Lawmakers from both parties grill SEC official on swing pricing

Lawmakers from both sides of the aisle on Sept. 19 pressed a top Securities and Exchange Commission official to overhaul or scrap the agency's proposal to require open-end funds use swing pricing.

"There may be a role for this swing pricing rule in some narrow, relatively illiquid funds, but when you look across the board, I join with the chairwoman in urging you to substantially modify or abandon this," said Rep. Brad Sherman, D-Calif., ranking member of the House Financial Services Subcommittee on Capital Markets, to William A. Birdthistle, the SEC's investment management division director, during an oversight hearing.

Sherman, Rep. Ann Wagner, R-Mo., the subcommittee's chair, and 36 other colleagues sent a letter Sept. 5 to SEC Chairman Gary Gensler urging him to withdraw the proposal, which was released in November. The proposal has received significant pushback and would require any open-end fund, other than a money market fund or ETF, to use swing pricing, which adjusts a fund's value based on trading activity, so shareholders engaging in transactions bear the costs, rather than diluting other shareholders.

At the hearing Sept. 19, both Republicans and Democrats on the committee voiced concern that the proposal's "hard close" component, which would require funds to receive investor trades by a certain time, typically around 4 p.m. Eastern Time, and execute them at that day's price.

California's Sherman said the hard close would hurt his constituents and others on the West Coast.

Birdthistle said staff are working through the concerns raised by lawmakers and other stakeholders, but said he's not in a position to decide whether to withdraw the proposal.

Following a round of questions from Rep. Erin Houchin, R-Ind., Birdthistle defended the proposal and said the SEC wants to ensure that funds are sufficiently liquid in times of stress. "Generally speaking, the rule is trying to make sure that at any time the promise of open-end funds is honored and people get their money out expeditiously," he said.

Republicans also hammered Birdthistle on the agency's pace of rule-making.

"Since spring 2021, the SEC has proposed over 50 rule-makings without a thorough evaluation of their cumulative effects," Wagner said. "This approach threatens financial market stability and imposes undue burdens on participants and investors."

She added, "The SEC has hastily rolled out a series of interconnected rule proposals in a span of just two-and-a-half years, jeopardizing the integrity of our capital markets and putting investors, especially those saving for retirement, at undue risk. Instead of diligently analyzing how these proposals will impact one another, the commission is neglecting its duty to protect investors and ensure fair markets."

During the hearing, Birdthistle said the SEC conducts an economic review for each rule proposal and considers stakeholder feedback during and after a given proposal's comment period.