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Asset managers are warning that proposals to tighten new liquidity requirements and pricing methods for US mutual funds will drive away investors, reduce choice and hasten the demise of an investment vehicle that underpins American retirement savings.
The US Securities and Exchange Commission first proposed last year that funds be required to hold enough “highly liquid securities” to cope with losing 10 per cent of their assets in a day and to use a method called “swing pricing”.
The agency said market ructions at the start of the Covid-19 pandemic showed that tougher rules were needed to protect buy-and-hold investors from losses when other traders flood into or out of a particular fund.
But industry groups have recently redoubled efforts to persuade the watchdog to change its plans, saying the details would drag down overall returns and force funds that hold loans and other less liquid assets to close down completely. The swing pricing proposal would disadvantage investors who purchase mutual funds through their retirement plans, they argue.
Commissioners and SEC staff have publicly disclosed having 16 meetings with investors, providers and lobbyists about the proposal since September. A bipartisan congressional group including both the chair and ranking minority member of the House subcommittee on capital markets has asked the SEC to withdraw it. The SEC has also received more than 3,000 comment letters, mostly in opposition.
“The proposal would dramatically decrease the appeal of mutual funds for individual investors, particularly for retirement savers. The result is likely to be a significant decline in mutual fund usage,” wrote Rick Wurster, president of Charles Schwab, the broker and mutual fund sponsor. “It is not hyperbole to say that this proposal will completely reshape the fund landscape.”
Even some investor advocacy groups are leery of parts of the plan. Better Markets, a financial reform organisation, supports the liquidity requirements but wrote in a comment letter that the SEC should “consider alternative methods” to swing pricing.
The industry has fought off earlier efforts to impose swing pricing, which requires funds to take into account the day’s flows before setting the price at which trades in and out are settled. That would require the imposition of a “hard close” that would force retirement plan sponsors to put through trades during market hours rather than giving them extra time to match trades internally and put through the total at the end of the day.
“Put simply, the proposal’s swing pricing/hard close framework is not viable,” Ken Bentsen, chief executive of Sifma, the securities industry lobbyist, recently wrote to the SEC. He noted that the commission backed off a similar plan to impose swing pricing on money market funds earlier this year and recommended a similar course of action.
Industry participants have high hopes that the SEC will at least make some modifications to the proposal when it takes it up in the new year. They said that both the staff and commission members have expressed interest in alternatives during meetings.
The SEC first imposed liquidity requirements on funds in 2016, but its examination staff warned in 2021 that they had found “deficiencies” in the oversight of liquidity management programmes.
The commission is now proposing to tighten the rules with a 10 per cent liquid assets requirement and a broader definition of “illiquid assets” that would subject more types of securities to a 15 per cent cap on such assets. Asset managers contend that this will drag down returns and force the closure of retail funds that buy bank loans.
“This would disrupt funds’ abilities to pursue their investment objectives and potentially harm fund performance,” the Investment Company Institute, which lobbies for fund managers, wrote.
But consumer groups argue that any drag on returns is far outweighed by the potential losses from rapid outflows that can lead to fire sales. “The 10 per cent highly liquid investment minimum is necessary because managers currently have too much discretion and take advantage of that discretion,” said Better Markets legal director Stephen Hall. “These rules should make mutual funds more attractive by making them more resilient during times of stress.”
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