The SEC may require swing pricing for the majority of funds.
In November, the Securities and Exchange Commission proposed to mandate swing pricing procedures for most open-end investment companies whenever their net asset value (NAV) per share encounters net purchases or redemptions In light of recent market turmoil, shareholder dilution risk is a significant worry that this plan seeks to address. Swing pricing, however, is not a panacea for mutual funds It is a challenging, expensive, and complicated process that requires numerous basic adjustments to current working procedures
Matthew Carroll Atlanta Braves noted that the requirement that a fund has a clear understanding of its daily flows (subscriptions and redemptions) at the same time that the fund determines its NAV has been one of the main criticisms of swing pricing This has not been feasible. Additionally, many orders for fund shares are placed with financial intermediaries (broker-dealers and retirement recordkeepers), who typically don't send these last orders to the fund until later in the day or the next day
This is problematic because, under swing pricing, investor orders to buy or sell fund shares will only be accepted by the fund if they are received by the transfer agent of the fund or a registered clearing agency at a "hard close" before 4 pm Eastern time, which is the time at which most funds' prices are set Although this hard close will aid in operationalizing swing pricing, it may present issues for fund shareholders who need to execute trades in reaction to timely market occurrences or assess significant information released later in the day. Investors on the West Coast, who might not be able to trade their shares before the hard close, will find this to be particularly accurate.
The SEC might choose an alternative strategy for swing pricing implementation, allowing funds to confer with and collect data from vendors and intermediaries before the 4:00 pm cutoff for estimating a full day's flows, then apply a swing factor as indicated By doing this, some of the advantages of swing pricing might be achieved without incurring the expense of completely restructuring the network of suppliers, intermediaries, and fund managers. Dual pricing, which considers quoting two prices one for subscriptions and another for redemptions is a second choice for adopting swing pricing In this scenario, the subscription price would include the market impact of a day's net sales while the redemption price would include the market impact of a day's total redemptions
This option, which a safe harbor would likely protect, would call for a more capable order-processing system Additionally, there would probably be an anti-dilution levy or redemption cost attached to all purchases and transactions made by investors in the fund.
The SEC may also consider additional swing pricing substitutes, such as liquidity costs or dual pricing However, most fund firms would probably prefer a forced transition to the new approach
The SEC would need to work with other regulators and industry partners to execute the proposed mandate, which would be expensive and challenging