Mutual Fund Directors Forum Submits Comments on SEC Swing Pricing, Liquidity Rule Proposal
On Tuesday, the Mutual Fund Directors Forum submitted written comments to the SEC’s proposal dated November 2, 2022 entitled, “Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT.” The proposal would, if adopted, mandate swing pricing for most open-end funds (excluding money market funds and ETFs) as well as modify how funds classify the liquidity of their investments. To read more information about the rule proposal, please see a November 2022 blog post from the Forum staff.
The Forum’s comments push back against the Commission’s proposal to mandate swing pricing for mutual funds as the rule would change how investors buy and sell mutual funds. In the letter, the Forum asserts that the Commission’s cost benefit analysis is incomplete as shareholders are likely to bear the cost of implementation. Additionally, because the swing factor will not be disclosed to investors, swing pricing will “introduce an element of complexity and randomness into fund transactions that run contrary to shareholder expectations.” The letter also highlights issues with the hard close, noting in the mutual fund space the “intermediary structure facilitates investors’ ability to make purchases or redemptions up until the market close” and tinkering with these expectations without a proven benefit, will confuse and harm mutual fund investors. The Forum states that while these costs will be incurred by all fund complexes, if the proposal is adopted as drafted, smaller funds will likely have to make choices on whether the mutual fund wrapper continues to be a viable product. The Forum suggests the Commission instead issue a Concept Release to study dilution and possible ways to protect shareholders which allow staff to “develop a real data set upon which it could suggest rule amendments pursuant to which fund shareholder would recognize real benefit.”
Additionally, the Commission’s proposal suggests changes to funds’ liquidity risk management programs by removing the “less liquid” classification bucket, requiring investments be classified individually, and change how funds analyze the liquidity of portfolio securities, among other changes. The Forum’s comments caution against these changes and assess “whether the Commission has adequately explained or justified the need for the rules.” While the Forum believes liquidity is an important area of focus for investment managers and boards, the proposed rules add further regulatory burden and cost to funds and their shareholders without additional benefit.
Click here to read the Forum’s comment letter on the Commission’s open-end fund rule proposal.