New SEC proposal could hurt retirement savers, industry leaders say

Retirement and investment industry leaders, as well as two House lawmakers, are staunchly opposed to a new SEC rule proposal that would implement "swing pricing," as the proposal would hinder investors saving for retirement, they said.

The proposal, adopted in November, requires any open-end fund — other than a money market fund or exchange-traded fund — to use "swing pricing." Swing pricing adjusts a fund's value based on trading activity, so that redeeming shareholders bear the costs of transactions, rather than diluting other shareholders.

Fatima S. Sulaiman, partner at K&L Gates' Washington, D.C., office, described swing pricing as "a mechanism that's designed to pass on the costs of coming into or out of a mutual fund … to the shareholder that is doing the activity."

In order to implement swing pricing, the SEC also proposed that there be a "hard close" for investors, typically around 4 p.m. ET, which would "(ensure) that funds receive timely flow information, help prevent late trading of fund shares, and improve order processing," according to an SEC fact sheet on the proposal.

Industry players expressed concern over the effects of the proposal, especially on retirement savers, in a host of comment letters, which were due to the SEC by Feb. 14.

Reps. Ann Wagner, R-Mo., and Brad Sherman, D-Calif., also voiced their concerns over the proposal, urging the SEC "to carefully evaluate its next steps," in a letter sent to Chairman Gary Gensler March 9. The lawmakers, who serve as chair and ranking member of the House Financial Services Committee Subcommittee on Capital Markets, respectively, specifically said the proposal would "disproportionately impact main street investors who are saving for retirement," according to the letter.

Their criticisms reflect the opinions of many leaders in the industry, who have called out the potential negative impacts of a hard close, as well as what they say is a lack of justification for the proposal.

The effects of a hard close

"A hard close would greatly harm retirement plan participants by making them 'second class' investors, as they would be pushed out of the market much earlier in the day than other investors to meet the earlier cut-off that would be required under a hard close," Tim Rouse, executive director of the SPARK Institute, a nonprofit representing retirement plan industry players, wrote in a comment letter.

The Insured Retirement Institute, a Washington-based trade association for the retirement industry, expressed similar sentiments in their comment letter.

"While investors across the board will be impacted by the swing pricing and hard close proposal, retirement savers are at a particular disadvantage given the steps plan record-keepers and intermediaries must take to execute trade orders in compliance with plan rules," wrote Emily C. Micale, director of federal regulatory affairs at IRI.

In their letter to Mr. Gensler, Ms. Wagner and Mr. Sherman pointed out that retirement savers have to place trade orders through their record-keeper, which they said puts them at a disadvantage to shareholders who hold shares directly with a fund.

Mr. Rouse added that "any potential benefits to retirement savers that would stem from swing pricing are vastly outweighed by the harm that a hard close would cause everyday investors saving for retirement."

According to K&L Gates' Ms. Sulaiman, "the overall criticism (of the proposal) is that there isn't any serious attempt to quantify the costs or the drawbacks of this …and determine whether there's adequate justification for imposing those costs."

The Investment Company Institute, a Washington-based trade association representing regulated investment funds, said in its comment letter that "the proposal is extreme in scope, rigid and arbitrary in its chosen policy measures, and seemingly indifferent to the costs, both quantitative and qualitative, that it would impose on the more than 100 million fund investors."

In a Feb. 14 news release, ICI president and CEO Eric Pan said: "The (SEC) presents scant evidence of a real problem to solve. ICI estimates that daily dilution for U.S. mutual funds is on average far too small — typically just hundredths or tenths of a basis point per day — to incentivize shareholders to redeem heavily, contrary to what the commission assumes."

Mr. Pan also said the proposal would disproportionately impact retirement savers, as he noted 61% of 401(k) plan assets are held in mutual funds.

"The SEC has failed to meet its cost-benefit analysis obligations for imposing swing pricing and the hard close on the mutual fund industry," said Cynthia Lo Bessette, Fidelity Investments' chief legal officer, in a comment letter. "The SEC offers no rigorous, data-driven analysis of the harms that the proposal is seeking to address."

"The SEC benefits from robust engagement from the public and will review all comments submitted during the open comment period," an SEC spokesperson said in an email. "Generally, we respond to comments received as part of the final rulemaking and not beforehand."

The CFA Institute is one of few organizations that expressed support for the proposal. The organization said in its comment letter that because swing pricing shifts the costs of inflows and outflows back to a fund's redeeming shareholders, it leads to more equitable treatment of shareholders. The organization also said that "swing pricing enhances fund resiliency and financial stability."

The SEC Investor Advisory Committee discussed the proposal at a meeting on March 2, in which Yiming Ma, assistant professor of finance at Columbia Business School, also spoke in support of the proposal. Speakers from the SPARK Institute, ICI and Vanguard told the committee why they are opposed to the proposal.