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Sept. 22 — Mutual fund investors could face increased costs if they hurry to cash in their accounts during market stress or volatility, under a rule proposed Sept. 22 by the SEC.
The commission voted 5-0 to propose a “swing pricing” rule that would allow funds to adjust their net asset value to account for the costs of providing liquidity. If a fund adjusts its NAV, investors could receive less than the fund’s actual closing price upon redeeming their shares during a run.
The proposal also requires mutual funds and exchange-traded funds to create liquidity risk management programs, under which they would have to classify and periodically review the liquidity risk of their fund products.
Swing pricing and liquidity risk management represent the second of five measures outlined by Chairman Mary Jo White in December to improve agency oversight of the asset management industry.
The first proposal, in May, dealt with new data collection and disclosure requirements.
Rules on funds' use of derivatives, transition plans and stress tests are still to come. The derivatives rule would be proposed by the end of the year, White said.
By then, the SEC will consider “measures to appropriately limit the leverage these instruments may create and enhance risk management programs for such activities,” she said at the Sept. 22 open meeting.
According to Investment Company Institute data, the mutual-fund industry had nearly $16 trillion in assets under management at the end of 2014.
In classifying the liquidity risks, the proposal would require companies to consider, among other factors, the fund's activity, trading volume, bid/ask spreads, volatility, structure and relationship to other funds.
They also would have to determine what minimum percentage of their funds would have to be held in cash, or assets that could be turned into cash within three days, in order to not significantly affect the value of the fund.
Commissioner Michael Piwowar said he would prefer a seven-day rule, similar to the requirement for fund payouts under the 1940 Investment Company Act, to the three-day proposal.
SEC staff said the swing pricing proposal would provide a way for funds to account for increased transaction costs during times of additional redemptions by passing some of those costs to exiting investors, rather than having remaining shareholders bear them. Some foreign funds already use swing pricing.
Individual fund boards could define the particular market conditions that would trigger the swing pricing.
“As proposed, funds opting to engage in swing pricing would be required to set one threshold that would apply equally to both net redemptions and net purchases,” Commissioner Daniel Gallagher said, in what is likely his final open meeting as a commissioner. “Thus, if the applicable threshold is met because of trading by a large institutional investor, a small investor that had the unfortunate luck to trade in the same direction as the institutional investor that day would likewise bear the impact from the amended price.”
Gallagher said he would leave the agency by Oct. 2.
Public comments will be accepted for the proposal for 90 days after it appears in the Federal Register.
“Today’s proposal raises a number of complex issues for funds, their directors, and their investors,” Paul Schott Stevens, president and chief executive officer of the Investment Company Institute, said in a news release. “We look forward to engaging with the SEC to ensure that any final rules in this area are well-founded, practicable, and effective.”
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For the proposal, visit https://www.sec.gov/rules/proposed/2015/33-9922.pdf
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