The SEC May Require Swing Pricing for Most Mutual Funds
Recent revisions suggested by the Securities and Exchange Commission (SEC) would enforce swing pricing for most funds. While this is an intriguing notion that might benefit shareholders, it presents some difficulties. A buy or redemption order would only be eligible for a given day’s price if received by an Open-End Fund, its transfer agent, or a registered clearing agency prior to the pricing time. This might alter how funds interact with their intermediaries, which could influence how investors purchase and sell mutual fund shares.
The SEC has suggested that Open-End Funds adopt “Swing Pricing Policies,” which change a fund’s current NAV per share by a “swing factor” based on whether the fund has net redemptions (no threshold) or net purchases beyond a predetermined threshold (2% of the fund’s net assets). With limited exclusions, the proposed Rule 22c-1 would mandate that each of these funds employ swing pricing to compute its swing factor.
Orders placed by investors through intermediaries might be received by Open-End Funds later on the same day or the following day, posing a possible operational difficulty with swing pricing. A fund may only know the investor’s order once its NAV is calculated. To overcome this issue, the SEC advises that relevant Open-End Funds implement a “hard closure” provision in which an intermediary must receive investor orders, a registered clearing agency, or the fund itself by the time the fund calculates its NAV, which is normally 4 p.m.
Instead of diluting the fund’s owners, swing pricing transfers expenses associated with inflows and outflows to the investors involved in such activities.
Swing pricing would be required for all open-end funds other than money market funds and exchange-traded funds under the SEC’s proposed modifications (Open-End Funds). This is a substantial change in the pricing of open-end fund shares, which may have an effect on a variety of products.
Proposed Rule 22c-1 mandates that the board of a fund must approve its Swing Pricing Policies and appoint an Administrator to oversee the Swing Pricing process. Additionally, the board must annually evaluate a written report compiled by the Administrator.
In addition, the SEC recommends a hard closure for Open-End Funds that must receive investor orders by the price time of the fund, which is generally 4 p.m. ET, in order for investors to obtain the day’s pricing. The SEC notes that this is vital to ensure the timeliness of information required to implement swing pricing. The SEC warns that this hard closing might provide difficulties for retirement plan record-keepers and will likely necessitate modifications to the processing of certain transactions.
The SEC might require swing pricing for the majority of mutual funds, which would benefit investors and fund managers. Nonetheless, some obstacles should be properly monitored.
Under swing pricing, one of the major difficulties is that investors will only know when they may redeem or purchase shares considerably later than the NAV calculation period. This might cause discrepancies between trades and NAV computations, causing issues for the fund.
To address this issue, the SEC recommends implementing a “hard close” rule for fund share transactions. This will necessitate that only transactions received by the fund company before the firm’s trade cutoff time (likely 4:00 p.m. for the majority of funds) will get the day’s price and trade date.
Compliance fees — the continual price of following the regulations — is one of hedge funds’ largest expenses. A poll of Asia-Pacific managers revealed that regulatory compliance consumes up to half of management expenses, including those of compliance officers and consultants.
The plan would force most open-end funds to employ swing pricing when net purchases or redemptions exceed a defined daily threshold. This would necessitate an adjustment to the fund’s NAV by a “swing component” that represents at minimum spread and transaction expenses.
The swing factor must also incorporate estimates of the market impact of selling assets to meet net redemptions that exceed a particular threshold (1% of NAV, unless the Administrator of swing pricing specifies a lower threshold). The market effect cost estimates may be evaluated independently for each investment or asset class in the portfolio, or they may be applied to all investments of that kind.
