The SEC expected the intense criticism it received after proposing to make swing pricing mandatory for open-end funds and understood much of the justification for that opposition, a senior SEC staffer admitted during a panel discussion today.
“We got a lot of vitriol, some of which was deserved,” Sarah ten Siethoff, deputy director and associate director for rulemaking in the SEC’s Div. of Investment Management (DIM) said during a March 18 panel session at an Investment Company Institute (ICI) conference in Palm Desert, Calif. “The infrastructure in the U.S. is just in the state it is that makes swing pricing very challenging.”
The SEC made the proposal fully aware from the industry’s past rejection of swing pricing that it would be unpopular, she said.
“We knew going in that swing pricing was going to get exactly the reception it did for exactly the reasons it did,” ten Siethoff said.
Swing pricing is one of several controversial requirements of a liquidity risk-management rule the SEC proposed in November 2022. Critics warned at the time that mandating swing pricing, instituting a hard close for affected funds and changing liquidity categorization criteria would create widespread operational challenges for funds, increase costs and put many shareholders at a disadvantage, all without solving the liquidity management issue the rule was proposed to address.
Opposition to the rule was so intense it inspired an unprecedented uprising by fund boards concerned about the negative impact on shareholders and created such anxiety among investment companies that discussion of its impact dominated discussions at the same ICI conference last year, which helped inspire ICI and other adviser-advocacy associations to a far more active opposition of both the swing-pricing rule and much of the rest of what critics call and overly aggressive regulatory agenda from the SEC.
SEC chair Gary Gensler rejected industry objections during a tense exchange with ICI president Eric Pan at a conference in April of last year, but signed off on the SEC’s decision to withdraw swing-pricing requirements from a similar rule aimed at money-market funds that the SEC approved in July 2023.
The concession gave hope to sponsors of open-end funds, but there has been no indication from Gensler or other SEC officials whether it would be pulled before the liquidity risk-management rule comes up for a final vote tentatively scheduled for later this year.
“People should never think any particular thing we do in one spot is going to mean that we’ll take a rinse-and-repeat approach to something else,” ten Siethoff said shortly after describing systemic difficulties with the swing-pricing requirement.
“I’d be remiss if I didn’t say here that we understand that money-market funds and open-ended funds are not the same thing and the lessons we take away differ in a lot of ways,” she said.
While the SEC needed to reconsider the swing pricing aspect of its proposal, the broader goal of modernizing US market infrastructure is still worthwhile, ten Siethoff argued.
“There are a lot of antiquated systems, probably following mergers and whatnot over the years and different products – retirement products, exchange traded, non-exchange-traded products, CITs and all these systems – that don’t talk to each other,” ten Siethoff said. “It would be better for resiliency in the markets; it would be better for investors.” Swing pricing and the technical difficulty of implementing it are far from the only problems with the liquidity risk-management proposal, however, according to Dalia Blass, partner at Sullivan & Cromwell LLP and former director of the DIM.
