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February 16, 2023

SEC Proposal Would Promote the Stability of Mutual Funds, While Raising Some Implementation Concerns

Better Markets filed a comment letter with the Securities and Exchange Commission (SEC) in response to the agency’s proposed rule to strengthen liquidity risk management programs for open-end funds and implement swing pricing.

Why It Matters. 

With $34 trillion in assets, the open-ends fund industry plays an important role in the U.S. capital markets and the overall economy. They must be resilient, but recent events proved that these funds can be subject to bank-like runs during periods of market stress, which can cause financial instability and investor harm. Those events also made clear that the existing liquidity requirements are not tough enough to ensure funds can meet redemption demand during periods of stress without suffering significant declines in share values.

What We Said. 

The proposal would help ensure that a greater percentage of the assets held by mutual funds are truly liquid. To address the fairness problem, the proposal would require funds to adjust their share price or NAV by a certain amount, known as the ‘swing factor,’ when funds experience high levels of net inflows or outflows.  That means, for example, that investors cashing out would get a share price adjusted to account for the costs and changes in asset values that remaining investors must shoulder.  To operationalize such swing pricing, the proposal would require funds to adopt a ‘hard close’ or firm deadline for all orders to buy or sell shares.  These provisions pose special implementation challenges and might actually create unfairness for some investors.

Bottom Line. 

As we argue in our comment letter, the SEC should finalize the liquidity provisions without delay but take more time to consider alternative methods for ensuring that the costs and asset price changes arising from large numbers of purchases and redemptions are allocated fairly among investors.

Read our full Comment Letter here or click the button below.

Comment Letters

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