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Millions of Americans rely on 401(k) and IRA accounts to save for retirement and protect their long-term financial security. The most common form of investment trusted by Americans is mutual funds, which allow investors to easily diversify their investments. Despite the success of mutual funds in helping hard-working Americans save for retirement, the Securities and Exchange Commission (SEC) wants to dramatically change how these funds operate in ways that result in higher costs and lower returns for investors.
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In early November, the SEC issued a proposal with the goal of protecting mutual fund investors from risk in times of market stress. Among the many far-reaching reforms under consideration, the SEC argues that “stronger convergence” in pricing and trading would prevent investors from running the market and more fairly share the costs associated with exiting mutual funds. While these may seem like wonderful goals at first glance, the reality is that these ideas can ultimately hurt retirees.
Swing pricing is a method of money management in which managers adjust the net asset value of a stock during a net redemption or purchase so that additional costs are passed on to subsequent investors without satisfying the remaining shareholders. By making shares more expensive to redeem, the SEC prevents inflationary mutual funds from facing liquidity problems because investors are prevented from exiting. The SEC is also proposing a 4pm ‘hard close’ on trading, which would currently halt trading for investors to allow funds to make the necessary calculations each day to decide whether to include pricing.
The proposal is another example of the SEC proposing a solution to a problem. Although the SEC pointed to economic stress caused by the Covid-19 pandemic in early 2020, the Commission did not provide any evidence that rates could have protected any mutual fund investors in March 2020 or would have done so during any market stress. It may happen in the future. In addition, pricing for currencies implemented in the US will be technically challenging. However, when the SEC confirms that European funds can occasionally use the method, it considers the important differences in the market structure.
Accepting price swings can result in higher costs for investors in the fund. When the proposal was announced, the SEC stated that investors would only bear the costs associated with ‘heavy close’, but the return of some funds is expected to be reduced because the funds are required to hold more liquid assets.
Especially at a time when retirees are vulnerable to persistent inflation and economic uncertainty, the SEC’s attempts to force investors to take on additional costs, move new trading periods, and sacrifice investment returns is worrisome.
About the authors
Christine Malinconico
Director, Center for Capital Markets Competitiveness, American Chamber of Commerce
Christine Malinconico is director of the Center for Capital Markets Competitiveness at the American Chamber of Commerce. She leads the center’s portfolios for asset management, derivatives and fiduciary matters.
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