K&L Gates on Swing Pricing Proposal
K&L Gates recently published a "U.S. Asset Management and Investment Funds Alert," entitled, "SEC Proposes Swing Pricing for Institutional Money Market Funds." It explains, "On 15 December 2021, the Securities and Exchange Commission proposed amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, which governs the structure and operation of money market funds. One key element of the Proposed Rule is a requirement that institutional prime and institutional tax-exempt money market funds (Institutional MMFs) adopt swing pricing policies so that redeeming investors bear the liquidity costs of their redemptions. The Proposed Rule reflects the SEC's concern over market stresses experienced in response to the Covid-19 Pandemic in March 2020 and it is the SEC's belief that such measures will improve the resiliency of Institutional MMFs." The update continues, "Swing pricing is a process of adjusting a fund's current net asset value (NAV) such that the transaction price effectively passes on costs stemming from shareholder redemptions to redeeming shareholders. As the SEC notes in its proposing release, fund trading activity associated with meeting redemptions may impose costs, including trading costs and costs associated with depleting a fund's daily or weekly liquid assets. These costs are currently borne by the remaining investors in the fund, diluting these investors' interests in the fund. In the SEC's view, this potential for dilution can create incentives for shareholders to redeem quickly to avoid losses, particularly in times of market stress." It adds, "The SEC now proposes to require Institutional MMFs to adopt swing pricing policies and procedures to adjust a fund's current NAV per share by a 'swing factor,' which would be expressed as a percentage discount to a fund's NAV. Swing pricing policies and procedures would have to be approved by a majority of the fund's independent directors and reviewed annually. The swing factor would be implemented by a board-designated 'swing pricing administrator' who must be reasonably segregated from the portfolio management of the Institutional MMF and make annual reports to the board.... The swing pricing administrator would also be responsible for the Proposed Rule's record keeping requirements.... Finally, each Institutional MMF would be required to report, in its Form N-MFP filing, the number of times the fund applied a swing factor over the course of the reporting period, and each swing factor applied. In any event, swing pricing, if implemented, will likely result in fundamental changes to the operations and services provided by Institutional MMFs. Most notably, as the ICI stated in its response to the White Paper, swing pricing would present significant operational hurdles to Institutional MMFs being able to continue to offer multiple settlements per day and same-day settlement. A comprehensive overview of the broader impacts of the Proposed Rule on MMFs can be found in our prior client alert entitled 'SEC Proposes Another Round of Money Market Fund Reforms that was published on 17 December 2021."
