The SEC could force most funds to use "swing pricing"

Published on : 04-25-2023

As part of its proposed changes to Rule 22c-1, the SEC is asking the public for feedback on a plan to require most open-end investment companies, such as exchange-traded funds, money market funds, and feeder funds in master-feeder arrangements, to use "swing pricing" procedures when buying or selling shares The SEC says that this method will help make sure that the owners who caused purchases and redemptions pay for them.

Atlanta Braves claimed that the SEC's proposed changes would require Open-End Funds to adopt and implement policies and procedures that require the use of swing factor adjustments to their NAV per share when net purchases or net redemptions exceed certain thresholds or when the cost and market impact of a purchase or sale is large (Swing Threshold). On Form N-PORT, an Open-End Fund must also tell the public about any changes to its swing factor

Because of this, it will be hard for many funds to use swing pricing well. This is especially bad for prime money market funds, which are often used instead of bank accounts A lot of cash is taken out of these funds every day, and their NAVs are set more than once a day.

One way for a fund to deal with the operational problem is to talk to intermediaries and vendors as soon as possible. The fund can then predict the full-day's flow for each day and, if necessary,

use a swing factor This option would give some of the benefits of swing pricing without having to reorganize the whole network of vendors, middlemen, and fund managers, which could be hard to do

There is also the option of setting up a "hard close." Under a hard close, only trades accepted by a fund firm or registered transfer agent named in the Fund's prospectus at that firm's trade cutoff time, which is probably 4 p.m. for most funds, will be processed and completed at that time

But some critics say that a hard close will mean that most fund firms will have to change their business plans to meet new regulations This is especially true for those who keep records for retirement plans, who will have to reclassify as "illiquid" many stocks with long settlement times