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Asset Managers Raise Concerns Over SEC's Proposed Mutual Fund Regulations

Asset managers are sounding the alarm over proposed regulatory changes by the US Securities and Exchange Commission (SEC) that aim to tighten liquidity requirements and pricing methods for US mutual funds. The SEC's initial proposal, put forth last year, suggests that funds should be mandated to maintain enough "highly liquid securities" to withstand a 10% loss of assets in a single day. Additionally, the proposal recommends the adoption of a method called "swing pricing." The SEC's rationale for these measures stems from the market disruptions witnessed at the onset of the Covid-19 pandemic, indicating a need for stricter rules to shield buy-and-hold investors from potential losses when significant fluctuations occur.

However, industry groups have intensified efforts to persuade the SEC to reconsider its plans, arguing that the proposed details could result in diminished overall returns and potentially force the closure of funds holding less liquid assets such as loans. One contentious aspect of the proposal is the swing pricing mechanism, which some argue would disadvantage investors who purchase mutual funds through retirement plans. The industry has successfully resisted previous attempts to impose swing pricing, which entails funds considering the day's flows before settling trade prices, leading to a "hard close." This hard close would necessitate retirement plan sponsors to execute trades during market hours rather than having additional time to match trades internally and process them at the end of the day.

The SEC has faced significant opposition to its proposal, with a bipartisan congressional group, including the chair and ranking minority member of the House subcommittee on capital markets, urging the regulatory body to withdraw the plan. Commissioners and SEC staff have engaged in 16 meetings with investors, providers, and lobbyists since September, and the SEC has received over 3,000 comment letters, primarily expressing opposition.

Rick Wurster, President of Charles Schwab, warns that the proposal could significantly decrease the appeal of mutual funds for individual investors, particularly those saving for retirement, potentially reshaping the fund landscape. Even investor advocacy groups such as Better Markets, while supporting liquidity requirements, have expressed reservations about certain aspects of the plan, suggesting the SEC consider alternative methods to swing pricing.

Despite the opposition, the SEC is yet to make a final decision. Industry participants remain hopeful that the SEC will incorporate modifications into the proposal when it is taken up in the new year. The industry contends that the SEC's proposed liquidity requirements, introduced in 2016, and the current proposal to tighten these rules with a 10% liquid assets requirement and a broader definition of "illiquid assets," could lead to reduced returns and the closure of retail funds investing in assets like bank loans. Consumer groups argue that any drag on returns is outweighed by the potential losses from rapid outflows, making the proposed rules essential to enhancing the resilience of mutual funds during times of market stress.



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