The market disruptions of March 2020 reinforced the fact that liquidity can deteriorate rapidly, the SEC said.
“In times of stress, when many investors may redeem their shares in a fund at once, a fund might need to sell less-liquid securities quickly to generate cash,” SEC Chair Gary Gensler said. “When done in volume, this can raise issues for investor protection, our capital markets, and the broader economy.”
The proposal, if adopted, would require mutual funds, and some exchange-traded funds, to ensure that at least 10% of their net assets are highly liquid.
The new rules would also require a hard daily closing time for mutual funds, and the use of “swing pricing,” which involves adjusting a fund’s value in line with trading activity so redeeming investors bear the costs of exiting without diluting remaining investors.
The proposal could have a big impact on how retirement savings are handled. Mutual funds managed $4.1 trillion, or 63%, of assets held in 401(k) plans at the end of June, as well as $5.1 trillion, or 43%, of IRA assets, according to the Investment Company Institute.
Asset managers have pushed back against an SEC proposal from December that would implement swing pricing for money market funds, arguing it would be operationally challenging, impose excessive costs on fund sponsors, and reduce daily liquidity for investors, potentially killing off some popular products.
Separately, the SEC voted 3-2 in favor of adopting new rules aimed at enhancing the reporting of proxy votes by registered management investment companies and the reporting of executive compensation votes by institutional investment managers.
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