SEC’s Gensler Seeks to Clarify Mutual Fund Swing Pricing Proposal

Securities and Exchange Commission Chairman Gary Gensler suggested that the SEC might choose mandatory liquidity fees over swing pricing for mutual funds in the open-end fund liquidity rule at the Investment Company Institute 2024 Leadership Summit in an interview with ICI CEO Eric Pan.

The rule, first proposed in November 2022, would impose mandatory swing pricing on mutual funds. Swing pricing is a pricing method whereby the costs of redeeming shares in a mutual fund are passed on to the redeemer, which can limit the effect of a panic sale in stressful times. The proposal also contained an alternative based on liquidity fees, which would impose a redemption fee if a certain net redemption threshold is met.

The SEC adopted liquidity fees for money market funds in July 2023 in a separate rulemaking. This is relevant to its mutual funding approach because the initial proposal likewise contained swing pricing and liquidity fees as alternative options, and the SEC went with liquidity fees in the end.

For institutional prime and tax-exempt MMFs, if daily net outflows exceed 5% of the fund’s value, the fund must implement a fee for new redemptions that covers the cost of those redemptions. That rule also required MMFs to hold at least 50% of their assets in weekly liquid assets, up from the previous 30% requirement.

The swing pricing proposal received industry pushback in the past, including from the ICI, which argued that investor dilution was not a genuine risk for mutual fund holders.

Gensler stressed at the ICI Summit that the mutual fund proposal also described “liquidity fees as an alternative” to swing pricing, and expressed regret that commenters did not comment more on that aspect of the proposal. Pan answered that the proposal had “no description on how the fee would operate or what it would look like” and therefore did not see it as the “core” of the proposal or fit for detailed feedback.

Michael Hadley, a partner at Davis & Harman LLP, spoke to this issue of alternatives: “The SEC’s proposal had a few high-level ideas that could be alternatives, but they were not well-formed.  If the SEC is going to suggest an alternative, which I think they should, then it is appropriate to release a new proposal so that the industry can provide meaningful input.”

Gensler said he stands by and is proud of the MMF rule, which takes effect in October, “I think the system will be safer in October.” He added that “we heard from many people not to do swing pricing [for MMFs] and we went with liquidity fees.” The chairman left unsaid if similar popular opposition to swing pricing for mutual funds, including from Democratic members of Congress, would cause a similar response for mutual funds.

Gensler also spoke to mutual funds and liquidity issues at the SEC’s 2024 conference on emerging trends in asset management on May 16. He explained that mutual funds and MMFs present risk to the system because they can be redeemed daily but not everything in their portfolio can, which can be problematic in times of stress and high redemptions.

He then turned to a similar product regulated by banking regulators and not the SEC: collective investment trusts. Gensler expressed concern that “rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, requirement for regular reporting on holdings to investors, or requirement for an independent board.”

He added that “we know from history that financial fires can spread from regulatory gaps, including when regulations don’t treat like activities alike.”

Gensler said that he “asked staff to consult with bank regulators on how to best mitigate for regulatory gaps between collective investment funds and open-end funds.”