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BlackRock Inc., Charles Schwab Corp., Fidelity Investments and Morgan Stanley are among those pushing back against a sweeping set of regulatory changes that would include the introduction of a “swing pricing” mechanism for the funds’ shares. That price-adjustment process is intended to protect investors who remain in a fund from bearing the costs when others enter or exit.
That’s theoretically a good thing for long-term investors by protecting them from the impact of liquidity crises like the one that broke out in March 2020, when funds were forced to dump assets at fire-sale prices as fearful holders pulled out cash in droves. But representatives of the securities industry say it would impose unnecessary new burdens, reduce transparency to investors, increase costs and ultimately do little to protect long-term shareholders.
“The result is likely to be a significant decline in mutual fund usage by individual investors, reducing choice, increasing complexity and ultimately driving investors to other investment options,” Rick Wurster, the president of Charles Schwab, wrote in a Feb. 14 letter to the SEC. “We believe it is not hyperbole to say that this proposal will completely reshape the fund landscape, harming tens of millions of investors.”
The SEC proposals, released last year, include adjusting funds’ per-share net asset values by a certain amount once a measure of redemptions or purchases exceeds a threshold. The mechanism could essentially create a fee meant to keep remaining shareholders from bearing the costs of significant buying or selling of a fund.
One of the ways that the SEC is suggesting it can implement the swing pricing is through a “hard close” requirement that would require brokerages to pass buy or sell orders on or before a specific time.
But the head of the Investment Company Institute said the proposal would significantly disrupt how mutual funds are traded and require major changes to the “entire fund ecosystem,” including intermediaries such as broker-dealers.
“Neither fund experience nor the proposal’s economic analysis establishes that such costly measures are warranted,” ICI President and Chief Executive Officer Eric Pan said in a Feb. 14 letter to the SEC. “The harm and disruption for everyday mutual fund investors resulting from them would be far too high.”
While BlackRock agrees with the SEC that swing pricing can protect fund investors who aren’t redeeming shares, it said in a comment that it does not support the approach described in the proposal. The asset-management giant recommended the SEC reconsider it and organize working groups to identify the best options.
The SEC’s proposal, which also involves changes about how funds classify the liquidity of their funds, follows a record year of outflows from mutual funds as investors shift into often-cheaper exchange-traded ones. The plans, if approved, may in some cases cause securities firms to consider converting funds into ETFs, according to Bloomberg Intelligence.
Even retail investors and organizations for individual investors expressed doubts. The Consumer Federation of America wrote that it opposes the hard close, saying it would “create a two-tier market” in which sophisticated investors who are able to secure same-day pricing would have an edge over less-sophisticated ones.
BI’s Nathan Dean estimates that there’s a 60% chance of the proposal passing within the next 18 months. The SEC typically takes many months to review comments and reach a final proposal, which requires approval of a majority of the five-member commission.
“We should find out later this year if swing pricing is a high priority for the SEC,” said Dean. “There will come a point, probably the second half of 2023, where the SEC will need to decide what to get over the line and what to delay.”
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