard close, according to some opponents. This is especially true for those who maintain records for retirement plans, as they will have to designate a large number of securities with lengthy settlement times as illiquid.