Investment Company Swing Pricing

Federal RegisterNov 18, 2016

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 270, and 274

[Release Nos. 33-10234; IC-32316; File No. S7-16-15]

RIN 3235-AL61

Investment Company Swing Pricing

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission is adopting amendments to rule 22c-1 under the Investment Company Act to permit a registered open-end management investment company (“open-end fund” or “fund”) (except a money market fund or exchange-traded fund), under certain circumstances, to use “swing pricing,” the process of adjusting the fund's net asset value (“NAV”) per share to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity, and amendments to rule 31a-2 to require funds to preserve certain records related to swing pricing. The Commission is also adopting amendments to Form N-1A and Regulation S-X and a new item in Form N-CEN, all of which address a fund's use of swing pricing.

DATES:

Effective Date:

November 19, 2018.

Compliance Dates:

See section II.C.

FOR FURTHER INFORMATION CONTACT:

Zeena Abdul-Rahman, John Foley, Andrea Ottomanelli Magovern, Naseem Nixon, Amanda Hollander Wagner, Senior Counsels; Thoreau Bartmann, Melissa Gainor, Senior Special Counsels; or Kathleen Joaquin, Senior Financial Analyst, Investment Company Rulemaking Office, at (202) 551-6792; Ryan Moore, Assistant Chief Accountant, or Matt Giordano, Chief Accountant, Office of the Chief Accountant, at (202) 551-6918, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION:

The Securities and Exchange Commission (the “Commission”) is adopting amendments to rules 22c-1 [17 CFR 270.22c-1] and 31a-2 [17 CFR 270.31a-2] under the Investment Company Act of 1940 [15 U.S.C. 80a-1

et seq.

] (“Investment Company Act” or “Act”); amendments to Form N-1A [referenced in 17 CFR 274.11A] under the Investment Company Act and the Securities Act of 1933 (“Securities Act”) [15 U.S.C. 77a

et seq.

]; amendments to Article 6 [17 CFR 210.6-01

et seq.

] of Regulation S-X [17 CFR 210]; and adopting a new item in Form N-CEN [referenced in 17 CFR 274.101] under the Investment Company Act.

Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all references to rules under the Investment Company Act are to Title 17, Part 270 of the Code of Federal Regulations [17 CFR part 270].

Table of Contents

I. Introduction

II. Discussion

A. Swing Pricing

B. Disclosure and Reporting Requirements Regarding Swing Pricing

C. Effective and Compliance Dates

III. Economic Analysis

A. Introduction and Primary Goals of Regulation

B. Economic Baseline

C. Benefits and Costs, and Effects on Efficiency, Competition, and Capital Formation

D. Reasonable Alternatives

IV. Paperwork Reduction Act Analysis

A. Introduction

B. Rule 22c-1

C. Rule 31a-2

D. Form N-CEN

E. Form N-1A

V. Final Regulatory Flexibility Act Analysis

A. Need for the Rule

B. Significant Issues Raised by Public Comment

C. Small Entities Subject to the Rule

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VI. Statutory Authority and Text of Amendments

Text of Rules and Forms

I. Introduction

Avoiding shareholder dilution is a key concern of the Investment Company Act.

In particular, section 22(c) gives the Commission broad powers to regulate the pricing of redeemable securities for the purpose of eliminating or reducing so far as reasonably practicable any dilution of the value of outstanding fund shares.

Under rule 22c-1 under the Investment Company Act, fund shareholders purchase and redeem fund shares at a price based on the current NAV next computed after the receipt of an order to purchase or redeem (the “forward price”).

Forward pricing addresses, in part, the risk of shareholder dilution posed by the “backward pricing” method used by funds prior to the adoption of the forward pricing rule.

However, under rule 22c-1, the NAV price that a purchasing or redeeming shareholder receives when transacting shares typically does not take into account the transaction costs (including trading costs and changes in market prices) that may arise when the fund buys portfolio investments to invest proceeds from purchasing shareholders or sells portfolio investments to meet shareholder redemptions.

See

Investment Trusts and Investment Companies Investment Trusts and Investment Companies: Hearings on S. 3580 before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. (1940), at 37, 137-145 (stating that, among the abuses that served as a backdrop for the Act, were “practices which resulted in substantial dilution of investors' interests”, including backward pricing by fund insiders to increase investment in the fund and thus enhance management fees, but causing dilution of existing investors in the fund).

Section 22(a) of the Act authorizes securities associations registered under section 15A of the Securities Exchange Act of 1934 (the “Exchange Act”) to prescribe rules related to the method of computing purchase and redemption prices of redeemable securities and the minimum time period that must elapse after the sale or issue of such securities before any resale or redemption may occur, for the purpose of “eliminating or reducing so far as reasonably practicable any dilution of the value of other outstanding securities of such company or any other result of such purchase, redemption, or sale which is unfair to holders of such other outstanding securities.”

Section 22(c) of the Act authorizes the Commission to make rules and regulations applicable to registered investment companies and to principal underwriters of, and dealers in, the redeemable securities of any registered investment company, whether or not members of any securities association, to the same extent, covering the same subject matter, and for the accomplishment of the same ends as are prescribed in section 22(a) in respect of the rules which may be made by a registered securities association governing its members.

See

rule 22c-1(a). Prior to adoption of rule 22c-1, investor orders to purchase and redeem could be executed at a price computed before receipt of the order, allowing investors to lock-in a low price in a rising market and a higher price in a falling market. The forward pricing provision of rule 22c-1 was designed to eliminate these trading practices and the dilution to fund shareholders that occurred as a result of backward pricing.

See

Pricing of Redeemable Securities for Distribution, Redemption, and Repurchase, Investment Company Act Release No. 14244 (Nov. 21, 1984) [49 FR 46558 (Nov. 27, 1984)], at text following n.2.

See

Pricing of Redeemable Securities for Distribution, Redemption and Repurchase and Time-Stamping of Orders by Dealers, Investment Company Act Release No. 5519 (Oct. 16, 1968) [33 FR 16331 (Nov. 7, 1968)] (“Rule 22c-1 Adopting Release”), at 2 (“One purpose of [rule 22c-1] is to eliminate or reduce so far as reasonably practicable any dilution of the value of outstanding redeemable securities of registered investment companies through (i) the sale of such securities at a price below their net asset value or (ii) the redemption or repurchase of such securities at a price above their net asset value. Dilution through the sale of redeemable securities at a price below their net asset value may occur, for example, through the practice of selling securities for a certain period of time at a price based upon a previously established net asset value. This practice permits a potential investor to take advantage of an upswing in the market and an accompanying increase in the net asset value of investment company shares by purchasing such shares at a price which does not reflect the increase.”).

See

Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment

Period for Investment Company Reporting Modernization Release, Investment Company Act Release No. 31835 (Sept. 22, 2015) [80 FR 62273 (Oct. 15, 2015)] (“Proposing Release”), at section III.F, 184-187. However, going forward, in a fund that swing prices, the NAV of the fund would reflect such costs, which would be borne by redeeming and purchasing shareholders.

We sought to address the risk of shareholder dilution that can result from such transaction costs, along with the risk that a fund would be unable to meet its obligations to redeeming shareholders or other obligations under applicable law (while mitigating investor dilution) as a result of liquidity risk, with the proposal on fund liquidity risk management that we published in 2015.

In order to provide funds with a tool to mitigate potential dilution and to manage fund liquidity, the proposal included amendments to rule 22c-1 under the Act to permit funds (except money market funds and exchange-traded funds (“ETFs”)) to use “swing pricing,” a process of adjusting the fund's NAV to effectively pass on more of the costs stemming from shareholder transaction flows into and out of the fund to shareholders associated with that activity.

See id.

We received more than 70 comment letters on the proposal,

many of which addressed the swing pricing amendments.

Today, we are adopting new rule 22c-1(a)(3) permitting funds (other than money market funds and ETFs) to engage in swing pricing substantially as proposed, with certain modifications to respond to commenters' suggestions and concerns.

We believe swing pricing could be an effective tool to assist U.S. registered funds in mitigating potential shareholder dilution. We also believe that swing pricing may be an additional tool to manage a fund's liquidity risk.

The comment letters on the Proposing Release (File No. S7-16-15) are

available at

http://www.sec.gov/comments/s7-16-15/s71615.shtml

. We are adopting requirements for funds to adopt liquidity risk management programs today in a companion release.

See

Investment Company Liquidity Risk Management Programs, Investment Company Act Release No. 32315 (Oct. 13, 2106) (“Liquidity Risk Management Programs Adopting Release”).

See, e.g.,

Comment Letter of the Mutual Fund Directors Forum (Jan. 13, 2016) (“MFDF Comment Letter”) (recommending that the Commission consider issuing a separate proposal for swing pricing due to the difficult operational issues of swing pricing); Comment Letter of Investment Company Institute (Jan. 13, 2016) (“ICI Comment Letter I”) (arguing that, for funds to adopt swing pricing, there must be widespread changes in market practices and significant reengineering of fund operations).

But see

Comment Letter of Eaton Vance Corp. (June 13, 2016) (“Eaton Vance Comment Letter”) (expressing that there are investor protection concerns associated with the implementation of swing pricing, but acknowledging the significant costs to existing shareholders as a result of purchase and redemption activity).

If any provision of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

We are also adopting amendments to rule 31a-2 to require funds to maintain records evidencing and supporting each computation of an adjustment to the fund's NAV based on the fund's swing pricing policies and procedures. Finally, we are adopting amendments to Form N-1A and Regulation S-X and adopting a new item in Form N-CEN to require a fund to publicly disclose certain information regarding its use of swing pricing.

We anticipate that this information will facilitate the Commission's ability to monitor and assess compliance with rule 22c-1 as amended and may assist investors in making more informed investment choices.

We are adopting Form N-CEN today in a companion release.

See

Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) (“Investment Company Reporting Modernization Adopting Release”).

II. Discussion

A. Swing Pricing

1. Background

Under rule 22c-1, all investors who submit requests to redeem from an open-end fund on any particular day must receive the NAV next calculated by the fund after receipt of such redemption request.

As most funds, with the exception of money market funds, calculate their NAV only once a day, this means that redemption requests submitted during the day receive the end of day NAV, typically calculated as of 4 p.m. Eastern time.

When calculating a fund's NAV, however, rule 2a-4 requires funds to reflect changes in holdings of portfolio securities and changes in the number of outstanding shares resulting from distributions, redemptions, and repurchases no later than the first business day following the trade date.

We allow this calculation method to provide funds with additional time and flexibility to incorporate last-minute portfolio transactions into their NAV calculations on the business day following the trade date, rather than on the trade date.

As a practical matter, this calculation method also gave broker-dealers, retirement plan administrators, and other intermediaries additional time to transmit transactions submitted before the cut-off time on the trade date, which then may be reflected in computation of the fund's NAV on the business day following the trade date.

The process of calculating or “striking” the NAV of the fund's shares on any given trading day is based on several factors, including the market value of portfolio securities, fund liabilities, and the number of outstanding fund shares, among others.

Commission rules do not require that a fund calculate its NAV at a specific time of day. Current NAV must be computed at least once daily, subject to limited exceptions, Monday through Friday, at the specific time or times set by the board of directors.

See

rule 22c-1(b)(1).

Rule 2a-4(a)(2)-(3).

See

Adoption of Rule 2a-4 Defining the Term “Current Net Asset Value” in Reference to Redeemable Securities Issued by a Registered Investment Company, Investment Company Act Release No. 4105 (Dec. 22, 1964) [29 FR 19100 (Dec. 30, 1964)].

See infra

footnote 195. These redemptions are effected at the trade date's NAV.

Nevertheless, we recognize that trading activity and other changes in portfolio holdings associated with meeting redemptions may occur over multiple business days following the redemption request. If these activities occur (and their associated costs are reflected in NAV) in days following redemption requests, the costs of providing liquidity to redeeming investors could be borne by the remaining investors in the fund, thus potentially diluting the interests of non-redeeming shareholders.

The less liquid the fund's portfolio holdings, the greater these liquidity costs can become.

The significant growth in the assets managed by funds with strategies that focus on holding relatively less liquid investments (such as fixed income funds, including emerging

market debt funds, open-end funds with alternative strategies, and emerging market equity funds), which could incur significant trading costs, could give rise to increased dilution effects from redeeming and subscribing shareholders in those funds.

The transaction costs associated with redemptions can vary significantly, with some costs having a more immediate impact on shareholders than others. For example, during times of heightened market volatility and wider bid-ask spreads for the fund's underlying holdings, selling the fund's investments to meet redemptions will necessarily result in costs to the fund, which in turn may negatively impact investors who chose to redeem in the days immediately following the stress event. The impact of such costs on the remaining fund investors can vary depending on when a shareholder choses to redeem.

See, e.g.,

Comment Letter of Mutual Fund Directors Forum on the Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 6.

See, e.g.

Comment Letter of Morningstar, Inc. (Jan. 13, 2016) (“Morningstar Comment Letter”).

See also

Proposing Release,

supra

footnote 6, at n.45 and accompanying text. We discuss the extent to which swing pricing could effectively pass on to redeeming shareholders more of the costs stemming from their trading activity, as opposed to being borne by non-redeeming shareholders, in

infra

section II.A.2. Furthermore, because shareholders' purchase activity would provide liquidity to a fund, which could reduce the fund's costs in meeting shareholders' redemption requests that day, investors who purchase shares on a day that the fund adjusts its NAV downward would not create dilution for non-redeeming shareholders.

See infra

at text following footnote 123.

See

Liquidity Risk Management Programs Adopting Release,

supra

footnote 8, at section II.C.

As we discuss more broadly in the Liquidity Risk Management Programs Adopting Release, these factors in fund redemptions can create incentives, at least in theory, in times of liquidity stress in the markets for shareholders to redeem quickly to avoid further losses (or a “first-mover advantage”).

If shareholder redemptions are motivated by this first-mover advantage,

they can lead to increasing outflows, and as the level of outflows from a fund increases, the incentive for remaining shareholders to redeem may also increase.

Additionally, a fund experiencing large outflows as a result of redemptions may be exposed to predatory trading activity in the securities it holds.

Regardless of whether investor redemptions are motivated by a first-mover advantage or other factors, there can be significant adverse consequences to remaining investors in a fund in these circumstances, including material dilution of remaining investors' interests in the fund.

See id.,

at n.84 and accompanying text.

But see

Comment Letter of Nuveen Investments on the Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 10 (stating that there is no evidence that shareholders are actually motivated by a first-mover advantage); Comment Letter of BlackRock on the Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 17 (stating that although incentives to redeem may exist, this does not necessarily imply that investors will in fact redeem

en masse

in times of market stress, but also noting that a well-structured fund “should seek to avoid features that could create a `first-mover advantage' in which one investor has an incentive to leave” before others); Comment Letter of Association of Institutional Investors on the Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 10-11 (“The empirical evidence of historical redemption activity, even during times of market stress, supports the view that either (i) there are not `incentives to redeem' that are sufficient to overcome the asset owner's asset allocation decision or (ii) that there are disincentives, such as not triggering a taxable event, that outweigh the hypothesized `incentives to redeem.' ”); Comment Letter of The Capital Group Companies on the Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 8 (“We also do not believe that the mutualization of fund trading costs creates any first mover advantage.”); Comment Letter of Investment Company Institute on the Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015) (“Investor behavior provides evidence that any mutualized trading costs must not be sufficiently large to drive investor flows. We consistently observe that investor outflows are modest and investors continue to purchase shares in most funds even during periods of market stress.”).

See also

discussion of the potential first-mover advantage in the Proposing Release,

supra

footnote 6, at n.49.

Id.

See, e.g.,

Joshua Coval & Erik Stafford,

Asset Fire Sales (and Purchases) in Equity Markets,

86 J. Fin. Econ. 479 (2007) (“Funds experiencing large outflows tend to decrease existing positions, which creates price pressure in the securities held in common by distressed funds. Similarly, the tendency among funds experiencing large inflows to expand existing positions creates positive price pressure in overlapping holdings. Investors who trade against constrained mutual funds earn significant returns for providing liquidity. In addition, future flow-driven transactions are predictable, creating an incentive to front-run the anticipated forced trades by funds experiencing extreme capital flows.”); Teodor Dyakov & Marno Verbeek,

Front-Running of Mutual Fund Fire-Sales,

37 J. of Bank. and Fin. 4931 (2013) (“We show that a real-time trading strategy which front-runs the anticipated forced sales by mutual funds experiencing extreme capital outflows generates an alpha of 0.5% per month during the 1990-2010 period . . . Our results suggest that publicly available information of fund flows and holdings exposes mutual funds in distress to predatory trading.”).

See

discussion of predatory trading concerns in the Proposing Release,

supra

footnote 6, at nn.805-809 and accompanying text.

See

Proposing Release,

supra

footnote 6, at n.37.

As a means of addressing potential shareholder dilution from redemptions, the Commission adopted in 2005 rule 22c-2 under the Investment Company Act, which permits funds to impose redemption fees under certain circumstances.

Although the Commission adopted the redemption fee rule to allow funds to recoup some of the direct and indirect costs incurred as a result of short-term trading strategies, such as market timing, rule 22c-2 is not limited to the context of market timing and expressly contemplates that a fund board of directors may approve a redemption fee in order to “eliminate or reduce so far as practicable any dilution of the value of the outstanding securities issued by the fund,” and thus the rule can also be used to mitigate dilution arising from shareholder transaction activity generally.

In adopting rule 22c-2, the Commission stated that the amount of the redemption fee under rule 22c-2 may include indirect costs associated with transactions in fund shares, such as liquidity costs.

See

Mutual Fund Redemption Fees, Investment Company Act Release No. 26782 (Mar. 11, 2005) [70 FR 13328 (Mar. 18, 2005)] (“Redemption Fees Adopting Release”). The redemption fee may be no more than two percent of the value of the shares redeemed. Rule 22c-2(a)(1)(i).

See

Redemption Fees Adopting Release,

supra

footnote 24, at section II.A. (“Rule 22c-2 requires that each fund's board of directors (including a majority of independent directors) either (i) approve a redemption fee that in its judgment is necessary or appropriate to recoup costs the fund may incur as a result of redemptions, or to otherwise eliminate or reduce dilution of the fund's outstanding securities, or (ii) determine that imposition of a redemption fee is not necessary or appropriate.”) (internal citation omitted).

See also

Comment Letter of Federated Investors, Inc. (Jan. 13, 2016) (“Federated Comment Letter”) (stating that redemption fees currently permitted under rule 22c-2 may be an effective anti-dilution tool and presenting an illustrative redemption fee structure assessed in an amount equal to expected transaction costs, up to two percent, for transactions over a certain dollar amount).

See

Redemption Fees Adopting Release,

supra

footnote 24.

Fund boards have flexibility under rule 22c-2 to adopt redemption fees that address the needs of their funds.

Rule 22c-2 provides discretion for fund boards to structure redemption fees in way that “in its judgment, is necessary or appropriate” to achieve the anti-dilution purposes of the rule.

For example, we believe that a fund board, consistent with its obligations under 22c-2, may determine that it is appropriate to approve a redemption fee that would apply for an indefinite time period after purchase of the security—that is, whenever an investor redeems from the fund—in order to reduce dilution.

In addition, a fund board might determine it appropriate to impose a redemption fee only on a subset of such redemptions that the board determines are most likely to result in such costs or dilution, such as all redemptions exceeding a certain size (

e.g.

over $100,000 or $250,000) or on such large redemptions if advance notice is not provided.

The details of the redemption fee and the circumstances under which it would (and would not) be imposed, as well as

exceptions or waivers must be disclosed to fund investors.

See id.,

at section II. (“[Rule 22c-2] permits each board to take steps it concludes are necessary to protect its investors, and provides the board flexibility to tailor the redemption fee to meet the needs of the fund.”); and Mutual Fund Redemption Fees, Investment Company Act Release No. 27504 (Sept. 27, 2006) [71 FR 58257 (Oct. 3, 2001)], at section II.C (“[T]he terms of redemption fee policies are a matter for fund boards to determine.”).

Rule 22c-2.

While rule 22c-2 provides a minimum seven day “time period” during which a redemption fee, if imposed, must apply, (

i.e.

a fee may not apply only to shares redeemed in three days or less after purchase, but must capture shares redeemed within at least a seven-day period after purchase), it does not impose a maximum duration of such a time period, and thus redemption fees may be imposed on shares redeemed within a month, three months, or even longer periods, depending on the duration deemed appropriate by the fund board.

See

rule 22c-2(a)(1)(i).

Redemption fees imposed for an indefinite time period after purchase but only on redemptions exceeding a certain size—like redemption fees imposed on all shares redeemed within a certain time period—might potentially implicate the senior security concerns of section 18(f)(1), but we note that in adopting rule 22c-2 we explicitly provided exemptive relief from section 18(f)(1) for redemption fees imposed under rule 22c-2.

See

Redemption Fees Adopting Release,

supra

footnote 24, at n.30 (“By adopting the rule, we are providing an exemption from . . . the Act's prohibition against the issuance of a senior security.”).

See id.,

at n.32 (“The details of the redemption fee, the circumstances under which it would (and would not) be imposed, and the specific exceptions to imposition of the fee are currently disclosed to fund investors when they decide to invest in a fund, and may include exceptions for particular transactions.”).

See also

Item 11(c) of Form N-1A.

While we believe redemption fees may be an effective anti-dilution tool, we acknowledge that these fees are viewed as unpopular with investors and intermediaries

and entail their own operational complexities.

As a result, redemption fees have not become prevalent as a means of addressing dilution due to shareholder transaction activity, and thus are used by a limited number of funds.

See

Eaton Vance Comment Letter (“Even investors who understand that transaction fees accrue to the benefit of the fund (and thus, indirectly, to fund shareholders) often react negatively when confronted with having to pay them.”).

For example, we recognize the compliance burdens and operational challenges certain types of redemption fees place on intermediaries, who would be required to track various fund policies for such fees by share class that may include varying fee rates, applicability and waiver policies. Such data also would require daily updating as it is sourced by systems that support both front-end (customer facing) and back-end transaction processing to ensure fees are accurately assessed.

See

Proposing Release,

supra

footnote 6 at text accompanying n.724 (acknowledging potential operational complexity that could accompany the use of redemption fees). We acknowledge that these operational challenges may be particularly acute in circumstances where a fund's policies assess redemption fees only in circumstances where the fund is experiencing heavy redemptions or particular market stresses or where a fund assesses redemption fees that may vary in size each time they are applied.

See

Eaton Vance Comment Letter (“Given a choice, most investors appear to prefer funds that do not charge transactions fees over funds that do. This creates a competitive disadvantage for funds that impose transaction fees, accounting for their limited use.”).

Funds may also attempt to address potential shareholder dilution by reserving the right to redeem in kind instead of with cash.

In-kind redemptions may reduce transaction costs by reducing the need for cash transactions, but they raise challenges of their own.

There are often logistical and operational issues associated with paying in-kind redemptions, and this limits the availability of in-kind redemptions under many circumstances.

For instance, in-kind redemptions could entail operational difficulties that result in manual processes, which would be imposed on both the fund and on investors receiving portfolio securities.

Moreover, some shareholders are generally unable or unwilling to receive in-kind redemptions.

See, e.g.,

Adoption of (1) Rule 18f-1 Under the Investment Company Act of 1940 to Permit Registered Open-End Investment Companies Which Have the Right to Redeem In Kind to Elect to Make Only Cash Redemptions and (2) Form N-18F-1, Investment Company Act Release No. 6561 (June 14, 1971) [36 FR 11919 (June 23, 1971)] (“Rule 18f-1 and Form N-18F-1 Adopting Release”) (stating that the definition of “redeemable security” in section 2(a)(32) of the Investment Company Act “has traditionally been interpreted as giving the issuer the option of redeeming its securities in cash or in kind.”).

Mutual funds that reserve the right to redeem their shares in kind may use such redemptions to manage liquidity risk under exceptional circumstances.

See

Karen Damato,

`Redemptions in Kind' Become Effective for Tax Management,

Wall Street Journal (Mar. 10, 1999),

available at

http://www.wsj.com/articles/SB921028092685519084

(“ `Redemptions in kind' are typically viewed by fund managers as an emergency measure, a step they could take to meet massive redemptions in the midst of a market meltdown.”). Funds may also use in-kind redemptions for other reasons. For example, funds may wish to redeem certain investors (particularly, large, institutional investors) in kind, because in-kind redemptions could have a lower tax impact on the fund than selling portfolio securities in order to pay redemptions in cash. This, in turn, could benefit the remaining shareholders in the fund.

See, e.g., id.

See also

Liquidity Risk Management Programs Adopting Release,

supra

footnote 8, at section III.F.

See, e.g.,

Comment Letter of Invesco on the Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 11 (noting that while “Invesco has on occasion exercised rights to redeem in kind, in practice such rights are exercised infrequently”).

See

Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR 47736 (Aug. 14, 2014)] (“2014 Money Market Fund Reform Adopting Release”), at section II.L.1.f (discussing “complex valuation and operational issues” associated with in-kind redemptions).

See also

Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 30551 (June 5, 2013) [78 FR 36834, (June 19, 2013)] (“2013 Money Market Fund Reform Proposing Release”), at n.473 and accompanying text.

See

Comment Letter of BlackRock Inc. (Jan. 13, 2016) (“BlackRock Comment Letter”) (“[R]edemptions in-kind are not practical for retail investors, as retail investors may lack the proper custodial accounts to hold a particular security and they may be less likely to have the necessary expertise and/or the operational ability to trade the securities that could be held in a fund. For example, a retail investor may not have a custodial account set up to hold a security that is traded in another country, nor the sophistication to be able to trade such a security.”).

See also

Comment Letter of Invesco Ltd. (Jan. 13, 2016) (“Invesco Comment Letter”) (“The primary problem with using redemptions in-kind to meet large redemptions is the willingness and ability of the redeeming entity to receive securities instead of cash.”); Peter Fortune,

Mutual Funds, Part I: Reshaping the American Financial System,

New England Econ. Rev. (July/Aug. 1997), at 47,

available at

http://www.bostonfed.org/economic/neer/neer1997/neer497d.htm

(“A fund redeeming in kind does so at the risk of its reputation and future business . . .”). In the context of money market funds, we requested comment on whether we should require redemptions in kind for redemptions in excess of a certain size threshold, to ease liquidity strains on the fund and reduce the risks and unfairness posed by significant sudden redemptions.

See

Money Market Fund Reform; Proposed Rule, Investment Company Act Release No. 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)] (“2009 Money Market Fund Reform Proposing Release”), at section III.B. Commenters generally opposed this type of reform for a variety of reasons, all of which likely would apply equally to funds other than money market funds. For example, most commenters stated that in-kind redemptions would be technically unworkable due to complex valuation and operational issues that would be imposed on both the fund and on investors receiving the in-kind distribution.

See

2013 Money Market Fund Reform Proposing Release,

supra

footnote 38, at section III.B.9.c.

Funds may still mitigate shareholder dilution using redemption fees and redemptions in kind, but each has downsides (as described above) and they are not broadly utilized by funds. Therefore, for the reasons discussed throughout this section, we believe that providing funds the option to use swing pricing as another anti-dilution tool is likely to benefit investors and may complement or be an alternative to the tools currently available to funds.

Finding efficient and cost-effective ways to protect fund shareholders from the dilutive impacts of trading activity and related costs is challenging, and many tools have been used in different jurisdictions to address these issues.

As discussed in detail in the Proposing Release, one particularly successful tool, which has been applied in the Luxembourg fund industry for over 15 years, is swing pricing.

Swing pricing is regarded abroad as an efficient mechanism to protect non-transacting shareholders from dilution, as well as an additional tool to help funds manage liquidity risks.

Asset managers have

implemented swing pricing for a range of fund types and asset classes, including equity, fixed income and multi-asset funds.

A number of other jurisdictions also permit the use of swing pricing within their domestic markets, or are considering allowing its use.

Although swing pricing may be more or less widely implemented in different jurisdictions (due to a particular home market's regulatory regime, investor profiles and operational infrastructure), when implemented it has been shown to provide performance benefits to funds,

which is consistent with a reduction in dilution attributable to the transactions costs associated with shareholder activity.

See

Proposing Release,

supra

footnote 6, at text preceding n.423 (“While redemption fees (or purchase fees) could mitigate dilution arising from shareholder transaction activity, implementing a fee requires coordination with the fund's service providers, which could entail operational complexity.”);

See also

BlackRock,

Fund Structures as Systemic Risk Mitigants,

Viewpoint (Sept. 2014) (“BlackRock Fund Structures Paper”),

available at

https://www.blackrock.com/corporate/en-fi/literature/whitepaper/viewpoint-fund-structures-as-systemic-risk-mitigants-september-2014.pdf

Against this background, today we are adopting amendments to rule 22c-1 that will enable funds to choose to use “swing pricing” as a tool to mitigate shareholder dilution. After further consideration and after evaluating comments, we have modified several aspects of the final rule from the proposal, including eliminating the consideration of “market impact” when setting a fund's swing factor; requiring funds to establish and disclose an upper limit on the fund's swing factor, which may not exceed two percent of the fund's NAV per share; and refining certain financial statement and performance reporting requirements related to swing pricing. The amendments as adopted also incorporate certain modifications to the board's approval and oversight role associated with swing pricing. The fund's board does not have to specifically approve changes to the fund's swing pricing policies and procedures. However, under the final rule, the fund's board will be required to approve the fund's swing pricing policies and procedures and periodically review a written report prepared by the persons responsible for administering swing pricing that describes, among other things, the swing pricing administrator's review of the adequacy of the fund's swing pricing policies and procedures and the effectiveness of their implementation, including the impact on mitigating dilution. This report also must describe the administrator's review and assessment of the fund's swing threshold(s), swing factor(s), and swing factor upper limit considering the requirements of the rule, including the information and data supporting these determinations. The board-approved policies and procedures must specify the process for setting the swing threshold, swing factor, and swing factor upper limit. In addition, the board will be required to approve the swing threshold(s) and the upper limit on the swing factor(s) used by the fund, and any changes thereto. We are also providing for an extended effective date to help alleviate concerns raised by commenters regarding operational changes that will be necessary before this new pricing method becomes available in the marketplace, because we believe that efficient, coordinated efforts to implement such operational changes will ultimately benefit investors. We have directed our staff to review, two years after the rule's effective date, market practices associated with funds' use of swing pricing under rule 22c-1(a)(3) to mitigate dilution and to provide the Commission with the results of this review.

2. Overview of Swing Pricing Proposal and Comments Received

We proposed amendments to rule 22c-1 that would permit a registered open-end fund (but not a money market fund or ETF) to choose to establish and implement swing pricing.

Under the proposal, a fund that chooses to use swing pricing would need to have policies and procedures that would require the fund to adjust its NAV per share by an amount known as the “swing factor” once the level of net purchases or net redemptions has exceeded a set, specified percentage of the fund's NAV, known as the “swing threshold.” A fund would be required to consider certain factors in determining its swing threshold, and the fund's board would be required to approve the swing threshold. Likewise, a fund would have to consider certain factors in determining the “swing factor,” which is the amount that the funds NAV would swing in response to the costs associated with the shareholder purchase and redemption activity, and the board would have to approve any swing factor upper limit.

See

Proposing Release,

supra

footnote 6, at section III.F.

Nearly all commenters supported the goals of swing pricing, and the ability of swing pricing in theory to achieve these goals.

However, commenters also highlighted a variety of concerns, many stemming from operational hurdles to implementing swing pricing in the United States that would require significant changes to fund processing infrastructure and systems.

Several commenters urged the Commission to assist the industry in addressing the operational challenges before swing pricing is implemented,

by seeking input from industry participants and other regulators about what could be done to make swing pricing a viable option in the U.S.

Commenters indicated that funds, intermediaries and service providers will have different levels of operational changes and burdens to consider, and certain funds may have the ability to implement swing pricing sooner than other funds (

e.g.,

some fund complexes have experience with implementing swing pricing in other jurisdictions, or are larger and may have more resources available to implement swing pricing, or are otherwise in a better position to be able to receive sufficient information to allow them to reasonably estimate whether they have crossed a swing threshold with high confidence). Commenters noted that such disparities could allow some funds to implement swing pricing faster than others, and that allowing time to work through operational issues in an efficient manner for all funds should help facilitate its implementation.

See, e.g.,

Comment Letter of Americans for Financial Reform (Jan. 13, 2016) (“AFR Comment Letter”); Federated Comment Letter; Comment Letter of Global Association of Risk Professionals (Jan. 12, 2016) (“GARP Comment Letter”); Comment Letter of Vanguard (Jan. 6, 2016) (“Vanguard Comment Letter”).

While most commenters supported the idea of swing pricing (with certain reservations), a few opposed swing pricing outright.

See, e.g.,

Comment Letter of ETF Consultants (Jan. 25, 2016) (“ETF Consultants Comment Letter”); Comment Letter of Voya Investment Management (Jan. 12, 2016) (“Voya Comment Letter”); Comment Letter of Eaton Vance Investment Managers (Jan. 13, 2016).

See also infra

section II.A.3.b. for a detailed discussion on operational challenges.

See, e.g.,

BlackRock Comment Letter; Comment Letter of Dodge & Cox (Jan. 21, 2016) (“Dodge & Cox Comment Letter”); Comment Letter of Pacific Investment Management Company LLC (Jan. 13, 2016) (“PIMCO Comment Letter”); Comment Letter of Securities Industry and Financial Markets Association (Jan. 13, 2016) (Comments on Swing Pricing Proposal) (“SIFMA Comment Letter II”).

See, e.g.,

Morningstar Comment Letter; SIFMA Comment Letter II; Vanguard Comment Letter.

See, e.g.,

BlackRock Comment Letter; Comment Letter of Capital Research and Management Company (Jan. 13, 2016) (“CRMC Comment

Letter”); Comment Letter of Fidelity Management & Research Company (Jan. 13, 2016) (“Fidelity Comment Letter”); ICI Comment Letter I (suggesting that the SEC consider a delayed effective date (of two years or 30 months) to permit funds and intermediaries to work through operational issues, and to reduce potential competitive disadvantages that may result for funds that may be less ready to adopt swing pricing).

In response to commenters' concerns regarding swing pricing's operational challenges and costs and to help facilitate efficient implementation of swing pricing, the Commission is adopting amendments to rule 22c-1 permitting swing pricing with a two-year extended effective date. Delaying the effective date should provide funds, intermediaries, and service providers a reasonable amount of time to evaluate and implement in an orderly and more cost-effective manner the necessary operational changes to conduct swing pricing, regardless of the unique operational hurdles a particular entity may face.

Providing this extended effective date may result in long-term benefits for many funds and investors as it may allow the industry to develop and implement standardized operations solutions for swing pricing that likely would result in lower costs, processing efficiencies and reduced operational risks that ultimately benefit investors.

We also appreciate the extent of operational changes that will be necessary for many funds to conduct swing pricing and that these changes may still be costly to implement, but we were not persuaded by commenters who argued that these changes are insurmountable, and indeed one stated that despite these challenges “the long-term benefits of enabling swing pricing for U.S. open-end mutual funds outweigh the one-time costs related to implementation for industry participants.”

These issues are discussed in detail below.

Id.

See infra

footnote 212 and accompanying paragraph. We note that providing an extended effective date to address such operational changes may also, consequently, alleviate some of the competitive concerns raised by commenters regarding certain funds being in a better position than others to rapidly implement swing pricing.

GARP Comment Letter.

As discussed in section II.A.3.b. below, commenters highlighted the various benefits of swing pricing for investors, including how the tool may be used to address the dilutive effect of shareholder transaction activity effectively and efficiently, and with observable performance benefits to the non-transacting shareholders in such funds.

Also, as discussed in section II.A.3.b. below, commenters raised overarching concerns regarding swing pricing generally, including shareholder fairness, alternatives to swing pricing such as redemption fees or redemptions in kind, the impacts swing pricing will have on the current NAV and potential performance volatility, and transparency, disclosure, and potential gaming behavior concerns.

See infra

footnote 88 and accompanying text.

With respect to the more detailed elements of the proposed swing pricing rules, multiple commenters raised various additional concerns, and in some cases provided suggestions on the processes for determining the swing threshold, calculating the swing factor, estimating net shareholder flows, pricing errors and materiality, impacts on financial statement presentation and other disclosures, and board approval and oversight, all of which are discussed in the sections below.

3. Discussion of Final Swing Pricing Rules

a. Scope of New Swing Pricing Rules

Under the final rule, all registered open-end management investment companies, with the exception of money market funds and ETFs, may choose to use swing pricing.

Although rule 22c-1(a) generally applies to all registered investment companies issuing redeemable securities,

we believe money market funds, while potentially susceptible to the risk of dilution, already have extensive tools at their disposal to mitigate potential shareholder dilution, and ETFs, because they redeem directly only with authorized participants, are generally able to utilize transaction fees to pass on certain costs associated with redemptions.

For purposes of the new amendments to rule 22c-1, “exchange-traded fund” includes an exchange-traded managed fund (“ETMF”).

See

Liquidity Risk Management Programs Adopting Release,

supra

footnote 8 at n.30 and accompanying text (discussing ETMFs in greater detail).

Rule 2a-7 provides exemptions from rule 22c-1 for money market funds to permit certain money market funds to use the amortized cost method and/or the penny-rounding method to calculate its NAV, and to permit a money market fund to impose liquidity fees and temporarily suspend redemptions.

See

rule 2a-7(c)(1)(i); rule 2a-7(c)(2).

A fund may decide to adopt swing pricing policies and procedures as part of the liquidity risk management program it is required to implement under rule 22e-4.

Some fund complexes may decide to use swing pricing for certain funds within the complex but not others, or establish different swing thresholds for different funds within the complex.

As discussed below, funds utilizing swing pricing are required to exclude any purchases and redemptions that are made in kind in determining whether the fund's level of net purchases or net redemptions has exceeded the fund's swing threshold.

We are not permitting closed-end investment companies (“closed-end funds”), unit investment trusts (“UITs”), ETFs and money market funds to use swing pricing under the final rule, as discussed in more detail below.

See

Liquidity Risk Management Programs Adopting Release,

supra

footnote 8. Under rule 22e-4, each open-end fund, including open-end ETFs but not including money market funds, is required to adopt and implement a written liquidity risk management program reasonably designed to assess and manage the fund's liquidity risk.

See id.

Outside the U.S., it is a common industry practice for funds within a fund complex each to have an individual swing threshold, or for some funds within a complex to use swing pricing while others do not.

See, e.g.,

BlackRock Fund Structures Paper,

supra

footnote 46; and J.P. Morgan Asset Management,

Swing Pricing: The J.P. Morgan Asset Management Approach in the Luxembourg Domiciled SICAVs

(June 2014),

available at

http://www.jpmorganassetmanagement.de/DE/dms/Swing%20Pricing%20%5bMKR%5d%20%5bIP_EN%5d.pdf

(“J.P. Morgan Asset Management Swing Pricing Paper”).

We note that although redemptions in kind are excluded from the swing threshold, any such redemptions would still receive the swung NAV if the fund were to swing price on that day. This is because the swung NAV would apply to all redemption transactions on that day, regardless of how the proceeds are paid. We recognize that funds have discretion in determining whether to satisfy redemptions in kind, and that a fund that does satisfy redemptions in kind is less likely to cross its swing threshold. As a result, a fund can control how much it engages in swing pricing through its use of redemptions in kind. We believe this flexibility is appropriate, however, because funds have discretion on whether to use swing pricing, and redemptions in kind reduce dilution, which lessens the need for swing pricing.

Closed-End Funds

Closed-end funds do not issue redeemable securities and therefore do not incur the same costs as open-end funds, associated with shareholder purchase and redemption activity, that swing pricing is intended to address.

One commenter suggested that swing pricing should be permitted for closed-end funds, indicating that certain closed-end funds (

e.g.,

those that rely on rule 23c-3) may incur transaction costs that may be mitigated by swing pricing.

The same commenter

conceded, however, that the “the risk of investor dilution in connection with any offering or tender process is low for closed-end funds,” that “the goals of the `swing-pricing' option for open-end funds are already met for closed-end funds through existing mechanisms,” and that the commenter would not expect many closed-end funds to utilize swing pricing. Because closed-end funds do not issue redeemable securities,

and therefore are much less likely to encounter much of the dilution that swing pricing is intended to address,

we agree that the goals of swing pricing are already met for closed-end funds and, as proposed, we are not permitting closed-end funds to utilize swing pricing.

See

section 2(a)(32) (defining “redeemable security”) and section 5(a)(1)-(2) (defining “open-end company” and “closed-end company”) of the Act.

See

Comment Letter of Simpson Thacher & Bartlett LLP (Jan. 14, 2016) (“[A] closed-end fund that continuously offers its shares may determine that the subscribing shareholders should bear the costs of the fund investing the new cash. In such situations, a fund and its board may determine that the use of the swing-pricing mechanism is appropriate. Accordingly, there may be potential benefits in allowing closed-end funds the option to use swing pricing.”).

Certain closed-end funds (“closed-end interval funds”) do elect to repurchase their shares at

periodic intervals pursuant to rule 23c-3 under the Investment Company Act.

See

Liquidity Risk Management Program Adopting Release,

supra

footnote 8, at n.145.

If a closed-end fund were to repurchase shares, it would have control over the timing and amount of any such repurchases (subject to the requirements of rule 23c-3, in the case of interval funds), and thus would not face the same liquidity pressures as open-end funds.

See supra

section I.

We believe that the risk of investor dilution targeted by swing pricing is already sufficiently mitigated for closed-end interval funds by the requirements in rule 23c-3 and, therefore, it would not be appropriate to permit such funds to utilize swing pricing.

UITs

Although UITs issue redeemable securities, we are not permitting UITs to utilize swing pricing for a number of reasons. First, most assets currently held in UITs serve as separate account vehicles used to fund variable annuity and variable life insurance products, and these UITs essentially function as pass-through vehicles, investing principally in securities of one or more open-end funds that could implement swing pricing.

UITs are not actively managed, and their portfolios are not actively traded. Unlike an open-end fund, a UIT generally does not have personnel available to actively manage the UIT's liquidity level. Because of the lack of a manager, we do not believe it would be feasible for a UIT to engage in the active administration of the swing pricing threshold and factor required by the rule. Also, UITs whose sponsor maintains a secondary market for the purchase and sale of units do not incur the dilutive transaction costs that swing pricing targets. Finally, we are not permitting UITs that are ETFs to utilize swing pricing for the reasons discussed in the ETFs section immediately below. We did not receive any comments on the Proposing Release indicating that UITs should be permitted to utilize swing pricing.

See

Proposing Release,

supra

footnote 6, at n.139 and accompanying text. We currently estimate that approximately 92.9% of UITs serve as separate account vehicles (based on data as of December 31, 2015).

ETFs

As proposed, we are not permitting ETFs to use swing pricing because, unlike mutual funds, which typically internalize the costs associated with purchases and redemptions of shares, ETFs typically externalize these costs by redeeming in kind and by charging a fixed and/or variable fee to authorized participants who purchase creation units from, and sell creation units to, an ETF to cover liquidity and transaction costs.

We also are not including ETFs within the scope of rule 22c-1(a)(3) because we believe that swing pricing could impede the effective functioning of an ETF's arbitrage mechanism.

The effective functioning of the arbitrage mechanism is necessary in order for an ETF's shares to trade at a price that is at or close to the NAV of the ETF.

If an ETF were to adopt swing pricing policies and procedures, an authorized participant would not know whether the ETF's NAV would be adjusted by a swing factor on any given day and therefore may not be able to assess whether an arbitrage opportunity exists.

The Commission historically has considered the effective functioning of the arbitrage mechanism to be central to the principle that all shareholders be treated equitably when buying and selling their fund shares (

i.e.,

that shareholders would not transact in shares of an ETF at market prices significantly diverging from the ETF's NAV).

Therefore, we believe that the implementation of swing pricing by an ETF could raise concerns about the equitable treatment of shareholders, to the extent that swing pricing could impede the effective functioning of the arbitrage mechanism. No commenters disagreed with our proposal not to allow ETFs to use swing pricing. We are, as proposed, not permitting ETFs to utilize swing pricing.

The fixed and/or variable fees are imposed to offset both transfer and other transaction costs that may be incurred by the ETF (or its service providers), as well as brokerage, tax-related, foreign exchange, execution, market impact and other costs and expenses related to the execution of trades resulting from such transaction. The amount of these fixed and variable fees typically depends on whether the authorized participant effects transactions in kind or with cash and is related to the costs and expenses associated with transactions effected in kind versus in cash. When an authorized participant redeems ETF shares by selling a creation unit to the ETF, for example, the fees imposed by the ETF defray the costs of the liquidity that the redeeming authorized participant receives, which in turn mitigates the risk that dilution of non-redeeming authorized participants would result when an ETF redeems its shares.

See

Invesco Comment Letter (“When an authorized participant redeems in cash, the variable transaction fee that an ETF may impose to offset transaction costs should address both dilution and liquidity concerns.”).

ETMF market makers would not engage in the same kind of arbitrage as ETF market makers because all trading prices of ETMF shares are linked to NAV.

See

Liquidity Risk Management Programs Adopting Release,

supra

footnote 8, at n.834 and accompanying text. ETMFs would charge transaction fees that mitigate the risk of dilution, however, and therefore we do not include ETMFs within the scope of rule 22c-1(a)(3).

By this we mean that, and we generally expect that, each day and over time an ETF's shares will trade at or close to the ETF's intraday value.

See

Request for Comment on Exchange-Traded Products, Securities Exchange Act Release No. 75165 (June 12, 2015) [80 FR 34729 (June 17, 2015)] (“2015 ETP Request for Comment”) (“When providing exemptive or no-action relief under the Exchange Act, the Commission and its staff have analyzed and relied upon the representations from ETP issuers regarding the continuing existence of effective and efficient arbitrage to help ensure that the secondary market prices of ETP Securities do not vary substantially from the value of their underlying portfolio or reference assets.”).

See also

Liquidity Risk Management Programs Adopting Release,

supra

footnote 8 at n.844. Because an ETF does not determine its NAV in real time throughout the trading day, in assessing whether this expectation is met, one looks to the difference between the ETF shares' closing market price and the ETF's end-of-day net asset value (

i.e.,

its “premium” or “discount”).

See

2015 ETP Request for Comment.

See infra

paragraph accompanying footnote 128 (noting that a fund is not required to disclose its swing threshold under the final rule).

See, e.g.,

Spruce ETF Trust,

et al.,

Investment Company Act Release No. 31301 (Oct. 21, 2014) [79 FR 63964 (Oct. 27, 2014)] (“ETFs require various exemptions from the provisions of the [Investment Company Act] and the rules thereunder. Critically, in granting such exemptions to date, the Commission has required that a mechanism exist to ensure that ETF shares would trade at a price that is at or close to the NAV per share of the ETF.”); and Precidian ETFs Trust,

et al.,

Investment Company Act Release No. 31300 (Oct. 21, 2014) [79 FR 63971 (Oct. 27, 2014)] (notice of application).

Money Market Funds

Under the final rule, like under the proposal, money market funds would not be able to use swing pricing. No commenters suggested that money market funds be allowed to use swing pricing. Money market funds are subject to extensive requirements concerning the liquidity of their portfolio investments. Also, a money market fund is permitted to impose a liquidity fee on redemptions if its weekly liquid investments fall below a certain threshold, and these fees serve a similar purpose as the NAV adjustments contemplated by swing pricing.

That is, money market fund liquidity fees allocate at least some of the costs of providing liquidity to redeeming rather

than non-transacting shareholders,

and generate additional liquidity to meet redemption requests.

We therefore believe that money market funds already have liquidity risk management tools at their disposal that could accomplish comparable goals to the swing pricing permitted for other funds under rule 22c-1(a)(3).

See

rule 2a-7(c)(2);

See also infra

footnote 212 and accompanying paragraph (discussing competitive concerns and an extended effective date).

101

See

GARP Comment Letter; J.P. Morgan Comment Letter (also discussing potentially delaying NAV publication time from 6 p.m. ET to 8 p.m. ET, and generally concurring with GARP discussion of operational challenges).

102

See, e.g.,

CRMC Comment Letter; GARP Comment Letter; Invesco Comment Letter; T. Rowe Comment Letter.

We recognize that most current systems for funds and intermediaries are not set up to accommodate swing pricing, and that certain changes would need to be made before swing pricing can be adopted in the U.S. We also anticipate that certain funds are better positioned to reasonably estimate their net flows, and thus could be ready to implement swing pricing sooner than other funds.

103

As discussed in greater detail in section II.A.3.d. below, we believe that the challenges to implementing swing pricing can be addressed by the fund industry and overcome. Two commenters also noted that the aggregate long-term benefits to both shareholders and to the stability of the overall financial system from swing pricing should be significant, likely outweighing the transition costs.

104

Although funds and intermediaries may incur costs in changing operational systems and developing new processes, because swing pricing is optional (not mandatory) these costs would only be incurred if funds elect to adopt swing pricing.

103

For example, we understand that some funds may have larger retail shareholder bases that transact directly with the fund's transfer agent or may be primarily distributed through affiliates or broker-dealers (that could potentially provide timely flow data) and/or do not have a substantial number of investors transacting in retirement plans or insurance products, where it may be more challenging to obtain timely estimates. Such funds may also have a high confidence in reasonable estimates used by back-testing their estimated flow information to actual trade flows.

104

See

BlackRock Comment Letter; GARP Comment Letter.

As mentioned above, the operational difficulties associated with swing pricing are not uniform among all funds. Certain funds that may have more direct relationships with shareholders, instead of being heavily intermediated, and funds that may have more transparency into shareholder flows due to different shareholder bases, or affiliate relationships, or more up-to-date systems may be more easily able to implement swing pricing. We believe, however, that an extended effective date can help ease the overall burden incurred by funds, intermediaries and service providers (and ultimately, the burden incurred by investors) by allowing sufficient time for the development and implementation of efficient and cost effective industry-wide operational solutions.

105

Further, we believe that even if only a limited number of funds adopt swing pricing immediately following the extended effective date, as funds begin to gain familiarity with the process, more funds may choose to adopt it over time.

106

In addition, once a few funds have adopted swing pricing, it may pave the way for other funds to leverage broader industry solutions implemented by intermediaries and service providers in support of swing pricing.

107

Finally, we are adopting swing pricing as a permissive tool, with no expectation that funds will utilize swing pricing by a certain date. This means that as funds, service providers and intermediaries upgrade systems over time, they may re-evaluate their ability to use swing pricing, or build the necessary changes into new systems, allowing more funds to use it in the future, even if they do not make immediate changes in response to our final rule by the extended effective date.

105

See infra

at footnotes 212-214 and accompanying text.

106

See, e.g.,

ALFI Survey 2015,

supra

footnote 42, at

6-7 (noting the trend observed in 2011 towards greater adoption of swing pricing in the Luxembourg fund industry has continued

107

We believe that the extended effective date for swing pricing mitigates competitive concerns by allowing time for funds that choose to implement swing pricing to confront the operational hurdles of doing so. This does not preclude, however, the possibility that certain funds will find it advantageous to wait until swing pricing is more widely established in the market before choosing to implement swing pricing.

Impacts on Current NAV and Performance Volatility

Several commenters voiced reservations about whether the swung NAV could appropriately be viewed as a fund's current NAV (particularly in light of the use of estimates to determine whether the fund has crossed the swing threshold and the swing factor) and may raise questions about the accuracy of the fund's NAV.

108

Although reasonable high-confidence estimates may be used to implement swing pricing, we believe the standards and guidance provided in this Release for establishing these estimates, as well as processes and procedures that funds may implement (including back-testing and adjusting estimates used based on actual or final data related to flows and transaction costs associated with subsequent portfolio trades), should mitigate concerns regarding the impact of using estimates for swing pricing on current NAVs.

109

We note that current NAV calculation processes already include subjective judgments and estimates, including, for example, fair-value determinations for assets that lack readily available market quotations. Additionally, we believe a swung NAV can reflect a more appropriate allocation of transaction costs to the redeeming shareholders whose redemptions caused these costs for those funds.

108

See

Eaton Vance Comment Letter (“In our view, the provisions of the Swing Pricing Proposal that would require funds adopting swing pricing to refer to their adjusted transaction prices as NAV are inconsistent with Chair White's recent statement emphasizing the importance of NAV accuracy.”);

See also infra

section II.A.3.g. for a discussion of swing pricing impacts on financial statement reporting, performance reporting and pricing errors.

Other commenters expressed concern that swing pricing could give rise to gaming behavior if certain shareholders were to attempt to time their trading activity to avoid (or take advantage of) pricing adjustments.

126

Requiring a fund

to publicly disclose its swing threshold could create the potential for shareholder gaming behavior because a fund's shareholders could attempt to time their purchases and redemptions based on the likelihood that a fund would or would not adjust its NAV. One commenter suggested, for example, that certain vendors may have access to fund flow information through non-fund sources (such as by observing intermediary trading behavior) and that market timers may try to use any such information to detect patterns in swing pricing by funds, suggesting that those market timers might seek to transact on days when there is an advantageous change in the fund's NAV.

127

126

See

CFA Comment Letter; Federated Comment Letter; HSBC Comment Letter; Invesco Comment Letter.

127

See

Eaton Vance Comment Letter.

For a shareholder to effectively game swing pricing, the shareholder would have to know the fund's swing threshold and net flow information on the day that the shareholder was purchasing or redeeming and that flow information would have to not materially change after the shareholder placed its order. Accordingly, without disclosure of this information, it will be difficult for shareholders to determine when the fund's net purchases or net redemptions exceed the swing threshold. After weighing these considerations, we are not requiring a fund to disclose its swing threshold or swing factor under the final rule, and we believe that a fund generally should not disclose its swing threshold unless it has determined that it is in the best interests of the fund to do so. In making this assessment, the fund should consider the nature of the fund's shareholders and whether disclosure of the swing threshold would result in significant shareholder harm. We note that, to the extent a fund does decide to disclose its swing threshold, we believe it would not be appropriate for a fund to disclose it selectively to certain investors (

e.g.,

to only disclose the fund's swing threshold to institutional investors), as we believe this could assist certain groups of shareholders in strategically timing purchases and redemptions of fund shares, potentially disadvantaging shareholders who do not know the fund's swing threshold.

128

The Commission has brought enforcement actions against fund managers for selective disclosure.

See

In the Matter of Evergreen Investment Management Company, LLC and Evergreen Investment Services, Inc., Investment Company Act Release No. 28759 (June 8, 2009) (settled order) (“Evergreen Order”); In the Matter of Alliance Capital Management, L.P., Investment Company Act Release No. 26312 (Dec. 18, 2003) (settled order).

With respect to market timing concerns, we note that a fund's market timing policies and procedures should address and seek to resolve such issues for a fund that uses swing pricing. We note that funds have a variety of tools to prevent any such market timing should it occur, such as redemption fees, purchase blocks, and roundtrip restrictions, which we believe should mitigate this risk. In addition, investors will not be able to purposefully take advantage of swing pricing to obtain a better price without knowledge of contemporaneous intraday flows and a fund's swing thresholds, neither of which funds are required to publicly disclose under the rule.

c. Swing Threshold

Under the final rule, as under the proposed rule, a fund's swing pricing policies and procedures must provide that the fund is required to adjust its NAV once the level of net purchases or net redemptions from the fund has exceeded a set, specified percentage of the fund's net asset value known as the “swing threshold.”

129

A fund must adopt policies and procedures that specify the process for how the fund's swing threshold is determined,

130

and the policies and procedures must be approved by the fund's board of directors.

131

In addition, the fund board will review a periodic report that describes, among other things, a review and assessment of the fund's swing threshold.

132

Finally, the fund board will be required to approve the fund's swing threshold and any changes thereto.

133

129

Rule 22c-1(a)(3)(i)(A). Under the rule, “swing threshold” is defined as “the amount of net purchases into or net redemptions from a fund, expressed as a percentage of the fund's net asset value, that triggers the initiation of swing pricing.” Rule 22c-1(a)(3)(v)(D).

130

Rule 22c-1(a)(3)(i)(B).

131

Rule 22c-1(a)(3)(ii)(A).

132

Rule 22c-1(a)(3)(ii)(D).

133

Rule 22c-1(a)(3)(ii)(B).

In determining whether the fund's level of net purchases or net redemptions has exceeded the swing threshold, the person(s) responsible for administering the fund's swing pricing policies and procedures will be permitted to make this determination based on receipt of sufficient information about the fund shareholders' daily purchase and redemption activity to allow the fund to reasonably estimate whether it has crossed the swing threshold with high confidence.

134

This shareholder flow information may be individual, aggregated, or netted orders, may include reasonable estimates where necessary, and shall exclude any purchases or redemptions that are made in kind and not in cash.

135

The fund's policies and procedures should describe how such determinations will be made.

136

We are adopting a requirement that, in specifying the process for how the swing threshold is determined, a fund consider:

134

Rule 22c-1(a)(3)(i)(A).

135

Id.

As noted in the Proposing Release, when a fund investor purchases or redeems shares of a fund in kind as opposed to in cash, this does not necessarily cause the fund to trade any of its portfolio assets. The risk of dilution as a result of shareholder purchase and redemption activity, therefore, is lower with respect to in-kind purchases and in-kind redemptions, and thus swing pricing would not be permitted unless a fund's net purchases or net redemptions that are made in cash (and not in kind) exceed the fund's swing threshold.

See

Proposing Release,

supra

footnote 6, at n.439 and accompanying paragraph.

136

See infra

footnote 179.

• The size, frequency, and volatility of historical net purchases or net redemptions of fund shares during normal and stressed periods;

• The fund's investment strategy and the liquidity of the fund's portfolio investments;

• The fund's holdings of cash and cash equivalents, as well as borrowing arrangements and other funding sources; and

• The costs associated with transactions in the markets in which the fund invests.

137

Rule 22c-1(a)(3)(i)(B).

These factors overlap significantly with factors that we understand are commonly considered by funds that use swing pricing in other jurisdictions, in order to determine a fund's swing threshold. For example, the Luxembourg Swing Pricing Survey, Reports & Guidelines provides that factors influencing the determination of the swing threshold ordinarily include: (i) Fund size; (ii) type and liquidity of securities in which the fund invests; (iii) costs (and hence, the dilution impact) associated with the markets in which the fund invests; and (iv) investment manager's investment policy and the extent to which the fund can retain cash (or near cash) as opposed to always being fully invested).

See

ALFI Survey 2015,

supra

footnote 42, at 14.

We requested comment on the process a fund would use to determine its swing threshold, including the factors that a fund would be required to consider, and also requested comment on whether there were certain procedures that we should require a fund to use when reviewing its swing threshold. Commenters on the proposed rule expressed a variety of views regarding the factors a fund must consider in specifying the fund's swing threshold. Some commenters indicated that the Commission should be less prescriptive in establishing the factors, arguing that not all of the factors are equally applicable to all funds, that requiring funds to consider all these factors may lead funds to create overly mechanistic checklists, and that a principles-based approach would better allow funds to

tailor their swing pricing processes to their unique circumstances.

138

Other commenters indicated that the rule's factors as proposed grant “excessive” discretion concerning the threshold for swing pricing,

139

and expressed concern that “fund shareholders will frequently bear swing pricing transaction costs that have little or no relation to the actual impact of their transaction on the fund and its continuing shareholders.”

140

One commenter stated that the factors are in line with the commenter's expectations.

141

138

See

ICI Comment Letter I; J.P. Morgan Comment Letter; Charles Schwab Comment Letter.

139

See

AFR Comment Letter.

140

See

Eaton Vance Comment Letter.

141

See

HSBC Comment Letter.

We recognize the potential dangers of being overly prescriptive in this area, but believe that the factors reflect common areas that a fund would consider in establishing its swing pricing process and are consistent with factors that are considered by funds that use swing pricing in other jurisdictions.

142

In addition, we note that the rule does not preclude a fund from considering other factors that the fund believes may be relevant.

143

Similarly, we recognize the potential dangers of providing complete discretion in this area, but note that further constraining funds' decision-making processes in setting the swing threshold may unduly restrict the ability of each fund to select an appropriate threshold that best suits the particular needs of the fund. Both extremes present a risk that transacting shareholders will bear swing pricing costs via the swing factor that are divorced from the fund's transaction costs. After considering commenters' concerns, therefore, we are adopting the factors related to setting a fund's swing threshold as proposed.

142

See supra

footnote 137.

143

In contrast, we have given more limited discretion to funds when setting a fund's swing factor(s), but are not requiring board approval of the fund's swing factors.

See

rule 22(c)-1(a)(3)(i)(C) (providing that the person(s) responsible for administering swing pricing may take into account only the near-term costs expected to be incurred by the fund as a result of net purchases or net redemptions that occur on the day the swing factor(s) is used). Together, these modifications are designed to enhance the fair treatment of shareholders in the use of swing pricing and to prevent abusive practices, while also providing funds with the ability to tailor a fund's use of swing pricing after consideration of the swing threshold factors.

See also

AFR Comment Letter (expressing concern regarding the degree of discretion afforded to funds in setting both the swing threshold and swing factor).

We continue to believe that evaluating all four factors will assist a fund in determining what level of net purchases or net redemptions would generally lead to the trading of portfolio assets that would result in material costs to the fund, and thus they are relevant to setting a fund's swing threshold.

144

Two of the factors a fund is required to consider in specifying the fund's swing threshold, relating to a fund's investment strategy and cash holdings, are similar (investment strategy factor) or the same (cash holdings factor) as two of the factors a fund is required to consider in assessing its liquidity risk under rule 22e-4.

145

Overlap between the factors is not surprising, because evaluating a fund's liquidity risk may be relevant to determining the fund's swing threshold (

i.e.,

determining the appropriate circumstances under which the fund should employ swing pricing to combat shareholder dilution).

146

Such overlap may also lead to efficiencies in both analyses, as funds become more familiar with the interaction between the factors, the risk of dilution, and efforts to combat dilution. A third factor (the size, frequency, and volatility of historical net purchases or net redemptions of fund shares during normal and stressed periods) is a consideration in determining how frequently a fund may expect a specified swing threshold to be exceeded.

147

The fourth factor, the costs associated with transactions in the markets in which the fund invests, is a consideration in determining whether costs of responding to shareholder transaction activity are significant enough at a specified threshold level that the fund should utilize swing pricing to address their dilutive impact.

148

144

Assessing the size, frequency, and volatility of historical net purchases and net redemptions of fund shares will permit a fund to determine its typical levels of net purchases and net redemptions and the levels the fund could expect to encounter during periods of unusual market stress, as well as the frequency with which the fund could expect to see periods of unusually high purchases or redemptions. We continue to believe that comparing the fund's historical flow patterns with the fund's investment strategy, the liquidity of the fund's portfolio holdings, the fund's holdings of cash and cash equivalents and borrowing arrangements and other funding sources, and the costs associated with transactions in the markets in which the fund invests will allow a fund to predict what levels of purchases and redemptions would result in material costs under a variety of scenarios.

145

See

rule 22e-4(b)(2)(ii)(A) (requiring a fund to consider, in assessing its liquidity risk, the fund's “investment strategy and liquidity of portfolio investments during both normal and reasonably foreseeable stressed conditions (including whether the investment strategy is appropriate for an open-end fund, the extent to which the strategy involves a relatively concentrated portfolio or large positions in particular issuers, and the use of borrowings for investment purposes and derivatives)”; and rule 22e-4(b)(2)(ii)(C) (requiring a fund to consider, in assessing its liquidity risk, the fund's “holdings of cash and cash equivalents, as well as borrowing arrangements and other funding sources”).

See also

Liquidity Risk Management Programs Adopting Release,

supra

footnote 8.

146

See

rule 22e-4(a)(11) (defining liquidity risk). We note that, in the Proposing Release, three of the factors a fund would have been required to consider in specifying the fund's swing threshold aligned with factors a fund is required to consider in assessing its liquidity risk. The change from three to two overlapping factors is due to a change in the liquidity risk assessment factors.

See

Liquidity Risk Management Programs Adopting Release,

supra

footnote 8, at section III.B.2.

147

This factor is similar to a factor for assessing liquidity risk, however, it has been tailored to be a more precise consideration for setting the swing threshold.

See id.

148

As discussed in the Proposing Release, a fund may wish to consider, as applicable, market impact costs and spread costs that the fund typically incurs when it trades its portfolio assets (or assets with comparable characteristics if data concerning a particular portfolio asset is not available to the fund). A fund also may wish to consider, as applicable, the transaction fees and charges that the fund typically is required to pay when it trades portfolio assets. These could include brokerage commissions and custody fees, as well as other charges, fees, and taxes associated with portfolio asset purchases or sales (for example, transfer taxes and repatriation costs for certain foreign securities, or transaction fees associated with portfolio investments in other investment companies).

In order to effectively mitigate possible dilution arising in connection with shareholder purchase and redemption activity, a fund's swing threshold should generally reflect the estimated point at which net purchases or net redemptions would trigger the fund's investment adviser to trade portfolio assets in the near term, to a degree or of a type that may generate material liquidity or transaction costs for the fund. We believe that a consideration of the factors set forth above will promote a fund estimating this threshold point.

149

In circumstances where fund purchases and redemptions are fairly balanced, we believe that it is unlikely that the purchases or redemptions would trigger the fund's investment adviser to trade portfolio assets in the near term, to a degree or of a type that may generate material liquidity or transaction costs for the fund.

Full Swing Pricing vs. Swing Pricing Above a Threshold

Like the proposal, the final rule does not impose a minimum “floor” for a fund's swing threshold. We believe that different levels of net purchases and net redemptions would create different risks of dilution for funds with different strategies, shareholder bases, and other liquidity-related characteristics, and thus we do not believe that it would be appropriate to determine a single swing threshold floor to apply to all funds that elect to use swing pricing.

150

Rather, we believe it is appropriate to constrain the swing threshold through the factors that a fund must consider in setting the

swing threshold, which are designed to prevent a fund from setting a swing threshold that is inappropriate and does not reflect the size and nature of the liquidity costs likely to be incurred by the fund. We believe that the consideration of the swing threshold factors would lead a fund to set a threshold at a level that would trigger the fund's investment adviser to trade portfolio assets in the near term to a degree or of a type that may generate material liquidity or transaction costs for the fund. We further believe that, after considering the swing threshold factors, a fund would be unable to set the swing threshold at zero.

150

We note that, in Europe, there are no across-the-board swing threshold floors applicable to UCITS that use swing pricing.

Commenters generally supported the approach taken under the proposal of not setting a minimum threshold for swing pricing. Some commenters indicated that the Commission should permit full swing pricing because a fund may find it more appropriate for its particular circumstances

151

and would mitigate any potential first-mover advantage inadvertently caused by swing pricing.

152

One commenter also suggested that full swing pricing is more transparent and easier to understand than partial swing pricing.

153

On the other hand, some commenters stated that the Commission should permit only partial swing pricing, arguing that the tracking error and volatility associated with full swing pricing would outweigh its benefits.

154

151

See

Dechert Comment Letter. Full swing pricing is the process of adjusting the fund's NAV whenever there is any level of net purchases or net redemptions, instead of swing pricing above a threshold (

i.e.,

partial swing pricing).

152

See

Federated Comment Letter.

153

See

HSBC Comment Letter (noting advantages of full swing pricing but also acknowledging benefits of partial swing pricing, such as “a lower impact on net asset value volatility, tracking error and fund performance.”).

154

See

AFR Comment Letter (“We understand that full swing pricing—allowing NAV adjustments anytime there are net purchases or redemptions—may increase volatility, tracking errors, and investor misperceptions about funds' performance that could lead to market distortions. Instead, we support the proposed partial swing pricing that would allow NAV adjustments only when net purchases or redemptions exceed an established threshold. We agree that this approach will result in lower volatility than full swing pricing, while still reducing dilution on assets. To that end, we do not support an option allowing funds to choose to use full swing pricing.”).

See also

MFS Comment Letter.

On balance, we continue to believe that setting a minimum threshold for all funds would not be appropriate, and that funds should be provided the flexibility to implement swing pricing at a threshold level that best fits their particular circumstances based on the required factors and the guidance set forth herein. We expect that as part of the process of determining whether the benefits of implementing swing pricing are justified given the costs, funds will evaluate the appropriate threshold level and select a level that is suitable for the fund, considering the required factors. We believe that this approach strikes an appropriate balance between competing considerations by allowing tailored choices to be made for each fund but constrained by the factors that the fund must consider in setting the threshold. Therefore, we are adopting the threshold requirements as proposed.

Board Approval of Swing Threshold

We are also requiring the fund's board to approve a fund's swing threshold as proposed. Several commenters opposed the proposed requirement for a fund's board to approve the fund's swing threshold, stating that the determination of swing thresholds is more appropriately a management function.

155

One commenter noted that the determination of a fund's swing threshold would likely be a highly technical analysis “that requires intimate familiarity with the fund's daily operations.”

156

Additionally, one commenter questioned whether the board should be required to approve changes to a fund's swing threshold(s), arguing that board approval could be detrimental to a fund's ability to respond quickly to changing market conditions.

157

One commenter, on the other hand, supported requiring that a fund's board, including a majority of independent directors, approve the swing threshold as “independent perspectives may more fully focus on shareholder interests.”

158

Another commenter suggested that the proposed swing threshold requirements granted excessive discretion to fund managers notwithstanding the proposed board approval requirement.

159

As discussed in more detail below, several commenters also supported the idea that a fund's board should be given visibility into the process by which the swing threshold was determined via written reports.

160

155

See, e.g.,

BlackRock Comment (“Mutual fund boards should not be required to approval all swing thresholds.”); Dechert Comment Letter (stating that board approval of the swing threshold “should instead be a management function, subject to board oversight”).

156

Dechert Comment Letter.

157

Charles Schwab Comment Letter.

158

CFA Institute Comment Letter (“We also support the requirements that fund boards approve initial swing thresholds and any material changes to it. . .”).

159

AFR Comment Letter.

160

See infra

footnote 276 and accompanying text.

After considering commenters' concerns, we believe that board approval of a fund's swing threshold (and any changes thereto) is an important element of board oversight of a fund's swing pricing process. A fund's swing threshold(s) represents the trigger point at which the fund's NAV will be adjusted and thus the point at which swing pricing begins to affect fund shareholders. We believe board review and approval of this determination will help ensure that the fund's swing threshold(s)—and the point at which swing pricing begins to affect shareholders in the fund—is in the best interests of fund shareholders. While requiring board approval of changes to a fund's swing threshold may constrain a fund's ability to immediately or frequently change a fund's swing threshold, we believe that this requirement acts as an important check on the discretion afforded to the fund's swing pricing administrator. Moreover, under the final rule, a fund is permitted to set multiple swing threshold(s), which we believe may allow a fund to prepare for some changes in market conditions.

As described further below, we are also requiring that the board be provided with a written report from the fund's swing pricing administrator that describes, among other things, the administrator's review and assessment of the fund's swing threshold(s), including information and data supporting this determination.

161

We believe that the information provided in this report will help the board in overseeing this important element of the fund's swing pricing process, thereby addressing the concern some commenters expressed that the board may not have the necessary information or expertise to approve the swing threshold (and changes to the threshold).

162

At the same time, we believe that requiring board approval of a fund's swing threshold (and any changes to the threshold), combined with the board review requirement, serves to address concerns about granting excessive discretion to the swing pricing administrator.

161

See infra

section II.A.3.f.

162

See id.

Application of Swing Pricing to Purchases and Redemptions

Under the proposal, a fund that adopted swing pricing policies and procedures would have been required to adjust the fund's NAV whenever net redemptions or net subscriptions exceeded the swing threshold. In other words, a fund could not apply swing pricing only when it received net redemptions beyond the threshold. The

proposal solicited comment on whether a fund should be permitted to apply swing pricing only when the fund's level of net redemptions exceeds the swing threshold. Commenters requested that the Commission permit funds the flexibility to adjust their NAV

only

when net redemptions (as opposed to both net subscriptions or net redemptions) exceed the swing threshold,

163

and permit a fund to set different swing thresholds for net redemptions versus net subscriptions.

164

Commenters argued that this additional flexibility was important because the dilution risks associated with net redemptions may be significantly different from the risks associated with net subscriptions, as funds may be able to manage inflows more effectively over time without as much cost.

165

For this reason, they argued that funds may wish to only use swing pricing for net redemptions, and not subscriptions, or set differing thresholds for subscriptions versus redemptions.

163

See

Dechert Comment Letter (“[A] fund should be permitted to apply swing pricing to net

redemptions

only, as opposed to applying it equally to net redemptions and net purchases, which would be the case under the proposed rule amendments.”) (emphasis in original).

164

See

BlackRock Comment Letter (“[T]he Commission should clarify that funds are permitted to create an `asymmetric' swing threshold where the threshold for inflows is different than the threshold for outflows.”) (internal citation omitted).

165

Unlike the requirement that funds meet redemptions within 7 days, there is no requirement for funds to immediately invest cash inflows.

See

ICI Comment Letter I (“[R]eceipt of new cash in a portfolio may not be as disruptive or problematic as large net redemptions.”); Dechert Comment Letter (noting that there may be more significant issues regarding potential dilution for non-redeeming shareholders in connection with shareholder redemptions).

While we agree with commenters that the impact of subscriptions may be different from that of redemptions and that funds have other tools to manage inflows over time,

166

the final rule continues to require a fund to adjust its NAV whenever net purchases or net redemptions exceed the swing threshold. Both purchases and redemptions may cause shareholder dilution in certain circumstances. Accordingly, we believe swing pricing will be a useful tool in mitigating shareholder dilution associated with shareholder purchase activity as well as shareholder redemption activity.

166

We note that a fund is not obligated to accept subscriptions, and so thus may be able to better manage dilution due to purchases.

Multiple Swing Thresholds

In response to a comment request in the Proposing Release, a number of commenters suggested that we should permit a fund to set multiple escalating swing thresholds (wherein each threshold could be associated with a different swing factor) instead of only a single threshold.

167

Commenters argued that permitting multiple thresholds may allow funds to more effectively mitigate shareholder dilution, because the costs of managing shareholder activity may increase as redemptions increase, and would allow swing pricing to more precisely reflect different levels of costs associated with different levels of shareholder activity.

168

167

See, e.g.,

ICI Comment Letter I (“[F]unds may wish to apply more than one threshold to net redemptions (or purchases), and apply different swing factors depending on which threshold the net redemption (or purchases) exceeds. This could enhance the precision of a swing pricing methodology, allowing a fund to make larger downward adjustments to its NAV when it experiences larger net outflows.”) (internal citation omitted).

168

See

BlackRock Comment Letter (“Funds should also be permitted to set multiple swing threshold levels for a given fund, where each threshold could be associated with different swing factors. Such a sliding swing threshold would allow partial swing pricing to more precisely reflect different levels of costs associated with the disposition (purchase) of securities for different trade sizes.”) (internal citation omitted).

We agree that permitting such multiple thresholds may allow funds to more precisely target the costs of managing shareholder activity and better mitigate shareholder dilution effects of such transactions. Accordingly, the final rule permits (but does not require) a fund to set multiple escalating swing thresholds, each associated with a different swing factor.

169

Whichever threshold is triggered on a given day would then determine the single swing factor that would be used to adjust the fund's NAV on that day. If a fund has more than one threshold, each should be established using the same factors discussed above, and if it has multiple swing factors, each should be set taking into account the same considerations discussed in section II.A.2.e. below.

169

As discussed in more detail below, however, a fund's swing factor(s) may not exceed two percent of NAV per share.

See infra

section II.A.3.e.

Review Requirement

The proposed rule would have required a fund's swing pricing policies and procedures to provide for a periodic review, no less frequently than annually, of the fund's swing threshold. Beyond specifying certain factors that a fund would be required to consider in reviewing its swing threshold, the proposed rule did not include prescribed review procedures, nor did it specify the changes in a fund's circumstances over the course of the review period that a fund must consider as part of its review. One commenter suggested that the final rule make clear that the required review should be similar in nature to the review that led to the determination of a fund's swing threshold in the first place.

170

Another commenter suggested that the proposal provided little guidance to fund sponsors and boards in how to balance conflicting interests of shareholders in setting appropriate swing thresholds.

171

172

170

See

Comment Letter of the Federal Regulation of Securities Committee of the Section of Business Law of the American Bar Association (Feb. 11, 2016).

171

See

Eaton Vance Comment Letter.

172

See infra

footnote 276 and accompanying text.

We agree that the review requirement should be more robust, and instead of requiring a fund to periodically review the fund's swing threshold, we have adopted in the final rule a requirement that the fund's board of directors, must review, no less frequently than annually, a written report prepared by the person(s) responsible for administering swing pricing for a fund that describes, among other things: (i) The swing pricing administrator's review of the adequacy of the fund's swing pricing policies and procedures and the effectiveness of their implementation, including the impact on mitigating dilution; and (ii) its review and assessment of the swing threshold(s), swing factor(s), and swing factor upper limit considering the requirements in rule 22c-1(a)(3)(i)(B) and (C), including the information and data supporting these determinations.

173

We are also requiring, as proposed, that the fund board approve the fund's swing pricing policies and procedures, which must specify the process for how the fund's swing threshold is determined.

174

Finally, as discussed above, we are requiring that the fund board approve any changes to the fund's swing threshold as proposed. We believe that the written report requirement, which specifies certain information that must be provided to the board, provides additional guidance regarding the information that may be useful in assessing the fund's swing threshold.

173

Rule 22c-1(a)(3)(ii)(D).

See also infra

section II.A.3.f. (discussing the board review requirements).

174

See infra

section II.A.3.f.

A fund may consider whether to review and assess its swing threshold more frequently than annually (

e.g.,

semi-annually or monthly), and/or

specify any circumstances that would prompt ad hoc review of the fund's swing threshold in addition to the periodic review required by the rule (as well as the process for conducting any ad-hoc reviews). We believe that funds should generally consider evaluating both market-wide and fund-specific developments affecting each of the rule 22c-1(a)(3)(i)(B) factors in developing comprehensive procedures for reviewing a fund's swing threshold.

Swing Threshold Considerations for Multiple Share Classes

The net purchase or net redemption activity of all share classes of a fund with multiple share classes is part of the determination of whether a fund has crossed its swing threshold. If a fund were to only include the transaction activity of a single share class, and were to swing one share class and not another, this would have the effect of having one share class pay transaction expenses incurred in the management of the fund's portfolio as a whole, expenses that are borne by all share classes and thus would generally be inconsistent with rule 18f-3.

175

Accordingly, a fund with multiple share classes may not selectively swing the NAV of certain share classes but not others.

176

Like a fund with only one share class, the purchase or redemption activity of certain shareholders (or a class of shareholders) within a multi-share-class fund could dilute the value of all shareholders' interests in the fund.

177

Further, because the economic activity causing dilution occurs at the fund level, it would not be appropriate to employ swing pricing at the share class level to target such dilution. We also note that because all share classes must utilize the same swing factor and ETFs cannot utilize swing pricing, funds structured to include ETFs as a share class would not be able to utilize swing pricing.

178

175

See

rule 18f-3(a)(1)(ii) (stating that allocation of expenses related to the management of a fund's assets may not differ among a fund's share classes).

176

One commenter indicated that “swing pricing can be used successfully by the conventional share classes of a fund that also operates an ETF as a share class.”

See

Vanguard Comment Letter. Because of the aforementioned 18f-3 concerns and the inability of ETFs to utilize swing pricing, we disagree. A swing pricing adjustment applied to certain share classes of a fund, but not applied to the ETF share class of that fund, would impermissibly allocate expenses related to the management of the fund's assets.

177

See

ALFI Survey 2015,

supra

footnote 42, at 4 (“If swing pricing is applied, all share classes of a fund swing in the same direction (and typically by the same basis point amount), as dilution occurs at the fund level rather than at the share class level.”).

178

See

section 18 of the Act.

d. Investor Flow Information

Critically important to the adoption of swing pricing is a fund's ability to obtain sufficient information about purchase and redemption activity that took place prior to striking the fund's NAV on a particular day in order to reasonably estimate whether it has crossed the swing threshold with high confidence, to determine whether swing pricing should be in effect that day. If the fund's applicable swing factor varies depending on the level of its net investor flows, sufficient investor flow information is also needed to determine the applicable swing factor that the fund will use to adjust its NAV. A fund using swing pricing will need to obtain reasonable estimates of investor flows daily, or the aggregate flows of money being invested in and redeemed out of the fund, for purposes of reasonably estimating with high confidence whether the fund's net purchases or net redemptions have crossed the swing threshold, thus resulting in an NAV adjustment under its swing pricing policies and procedures.

179

We have previously stated that a fund should adopt compliance policies and procedures that provide for monitoring shareholder trades or flows of money in and out of the fund for purposes of detecting market timing activity.

See

Compliance Programs of Investment Companies and Investment Advisers, Investment Company Act Release No. 26299 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)] (“Rule 38a-1 Adopting Release”), at nn.66-69 and accompanying text. We also note the requirement that funds have shareholder information agreements under rule 22c-2 that require financial intermediaries to provide certain shareholder transaction data to funds upon their request, which may be helpful in estimating flows in some respects.

See

rule 22c-2.

We understand that the deadline by which a fund must strike its NAV may precede the time that a fund (or its pricing agent) receives final information concerning daily net investor transaction flows from the fund's transfer agent. As a result, funds engaging in swing pricing will likely need to develop processes and procedures to gather sufficient investor flow information from transfer agents that include transactions being conducted by intermediaries on behalf of fund investors.

180

This information could include actual transaction orders received by the transfer agent, as well as estimates of investor flows, which funds can use to reasonably estimate its aggregate daily net investor flows for swing pricing purposes.

181

180

As indicated in the proposal, a fund may wish to implement formal or informal policies and procedures regarding the timely receipt of shareholder flow information, and to establish effective communication between the persons charged with implementing the fund's swing pricing policies and procedures, the fund's investment professionals, personnel charged with the calculating the fund's daily NAV, and the fund's transfer agent.

See

Proposing Release,

supra

footnote 6, at section III.F.2.a.

181

Under the current system, redemption and subscription orders from shareholders are typically accepted by funds and their intermediaries on any given trading day up until 4 p.m. Eastern time. Intermediaries typically begin processing, aggregating and submitting transaction orders to fund transfer agents (where transactions are not NAV dependent) in the late afternoon. Funds generally publish their NAVs between 6 and 8 p.m. Eastern time (“ET”). Following the publication and delivery of such NAVs, both intermediaries and fund transfer agents complete their transaction processing and conduct their nightly processing cycles, which update applicable recordkeeping systems for the day's activities.

See

rule 2a-4 (allowing the adjustment in outstanding fund shares as a result of purchase and redemption activity to be reflected on T+1).

Reasonable Estimates

Several commenters asked for additional guidance regarding a fund's use of estimates in determining its net flows in order to determine whether a fund has crossed its swing threshold.

182

We acknowledge that full information about shareholder flows is not likely to be available to funds by the time such funds need to make the decision as to whether the swing threshold has been crossed,

183

but we do not believe that complete information is necessary to make a reasonable high confidence estimate.

184

Instead, a fund may determine its shareholder flows have crossed the swing threshold based on receipt of sufficient information about the fund shareholders' daily purchase and redemption transaction activity to allow the fund to reasonably estimate, with high confidence, whether it has crossed the swing threshold. The shareholder flow information used by funds may be individual, aggregated or netted orders and may include reasonable estimates where

necessary

185

(made by funds and their intermediaries) and should exclude any purchases or redemptions that are made in kind and not in cash.

186

182

See

BlackRock Comment Letter; ICI Comment Letter I (noting that swing pricing in the U.S. will likely involve the use of estimates with respect to current day net flows (as well as when determining factors) and that the Commission should further clarify that it is comfortable with fund managers and their administrators using such estimates in a disciplined and documented manner when employing swing pricing). Similarly, another commenter asked the Commission to clarify that there is an element of estimation in evaluating whether a fund has crossed its threshold, inherent in the proposed reasonable inquiry standard.

See

SIFMA Comment Letter II.

183

The deadline by which a fund must strike its NAV may precede the time that a fund receives final information concerning daily net flows from the fund's transfer agent or principal underwriter.

184

A fund should not employ swing pricing if the fund is unable to obtain sufficient information about the fund shareholders' daily purchase and redemption activity on the relevant date at the time it calculates the fund's NAV.

See supra

section II.A.3.c. We understand that many funds in Europe that use swing pricing may typically receive as much as 90% of net purchase/redemption data prior to deciding whether to adjust the fund's NAV by a swing factor.

185

We understand that most intermediaries submit aggregated and/or netted transactions orders to funds. Such orders represent the transactions of underlying investors whose shares are held in omnibus accounts registered in the name of intermediaries (such as a broker-dealer, retirement plan record keeper, bank or trust) for the benefit of such shareholders on transfer agent recordkeeping systems for each share class in a fund. Intermediaries typically aggregate their individual customer daily transaction orders and also may net the total purchase and redemption orders, which are periodically transmitted for processing to fund transfer agents.

See

Investment Company Institute,

Navigating Intermediary Relationships,

(2009), at nn.3, 6-7,

available at

https://www.ici.org/pdf/ppr_09_nav_relationships.pdf

186

See

rule 22c-1(a)(3)(i)(A).

As discussed below, we recognize in some cases, it may not currently be feasible for certain intermediaries to provide their actual orders (even in an aggregated or netted format) promptly enough for the fund to conduct swing pricing. However, we understand that a fund's reasonably estimated shareholder flows could include estimates for certain intermediary flows that are based on actual transaction orders received from investors prior to the fund's cut-off time, which would subsequently be submitted by intermediaries to the fund's principal underwriter and/or transfer agent for processing after receipt of the fund's final NAV. For example, in the European fund sector, swing pricing is feasible operationally as “actual” trade flows based on estimated prices (typically the prior day's NAV) and orders occurring on the trade date are available on a timely basis. Trading platforms collect all of that day's activity and supply it to the fund's transfer agent. An estimated fund price is then applied to generate estimated trade values for that trading day. We also note that where transaction orders are NAV dependent, the application of estimated fund prices (such as the prior day's NAV) to the current day's orders to derive estimated shareholder flow information could be conducted by intermediaries or fund transfer agents.

187

Additionally, a fund may require different levels or types of information from each of its intermediaries depending on a variety of factors.

188

187

See

GARP Comment Letter.

188

Such factors might include the size of flows that ordinarily come through a particular intermediary, the nature of such orders (

i.e.,

subscriptions, redemptions, exchange transactions), or certain characteristics or additional information about the redeeming or purchasing shareholders and intermediaries conducting transaction processing (

e.g.,

large trade notifications). A fund may also choose to request flow data only from certain of its intermediaries if it determines that it can make a high confidence determination to swing its price with flow information provided by only a subset of its intermediaries (for example, if there are intermediaries that typically only conduct a very small volume of transaction activity with the fund).

Funds should consider utilizing policies and procedures to make the necessary estimates.

189

Such policies and procedures could describe the process by which the fund obtains shareholder flow information (including flows obtained from intermediaries), as well as the amount and kind of transaction data that the fund believes necessary to obtain before making its estimate of total net flows in order to determine whether the swing threshold has been exceeded, and applying swing pricing that day.

190

Funds (and their intermediaries) may also wish to consider regular back-tests of their daily estimated net flows used in determining whether a swing threshold has been crossed based on complete or final data obtained later, and then update their estimation process over time based on the results of such back-tests. A fund may wish to consider whether having a process to back-test data, which would allow a fund to review whether the fund is appropriately considering and weighing the factors and, over time, may potentially improve the accuracy of the fund's estimation process. Back-testing data is a commonly utilized practice in the fund industry (and other industries) to continuously improve the quality of processes involving subjective judgments or estimates, and its use has been discussed in the context of swing pricing in Europe.

191

189

One commenter requested that we “recognize that certain components of the swing pricing process will be based on estimates” and suggested that we “provide a safe harbor from liability for differences between estimates and what is observed ex-post if swing pricing procedures are followed properly.” BlackRock Comment Letter. We decline to provide such a safe harbor given the facts and circumstances nature of this determination.

190

As discussed in section II.A.3.g. below, if a fund, pursuant to reasonably designed policies and procedures, determined with reasonable high confidence that it should apply swing pricing based on estimated information obtained after reasonable inquiry, the fund would not need to treat the application of swing pricing as a pricing error if it turned out, after the fact based on final data, that the swing threshold had not been crossed; similarly, the fund would not need to treat the failure to apply swing pricing as a pricing error if it turned out, after the fact based on final data, that the swing threshold had been crossed.

191

See, e.g.,

ALFI Swing Pricing Guidelines 2015,

supra

footnote 88 (discussing the value of back-testing).

We recognize that funds may take different approaches in determining whether they have sufficient flow data to make a reasonable high confidence estimate,

192

and that the completeness of data (such as the percentage of actual versus estimated net flow data), as well as the nature and types of estimates used may vary based on the particular circumstances of the fund. For example, a fund whose redemption levels have been very consistent in the past, and that has a large direct shareholder base that is made up of primarily small retail positions, may be better positioned to make a high confidence estimate of flows with less effort, than a fund that is primarily distributed through intermediaries, who has experienced volatile purchases and redemptions and has a mix of distribution partners and institutional and retail shareholders. Because many funds are primarily distributed through intermediaries, they will need to obtain sufficient information about shareholder flows (whether actual orders or estimated flows) in a timely manner to reasonably estimate with high confidence whether a fund should use swing pricing on a given day.

192

See infra

footnote 205.

Operational Issues

Many commenters on the swing pricing proposal discussed the operational difficulties that exist today for funds in obtaining timely enough information from intermediaries about shareholder flow data to determine whether or not a swing threshold has been crossed.

193

These commenters discussed operational challenges to implementing swing pricing in the United States as compared to Europe, where many funds have successfully implemented swing pricing.

194

Commenters noted that omnibus account structures and existing processing arrangements with intermediaries limit the ability of many funds to receive sufficient flow information prior to the time that the fund's NAV must be calculated, thus impeding the use of swing pricing as an anti-dilution tool currently in the U.S.

195

These commenters also highlighted that certain intermediaries

(

e.g.,

retirement plan record keepers and insurance companies) typically require the receipt of actual fund prices (NAVs) to initiate the processing of fund trades, thus posing difficulties in getting final actual orders from these distribution channels to funds before the NAV has been struck.

196

Some commenters expressed concerns regarding funds' ability to obtain estimated shareholder flow information if requested from intermediaries.

197

Several commenters also suggested that large fund complexes with more influence over their distribution partners could be more successful than small complexes in obtaining such information.

198

In addition, funds also expressed concerns that intermediaries may choose not to offer funds that choose to implement swing pricing, due to the increased processing and technology burdens that swing pricing would impose on intermediaries, a consideration that funds will evaluate as they determine whether to adopt swing pricing. Several commenters stated that, although swing pricing is used relatively widely in European jurisdictions, certain differences between U.S. and European fund operations make swing pricing easier to implement in Europe than in the U.S.

199

193

See, e.g.,

CRMC Comment Letter; Invesco Comment Letter; ICI Comment Letter I; GARP Comment Letter.

194

See

CRMC Comment Letter; Dechert Comment Letter; ICI Comment Letter I; IDC Comment Letter.

195

See, e.g.,

BlackRock Comment Letter; Comment Letter of Financial Services Roundtable (Jan. 13, 2016) (“FSR Comment Letter”); J.P. Morgan Comment Letter; SIFMA Comment Letter II. Commenters also stated that the fund's agent (either the transfer agent or intermediaries authorized to distribute or transact fund shares) will take orders from shareholders for execution; typically until the fund's cut-off time (which is 4 p.m. ET for most U.S. funds). Thus, a large amount of flow information from intermediaries is currently provided to some funds after the close of business in the later evening hours, or the next business day after the investor transaction occurs (typically early morning on T+1), which is generally after a fund strikes its NAV.

Id.

196

See

Eaton Vance Comment Letter; GARP Comment Letter; ICI Comment Letter I; LPL Comment Letter; Charles Schwab Comment Letter; Comment Letter of Wells Fargo Funds Management, LLC (Jan. 13, 2016) (“Wells Fargo Comment Letter”). Commenters also pointed to the constraints of older (legacy) technology systems used by some service providers, which limit the ability of these intermediaries to deliver fund flow information prior to the time a fund strikes its NAV.

See

Dechert Comment Letter; Federated Comment Letter; GARP Comment Letter; SIFMA Comment Letter II. According to these commenters, these older systems batch process daily transactions received from fund investors throughout the evening, versus newer real-time or continuous and automatic systems that process and submit transactions to fund transfer agents throughout the day.

197

See, e.g.,

ICI Comment Letter I; Comment Letter of T. Rowe Price (Jan. 13, 2016) (“T. Rowe Comment Letter”) (expressing concerns regarding (i) funds' need to rely on estimated flows from intermediaries, (ii) the costs and burdens to provide sufficient estimated flows to allow a fund to accurately determine whether a swing threshold has been exceeded, and (iii) the potential for NAV errors). These issues are discussed throughout this section. As discussed below, commenters also encouraged the Commission to consider what changes to the regulatory framework are necessary to require intermediaries to provide accurate estimates of shareholder flows prior to funds striking their NAVs so that swing pricing can be an effective tool to mitigate potential dilution for shareholders.

198

See

CRMC Comment Letter; Dechert Comment Letter; ICI Comment Letter I; Comment Letter of Independent Directors Council (Jan. 13, 2016) (“IDC Comment Letter”).

199

See, e.g.,

BlackRock Comment Letter; GARP Comment Letter; Eaton Vance Comment Letter; ICI Comment Letter I. In particular, commenters maintained that European funds are better able to receive timely flow information than U.S. funds because there are multiple or earlier trading cut-off times in Europe and that there is greater use of currency-based orders in Europe, which contributes to confidence in the accuracy of fund flows.

Some commenters provided specific ideas about initiatives the Commission could pursue to mitigate operational challenges and help facilitate implementation of swing pricing for funds and investors. For example, they stated that the Commission could require (or encourage) intermediaries to provide shareholder flow estimates prior to the deadline by which a fund must strike its NAV.

200

Some commenters stated that the Commission also could require (or encourage) funds and intermediaries to implement earlier cut-off times to buy and sell fund shares, but many acknowledged the downsides associated with this option, including limiting investors' ability to transact in funds up until the close of the U.S. equity markets.

201

One commenter representing a group of asset management risk professionals suggested a detailed roadmap to altering current fund and intermediary processes that they suggested may represent a feasible approach to implementing swing pricing in the U.S.

202

Many commenters suggested that the Commission should address the operational challenges to swing pricing before it is implemented in the U.S and suggested delaying the effective date and/or implementation date of such new rules to allow the industry to work together to make the necessary changes to their infrastructure to resolve these concerns.

203

200

See

CRMC Comment Letter; GARP Comment Letter; Invesco Comment Letter; T. Rowe Comment Letter.

201

See

GARP Comment Letter; PIMCO Comment Letter; Charles Schwab Comment Letter; SIFMA Comment Letter II. Some commenters noted that funds could be put at a competitive disadvantage to other types of investment products (

e.g.,

hedge funds and collective trusts) that continue to accept trades throughout the day, and others stressed the fact that there is a long history in the U.S. mutual fund market of providing investors with flexibility to submit redemption and subscription requests until 4 p.m. ET.

See, e.g.,

ICI Comment Letter I; GARP Comment Letter; Wells Fargo Comment Letter.

202

See

GARP Comment Letter. This roadmap involved action by funds and intermediaries to solve swing pricing operational issues by: (1) Maintaining the dealing (intermediary and transfer agent) cut-off time for fund redemptions and subscriptions at 4 p.m. ET, as is current market practice; (2) requiring funds' NAV publication time to be shifted from 6 p.m. ET to 8 p.m. ET; (3) requiring providers of fund flows to provide “estimated” trading flows occurring each day by 6 p.m. ET, which would be used to determine whether to adjust the fund's NAV per share and calculate the adjusted NAV.

Id.

203

See, e.g.,

Blackrock Comment Letter; Dodge & Cox Comment Letter; SIFMA Comment Letter I; Vanguard Comment Letter.

The Commission acknowledges the operational challenges noted by commenters that will need to be addressed by industry participants. Because of these concerns, we believe the adoption of swing pricing in the U.S. as a new (optional) anti-dilution tool will likely require considerable lead time for many funds that will need to coordinate and implement the necessary operational changes with intermediaries and service providers in order to effectively conduct swing pricing for new or existing funds. Additionally, as noted by commenters, we understand that certain funds, intermediaries and service providers may incur substantial costs in doing so.

204

See, e.g.,

ICI Comment Letter I (“Building and maintaining additional systems would be quite costly, and even assuming that intermediaries at large would rework their systems to support swing pricing, they can be expected to seek the substantial costs of doing so from funds.”);

see infra

section III discussing the potential costs and benefits.

See also

discussion throughout this section regarding funds' deliberative process in determining whether the costs and drawbacks of implementing swing pricing, including managing such operational challenges and any cost sharing requested by intermediaries, are justified by the anti-dilution and other benefits that may result as a consequence of implementing swing pricing.

We recognize that U.S. fund complexes differ widely in terms of their size, the types of funds they offer, the types of investors they serve (

e.g.,

retail and/or institutional), and their distribution models. Thus, we anticipate that there may be certain funds that could make the necessary adjustments and prepare to implement swing pricing sooner than other funds, because they have or may be able to more easily obtain sufficient net flow information. For example, we understand that certain funds with investors that primarily transact directly with the fund's principal underwriter or transfer agent, or that are primarily distributed through affiliates or broker-dealers (that could potentially provide timely flow data),

205

and/or do not have a substantial number of investors transacting in retirement plans or insurance products could more easily obtain sufficient net flow information. In addition, larger fund complexes with the ability to more easily get net flow information from their intermediaries, including those that have established large trade

notification processes,

206

may have the leverage to negotiate operational solutions and the resources to implement swing pricing sooner for certain funds, which m

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