(PlanSponsor) - The retirement industry finished its homework in time to meet the Securities and Exchange Commission’s deadline to comment on a “swing pricing” rule that would upend decades’ worth of investing and trading practices for mutual funds.
On Tuesday, industry association responses flooded in arguing that the proposal published in November 2022 for open-ended funds to include mutual funds—though excluding money market funds and exchange-traded funds—would disadvantage everyday retirement savers in both their investment outcomes and short-term-withdrawal needs.
The SEC’s proposed swing pricing method, which is widely used in Europe, allows fund managers to adjust the net asset value of a fund to account for trading costs. That, in turn, passes those costs on to “first mover” traders instead of pushing them to existing fundholders and potentially diluting their holdings. Implementing the method would also require a “hard close” for open-ended funds to ensure that the managers receive trade information in time to adjust their net asset values.
The proposal comes after the COVID-19 market panic caused a “fire sale” that benefitted first mover trades when investors sold off some $100 billion from corporate bond mutual funds, according to an analysis by the Brookings Institution. But many retirement, insurance and investment associations see the proposal as bringing widespread disruption to a mutual fund market that accounts for 66% of 401(k) retirement plan assets, according to data from the Investment Company Institute.
The proposal, according to organizations including ICI, would alter how mutual funds are managed, priced, bought and sold, increasing costs and decreasing the benefit of mutual funds for “more than 100 million Americans.”
“The SEC’s unworkable and costly proposal would severely damage these funds, targeting middle-class Americans and making it harder for families to achieve their financial goals,” wrote the ICI, which represents regulated investment fund firms.
The Washington, D.C.-based institute also argued that the daily dilution of U.S. mutual funds is relatively small—at an average of hundredths or tenths of a basis point per day—meaning the risks do not support the SEC’s overarching mandate.
A Hard No
The ERISA Industry Committee, a national advocacy group for retirement, health and benefit providers, argued that the rule would require retirement plan recordkeepers to create an earlier time for plan participants to submit orders and could delay requested distributions. Washington, D.C.-based ERIC also said the timing mandates would create expensive changes to recordkeeper technology and processes that might pass through to participants as higher costs.
“The SEC should abandon its ill-considered proposal because it would hurt workers and retirees that participate in 401(k) plans,” Andy Banducci, senior vice president of retirement and compensation policy for ERIC, wrote in the letter. “To implement it, employers and service providers would need to make costly changes and plan participants would have to submit orders earlier than others in the marketplace.”
The SPARK Institute, which represents retirement plan service providers and investment managers, argued that the rule would make everyday retirement plan transactions—such as purchases, loans and required minimum distributions—difficult, if not impossible, to execute.
“This proposal establishes an order for processing trades, with large institutional investors going first and everyone else going second,” Tim Rouse, the executive director of SPARK, wrote in a letter. “This would mean retirement savers will have much earlier trade processing cut-offs. And it’s likely that their trades will end up getting delayed by a full day. This will disadvantage—and confuse—many retirement investors who rely on prompt and transparent account transactions.”
The Securities Industry and Financial Markets Association’s Asset Management Group argued against the hard close proposal, but acknowledged that a more “flexible, non-mandatory form of swing pricing” may work to address the dilution issue for shareholders.
“If the commission is committed to the wide adoption of swing pricing as a liquidity risk management tool in the U.S., we urge the commission to provide managers with the flexibility to implement swing pricing based on those factors specific to each fund and not at prescribed thresholds that unduly rely on what would be, at best, low confidence estimates of market impact costs,” the New York-based SIFMA AMG wrote.
Other letters opposing the proposal came from fund and annuity providers including AllianceBernstein, Nationwide Financial, Putnam Investments, PIMCO, Brighthouse Financial and Prudential Investments.
Swinging for the Fences
The SEC’s proposal did get letters of support from some academic institutions and industry organizations. The University of Pennsylvania’s Wharton School, as well as Columbia University’s Columbia Business School, argued that swing pricing would actually reduce the amount of liquidity mutual funds would need to hold to meet redemption requests. This would allow more assets to be put to work in investments and “help investors achieve their long-term savings goals.”
The CFA Institute, a nonprofit providing financial profession education and certification, supported the proposal on the grounds that swing pricing would protect shareholders from costs created by first mover trades.
“The absence of swing pricing in the U.S. stems from a combination of factors, including operational challenges, fear of stigma, and collective action problems,” the CFA wrote. “This situation justifies commission action to mandate swing pricing in the overall interest of mutual funds and their shareholders. In doing so, the commission will be fulfilling two elements of its three-part mission: to protect investors and to maintain fair, orderly, and efficient markets.”
There were more than 150 comments submitted ahead of Tuesday’s deadline, according to the SEC’s website.
By Alex Ortolani
February 15, 2023
