Swing Pricing, Predictive Analytics, Safeguarding SEC Proposals to be Re-Proposed

The Securities and Exchange Commission announced in its spring 2024 agenda that it will likely re-propose its swing pricing proposal for open-end funds. According to the agenda, the target for a re-proposal is April 2025, though the timeline is is not binding.

First proposed in November 2022, the proposal would impose mandatory swing pricing on mutual funds. Swing pricing is a 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 featured a hard close of trading at 4 p.m. Eastern time, which widely criticized as inimical to retirement investors and to any investors in other time zones.

The proposal also contained an alternative based on mandatory liquidity fees, which would impose a redemption fee if a certain net redemption threshold is met. This alternative was actually adopted for money market funds in July 2023. The initial MMF proposal also contained a provision on swing pricing that was dropped.

SEC Chairman Gary Gensler indicated at an Investment Company Institute conference in May that the SEC was considering a similar approach for mutual funds.

The SEC wrote in the agenda that “the Division is considering recommending that the Commission re-propose changes to regulatory requirements relating to open-end funds’ liquidity and dilution management.”

Predictive Analytics and Safeguarding

The SEC also announced it is likely to re-propose both the predictive analytics and safeguarding proposals. The target date for both is —October 2024—but is also not binding.

The predictive analytics proposal, proposed in July 2023, would require advisers to eliminate conflicts of interest related to their use of predictive technologies, defined as “analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor.”

Gensler indicated publicly twice in May that a re-proposal would be coming, but he has also indicated that the core purpose of the proposal—to address conflicts in the use of predictive technology—will not be abandoned.

The safeguarding proposal would replace the custody rule. Currently, advisers must keep assets with a qualified custodian if they have the right to obtain or control assets, including to draw from client assets to pay advisory fees. The custody rule applies to most securities.

The new proposal adds to these requirements. The first addition would require investment advisers to follow custody requirements if they have discretionary trading authority, even if they are not able to draw fees from the assets. Second, the proposal would require custodians to segregate client assets so the client is protected if the custodian goes bankrupt.

It would also address all assets, not just securities, including cash held by banks. Perhaps the most common criticism of the proposal is that it would be disruptive to ordinary commercial lending.