On June 28, Sen. Bill Cassidy (R-LA), ranking member of the Senate Health, Education, Labor, and Pensions (HELP) Committee, and Rep. Virginia Foxx (R-NC), chairwoman of the House Education and the Workforce Committee, criticized the Biden administration’s hard close proposed rule that they said “limits Americans’ ability to trade in mutual funds, threatening millions of retirement plans.”
“We write to express our strong opposition to the Securities and Exchange Commission’s (SEC) proposed rule, which could have devastating consequences for millions of America’s retirement savers,” the lawmakers wrote in a letter to SEC Chairman Gary Gensler. “The proposed rule is intended to provide additional safeguards to prepare for stressed market conditions. However, we are concerned that the harm the proposed rule would cause to the retirement savings of American workers far outweighs any benefits.”
It’s the latest move in what is increasingly bipartisan opposition to both swing pricing and the hard close, with Democrat lawmakers joining their Republican counterparts in sharing their concerns.
More specifically, Rep. Brad Sherman (D-CA) expressed his worries in a June 22 Financial Services Committee Subcommittee on Capital Markets hearing. He said the rules would discriminate against West Coast and Hawaiian Island investors due to their different time zones.
“I am concerned about one SEC proposal, and that is swing pricing,” Sherman said in an opening statement at the hearing chaired by Rep. Ann Wagner (R-MO).
“There are those that say that if we just, at certain times, tell mutual fund investors, that ‘The markets are unsteady, we may have a disaster, therefore please don’t sell your mutual fund shares, and if you do, you’re going to be subject to an additional charge.’ That is like telling people on the Titanic they’ll be an extra couple of hundred-dollar fee for getting in the lifeboat. That is not the way to get people calmly into the lifeboats.”
The proposal would require open-end funds to use “swing pricing,” the method to allocate costs from inflows or outflows to the investors engaged in that activity, rather than diluting other shareholders. The proposal would also require a daily 4 p.m. ET “hard close” for relevant funds.
Claiming people need to save for their retirements and “build America by investing in mutual funds,” Sherman argued swing pricing would do the opposite.
“I’m particularly concerned about the swing pricing rule because of its horrendous effect on those of us living by the Pacific Ocean,” he added. “People would have to get their orders in by 10:00 a.m. eastern time. That’s 7:00 a.m. in California and 4:00 a.m. in Hawaii. Let’s not adopt a rule that says that those of us who live by the Pacific will be treated worse.”
His comments came on the heels of the House Appropriations Committee June 21 release of the Fiscal Year 2024 bill for the Financial Services and General Government Subcommittee. The next day, it was sent for markup and specifically included language prohibiting the SEC’s proposed rulemaking on swing pricing.
American Retirement Association Weighs in
At the direct request of the American Retirement Association, Sherman and Wagner sent a letter to SEC Chairman Gary Gensler in March expressing similar sentiments, writing, “If finalized, the rule could upend mutual fund operations and create a system where shareholders are denied a safe, secure retirement option that has existed for almost 100 years.”
“The ARA doesn’t support the SEC’s proposal and submitted its own comment letter to that effect in February,” Allison Wielobob, General Counsel of the American Retirement Association, said. “We think that any solution for potential dilution problems and allocation of transaction costs in open-end funds should not un-level the playing field for millions of American families who own those funds through their employer-sponsored defined contribution plans or materially disadvantage or harm this important group.”
She argued that the proposal does not make for good retirement policy, and it effectively places retirement plan participants in the position of bystanders that facilitate the Commission’s goals relating to swing pricing.
“The SEC acknowledged that, under the proposal, retirement plan recordkeepers, indeed many market intermediaries, would need to make significant changes to their business practices and that recordkeepers would face particular challenges,” she concluded. “All that said, it is unfortunate that the solution Congress seems to be considering is blunt—blocking an appropriation to the SEC for implementing and enforcing the proposal.”
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