Statement on Proposed Rule: Open-End Fund Liquidity Programs and Swing Pricing; Form N-PORT Reporting
Nov. 2, 2022
Thank you, Chair Gensler, and thank you to the staff for the presentation.
Mutual funds have been phenomenally successful as a savings tool for retail investors by offering professional money management at a low cost. The substantial regulatory protections provided by the Investment Company Act of 1940 (“Investment Company Act”) help to ensure that funds are managed for the benefit of investors, including important safeguards against self-dealing, conflicts of interest, misappropriation of funds, and overreaching, as well as to ensure the disclosure of full and accurate information about funds and their sponsors.
The growth of mutual funds is also an American success story. As of December 2021, mutual funds had $21 trillion under management. This figure includes around $12.6 trillion of defined contribution plan and IRA assets invested in mutual funds, and 63% of American households have tax-advantaged savings.
A key feature of mutual funds is the ability of an investor to redeem his or her shares on any business day, which is specifically protected by law. The Commission has previously adopted a rule mandating that funds institute liquidity risk management programs, in part to facilitate shareholder redemptions in a timely matter.
Today’s proposals go further and are designed to: (1) revise fund liquidity determinations and classifications; (2) require more frequent reporting on Form N-PORT; (3) require swing pricing; and (4)institute a hard 4:00 pm close Eastern time for investor purchases and redemptions.
These proposals, if adopted, would dramatically alter how investors buy and sell fund shares. The proposals potentially reduce investor choice, and come with significant compliance and operational costs, which will ultimately be paid for by fund investors.
While today’s proposals sensibly do not apply to exchange-traded funds (“ETFs”), the Commission may be simply accelerating an existing trend where ETFs replace mutual funds as the low cost choice of investors.
Retirement plan sponsors may also eliminate mutual funds as investment options due to the complexities of swing pricing and the hard 4:00 pm close. Unregulated pools such as collective investment trusts may replace mutual funds regulated under Investment Company Act – thus not only reducing investor choice but also undercutting investor protection.
The release justifies today’s proposals in part because of potential shareholder dilution, concerns about late trading, and assertions that European funds successfully use swing pricing, but the underlying data is not persuasive in my opinion. The concerns appear to be more theoretical, rather than grounded in fact. For instance, the release does not provide any support for the concern that late trading is occurring or that the reforms regarding market timing adopted nearly 20 years ago are not working. And while some European funds may use swing pricing, their experience does not appear analogous to ours due to the fundamental differences in our markets and retirement plan systems.
The events of March 2020, at the start of the COVID-19 pandemic, are cited in support of the proposals. The release notes there were significant redemptions, most notably with fixed-income funds. Our staff’s separate analysis of this time period found, however, “though many observers have been concerned about the ability of bond funds to access liquidity to meet redemption requests during periods of market stress, these concerns did not materialize.”
In the end, the only convincing case of liquidity concerns is with respect to bank loan funds organized as mutual funds. Yet at the end of March 2020, bank loan assets represented only $70 billion out of $13.5 trillion in mutual fund assets. Targeted changes may be appropriate for bank loan funds. Wholesale changes to how fund investors purchase and redeem their shares are not needed to address these concerns.
Funds should have sufficient liquidity and must be resilient at all times, particularly during market stress. However, costly and prescriptive regulations that provide little or no assurance of achieving those objectives neither benefit investors nor market stability. Accordingly, I cannot support today’s proposals.
Nonetheless, the release also discusses some alternatives to further enhance liquidity and resiliency, which are worthy of consideration. These alternatives include liquidity fees, dual pricing, and alternatives to a hard 4:00 pm close. Thus, I look forward to public comments, especially with respect to the alternatives described.
I appreciate the efforts of the staff of the Divisions of Investment Management, and Economic and Risk Analysis, as well as the Office of the General Counsel. I also appreciate the effects of other offices that have contributed to these proposals.
 See, e.g., Division of Investment Management, Securities and Exchange Commission, Protecting Investors: A Half Century of Investment Company Regulation (May 1992) at xviii, available at https://www.sec.gov/divisions/investment/guidance/icreg50-92.pdf.
 Open-End Fund Liquidity Programs and Swing Pricing; Form N-PORT Reporting, Release No. 11130 (Nov. 2, 2022) (“Adopting Release”), at note 8, available at https://www.sec.gov/rules/proposed/2022/33-11130.pdf.
 15 U.S.C. 80a-22(e).
 17 CFR 270.22e-4.
 Conrad de Aerile, As Investors Switch to E.T.F.s, so do Investment Managers, N.Y. Times (Apr. 8, 2021, updated Oct. 18, 2021), available at https://www.nytimes.com/2021/04/08/business/mutfund/fund-stock-etf-conversion.html.
 Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings, Release No. 33-8048 (Apr. 9, 2004) [69 FR 22300 (Apr. 23, 2004)], available at https://www.sec.gov/rules/final/33-8408.htm.
 See SEC Staff Report on U.S. Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock (Oct. 2020) at 7, available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.
 Adopting Release, supra note 2 at text accompanying note 10.