Multiple retirement industry houses have released comments strictly opposing the Securities and Exchange Commission’s (SEC) proposal on mandatory swing pricing for open-end funds.
The SEC’s proposal would change open-end liquidity risk management programs to require swing pricing on the funds, and would mandate open-end funds to establish new minimum standards for classification analyses, adding that such procedures and processes would “better prepare open-end funds for stressed conditions” and “mitigate dilution of shareholders’ interest,” according to the SEC.
Several organizations have come out against the SEC’s proposal since its introduction. The ERISA Industry Committee (ERIC) submitted comments opposing the plan, arguing that it could disturb already-implemented retirement plan processes.
“While the SEC does not typically regulate private-sector retirement plans, its rules can significantly disrupt the operations of plans that provide benefits to millions of Americans,” said Andy Banducci, ERIC senior vice president of Retirement and Compensation Policy, in a statement.
Controversial timing restriction
ERIC explains the amendment would require retirement plan recordkeepers to create earlier times for plan participants to submit orders due to the proposed “hard close” that would halt orders at 4 p.m. ET. With this change, investor orders would need to be received by the fund, its transfer agent, or a registered clearing agency by the time of the fund’s pricing in order to obtain the day’s price.
In its comments, ERIC states this would put participants at a disadvantage in the marketplace and says the timing mandates would require expensive changes to technology already used.
“The SEC should abandon its ill-considered proposal because it would hurt workers and retirees that participate in 401(k) plans,” said Banducci. “To implement it, employers and service providers would need to make costly changes and plan participants would have to submit orders earlier than others in the marketplace.”
Similarly, the Investment Company Institute (ICI) issued several statements denouncing the amendment, emphasizing how the proposed time restrictions would severely impact retirement plans.
“This is a dramatic change,” said ICI President and CEO Eric Pan, in a statement. “It will require intermediaries like brokers and retirement plans to institute cut-off times well before the market closes at 4 p.m. in New York, even at times as early as 7 a.m. on the West Coast—meaning that mutual fund investors will lose full access to trading at today’s price during normal market hours.”
In his comments, Pan accuses the SEC of failing to realize the impact such a restriction would have on investors, and whether the change would benefit funds.
“The SEC already has a mandatory liquidity risk management rule and an optional swing pricing rule on the books,” Pan continued. “The SEC has failed to demonstrate that the enormous changes they are contemplating, including the 4 p.m. hard close, would be beneficial to investors. Similarly, the agency has not fairly analyzed whether the changes would be workable for funds, given that they would require a complete overhaul of operational systems and the conscription of thousands of fund staff. The hard close would be particularly harmful to retirement savers, since we know that 61% of 401(k) plan assets are held in mutual funds.”
“Favors Wall Street investors over Main Street investors”
In a letter to the SEC, the SPARK Institute outlined four negative outcomes that would occur if the SEC’s proposal was implemented, claiming that the change would favor Wall Street investors over Main Street investors; make everyday retirement plan transactions—such as purchases, loans, and required minimum distributions (RMDs)—extensively difficult to execute; undermine the open investment architecture system created for retirement investors; and erode retirement savers’ confidence in the system.
“This proposal establishes an order for processing trades, with large institutional investors going first and everyone else going second,” said Tim Rouse, executive director of SPARK, in a statement. “This would mean retirement savers will have much earlier trade processing cut-offs. And it’s likely that their trades will end up getting delayed by a full day. This will disadvantage – and confuse – many retirement investors who rely on prompt and transparent account transactions.”
In its written comments, the Insured Retirement Institute (IRI) urged the SEC to withdraw the proposed rule and abandon any further rulemaking, adding that it would have “profound and adverse impacts on investors and their retirement savings,” and especially for middle-class Americans dependent on the process.
“Adoption of a rule that would have such an effect would be inconsistent and incompatible with the SEC’s published mission of ‘protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation,’ and ‘… protecting Main Street investors and others who rely on our markets to secure their financial futures,” the IRI wrote.
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
