Kristen Malinconico
Director, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce


December 12, 2022


Millions of Americans rely on 401(k) and IRA accounts to save for retirement and protect their long-term financial security. The most common investment type trusted by Americans is the mutual fund, which allows investors to easily diversify their investments. Despite the success of mutual funds in helping hardworking Americans to save for retirement, the Securities and Exchange Commission (SEC) is seeking to drastically change how these funds operate in ways that would result in higher costs and lower returns for investors.

In early November, the SEC issued a proposal with the stated goal of protecting mutual fund investors from risk in times of market stress. Among the many far-reaching amendments under consideration, the SEC argues that swing pricing and a ‘hard close’ on trades can protect investors from runs in the market and more equitably share the burden of costs associated with withdrawals from mutual funds. While these appear at first glance as admirable goals, the truth is these proposals could ultimately end up hurting retirees.

Swing pricing is a method of fund management in which managers adjust the net asset value of shares during times of net redemptions or purchases so that additional costs are passed on to the transacting investors without diluting remaining shareholders. By making it more costly to redeem shares, the SEC argues that swing pricing will prevent mutual funds from facing a liquidity crisis because investors will be disincentivized from withdrawing. The SEC also proposes a 4pm ‘hard close’ on trades, which will cut off investors’ trading earlier than under current conditions so that funds can make the necessary daily calculations to determine if swing pricing must be incorporated.

The proposal is yet another example of the SEC presenting a solution in search of a problem. Although the SEC points to the economic stress brought on by the COVID-19 pandemic in early 2020, the Commission does not present any evidence that swing pricing could have protected any mutual fund investors in March 2020 or would do so in any times of market stress that may occur in the future. Further, swing pricing would be technically challenging for funds to implement in the U.S; however, the SEC overlooks the important differences in market structure when asserting that European funds may occasionally use the mechanism.

The adoption of swing pricing would result in significant costs being passed on to fund investors. During the public release of the proposal, the SEC noted that investors would not only bear the costs associated with the ‘hard close,’ but it expected that the return on some funds could be reduced because funds would also be required to hold more liquid assets 

At a time when retirees are particularly vulnerable due to persistent inflation and economic uncertainty, it is deeply troubling that the SEC is attempting to force investors to absorb additional costs, navigate new transaction timeframes, and sacrifice their investment returns.

About the authors

Kristen Malinconico

Kristen Malinconico

Director, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce

Kristen Malinconico is a Director for the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. She leads the Center’s portfolios for asset management, derivatives, and fiduciary issues.

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