SEC Chairman Gary Gensler defended the agency's swing pricing proposal and reach of its regulatory agenda at the Investment Company Institute Leadership Summit Thursday.
Swing pricing adjusts a fund's value based on trading activity, so redeeming shareholders bear the costs of transactions, rather than diluting other shareholders. Issued in November, the SEC's proposal would require any open-end fund — other than a money market fund or exchange-traded fund — to use swing pricing.
When ICI President and CEO Eric Pan asked Mr. Gensler whether the proposal is meant to address dilution or financial stability, Mr. Gensler replied, "I think that they're intertwined."
"Dilution and liquidity are key to investor protection," Mr. Gensler added, who spoke at the conference via video call. "And that's key to investor protection in terms of just those daily redemptions, but also in times of stress."
The SEC's swing pricing proposal is one of several recent proposals from the agency that has received substantial pushback in industry comment letters, including one from ICI.
In a Feb. 14 news release, Mr. Pan said of the proposal: "The (SEC) presents scant evidence of a real problem to solve. ICI estimates that daily dilution for U.S. mutual funds is on average far too small — typically just hundredths or tenths of a basis point per day — to incentivize shareholders to redeem heavily, contrary to what the commission assumes."
Mr. Pan brought this up Thursday, asking, "Is the dilution quantity of such a size to have the effect that you're worried about?"
Mr. Gensler replied, "I don't know, ask your members that were making those phone calls in 2020," referring to what he said were several phone calls to the SEC and the Federal Reserve from those in the investor community, asking for help with dilution.
Mr. Gensler also defended the SEC's regulatory agenda, which some industry leaders and commissioners themselves have expressed concern about being too aggressive and extensive.
"It's really about the investor protection," Mr. Gensler said, contending that market intermediaries should work for the benefit of issuers and investors, and not the other way around.
"Our clients are different, Eric, than yours or the other trade associations' clients," Mr. Gensler told Mr. Pan. "It's just natural there's going to be some comments that come in, because our clients are 334 million Americans."
He also said the 50 or so proposals the agency has put out so far are on par with his predecessor, former Chairman Jay Clayton, and the SEC "greatly (benefits) from the comments" provided to them, including comments that come in after the traditional 60-day comment period.
In a huddle with reporters after interviewing Mr. Gensler, Mr. Pan took issue with the characterization that the SEC and ICI members have different constituencies. "It's incorrect for him to suggest that somehow he's looking out for Americans, and the industry somehow is not; that we're completely in a different place," Mr. Pan said.
If the SEC under Mr. Gensler implements rules that hurt the fund industry, investors will be hurt, Mr. Pan added.
