The SEC voted to adopt rule changes under the Investment Company Act that (i) expand the required reporting and disclosure of information by registered investment companies, (ii) impose additional liquidity risk requirements by open-end funds, such as mutual funds and exchange-traded funds and (iii) permit mutual funds to use "swing pricing" (which allows funds to redeem investors at prices that are lower than the going market value of funds' assets under certain circumstances). SEC Chair Mary Jo White emphasized the benefits of the final rules:
These new rules represent a sweeping change for the industry by requiring strong transparency provisions and enhanced investor protections. Funds will more effectively manage liquidity risk and both Commission staff and investors will receive additional and better quality information about fund holdings.
The SEC announced that most funds will be required to file reports on new Forms N-PORT and N-CEN after June 1, 2018, but fund complexes with less than $1 billion in net assets will be required to file reports on Form N-PORT after June 1, 2019. The SEC stated that most funds will be required to comply with the liquidity risk management program requirements on December 1, 2018. Fund complexes with less than $1 billion in net assets will be required to comply on June 1, 2019.
Further, the SEC clarified effective dates related to amendments on swing pricing. The SEC explained that swing pricing is the "process of adjusting a fund's net asset value per share [in order] to pass on to purchasing or redeeming shareholders certain of the costs associated with their trading activity." Subject to certain conditions, the final amendments permit open-end funds (with the exception of money market or exchange-traded funds) to use swing pricing. The SEC stated that it is delaying the effective date of amendments that would permit funds to use swing pricing; they will become effective 24 months after publication in the Federal Register. The form amendments' compliance dates will differ depending on the form.
Commentary / Steven Lofchie
The adopted rules may provide some benefits, but whether those benefits will be substantial is far from clear. The increased reporting requirements now inflicted on SEC-registered investment companies seem more problematic than beneficial. Before it imposed new rules, the SEC should have corrected the material deficiencies in its reporting requirements for private funds (Form PF), which in its current format produces vast amounts of useless information.
Swing pricing is also a rule change that may not produce the benefits anticipated by the SEC. For example, some managers of SEC-registered investment companies might announce that they will not use swing pricing. Institutional investors might prefer to invest in such companies' funds instead of trusting the judgment of investment advisers whose incentive will be to use swing pricing to discourage redemptions.
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