Industry Groups to SEC: Kill ‘Hard Close’ Proposal That Could Hurt 401(k) Savers

Retirement fund managers, small-investor advocates, and plan sponsors are having a very hard time with the Securities and Exchange Commission’s (SEC’s) hard close proposal.

The proposal was unveiled by the SEC last fall. The comment period ended February 14, and the comments did indeed pour in.

In essence, the commission’s “swing price/hard close” proposal, which was first introduced 20 years ago, is designed to bring order to potentially disorderly investor responses to an economic earthquake. Opponents say it gives large investors yet another advantage over “mainstream” investors without really fixing an existing problem.

Aimed at investment platforms that manage multiple trades for various investment firms (Fidelity, Vanguard, T. Rowe Price, etc.), the proposal incorporates swing pricing into the trading process when triggered by certain actions, combined with a hard closing time on pricing (generally 4 p.m. on a trading day). Trades not registered by the hard close would be valued at the next trading day’s price. (Swing pricing, designed to protect existing investors in a fund from the costs incurred when other investors buy or sell units in that fund, works by adjusting the net asset value of the fund, or the price at which investors buy and sell shares in the fund.)

For plan sponsors that offer 401(k)s, this could lead to significant transactional costs that currently do not exist, say the proposal’s critics. The winners are institutional investors and large-scale traders; individual savers stashing money for retirement would bear the burden of the proposal.

Under the existing rules, intermediary platform managers often wrap up trading after the 4 p.m. market close—but they get the closing price for that day for the transactions. Under the proposed rule, some pricing might be delayed for more than a day as the processing continues, thus undermining efforts by fund managers to capture a certain price.

Several retirement plan and financial services advocacy organizations submitted comment letters with concerns. In a letter to the SEC regarding the proposal, Tim Rouse, executive director of the SPARK Institute, said the real flaw in the proposal is the hard close, not the swing pricing.

“If the Commission implements a hard close requirement, the millions of retirement plan participants who own mutual funds through their retirement accounts would be reduced to ‘second-class’ investors,” according to Rouse. “A hard close would disadvantage retirement savers by forcing them out of the market early in the day, reducing the information they have available to make investment decisions and forcing them to shoulder the extreme costs of reconfiguring the existing 401(k) trade processing system.

“Because retirement plans are major investors in mutual funds, the implementation of a hard close would have extensive negative impacts. A hard close would force an early cutoff time on retirement plan participants. A hard close would create a two-tier system—one for those who directly invest with a mutual fund, and another for those that invest through intermediaries, such as the typical retirement plan participant—that disadvantages the latter group by cutting them off from market participation much earlier in the day,” Rouse wrote.

Others submitted similar objections to the hard close.

The American Society of Pension Professionals and Actuaries wrote: “Among the provisions of this requirement is that an order to purchase or redeem a fund’s shares would be executed at the current day’s price only if the fund, its designated transfer agent, or a registered securities clearing agency receives the order BEFORE the pricing time as of which the fund calculates its net asset value (NAV). That would be a significant change from current practices that permit that receipt by a qualifying intermediary—like a recordkeeper. Little wonder that the Investment Company Institute (ICI) cautioned that the “SEC’s proposed ‘hard close’ … is likely to make it impossible for 401(k) plans to place trade orders for their participants.” Well, certainly not at the market close timing currently employed by most.

In a letter sent to the SEC on February 14, the Consumer Federation of America (CFA) wrote: “The proposed hard close would create a two-tier market, putting investors who are able to structure their transactions so as to secure same-day pricing at an advantage relative to those who are unable to structure their transactions so as to secure same-day pricing. In so doing, sophisticated investors who are able to secure same-day pricing would continue to have an incentive to exercise a first-mover advantage, which would unfairly impose their trading costs and dilutionary behavior on other, less sophisticated investors.”

The rule, the CFA said, “would intensify disparities between more sophisticated and less sophisticated investors, to the detriment of market integrity and investor protection, and be particularly detrimental to retail investors saving for a secure and dignified retirement.”

The SEC did not respond to efforts by SPARK and other organizations opposed to the hard close to discuss the proposal, Rouse said.

In an interview, Rouse said the swing pricing aspect of the proposal wasn’t particularly onerous. But coupled with the hard close, it represents a major shift for investors and fund managers. “It’s really the hard close that has the biggest impact, because it turns mainstream investors into second-class citizens. Plan sponsors generally manage members’ retirement funds through an intermediary platform, while large investors do their trading through proprietary platforms. The proprietary investors would get the day’s price, while the intermediary investor would not. It starts to undermine the confidence the investor has in the system.”

Rouse is hopeful that the comments submitted by opponents will convince the SEC to at least deep-freeze the proposal for now.

From: BenefitsPRO