July 20, 2023
Hester M. Peirce
Commissioner, U.S. Securities and Exchange Commission
Executive Vice President, Center for Capital Markets Competitiveness (CCMC), U.S. Chamber of Commerce, Executive Vice President, Center for Technology Engagement (C_TEC), U.S. Chamber of Commerce, Executive Vice President, Global Innovation Policy Center (GIPC), U.S. Chamber of Commerce, Senior Advisor to the President and CEO, U.S. Chamber of Commerce
The U.S. Securities and Exchange Commission (SEC)’s proposed swing pricing and hard close rules for mutual funds have raised concerns. The swing pricing fee and 4:00 p.m. transaction closure might negatively impact retirement assets by $32 billion annually — with added $10 billion from implementation costs, according to a recent report commissioned by the U.S. Chamber’s Center for Capital Markets Competitiveness (CCMC). For example, for an individual who invests $25,000, a potential $50,000 loss over 26 years can occur.
Tom Quaadman, executive vice president of the CCMC, sat down with Commissioner Hester M. Peirce of the U.S. Securities and Exchange Commission to discuss the SEC’s swing pricing proposal for open-end funds along with challenges and implications for retirement plans.
Public Feedback Can Impact the Final Decision on Swing Pricing Proposals
Swing pricing was a tool that European countries implemented in the past, and the U.S. financial market has taken a similar route to mirror that of Europe — due to pressure on the SEC from both international markets and federal organizations.
“There's pressure coming internationally for us to do things. And … our capital markets work really well. We have really high [direct] participation by American households in our markets in products like mutual funds,” Peirce said. “We certainly don't want to become a more bank-dependent market, because there's flexibility that comes with the non-bank financial institutions that can take more risk, that are much more nimble, that can disappear when they fail, and not be a problem.”
Bipartisan opposition, including Congressional letters, has questioned the proposal’s impact on vital mutual funds. Additionally, the SEC’s consideration of public comments and recent changes in other rules suggest that feedback will influence the final decision.
“The end result could be hurting the very people that we’re purporting to help. And so it is … very useful to us to hear that feedback,” Peirce continued. “Our staff takes the comment letters very seriously … so I'm sure that you'll see those comment letters affecting the final rule.”
The Swing Pricing Proposal Could Affect Retirement Accounts
When it comes to the cost-benefit analysis of the SEC’s proposed swing pricing rule for open-end funds, many are concerned about the rise in costs and return reduction on retirement accounts. Concerns also arise regarding the theoretical issue of liquidity imbalances in funds due to redemptions, leading to potential future challenges.
“You can end up in a situation where the people who redeem are getting redeemed out of more liquid assets, leaving the less liquid assets in a fund and … then people who come to redeem later could end up posing a problem for the fund,” Peirce explained.
Additional proposals by the SEC include changes to liquidity bucketing. While requiring liquidity risk management programs is largely supported by the public, concerns have been raised about restricting certain strategies and assets for investors.
“It could end up keeping those strategies out of certain investors’ portfolios and that could certainly have consequences on their retirement returns,” Peirce said. “Some commenters have done some interesting analyses of what [this would] actually look like in practice [and] what kinds of securities would be affected.”
Letting the Marketplace Act Without Intervention Can Combat Systemic Risk
Peirce brought up her concerns about the SEC’s role in solving systemic risk, the importance of maintaining market heterogeneity, and the impact of allowing informed individual choices to combat risk.
“I actually don't think we have a systemic risk mandate, and I think there's a reason for that,” Peirce explained. “The capital markets, if they're functioning properly … [are themselves] a way to combat systemic risk, because you have different people making different decisions based on their own needs and … ideas about what's happening in the market.”
Peirce also mentioned a few of the pitfalls of government intervention, including unintended consequences and risk transfer along with the operational complexities of implementing mandates and the potential for disruptions.
“It's not a guarantee that a transition of the kind that we're asking for here would go smoothly,” Peirce noted. “While that might be temporary, [it] also has to be born in mind that we could end up causing massive, massive problems that we didn't expect. And some of that is flowing from the fact that we're trying to do everything so quickly too in terms of implementation periods.”