A Small Entity Compliance Guide[1]

Introduction

On October 13, 2016, the U.S. Securities and Exchange Commission (“SEC”) adopted rule and form amendments that will permit certain open-end management investment companies (“funds”) to use “swing pricing.”

The changes are part of the SEC’s initiative to enhance its monitoring and regulation of the asset management industry.

Highlights

Swing Pricing

Swing pricing is the process of adjusting a fund’s net asset value (“NAV”) per share to pass on to purchasing or redeeming shareholders certain of the costs associated with their trading activity.  It is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions, and is another tool to help funds manage liquidity risks. 

The new swing pricing provisions will give open-end funds (except money market funds or exchange-traded funds) the option to use swing pricing.  A fund that chooses to use swing pricing will adjust its NAV by a specified amount– the swing factor – once the level of net purchases into or net redemptions from the fund has exceeded a specified percentage or percentages of the fund’s NAV – the swing threshold.  A fund’s swing pricing policies and procedures must specify the process for determining the fund’s swing factor and swing threshold (taking into account certain considerations) and establish an upper limit on the swing factor used, which may not exceed two percent of NAV per share.

The amendments also require the fund’s board to approve the fund’s swing pricing policies and procedures, and the designation of the fund’s adviser or officer(s) responsible for administering the policies and procedures.  The fund’s board also must review, at least annually, a written report that, among other things, reviews the adequacy of the fund’s swing pricing policies and procedures and the effectiveness of their implementation.  Additionally, the board is required to approve the fund’s swing factor upper limit, swing pricing threshold, and any changes thereto.

Additional Disclosure and Reporting Requirements

Form N-1A and Regulation S-X

Amendments to the registration form used by open-end funds (Form N-1A) and Regulation S-X require a fund that uses swing pricing to provide an explanation of the fund’s use of swing pricing in its registration statement, including what swing pricing is, the circumstances under which the fund will use it, the effects of using swing pricing, and the fund’s swing factor upper limit. The amendments also address financial statement and performance reporting related to swing pricing.

Form N-CEN

The swing pricing amendments add a new item to the annual census reporting form (Form N-CEN) that requires a fund to report information regarding the use of swing pricing, including a fund’s swing factor upper limit.

Effective and Compliance Dates

• Swing Pricing.  The SEC is delaying the effective date of the amendments that permit funds to use swing pricing.  The final amendments will become effective November 19, 2018. In light of the extended effective date and discretionary nature of swing pricing, the SEC believes that a compliance period is unnecessary.
• Form N-1A, Regulation S-X and Form N-CEN.  The effective date for the amendments to Form N-1A, Regulation S-X and Form N-CEN associated with swing pricing is also November 19, 2018.

Other Resources

The adopting release for investment company swing pricing can be found on the SEC’s website at https://www.sec.gov/rules/final/2016/33-10234.pdf. The proposing release can be found on the SEC’s website at https://www.sec.gov/rules/proposed/2015/33-9922.pdf.

Contacting the SEC

The SEC’s Division of Investment Management is happy to assist small entities with questions regarding the investment company swing pricing rules.

Questions may be directed to the Division of Investment Management’s Office of Chief Counsel by e-mail at IMOCC@sec.gov or by telephone at (202) 551-6825.