SEC Proposes New Rules for Open-End Funds

Last week, the SEC proposed new rules governing liquidity of open-end funds, including mandating swing pricing for most open-end funds (excluding money market funds and ETFs) by a vote of 3 to 2. According to Chair Gensler the proposal is designed to protect remaining investors during times of market stress. He acknowledged the fundamental right of open-end fund shareholders to redeem their shares, but stated, “[o]pen-end funds, though, have an underlying structural liquidity mismatch. This can raise issues for investor protection, our capital markets, and the broader economy. We saw such systemic issues during the onset of the COVID-19 pandemic, when many investors sought to redeem their investments from open-end funds. Today’s proposal addresses these investor protection and resiliency challenges.”

The proposal would:

• Change how funds classify the liquidity of their investments
• Require funds to use swing pricing
• Institute a “hard close” on fund transactions
• Require more detailed public reporting of a fund’s liquidity more frequently

In her dissent, Commissioner Hester Peirce expressed concern that the pace of the Commission’s rulemaking would prevent proper consideration of the far-reaching implications of the proposal, saying “[a]t a time when so much of our rulebook is up for discussion, nobody has the bandwidth to consider properly a proposal that would fundamentally alter the way open-end funds operate, how investors interact with them, and the infrastructure surrounding them.” Regarding swing pricing, she noted that “[t]his part of the proposal is stunning in light of the stone-cold reception the proposal to require swing pricing for money-market funds received.” Commissioner Mark Uyeda also expressed concerns about the proposal, saying “[t]he release justifies today’s proposals in part because of potential shareholder dilution, concerns about late trading, and assertions that European funds successfully use swing pricing, but the underlying data is not persuasive in my opinion. The concerns appear to be more theoretical, rather than grounded in fact.”

Comments on the proposal are due 60 days after the proposal is printed in the federal register. 

Click here to read an SEC Fact Sheet on the rule proposal.

Click here to read Chair Gensler’s statement on the proposed rule.

Click here to read Commissioner Peirce’s dissenting remarks

Click here to read Commissioner Uyeda’s dissenting remarks.

Click here to read a client alert on the proposed rule from Dechert.