Plan Sponsors Could See Effects from SEC Final Liquidity Rule

Stronger liquidity rules for mutual funds and permitting ‘swing pricing’ could help long-term retirement investors.

By Rebecca Moore | October 13, 2016
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The Securities and Exchange Commission (SEC) voted to adopt changes to modernize and enhance the reporting and disclosure of information by registered investment companies and to enhance liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs).

Previously, John Hollyer, global head of Vanguard’s Investment Risk Management Group in Malvern, Pennsylvania, told PLANSPONSOR mutual funds have a very strong track record of managing risk and liquidity. “So you could argue that plan sponsors have been well-served by regulations so far, and … sponsors could benefit from knowing firms have higher standards for risk management,” he said.

However, “If mutual funds were less fully invested in the market because of liquidity requirements, that could be a detriment, particularly to long-term investors,” Hollyer added. And, there could be the potential for increased costs passed to investors by mutual funds.

In order to provide funds with an additional tool to mitigate potential dilution and to manage fund liquidity, the SEC proposed amendments to rule 22c–1 under the Investment Company Act to permit funds—except money market funds and exchange-traded funds (ETFs)—to use ‘‘swing pricing,’’ a process of adjusting the net asset value of a fund’s shares to pass on to purchasing or redeeming shareholders more of the costs associated with their trading activity. Those amendments were adopted by the SEC as well.

Hollyer explained that this means when cash flows in or out rise above a certain threshold, the mutual fund could choose to adjust the cost of the fund that day to account for the number of investors who bought or sold on that day. Long-term investors, such as retirement plan participants, would benefit from this because they would not bear the cost of frequent traders.

NEXT: The changes