The SEC is weighing mutual fund pricing rule to protect long-term investors

Wall Street’s top regulator is trying to change the way mutual funds for stocks and bonds set their daily prices to protect buy-and-hold investors from having to bear the costs of rapid inflows or outflows Move that would increase costs for wealth managers.

Gary Gensler, chairman of the U.S. Securities and Exchange Commission, said in a statement that the proposal would “build resilience” for U.S. open-end funds, which faced a liquidity squeeze in March 2020 when investors were beginning the year endeavored to return shares pandemic. “I think that would reduce some systemic risk,” he said.

The SEC proposal would require U.S. funds, which collectively hold more than $16 trillion in assets, to adopt swing pricing, a common practice among European funds. Basically, fund managers have to wait until they know exactly how much money has gone in or out before calculating the daily “Net Asset Value” (NAV). This allows the fund’s costs of buying or selling securities during a volatile trading session to be factored into the share price that outgoing and incoming clients receive.

In Europe, funds using swing pricing typically require buy and sell orders to be received well in advance of the NAV determination deadline. In the US, all funds set their NAV at 4:00 pm New York time. Fund customers must place buy and sell orders before this time to receive the daily price, but their brokers do not have to transmit orders to the fund until later.

A 2017 study by the Bank for International Settlements found that funds using swing pricing produced better returns than those who didn’t. However, practice has not significantly reduced volatility.

The SEC said there is an optional swing pricing rule, but no fund has used it because they lack the timely flow of information.

The commission will vote on Wednesday on whether to propose the new requirements. If successful, the measure will be deferred to a public comment period before being sent back to the SEC for final approval and implementation.

The introduction of swing pricing would force US fund managers to fundamentally overhaul their processes and could make mutual funds more expensive to run. If the proposal passes, brokers and other intermediaries would have to make changes to meet the 4 p.m. deadline, and most brokers would likely set earlier cut-off times for placing orders, the SEC said.

This will be unwelcome news for a funds industry that is seeing a significant drop in fees and a shift of investors to exchange-traded funds as they change prices more frequently and offer lower fees. The proposed rules would not apply to ETFs or money market funds.

The SEC also proposes requiring mutual funds to hold at least 10 percent of their assets in highly liquid securities, which would be subject to tighter definitions to ensure they are easy to sell. Many equity funds already exceed this threshold, but the requirement could be more challenging for bond funds. The SEC is weighing mutual fund pricing rule to protect long-term investors

Adam Bradshaw

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