Bipartisan lawmakers warn SEC to tread carefully on mutual fund proposal

Two members of the House, one a Republican and the other a Democrat, warned the SEC “to carefully evaluate its next steps” on a mutual fund reform initiative that has drawn strong financial industry opposition.

The Securities and Exchange Commission is considering a proposal released in November that would require open-end funds to strengthen their liquidity management to better withstand sudden withdrawals during times of market stress.

The proposal involves changes in how mutual funds operate that would hurt ordinary investors, Reps. Ann Wagner, R-Mo., and Brad Sherman, D-Calif., said.

“It is clear that the SEC has presented this rule without due consideration for its impact on main street investors,” the lawmakers wrote in a letter Thursday to SEC Chairman Gary Gensler. “The proposal fails to identify a real problem that it claims to solve, and its implementation would disproportionately harm those saving for retirement. We urge the SEC to carefully evaluate its next steps and ensure that any new rules are made with the best interests of all investors in mind.”

An SEC spokesperson was not immediately available for comment.

Under the plan, mutual funds would have to implement so-called swing pricing, in which their net asset value changes based on the buying and selling of fund shares so that the costs are not borne by those staying in the fund.

Funds also would have to institute a “hard close” for purchase orders so that the current-day price is only available if the order is received before a fund calculates its NAV, which is generally assumed to occur at 4 p.m. ET.

The lawmakers said those changes would put investors buying fund shares through a 401(k) plan at a disadvantage because the transaction is done through a record keeper rather than directly through a transfer agent. The hard close would allow more sophisticated investors who buy through the agents to obtain better prices.

“This is unacceptable and unfair to investors who are simply trying to save and invest their hard-earned money to meet their financial goals,” Wagner and Sherman wrote. The swing-pricing and hard-close “mandates are untested in the United States and may be unworkable.”

Wagner and Sherman are the chair and ranking members, respectively, of the House Financial Services Subcommittee on Capital Markets.

Their criticisms echo those of a wide range of financial industry trade associations as well as some consumer advocacy organizations. The American Retirement Association said it asked Wagner and Sherman to write the letter.

“The ARA greatly appreciates the support from these members of the House Financial Services Committee and will be meeting shortly with the SEC Commissioners to express our significant concerns with the proposal directly to them,” American Retirement Association CEO Brian Graff said in an article in a newsletter published by the National Association of Plan Advisors.