supported by data, of the costs the fund would incur if it purchased or
sold a pro rata amount of each investment in its portfolio to satisfy
the amount of net purchases or net redemptions (i.e., a vertical
slice).\193\ The current swing pricing framework requires that the
swing factor 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 is used, as well as borrowing-
related costs associated with satisfying redemptions.\194\ Under our
proposal, a fund would be required to assume it would purchase or sell
a pro rata amount of each investment in its portfolio, rather than
consider the specific investments it would purchase to invest the
proceeds from subscriptions or sell to meet redemptions.\195\ Because a
fund would need to calculate its costs based on the purchase or sale of
a vertical slice of its portfolio, rather than selecting specific
investments or borrowing to meet redemptions, we have proposed to
remove borrowing costs from the swing factor calculation. We recognize
that there are many ways a fund could pay redemptions or invest
proceeds from investor purchases, and a fund may not necessarily sell
or purchase a vertical slice of its portfolio holdings to do so.
However, we believe analyzing costs based on an assumed purchase or
sale of a vertical slice of the fund's portfolio would more fairly
reflect the costs imposed by redeeming or purchasing investors than an
approach that focuses solely on the costs associated with the
instruments that the fund expects to buy or sell (or expected borrowing
costs, in the case of redemptions). For example, under the current
rule, if a fund sells only highly liquid investments to meet
redemptions, the swing factor would typically reflect relatively low
transaction costs of selling those investments and any near-term
rebalancing, and generally would not account for the effect of leaving
remaining investors with a less liquid portfolio or potential longer-
term rebalancing costs. In contrast, the proposed requirement that a
fund calculate costs to purchase or sell a vertical slice of the
portfolio is designed to recognize the potential longer-term costs of
reducing the fund's liquidity under these circumstances.
---------------------------------------------------------------------------

    \193\ See proposed rule 22c-1(b)(2).
    \194\ These near-term costs include spread costs, transaction
fees and charges arising from asset purchases or asset sales
resulting from those purchases or redemptions. See rule 22c-
1(a)(3)(i)(C).
    \195\ See proposed rule 22c-1(b)(2).
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    In addition, using a vertical slice is more objective than the
current approach, because the swing factor administrator does not need
to anticipate what actions the fund will take to pay redemptions or
invest proceeds from investor purchases, which may vary from day to
day. This should make the swing factor easier to administer. Further,
under the proposed swing pricing framework and consistent with the
current rule, a swing factor could generally be determined on a
periodic basis, as long as developments that should affect the swing
pricing administrator's good faith estimates of spreads, market impact,
and other transaction costs, such as significant market developments,
prompt a quicker reevaluation.\196\ A quicker reevaluation would be
required to comply with the proposed amendments where developments
would otherwise prevent the prior swing factor from reflecting the cost
the fund would incur if it purchased or sold a pro rata amount of each
portfolio investment under current market conditions. Accordingly, we
believe a fund would have the incentive to reevaluate promptly its
swing factor in these circumstances because having an accurate and fair
transaction price is crucially important to investors. We believe that
funds would address the frequency of swing factor determinations when
designing their policies and procedures relating to swing pricing.
---------------------------------------------------------------------------

    \196\ See Swing Pricing Adopting Release, supra note 11, at
paragraph accompanying n.268.
---------------------------------------------------------------------------

    Calculating the swing factor would differ depending on whether the
fund is experiencing net purchases or net redemptions. In the case of
net redemptions, the good faith estimates must include, for selling a
pro rata amount of each investment in the fund's portfolio to satisfy
the amount of net redemptions: (1) spread costs; (2) brokerage
commissions, custody fees, and any other charges, fees, and taxes
associated with portfolio investment sales; and (3) if the amount of
the fund's net redemptions exceeds the market impact threshold, the
market impact.\197\ In the case of net purchases, swing pricing would
only be applied if the amount of the fund's net purchases exceeds
2%.\198\ In such cases the good faith estimates must include, for
purchasing a pro rata amount of each investment in the fund's portfolio
to invest the proceeds from the net purchases: (1) spread costs; (2)
brokerage commissions, custody fees, and any other charges, fees, and
taxes associated with portfolio investment purchases; and (3) the
market impact.\199\ We believe these components of the swing factor for
both net redemptions and net purchases, taken together, approximate the
aggregate costs associated with dilution. We also believe that
providing a standard for calculating swing factors, including the
vertical slice approach and the identification of the categories of
costs funds must include, would help avoid the variability in how funds
calculate swing factors, as observed in some other jurisdictions where
funds use swing pricing.\200\
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    \197\ See proposed rule 22c-1(b)(2)(i).
    \198\ See proposed rule 22c-1(b)(2)(ii).
    \199\ Id.
    \200\ See Bank of England Survey, supra note 60. This report
states that in calculating swing factors, some surveyed UK funds
only considered bid-ask spreads, some other funds also considered
explicit transaction costs such as commissions, and a few funds
considered market impact as well. Moreover, in reviewing the size of
swing factors applied in Mar. 2020, the report found that corporate
bond funds with net outflows applied swing factors ranging between -
5% and +0.5% from Mar. 10 to 23. The report states that the scale of
variation suggests that fund-specific experiences are not the sole
explanation for differences in swing factors and that different
approaches fund managers took in applying swing pricing also
contributed to these variations.
---------------------------------------------------------------------------

    We understand that in calculating the swing factor, fund managers
may have incentives to over-estimate costs in order to improve fund
performance. However, doing so would be misleading. To help address
this risk, under the proposal funds would be required to report their
swing factor adjustments publicly on Form N-PORT. We believe this
public transparency

should reduce a fund's incentive to over-estimate costs. Additionally,
a fund's portfolio manager, who arguably might have the strongest
incentives to over-estimate costs, could not be designated as the swing
pricing administrator.\201\
---------------------------------------------------------------------------

    \201\ See proposed rule 22c-1(b)(3)(ii).
---------------------------------------------------------------------------

    The method for calculating a fund's spread costs would differ
depending on how the fund values its portfolio holdings. We understand
that funds may value portfolio holdings at the bid price or the mid-
market price when striking their NAVs.\202\ If a fund values its
portfolio holdings at the bid price, it would not need to include
spread costs in its swing factor when the fund has net redemptions. In
contrast, if the fund has net purchases exceeding 2%, the fund would
need to include spread costs, which would reflect the full bid-ask
spread. For a fund that uses mid-market pricing, it would need to
include spread costs in its swing factor any time it applies swing
pricing. When a fund using mid-market pricing has net redemptions, or
net purchases exceeding 2%, the spread cost component of its swing
factor would reflect half of the bid-ask spread.
---------------------------------------------------------------------------

    \202\ See FASB ASC 820-10-35-36C (providing that if an asset
measured at fair value has a bid price and an ask price, the price
within the bid-ask spread that is most representative of fair value
in the circumstance shall be used to measure fair value, and that
the use of bid prices for asset positions is permitted but not
required for these purposes); FASB ASC 820-10-35-36D (stating that
use of mid-market pricing as a practical expedient for fair value
measurements within a bid-ask spread is not precluded). Since a
seller generally asks for a higher price for a security than a buyer
bids for that security, the mid-market price is incrementally higher
than the bid price for a security, but lower than its ask price.
---------------------------------------------------------------------------

    The proposal would require a fund to include market impact in its
swing factor only if the amount of net redemptions exceeds the market
impact threshold, and in all cases where the amount of net purchases
exceeds the inflow swing threshold. The market impact component of the
swing factor would reflect good faith estimates of the market impact of
selling (in the case of net redemptions) or purchasing (in the case of
net purchases) a vertical slice of a fund's portfolio to satisfy the
amount of net redemptions or net purchases. The fund would estimate
market impacts for each investment in its portfolio by first estimating
the market impact factor. This factor is the percentage change in the
value of the investment if it were purchased or sold, per dollar of the
amount of the investment that would be purchased or sold. Then, the
fund would multiply the market impact factor by the dollar amount of
the investment that would be purchased or sold if the fund purchased or
sold a pro rata amount of each investment in its portfolio to meet the
net redemptions or net purchases.\203\
---------------------------------------------------------------------------

    \203\ See proposed rule 22c-1(b)(2)(iii).
---------------------------------------------------------------------------

    We understand that it may be difficult to produce timely, good
faith estimates of the market impact of purchasing or selling a pro
rata portion of each instrument the fund holds. Recognizing these
difficulties, and because some securities held by mutual funds may have
similar characteristics and would likely incur similar costs if
purchased or sold, the proposed rule would permit the swing pricing
administrator to estimate costs and market impact factors for each type
of investment with the same or substantially similar characteristics
and apply those estimates to all investments of that type rather than
analyze each investment separately.\204\
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    \204\ See proposed rule 22(c)-1(b)(iv).
---------------------------------------------------------------------------

    The existing swing pricing framework currently in rule 22c-1 does
not permit a fund to include market impact costs relating to
transacting in the fund's investments in the swing factor calculation.
At the time of the rule's adoption, the Commission stated that it may
be difficult for many funds to estimate readily market impact costs,
and that subjective estimates of market impact costs could grant
excessive discretion in a fund's determination of a swing factor.\205\
We understand that it may continue to be difficult to determine market
impact costs with precision, while a fund would be able to determine
other relevant factors more precisely.\206\ However, we believe the
experiences of European funds that employed swing pricing through March
2020 have highlighted the importance of considering market impact
costs, given the stressed nature of markets at that time, the level of
those funds' redemptions, and the size of those funds' swing factors.
We understand that only some European funds consider market impact
costs when determining their swing factors.\207\ A recent survey
conducted by the Association of the Luxembourg Fund Industry
(``ALFI''), however, observed an increase in asset managers including
market impact in their swing factors, with 35% of surveyed asset
managers including this component in the factor calculation.\208\
---------------------------------------------------------------------------

    \205\ See Swing Pricing Adopting Release, supra note 11, at
paragraph accompanying n.240.
    \206\ Methodologies used to estimate market impact are often
created by liquidity measurement vendors. These vendors typically
create a model to gauge what size of trade will have a market impact
on a security (using various factors such as bid-offer spreads,
issue sizes, recent daily average volumes, and recent trade sizes),
back-test the model to check its accuracy, and then adjust the
weights of the various factors used in the model accordingly.
    \207\ See Bank of England Survey, supra note 60 (stating that
most surveyed fund managers did not factor market impact explicitly
into their swing factors, and few had models in place to estimate
spreads when needed).
    \208\ See ALFI Swing Pricing Survey 2022 (July 2022), available
at https://www.alfi.lu/getattachment/8417bf51-4871-41da-a892-f4670ed63265/app_data-import-alfi-alfi-swing-pricing-survey-2022.pdf.
---------------------------------------------------------------------------

    To address the concern that market impact estimation may be
difficult, and that subjective estimates of market impact costs could
grant excessive discretion in the determination of a swing factor, we
are providing additional parameters for estimating market impact to
make the calculation more objective as discussed above. These
prescriptive requirements should help to limit subjectivity, and
recordkeeping requirements would require funds to document their market
impact factors, facilitating our staff's review and oversight of mutual
fund swing pricing.\209\
---------------------------------------------------------------------------

    \209\ See rule 31a-2(a)(2) (requiring funds to preserve for a
period of not less than six years all schedules evidencing and
supporting each computation of an adjustment to the fund's NAV based
on swing pricing policies and procedures). A fund's records under
the proposed amendments should generally include the fund's unswung
NAV, the level of net purchases or net redemptions that the fund
encountered (and estimated) that triggered the application of swing
pricing, the swing factor that was used to adjust the fund's NAV,
and relevant data supporting the calculation of the swing factor,
including the components of the swing factor such as market impact.
---------------------------------------------------------------------------

    The current swing pricing framework requires the establishment of
an upper limit on the swing factor used.\210\ The Commission included a
2% upper limit in the current rule to make sure that swing pricing
would not operate as a ``de facto gate.'' \211\ We are not including an
upper limit on the swing factor under our proposed framework. We
propose to remove the requirement for the board to review and approve
the fund's swing threshold and the upper limit on the swing factor(s)
used, as well as any charges on these items, to conform to our proposed
swing pricing framework.\212\ The more specific parameters in this
proposal for determining a fund's swing factor are intended to
sufficiently mitigate the

concerns that led to an upper limit in the existing swing pricing
regime. In addition, although the current rule does not prescribe which
investments a fund would purchase or sell, the current upper limit may
provide an incentive for funds to sell their most liquid assets first,
which may increase the risk of dilution when the fund later rebalances
its portfolio. Furthermore, we understand that in certain other
jurisdictions, several funds experienced costs and dilution that led to
swing factors above 2% in March 2020.\213\ Those cases suggest that the
swing factors helped mitigate dilution and did not constitute a de
facto gate, given that they reflected market conditions at that time.
We recognize that liquidity costs could vary widely across funds and
under different market conditions, and we do not wish to limit the
extent to which swing pricing could mitigate dilution. Finally, the
policies and procedures for determining the swing factor would be
required to be approved by the fund's board, which has an obligation to
act in the best interests of the fund.
---------------------------------------------------------------------------

    \210\ See rule 22c-1(a)(3)(i)(C). Additionally, a fund's board
of directors, including a majority of directors who are not
interested persons of the fund must approve the fund's swing
threshold(s) and the upper limit on the swing factor(s) used, and
any changes to the swing threshold(s) or the upper limit on the
swing factor(s) used. See rule 22c-1(a)(3)(ii).
    \211\ See Swing Pricing Adopting Release, supra note 13, at text
accompanying nn.253-254.
    \212\ See proposed rule 22c-1(b)(3). We also propose to modify
the board's review of a fund's swing pricing policies and procedures
to include ``their effectiveness at mitigating dilution'' rather
than ``the impact on mitigating dilution.'' See proposed rule 22c-
1(b)(3)(iii)(A).
    \213\ See, e.g., Commission de Surveillance du Secteur
Financier, Swing Pricing Mechanism--FAQ, available at https://www.cssf.lu/en/Document/cssf-faq-swing-pricing-mechanism/(providing
guidance for increasing the swing factor above the maximum level
identified in a fund's prospectus under certain circumstances, and
noting that typical maximum swing factors observed in fund
prospectuses are between 1% and 3%).
---------------------------------------------------------------------------

    Additionally, Form N-1A currently requires funds that use swing
pricing to disclose a fund's swing factor upper limit.\214\ Because we
propose to remove the swing factor upper limit in the rule, we also
propose to remove the requirement to provide an upper limit on the
swing factor from Item 6(d) of Form N-1A.\215\
---------------------------------------------------------------------------

    \214\ Item 6(d) of Form N-1A.
    \215\ See Item 6(d) of proposed Form N-1A.
---------------------------------------------------------------------------

    We request comment on our proposed calculation of a fund's swing
factor.
    78. Does our proposed requirement that a fund calculate the swing
factor by assuming it would sell or purchase a pro rata amount of each
investment in its portfolio properly account for liquidity costs? Are
there other considerations related to liquidity costs that the swing
pricing framework should take into account, such as shifts in the
fund's liquidity management or other repositioning of the fund's
portfolio?
    79. Should funds calculate the swing factor by estimating the costs
of purchasing or selling only the investments the fund plans to buy or
sell to satisfy shareholder purchases or redemptions (consistent with
the current rule), rather than calculating the swing factor based on
the costs the fund would incur if it sold a pro rata amount of each
investment in its portfolio (as proposed)? Which approach would more
fairly reflect the costs imposed by redeeming or purchasing investors?
    80. Should we permit a fund not to use the vertical slice
assumption when doing so would require the fund to assume that it is
purchasing or selling an amount of a given instrument that would not be
permissible under other rules (e.g., if it would result in an
assumption that a fund would purchase an amount of illiquid investments
that exceeds 15%)? If so, how should we modify the assumption for these
purposes? Should we require a vertical slice assumption in all cases
for administrative ease and consistency in calculations?
    81. As proposed, should the swing factor calculation take into
account spread costs; brokerage commissions, custody fees, and any
other charges, fees, and taxes associated with portfolio investment
sales; and the market impact under certain circumstances? Should we
remove any of these types of costs from the calculation? Are there
other types of costs we should include?
    82. Should the swing factor calculation take into account borrowing
costs like under the current rule? Should the proposed rule only
include borrowing costs for certain assets, such as illiquid assets?
Should illiquid investments be defined for this purpose using the same
definition as in rule 22e-4?
    83. Should the way in which a fund calculates spread costs depend
on whether it uses midpoint or bid pricing when valuing its holdings?
Should we allow a fund that uses bid pricing not to apply a swing
factor when it has net redemptions unless the amount of net redemptions
exceeds a threshold (e.g., the market impact threshold)? Should we
require all funds to use bid pricing, either instead of or in
combination with a swing pricing requirement? Would use of bid pricing
effectively address dilution, particularly when net redemptions are
small? Instead of requiring swing pricing as proposed, should we
require a fund to use bid pricing to compute its share price or
otherwise adjust its price to reflect spread costs on days the fund
estimates that it has net redemptions? If so, should the fund also use
ask pricing on days the fund estimates that it has net purchases?
Should we require a fund to use bid pricing to compute its share price
on all days, regardless of whether the fund has net redemptions or
purchases?
    84. Should we require the swing factor to include market impact
under certain circumstances, as proposed? Do some or all funds already
estimate market impact factors, or perform similar analyses, to inform
trading decisions or liquidity rule classifications? If so, would these
funds' prior experience smooth the transition to making a good faith
estimate of the market impact factor under the proposal? Would the
proposed amendments to the liquidity rule further enhance funds'
ability to estimate market impacts? What difficulties might funds
experience in developing a framework to analyze market impact factors
and in producing good faith estimates of market impact factors for
purposes of the proposed swing pricing requirement? What are the
specific operational challenges in estimating market impact? Are there
ways we could reduce those difficulties, while still requiring
redeeming investors to bear costs that reasonably represent the costs
they would otherwise impose on the fund and its remaining shareholders?
    85. Should we permit funds to calculate swing factors on a periodic
basis, as long as developments such as significant market developments
prompt a quicker re-evaluation, as proposed? Does this approach have
any effect on the goals of reducing dilution, improving fairness, and
addressing potential first-mover advantages? Are there other
circumstances in which a fund should be required to re-evaluate its
swing factors or certain swing factor components, such as changes in
the fund's investment strategy or liquidity? Should we instead require
funds to calculate swing factors (or certain components of swing
factors) on a daily basis or at some other defined minimum frequency
(e.g., weekly or monthly) unless developments prompt a quicker re-
evaluation?
    86. Should the rule permit, rather than require, funds to follow
the identified inflow swing threshold, market impact threshold, and
swing factor calculations set forth in the rule? If so, what
considerations or factors should the rule require a fund to consider
when determining thresholds and swing factors if the fund determines
not to follow the threshold or calculations set forth in the rule? For
example, instead of removing the factors a fund must consider when
setting swing threshold(s) under the current rule, should we maintain
those or similar factors for purposes of determining a fund's market
impact

threshold or the inflow swing threshold? \216\
---------------------------------------------------------------------------

    \216\ See rule 22c-1(a)(3)(i)(B).
---------------------------------------------------------------------------

    87. Should funds be subject to a numerical limit on the size of
swing factors? If so, should we retain the current rule's 2% swing
factor upper limit and the disclosure of the limit in Form N-1A?
Alternatively, should the limit be higher or lower (e.g., 1% or 3%)?
    88. Should we allow a fund to use a set swing factor, such as 2% or
3%, in times of market stress when estimating a swing factor with high
confidence may not be possible? How would we define market stress for
this purpose? Should a fund's swing pricing administrator, adviser, or
a majority of the fund's independent directors, be permitted to
determine market conditions were sufficiently stressed such that the
fund would apply the set swing factor? Are there other circumstances in
which we should permit or require a fund to use a default swing factor?
For example, should the rule establish a default swing factor that
would apply when a fund has illiquid investments that exceed 15% or
when a fund drops below its highly liquid investment minimum under rule
22e-4?
    89. Should the rule permit a fund to apply a market impact factor
of zero for certain investments or under certain circumstances? For
example, should a fund be able to use a market impact of zero for
certain categories of investments, such as Treasuries or other
investments that the fund classifies as highly liquid investments under
rule 22e-4? Are there particular circumstances in which it would not be
reasonable for the rule to permit a fund to use a market impact factor
of zero, such as in stressed market conditions?
    90. Instead of specifying swing factor calculations and thresholds
in the rule, should we require a fund to adopt policies and procedures
that specify how the fund would determine swing pricing thresholds and
swing factors based on principles set forth in the rule? If so, should
the policies and procedures include the methodologies from the market
impact factor calculation we proposed? Should the policies and
procedures be required to include the swing factor calculation? Should
the policies and procedures be required to define the market impact
threshold with reference to a metric other than net purchases or net
redemptions? If we require policies and procedures, should we specify
the market impacts and dilution costs that a fund's swing pricing
program must address, rather than specifying specific principles and
calculation methodologies?
    91. Are there circumstances in which it would not be possible to
estimate the market impact factor with a high degree of accuracy? If
so, what modifications should we make to the proposal?
    92. Would our proposed swing pricing requirement cause or
incentivize investors to move their assets out of the funds that must
implement swing pricing into other investment vehicles that do not use
swing pricing, such as ETFs, collective investment trusts (``CITs''),
or separately managed accounts? What are the potential effects
associated with these decisions? For example, when would such movements
occur (e.g., before the end of the compliance period for a swing
pricing requirement, if adopted, or over a longer time horizon)? Would
retirement plan sponsors or others remove mutual funds as investment
options if swing pricing is required? In the case of separately managed
accounts, should the Commission take any action with respect to how the
Investment Company Act may apply to investment advisory programs
seeking to provide the same or similar professional management services
on a discretionary basis to a large number of advisory clients having
relatively small amounts to invest? \217\
---------------------------------------------------------------------------

    \217\ See, e.g., 17 CFR 270.3a-4.
---------------------------------------------------------------------------

    93. Would a swing pricing requirement change the behavior of funds?
For example, would it cause any changes to fund strategies or
practices?
    94. How might swing pricing affect investor behavior in a period of
liquidity stress? Would swing pricing increase fund resilience by
reducing the first-mover advantage that some investors may seek during
periods of market stress? Would swing pricing encourage investors to
redeem smaller amounts over a longer period of time because investors
will not know whether the fund's flows during any given pricing period
will trigger swing pricing and, if so, the size of the swing factor for
that period?
    95. Based on historical data, how would our swing pricing framework
affect funds' transaction prices under normal market conditions?
    96. Rather than requiring funds to adopt a swing pricing
requirement, should we provide more than one approach to mitigate
dilution and require each fund to implement an anti-dilution tool, but
permit each fund to determine its own preferred approach? If so, which
anti-dilution tool options should the rule provide? Should we, for
example, allow a fund to adopt swing pricing, a liquidity fee (i.e.,
purchase and/or redemption fees), or dual pricing? \218\ Are there
other options that would be appropriate under this approach? Would
funds' use of different approaches benefit investors by increasing
investor choice or, conversely, would these differences confuse
investors or make it more difficult for them to compare funds with each
other?
---------------------------------------------------------------------------

    \218\ See infra section II.D for a discussion of potential
liquidity fee or dual pricing frameworks.
---------------------------------------------------------------------------

    97. The current rule requires a fund's board of directors to
approve the fund's swing pricing policies and procedures and to
designate the persons responsible for swing pricing. Should we require
board involvement in the day-to-day administration of a fund's swing
pricing program in addition to its compliance oversight role? How might
funds maintain segregation between portfolio management and swing
pricing administration? Should a fund's chief compliance officer have a
designated role in overseeing how the fund applies the proposed swing
pricing requirement?
    98. The current rule requires a fund's board to review, no less
frequently than annually, a report prepared by the swing pricing
administrator on the fund's use of swing pricing, including the
effectiveness of the fund's policies and procedures and any material
changes to them since the last report. Should we require board review
of a swing pricing report more or less frequently than annually? Should
we require less frequent board review over time (e.g., every quarter
for the first year after implementation and then less frequently in
following years as the fund gains experience implementing the swing
pricing program under various market conditions)? Should we require the
fund to disclose any material inaccuracies in the swing pricing
calculation to the board (e.g., as they arise, no less frequently than
quarterly, or at some other frequency)? Would this disclosure
requirement be additive, or would fund boards already receive
information about material inaccuracies in the swing pricing
calculation in the course of existing board oversight? \219\
---------------------------------------------------------------------------

    \219\ See, e.g., 17 CFR 270.38a-1 (requiring the fund's chief
compliance officer to provide a written report to the board
addressing each material compliance matter occurring since the date
of the chief compliance officer's last report to the board);
Compliance Programs of Investment Companies and Investment Advisers,
Investment Company Act Release No. 26299 (Dec. 17, 2003) [68 FR
74713 (Dec. 24, 2003)] (``Rule 38a-1 Adopting Release''), at n.84
(``Serious compliance issues must, of course, always be brought to
the board's attention promptly, and cannot be delayed until an
annual report.'').
---------------------------------------------------------------------------

    99. In addition to the proposed requirement that funds would
publicly

report their swing factor adjustments on Form N-PORT, should funds also
be required to post that same information on their websites? If so, how
promptly should website reporting be required (e.g., weekly, monthly,
quarterly, annually)? Are there other ways to provide this information
to investors?

C. Hard Close

    Currently if an investor submits an order to an intermediary to
purchase or redeem fund shares, that order will be executed at the
current day's price as long as the intermediary receives the order
before the time the fund has established for determining the value of
its holdings and calculating its NAV (typically 4 p.m. ET).\220\ The
fund, however, might not receive information about that order until
much later, sometimes as late as the next morning. We are proposing
amendments to rule 22c-1 under the Act to require a hard close for
those funds that are required to implement swing pricing.\221\ The
proposed hard close requirement would provide that a direction to
purchase or redeem a fund's shares is eligible to receive the price
established at the current day's price solely if the fund, its
designated transfer agent, or a registered securities clearing agency
(collectively, ``designated parties'') receives an eligible order
before the pricing time as of which the fund calculates its NAV.\222\
Orders received after the fund's established pricing time would receive
the next day's price.\223\ In 2003, the Commission proposed a similar
hard close requirement but did not adopt the proposed amendments.\224\
The proposed hard close amendments would serve multiple goals, such as
facilitating mutual funds' ability to operationalize swing pricing by
ensuring that funds receive timely flow information, modernizing and
improving order processing, as well as helping to prevent late trading.
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    \220\ Although not all funds calculate their NAVs as of 4 p.m.
ET, throughout this release we use 4 p.m. ET as the time as of which
a fund calculates its NAV unless otherwise noted.
    \221\ As discussed above in section II.B, swing pricing would be
required for all registered open-end management investment companies
other than money market funds and ETFs. The proposal would not
affect the operation of current rule 22c-1 for money market funds or
ETFs, as well as unit investment trusts (which are also subject to
rule 22c-1).
    \222\ See proposed rule 22c-1(a)(3).
    \223\ Funds generally compute their NAVs once per day, although
some funds compute their NAVs multiple times per day. For
simplicity, this discussion assumes that a fund computes its NAV
once per day.
    \224\ See Amendments to Rules Governing Pricing of Mutual Fund
Shares, Investment Company Act Release No. 26288 (Dec. 11, 2003) [68
FR 70388 (Dec. 17, 2003)] (``2003 Hard Close Proposing Release'').
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1. Purpose and Background
    We are proposing to require all registered open-end funds (other
than money market funds and ETFs) to implement swing pricing in order
to combat dilution. Our hard close proposal is designed to support the
proposed swing pricing amendments by facilitating the more timely
receipt of fund order flow information. To implement the proposed swing
pricing requirement, mutual funds need sufficient net order flow
information to determine whether to apply a swing factor, and the size
of that swing factor, before they finalize that day's price. Based on
staff outreach with foreign regulators and asset managers that operate
in Europe, we understand that a hard close is common in other
jurisdictions in which funds currently implement swing pricing, and use
of a hard close in those jurisdictions facilitates the receipt of
timely flow information to inform swing pricing decisions.\225\ The
proposed hard close requirement would facilitate the more timely
receipt of order flow information by requiring that the fund, its
transfer agent, or a clearing agency receive all orders that are
eligible to receive that day's price before the fund computes its NAV.
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    \225\ We understand that the hard close employed in these other
jurisdictions is not necessarily the same as the hard close approach
we are proposing. For example, we understand it is common in some
other jurisdictions for the required time of receipt of orders by
the fund to be several hours before the time as of which the fund
values its holdings.
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    Beyond facilitating swing pricing, our proposed hard close
amendments to rule 22c-1 also would help prevent late trading of fund
shares. Because a financial intermediary currently can submit an order
that it received before 4 p.m. ET to a designated party after 4 p.m. ET
for execution at that day's NAV, there is a risk that an intermediary
could unlawfully alter orders using after-hours information to benefit
the intermediary or its clients. The Commission and others uncovered
several instances of late trading in the early 2000s.\226\ While the
Commission adopted rules to address concerns about late trading, we
believe that the hard close proposal, when coupled with our current
rules, would more effectively prevent late trading.\227\ For example,
some fund intermediaries are not subject to examination by the
Commission and staff, and we are unable to examine whether those
intermediaries permit or engage in unlawful late trading. By proposing
to require that all purchase and redemption orders be received by the
fund, its transfer agent, or a registered clearing agency by 4 p.m. ET,
the proposal would prevent intermediaries from altering orders after 4
p.m. ET or unlawfully misrepresenting that an order was received before
4 p.m. ET and entitled to that day's price. We believe that the
proposed amendments would aid in the elimination of late trading
through intermediaries by requiring certain SEC-regulated parties to
receive orders before the NAV is computed to receive that day's price.
The proposed hard close requirement would also modernize and improve
order processing and reduce operational risks, as discussed below.
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    \226\ See, e.g., 2003 Hard Close Proposing Release, supra note
224 (discussing investigations by Commission staff of suspected late
trading, which suggested that, at the time, late trading of fund
shares was not an isolated event). See, also, e.g., In the Matter of
Steven B. Markovitz, Investment Company Act Release No. 26201 (Oct.
2, 2003); In the Matter of Theodore Charles Sihpol, III, Investment
Company Act Release No. 27113 (Oct. 12, 2005); In the Matter of Legg
Mason Wood Walker, Inc., Investment Company Act Release No. 27071
(Sept. 21, 2005); In the Matter of Canadian Imperial Holdings, Inc.
and CIBC World Markets Corp., Investment Company Act Release No.
26994 (July 20, 2005); In the Matter of Brean Murray & Co., Inc.,
Investment Company Act Release No. 26761 (Feb. 17, 2005).
    \227\ See, e.g., Rule 38a-1 Adopting Release, supra note 219
(adopting rule 38a-1 under the Act, which requires written policies
and procedures reasonably designed to prevent violation of the
securities laws, oversight of compliance by the fund's service
providers, and designation of a chief compliance officer).
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2. Pricing Requirements
    Under the proposed rule, an eligible order to purchase or redeem
would receive the price for the next pricing time after a designated
party receives the order.\228\ We propose to define the terms ``pricing
time'' and ``eligible order'' for purposes of the rule.\229\ Eligible
orders would receive a price based on the current NAV as of the next
pricing time, which would include an adjustment to the NAV to include
the swing factor, as applicable. Consistent with the current rule, the
fund's board of directors would be required to establish a ``pricing
time,'' which would be defined as the time or times of day as of which
the fund calculates the current NAV of its redeemable shares pursuant
to the rule (typically 4 p.m. ET). The price of a fund's shares would
typically be finalized several hours after the pricing time, giving
funds time to calculate the current NAV, apply any

swing factor, and finalize and publish the fund share price.
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    \228\ See proposed rule 22c-1(a)(3).
    \229\ See definitions of ``Eligible order'' and ``Pricing time''
in proposed rule 22c-1(d).
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    For purposes of the proposed hard close requirement, an eligible
order to purchase or redeem fund shares would have to supply certain
information about the size of an investor's intended trade. This
approach is intended to facilitate swing pricing by providing mutual
funds with information they can use to calculate investor flows. In
addition, this approach requires that trading intentions are clear
before 4 p.m., which would further help prevent late trading.
Specifically, we propose to define the term ``eligible order'' to mean
a direction to purchase or redeem a specific number or value of fund
shares. For example, an eligible order would include the direction to
purchase or sell either (1) a specific number of shares of a fund
(e.g., 100 shares, or all the shares held in the account), or (2) an
indeterminate number of shares of a specific value (e.g., $10,000 of
shares of the fund).
    The proposed definition of eligible order also would include
exchange orders. An exchange refers to the process in which an investor
initiates an order to purchase shares of a fund using the proceeds from
a contemporaneous order to redeem shares of another fund. When an
exchange is initiated, two transactions are created--a redemption of
securities and a purchase. We understand that exchanges are often
between funds in the same fund complex, however, exchanges can occur
between funds in different complexes. In either case, exchanges often
are processed as a single transaction so that both the redemption and
purchase components of the exchange receive same-day pricing. For
exchanges involving a fixed number of shares on the redemption leg, the
amount and number of shares of the second fund to be purchased will not
be known until the NAV of the first fund is determined, which will be
after the NAV is struck after 4 p.m. ET. For example, if an investor
submits an order to redeem 100 shares of Fund A and invest the
redemption proceeds in Fund B, the amount of the redemption proceeds
from Fund A is not known until Fund A determines its price for that day
and, likewise, the purchase amount for Fund B is not known until that
time.\230\ Under our proposed rules, this exchange transaction would
qualify as an eligible order so that these contemporaneous transactions
may continue to occur.
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    \230\ See supra section II.B.3 (discussing how a fund whose
shares are purchased in an exchange transaction can estimate the
size of the inflow for purposes of the proposed swing pricing
requirement).
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    To receive that day's price, a designated party must receive the
eligible order before the pricing time.\231\ The fund's designated
transfer agent is a registered transfer agent that is designated in the
fund's registration statement filed with the Commission.\232\
Currently, NSCC is the only registered clearing agency for fund shares,
which operates its Fund/SERV service for processing fund transactions.
The proposed rule would specify that eligible orders are irrevocable as
of the next pricing time after a designated party receives the order.
The proposed requirement of irrevocability of an eligible order is
designed to prevent the cancellation or modification of orders by
investors or intermediaries after the pricing time applicable to the
order.\233\ Preventing the cancellation or modifications of orders
after the pricing time would help avoid continuing adjustments to the
investor flow information that a fund uses to make swing pricing
decisions. In addition, the alteration or cancellation of fund orders
after the pricing time may be used as a means to facilitate late
trading as fund investors may become aware of new market information
after the order has been submitted and after the pricing time. We
request comment on the proposed approach to implementing the hard close
requirement, including:
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    \231\ Although orders would have to be received by Fund/SERV or
the designated transfer agent by 4 p.m. ET to ensure same-day
pricing, the clearing agency and designated transfer agent each may
complete its processing after the pricing time.
    \232\ See proposed rule 22c-1(d). The term ``transfer agent''
has the same meaning as in section 3(a)(25) of the Exchange Act [15
U.S.C. 78c(a)(25)] and does not include underlying or sub-transfer
agents. A fund may designate more than one transfer agent in its
registration statement.
    \233\ The irrevocability of an order does not prevent a fund
from rejecting an order and does not affect the ability of a fund to
maintain policies and procedures for correcting bona fide errors.
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    100. Should we make any changes to the definitions included in the
proposed rule? Is the definition of ``eligible order'' clear and
understandable? Is the definition of ``designated transfer agent''
clear and understandable? Is the definition of ``pricing time'' clear
and understandable''? Are there other terms we should define?
    101. Should the proposed hard close requirement permit exchanges,
as proposed? If not, what goals of the proposed hard close requirement
would be supported by no longer permitting exchanges?
    102. Should the definition of ``eligible order'' require orders to
be irrevocable as of the pricing time, as proposed? Should funds be
permitted to correct bona fide errors under a hard close, as proposed?
If not, how should errors be resolved? Are there other reasons why an
eligible order should not be considered irrevocable as of the pricing
time?
    103. Should the definition of ``eligible order'' include directions
to purchase or redeem a specific percentage of fund shares in an
account or a specific percentage of an account's value?
    104. To what extent do designated parties already time stamp orders
based on the time of receipt? Should we include new requirements for
each designated party to time stamp order information for purposes of
the hard close requirement?
    105. Should we include funds, designated transfer agents, and
registered clearing agencies as designated parties, as proposed? Would
allowing registered clearing agencies to receive eligible orders for
purposes of the hard close delay the ability of the fund's swing
pricing administrator to assess investor flow information to make swing
pricing decisions? If so, how long would this delay be?
    106. Beyond the proposed designated parties, are there other
parties involved in processing order information that should be
eligible to receive eligible orders before the pricing time so that
orders may receive that day's NAV? For example, should a fund's
principal underwriter qualify as a designated party and, if so, why? To
what extent do direct investors or intermediaries today place orders
with a fund's principal underwriter or directly with the fund's
transfer agent?
    107. Should we limit the proposed hard close requirement to funds
that must implement swing pricing under the amendments to rule 22c-1,
as proposed?
    108. The proposed amendments to rule 22c-1 would establish
different requirements for money market funds, transactions by
authorized participants with ETFs, and unit investment trusts than for
all other open-end funds, which would be required to implement a hard
close. Would investors, funds, or intermediaries be confused by the
different pricing requirements that would be created by the proposed
amendments to rule 22c-1? If so, what confusion would be created? What
party to a transaction would bear that confusion? Would additional
burdens be created by having different pricing requirements under
proposed rule 22c-1 for these different types of registered investment
companies?

3. Effects on Order Processing, Intermediaries and Investors, and
Certain Transaction Types
    The proposed hard close would require changes to current order
processing practices. Although modernizing these practices is intended
to reduce operational risk and enhance resilience, in addition to the
benefits related to swing pricing and helping deter late trading, we
recognize these changes would also involve costs.\234\
---------------------------------------------------------------------------

    \234\ See infra section III.C.3 discussing the estimated costs
of the hard close proposal on funds, designated parties,
intermediaries, and investors.
---------------------------------------------------------------------------

a. Order Processing Improvements
    The system updates that would support the implementation of a hard
close may provide additional benefits by requiring modernization of how
orders are processed. Today, some intermediaries net their customers'
purchase and redemption orders in a given fund against each other,
meaning that an intermediary combines and offsets the value of purchase
and redemption activity across multiple customer accounts. Instead of
netting purchases and redemptions together, some other intermediaries
maintain separation between purchase orders and redemption orders.
After aggregating customers' orders, intermediaries then submit orders
in one or more batches, with most orders submitted to the designated
party after 4 p.m. ET. As a result of the proposed hard close
requirement, some intermediaries may opt to discontinue infrequent or
even once-a-day batch processes for submitting orders and instead adopt
more frequent batch processing approaches that result in more frequent
order submission throughout the business day. Some intermediaries may
even elect to utilize message-based communications for order flow, in
which orders are submitted on a near-real-time basis.\235\ We
understand based on industry outreach that some intermediaries
currently do not submit orders throughout the day to facilitate
customers' ability to cancel or correct orders intra-day, before the
orders are submitted to a designated party. If intermediaries continue
to provide this capability to customers under a hard close, they would
likely either: (1) need to develop a process with designated parties
for cancelling and correcting orders submitted to a designated party
before the pricing time (as eligible orders are irrevocable under the
proposal as of the pricing time, but not before); or (2) submit orders
to a designated party relatively close in time to the pricing time,
instead of throughout the day.
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    \235\ Intermediaries that take advantage of netting likely would
be unable to eliminate batch processing altogether since netting
necessitates definition of a period over which trades are netted and
a process that collects eligible customer orders and nets them
together into a single order for submission to a fund. Message-based
communication is less likely to be implemented when netting is
utilized.
---------------------------------------------------------------------------

    If an intermediary submits orders more often or earlier in the day,
it would be less vulnerable to an intra-day disruption within its own
operational environment. Orders that have been submitted prior to a
disruption are able to be accepted and acknowledged by a fund, even if
the intermediary experiences delays in its own processing. This
improves the intermediary's operational resilience, since some
operational activities on which the intermediary is dependent will be
able to continue. Similarly, earlier order submission should also
result in earlier confirmations from the fund.\236\ As such, the
chances increase for an intermediary to submit an order and receive a
confirmation even if the fund's transfer agent has a disruption later
in the day. This reduces an intermediary's vulnerability to disruptions
in others' operational processing, further improving the intermediary's
operational resilience. Collectively, as all intermediaries, funds, and
fund transfer agents process orders more frequently, operational
resilience across all market participants improves.\237\
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    \236\ The term ``confirmation,'' for the purposes of this
release, unless otherwise indicated, refers to the process by which
a fund accepts a purchase or redemption order. The confirmation
process discussed in this section is different from the
confirmations required by 17 CFR 240.10b-10 (Exchange Act rule 10b-
10). Confirmations under rule 10b-10 require broker-dealers to
provide specific disclosures in writing to customers at or before
the completion of a transaction. See rule 10b-10 under the Exchange
Act.
    \237\ See infra section II.C.3.b for additional complexity and
possible points of failure in current order processing practices.
---------------------------------------------------------------------------

    The proposed hard close would also eliminate cancellations and
corrections that are submitted after the pricing time. As a result, an
investor or intermediary would bear the cost, if any, of the errors
leading to a cancel or correct order. We believe it would be unfair for
a fund's shareholders to bear the cost of an error in this case, as the
investor or intermediary was the cause of that error. For errors that
were the intermediary's responsibility, the intermediary should be
solely accountable for correcting the error and, if necessary,
compensating the investor. We understand that currently some
intermediaries and funds have complex processes for posting
cancellations and corrections, including processes for funds to bill
intermediaries for errors.
    In addition, the proposed hard close requirement would improve the
confirmation process for funds. The confirmation process helps ensure
the accuracy of the trade that will be settled. Until the fund provides
a confirmation, an intermediary does not know whether the order will be
accepted or rejected. Under current practice, we understand that
because of the delay in intermediaries submitting orders, funds
likewise issue order confirmations on a delayed basis. When an
intermediary must submit all orders by a certain time under the hard
close proposal, funds would be able to issue confirmations to
intermediaries earlier. We believe that timelier confirmations by funds
would support the reduction of operational risks and improve market
resiliency by providing certainty to intermediaries and investors about
whether orders are accepted or rejected at an earlier point in the
process, meaning they have more time to work toward settlement of the
trade or determine how to manage a rejected order.\238\ Further,
intermediaries similarly may be able to issue trade confirmations
required by rule 10b-10 of the Exchange Act to their customers on a
timelier basis, although an intermediary will need to wait until the
price is published before it can calculate the net money or number of
shares to issue the trade confirmation to its customer. Requiring a
hard close may also facilitate settlement modernization. Many funds
settle purchases and redemptions on a T+1 basis, and the proposed hard
close could help improve the settlement process by providing complete
information about eligible orders on the trade date.
---------------------------------------------------------------------------

    \238\ An order may be rejected for a variety of reasons
including, among others, the intermediary is not set up to transact
with a particular fund, an order to sell is for more than the number
of shares held, or an order to purchase is less than the fund's
investment minimum.
---------------------------------------------------------------------------

    In addition, providing funds with more timely and accurate
information about the fund's daily flows under the proposed hard close
would allow funds to make portfolio and risk management decisions based
on more complete and accurate flow information than is available under
current practices. Currently, some funds may rely on projected flows
when making investment decisions, though these projections may be
unreliable because of orders that the fund does not receive until the
next day, including cancellations and corrections. Other funds may
instead rely on flow information posted at the custodian because of its
accuracy, but this

information is delayed. For example, for a fund that settles on T+1,
the custodian often will post the flow at the end of the day on T+1,
which may not be visible to the portfolio manager until the morning of
T+2. With a hard close, however, flow information should be available
from the transfer agent on the night of the trade date. In addition, by
eliminating the possibility that the fund could receive additional
orders after the pricing time, including cancellations and corrections,
the data available that night would be more reliable. Similarly, a fund
managing its risk would be able to do so more effectively by having
access to accurate flow data more quickly. Ultimately, the proposed
hard close requirement is designed to further the Commission's mission
to protect investors and reduce risk by improving the timeliness of
order flow information communicated to the fund.
b. Effects on Intermediaries
    The proposed amendments would require changes in the ways funds and
intermediaries process fund purchase and redemption orders. As
discussed above, intermediaries generally submit aggregated and, in
some cases netted, orders in one or more batches, often after 4 p.m.
ET. Some intermediaries submit orders directly to the fund's transfer
agent or to Fund/SERV, while some intermediaries rely on other
intermediaries, such as clearing brokers or retirement platforms, to
submit orders to the transfer agent or Fund/SERV. In addition, some
intermediaries' systems do not initiate batch processing until a fund's
final NAV is received or until final NAVs are received for all funds
offered on their platforms.
    In response to the proposed hard close requirement, funds and
intermediaries would need to make significant changes to their business
practices, including updating their computer systems, altering their
batch processes, or integrating new technologies that facilitate faster
order submission. Intermediaries would need to reengineer their systems
to ensure disseminated order information reaches the transfer agent or
Fund/SERV before 4 p.m., unless they determine to process fund orders
at the next day's price as a matter of practice.\239\ For
intermediaries with reliance on ``downstream'' intermediaries,
coordination in the timing of order communication will be essential to
ensure orders reach the fund, transfer agent, or registered clearing
agency prior to the deadline. In addition, Fund/SERV may need to run
more batch cycles in the period leading up to 4 p.m. than it does
today, as currently batch cycles run into the evening and overnight to
receive and process orders from intermediaries.
---------------------------------------------------------------------------

    \239\ While the proposed hard close requirement would require
intermediaries to transmit eligible orders before 4 p.m. ET,
intermediaries would still be able to process orders after 4 p.m.
for purposes of execution and settlement, as they currently do
today. For example, after receiving the NAV the intermediary would
then be able to determine the net money to be paid to the investor
or to be collected.
---------------------------------------------------------------------------

    We understand that retirement plan recordkeepers may face
particular challenges with adhering to the proposed hard close
requirement.\240\ Retirement plan recordkeepers may employ a method of
order processing that relies on receiving the current day's NAV before
submitting orders. Funds do not typically receive the order flow
information for transactions from retirement plan recordkeepers until
well after the day's NAV has been calculated. These order flows are
delayed, we understand, due to the calculations that the retirement
plan recordkeepers complete under plan rules as well as to legacy
systems that require the final NAV before finalizing the order. For
retirement plan recordkeepers, we understand that current recordkeeping
systems require that day's NAV before the participant's plan
instructions may be applied to the participant's order. Once the order
has been processed through the investment instructions specific to the
participant's plan, it can be placed for execution. In addition,
retirement plan recordkeepers may perform compliance and other checks
on orders before finalizing the orders for submission post-NAV strike.
---------------------------------------------------------------------------

    \240\ See Comment Letter of The Principal Financial Group on
2003 Hard Close Proposing Release, File No. S7-27-03 and Comment
Letter of ASPA on 2003 Hard Close Proposing Release, File No. S7-27-
03. The comment file for the 2003 Hard Close Proposing Release,
where these comment letters can be accessed, is available at https://www.sec.gov/rules/proposed/s72703.shtml.
---------------------------------------------------------------------------

    We understand that the time it currently takes between when some
retirement plan recordkeepers begin to process their orders and when
the order is finally submitted to the fund can take upward of six hours
due to the limitations of their current processing systems and
hardware. We believe that retirement plan recordkeepers would need to
substantially update or alter their processes and systems to
accommodate the proposed hard close requirement to submit orders more
quickly. In the event compliance and other checks are required, plans
may need to utilize the prior day's NAV to estimate the share or dollar
size of an order for those orders to receive same day pricing.
c. Intermediary Cut-Off Times
    To help ensure that order flow information is provided to a
designated party before the established pricing time, the proposed rule
would likely cause some intermediaries to set their own internal cut-
off time for receiving orders to purchase or redeem fund shares that is
earlier than the pricing time established by the fund. Intermediaries
may use earlier cut-off times to provide time to transmit order flow
information to a designated party so those orders receive that day's
price. Investors, therefore, depending on the entity through which an
investor is transacting (e.g., a broker-dealer, retirement plan
recordkeeper, or the fund's transfer agent), may have different
deadlines for the same fund for submission of orders to receive that
day's price. For example, an investor submitting an order to a fund's
transfer agent might have until 3:59 p.m. ET to submit its order, while
an investor submitting an order to an introducing broker would likely
have to submit its order earlier to provide enough time for the
introducing broker to send the order to the clearing broker and for the
clearing broker to send it to the transfer agent or to Fund/SERV.
    Investors transacting through intermediaries may lose some
flexibility in when they may submit orders through an intermediary to
receive that day's price as intermediaries may institute earlier cut-
off times. Because technology has advanced since the Commission last
considered a hard close in 2003, we generally do not believe, however,
that intermediaries would need to establish cut-off times significantly
earlier than the pricing time set by the fund. We recognize, however,
that layered cut-off times may occur when an intermediary uses one or
more tiers of other intermediaries to submit orders, and that cut-off
times generally would be earlier for investors submitting orders to
lower-tier intermediaries. We also recognize that intermediaries that
net order activity or rely on batch processing may require additional
time to support such netting or batch activities, while those
intermediaries that submit orders individually through message-based
communications may have a higher volume of orders submitted, but a
shorter time between order submission by an investor and order receipt
by a fund, transfer agent, or registered clearing agency. While the
proposed hard close requirement generally would cause intermediaries to
establish earlier cut-off times, the proposed rule would not prevent an
intermediary from

transmitting orders it received after its internal deadline but before
4 p.m. ET on an individual basis to the fund's transfer agent or to
Fund/SERV in order to receive that day's price.
d. Effects on Certain Transaction Types
    We recognize that the proposed hard close requirement could extend
completion times for certain types of transactions, where the specific
number or value of fund shares to be purchased or redeemed is unknown
until that day's price is available. For example, under certain
retirement plan rules, certain transactions, such as plan loans or
withdrawals, currently remain incomplete until all fund positions in
the investor's accounts are valued using that day's prices.
Specifically, some plan provisions specify a hierarchy for drawing from
different investments to accommodate participant loan or withdrawal
requests. As an example, the plan may require the sale of shares in
Fund A to pay the loan or withdrawal before the sale of shares in Fund
B. In this case, until that day's final price for Fund A shares is
available, the retirement plan recordkeeper may not know if the value
of the participant's investment in Fund A is sufficient to pay the loan
or withdrawal amount on its own, or if satisfying the loan or
withdrawal request in full will also require redemptions from Fund B.
    Under the hard close proposal, although plans would not be required
to change their rules governing these kinds of transactions,
transaction requests that are subject to hierarchy rules may take one
or more additional days to complete than they would currently. This is
because the retirement plan recordkeeper would no longer be able to
wait until final prices are available before calculating and submitting
one or more redemption orders to satisfy the requested plan
transaction. In the above example, this would mean that the
recordkeeper would likely submit an order to redeem shares of Fund A on
the first day and may submit an order to redeem shares of Fund B on a
subsequent day if the loan or withdrawal is not fully funded. We
understand that these transactions typically are a small percentage of
overall retirement plan flows and that plan participants generally do
not receive immediate execution of loan or withdrawal requests
today.\241\ Thus, we believe the aggregate effect of the proposed hard
close requirement on such transactions would not be significant.
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    \241\ For example, according to one source, in 2021, 4.1% of
defined contribution plan participants took withdrawals, and at the
end of Dec. 2021, 12.5% of participants of plan participants had
loans outstanding. See ICI Research Report, Defined Contribution
Plan Participants' Activities, 2021 (Apr. 2022), available at
https://www.ici.org/system/files/2022-04/21_rpt_recsurveyq4.pdf.
---------------------------------------------------------------------------

    As another example, the proposed hard close requirement could
extend the period of time for executing an investor's request to
rebalance its holdings to a target asset allocation or model portfolio.
We understand that currently these requests may be facilitated by first
valuing the investor's existing positions, based on final prices for
that day, and then submitting orders that would result in the desired
allocation. The proposed rule would not permit these orders to receive
same-day pricing if they are submitted after the pricing time, and
therefore may require the intermediary to achieve the desired
rebalancing through a series of orders over more than one day or to
rebalance using prices from the prior day. In addition, the proposed
hard close might affect current order processing for funds of funds. We
understand that a lower-tier fund in a fund of funds structure may not
receive purchase or redemption orders from upper-tier funds until well
after 4 p.m. Under the proposed rule, the lower-tier fund (or another
designated party) would have to receive an upper-tier fund's orders to
purchase or redeem the lower-tier fund's shares before the lower-tier
fund's pricing time to receive that day's price for the orders.
e. Effects on Investors
    The extent to which the hard close proposal would affect investors
largely depends on the value investors place on their ability to obtain
same-day pricing for orders initiated in the period immediately before
4 p.m. ET or on the complex transaction types discussed above.\242\
Most fund shareholders are long-term investors, and thus we believe
that most fund orders are not time sensitive. In addition, because of
advances in technology, it seems likely that intermediaries would set
cut-off times that are only incrementally earlier than current cut-off
times. As a result, it seems likely that many investors would
experience a significant change in when they must submit their orders
to intermediaries. For those investors who place a premium on being
able to place orders up until 3:59 p.m. ET, they generally could place
orders with the fund's transfer agent to retain this option.\243\ While
we understand that investors may experience a change in how late they
may transact through intermediaries that set earlier cut-off times as a
result of our proposed rule, overall the proposal is intended to better
protect shareholders' interests by operationalizing swing pricing to
combat shareholder dilution and enhancing fund resiliency. We request
comment on the effects of the proposed hard close on order processing,
intermediaries and investors, and on different transaction types:
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    \242\ Rule 22c-1 already affects investors differently based on
the time zone in which the investor lives. Investors located in time
zones other than the eastern time zone are subject to different cut-
off times today. For example, 4 p.m. ET is 10 a.m. Hawaii time,
meaning that an investor in Hawaii has to submit its order before 10
a.m. to receive that day's NAV if the fund's pricing time is 4 p.m.
ET.
    \243\ See infra section III.C.3 discussing that some investors
may be affected by the proposed hard close requirement if they
desire to transact later in the day in response to market events and
are limited in their ability to change intermediaries or place
orders with the fund's transfer agent.
---------------------------------------------------------------------------

    109. Should we require funds to implement the proposed hard close
requirement? Are there alternatives to the proposed hard close
requirement that we should implement? Would the proposed hard close
requirement help funds operationalize swing pricing? Would the proposed
hard close requirement help prevent late trading? Are the Commission's
efforts to modernize fund order processing supported by the proposed
hard close requirement?
    110. What steps would intermediaries be required to take to
operationalize the proposed hard close requirement? Are there
operational impediments to funds implementing the proposed hard close
requirement? Are there operational impediments for intermediaries,
transfer agents, and/or registered clearing agencies in implementing
the proposed hard close requirement? Are there other operational
changes that would be helpful to operationalize swing pricing?
    111. Would retirement plan providers need to make changes to plan
rules in order to accommodate compliance with a hard close? Are plan
rules able to be altered for plans that are currently owned, or would
alterations only be feasible on a going forward basis? If a change in
plan rules would be necessary, how would plan rules need to be altered?
How would plan participants be affected by changes to plan rules?
    112. Would the proposed rule affect intermediaries' ability to net
order flow? Would intermediaries move to message-based communications,
where orders are transmitted to the transfer agent or registered
clearing agency as they are received, in response to the proposed hard
close requirement?
    113. Would elimination of cancellations and corrections that
designated parties currently may receive

after the pricing time streamline processing and reduce costs for funds
and/or designated parties and, if so, by how much? Would costs for
investors be affected by the elimination of these cancellations and
corrections?
    114. Should there be any exceptions from the proposed hard close
requirement for exigencies or types of parties? For example, should
there be exceptions for certain scenarios (e.g., emergencies), fund
types (e.g., funds of funds), or intermediaries (e.g., retirement plan
recordkeepers)? If so, what should be the parameters of such
exceptions? For example, should we permit investor orders to receive
same-day pricing treatment as the result of an emergency, if the
intermediary is unable to send orders or a designated transfer agent or
clearing agency is unable to receive orders? Should an emergency
exception be conditioned on the board or the chief executive officer of
the intermediary, transfer agent, or clearing agency certifying to the
nature and duration of the emergency and, in the case of an
intermediary, that the intermediary received the orders before the
applicable pricing time? Should we permit conduit funds, which invest
all their assets in another fund and must calculate their NAV on the
basis of the other fund's NAV, and which include master-feeder funds
and insurance company separate accounts, to receive same-day pricing?
Should we provide an exception to permit certain intermediaries, such
as retirement plan recordkeepers, to receive same-day pricing for the
orders they submit, even if not received by a designated party before
the pricing time, as long as the relevant intermediary received the
orders before the pricing time? Should there be other conditions
associated with such an exception, such as a requirement to provide
advance notice of certain flow information to the fund or another
designated party?
    115. Should we provide an exception from the proposed hard close
requirement for certain transaction types (e.g., retirement plan loans
or withdrawals or certain rebalancing transactions)? Should we amend
the definition of eligible order to include these or other transaction
types? If so, what information should we require the intermediary to
supply to a designated party before the pricing time to qualify for
same-day pricing? Should retirement plan recordkeepers or other
intermediaries be permitted to estimate order flow information for
specific transaction types, like loans or withdrawals? Would the
estimates be prepared using the prior day's price, or through some
other method?
    116. If exceptions to the hard close were permitted, how would that
affect the proposed swing pricing requirement?
    117. Would the proposed hard close requirement help retirement plan
recordkeepers to reduce their batch processing cycles and, if so, how?
    118. Should the rule permit a fund or other designated party to
impose a cut-off for orders received before that day's NAV computation?
For example, if the time for an order to receive that day's NAV is 4
p.m. ET, should the fund be permitted to impose an earlier time of day,
say 2 p.m. ET, as an earlier cut-off time to receive orders? Would the
ability to disconnect the cut-off time for receiving orders from the
pricing time help facilitate swing pricing by providing additional time
to calculate the swing factor?
    119. If different funds adopted different cut-off times for receipt
of orders pursuant to rule 22c-1, would intermediaries and transaction
processing systems be able to accommodate such differences on a fund
specific basis? How would different cut-off times affect investors?
Would it be confusing or challenging for investors if there were
variation among funds' cut-off times?
    120. If most funds continue to calculate their NAVs as of 4 p.m. ET
and, as proposed, funds are required to implement swing pricing and are
subject to a hard close, would funds have sufficient time between 4
p.m. ET and when they publish their prices to assess their flow
information and apply the proposed swing pricing requirement, including
determination of a swing factor, as applicable? If not, how might funds
adjust their practices to provide more time to make swing pricing
determinations? For example, would funds publish their prices later
than they typically do, which is currently several hours after the
pricing time? \244\ Are there any changes we could make to facilitate
later publication of prices, if needed? As another example, would funds
begin to calculate their NAVs as of an earlier time than 4 p.m. ET?
What affect, if any, would such a change have on transaction processing
and the valuation of the fund's investments?
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    \244\ See infra section III.C.2.a (discussing the potential
effects on intermediaries and other market participants if funds
were to publish their prices later than they currently do).
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    121. How would the proposed hard close requirement affect
investors? For example, what percentage of investors place orders
shortly before 4 p.m., and how important is it for those investors to
receive that day's price as opposed to the next day's price? When
intermediaries establish their own cut-off times by which customers
must place orders to receive that day's price, would these cut-off
times be close to 4 p.m. ET as a result of competition among
intermediaries and customer demand? Are intermediaries able to
accelerate the time between receiving an order and relaying that order
to a designated party compared to current practice? Would it be
confusing or challenging for investors if there were variation among
intermediaries' cut-off times? Are there circumstances in which
intermediaries would transmit orders received after their internal cut-
off times and before 4 p.m. ET to a fund's transfer agent or to Fund/
SERV individually to receive same-day pricing? Would this increase the
risk of errors or otherwise be burdensome on funds or intermediaries?
    122. Should the rule initially require that funds receive order
flow information by a time that is after the pricing time in order to
``phase in'' the proposed hard close requirement? For example, instead
of requiring a designated party to receive all of a fund's order flow
information by 4 p.m. ET each day, should we initially require receipt
of order flow information by the designated party one to two hours
after the pricing time with the goal of eventually moving the time of
receipt to before the pricing time? Would a delayed phase in of the
proposed hard close requirement be compatible with the proposed swing
pricing requirement? If so, how would a fund determine whether to swing
its NAV if it does not have all of its order flow information until
after the pricing time?
    123. We understand that intermediaries currently may adjust trade
amounts to account for commissions or other fees. Would the proposed
hard close requirement affect how these adjustments are made? If so,
should we make any changes to the proposed approach to better
accommodate such adjustments?
    124. Would earlier confirmations from a fund to an intermediary
reduce an intermediary's vulnerability to disruptions? Would
intermediaries process orders more frequently under a hard close? If
so, would more frequent order processing increase the resiliency of
funds and transfer agents? If not, why not?
    125. Would intermediaries need to set earlier cut-off times than is
the current practice for investors in order to get orders to a
designated party before the pricing time? If so, how early? How

much time do intermediaries need to process order flow information?
    126. Should the rule require that funds set a uniform cut-off time
for orders to be received by intermediaries? If the rule requires a
uniform cut-off time, should we also require that a fund disclose the
cut-off time, such as in the fund's prospectus? Would funds,
collectively, establish consistent cut-off times for these purposes, or
would intermediaries need to manage different fund-specific cut-off
times?
    127. Some intermediaries may establish earlier cut-off times in
order to accommodate a hard close. Would investors that want to make an
order up until 3:59 p.m. place orders with a fund's transfer agent
instead of with an intermediary to preserve this flexibility? Are there
limitations on certain investors' abilities to place orders with the
transfer agent instead of through an intermediary?
    128. Would some intermediaries choose to no longer distribute open-
end funds that would be subject to the hard close requirement in order
to avoid compliance costs? In addition, would retirement plan providers
be more likely to replace mutual funds as plan investment options with
ETFs or CITs? If so, how would this affect investors?
4. Other Proposed Amendments to Rule 22c-1
    The proposed amendments would retain the requirements of the
current rule concerning the frequency and time of determining the NAV,
but would reorganize and reword those provisions.\245\ The proposed
amendment would use the phrase ``based on the current net asset value
of such security established for the next pricing time,'' as opposed to
``based on the current net asset value of such security which is next
computed'' in the current rule. While its substance is already
required, this amendment would codify in the rule text that orders
received after the pricing time, but before calculation of the NAV is
complete, do not receive same-day pricing.\246\ We also propose to
reorganize certain other provisions of rule 22c-1, including the
existing exceptions to the rule's forward pricing requirement.\247\ In
addition, we propose to revise certain terminology in the rule.\248\
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    \245\ See rule 22c-1(a), (b)(1), and (d); proposed rule 22c-
1(a).
    \246\ See 2003 Hard Close Proposing Release, supra note 224, at
n.26.
    \247\ See rule 22c-1(a)(1), (a)(2), and (c); proposed rule 22c-
1.
    \248\ For example, we propose to replace references to
``orders'' in the current rule with references to ``directions'' to
purchase or redeem, which is intended to distinguish between the
concept of eligible orders that we propose to add for purposes of
the proposed hard close requirement and directions to purchase or
redeem shares of other registered open-end investment companies that
are not subject to the proposed hard close requirement. As another
example, we propose to incorporate the term ``pricing time'' into
provisions of the rule that are not specific to the hard close
requirement for cohesion of the rule.
---------------------------------------------------------------------------

    We are also proposing to remove the provision from rule 22c-1 that
would allow funds not to calculate their current NAV on days in which
changes in the value of the fund's securities will not materially
affect the current NAV. We believe this provision is no longer
necessary because a fund generally would need to determine its current
NAV in the first instance before it could conclude with certainty that
changes in the value of the fund's securities would not materially
affect the fund's current NAV.
    We request comment on the other proposed amendments to rule 22c-1,
including:
    129. Are our proposed amendments to provide that orders received
after the pricing time, but before calculation of the NAV is complete,
do not receive same-day pricing sufficiently clear?
    130. Should we retain the current provision in rule 22c-1 that
allows a fund not to calculate its NAV on days when the changes in the
value of the fund's portfolio securities do not materially affect the
current NAV? If so, how would this affect the ability of a fund to
implement swing pricing? Do any funds rely on this provision today? If
so, what are the scenarios in which a fund relies on this provision?
How are changes in the value of the fund's securities determined if the
fund is not valuing the underlying securities and computing the NAV on
a daily basis?
5. Amendments to Form N-1A
    Open-end funds use Form N-1A to register under the Investment
Company Act and to register offerings of their securities under the
Securities Act. Item 11 of Form N-1A requires a fund to describe how it
prices its shares. Item 11(a) specifically requires that funds state
when they calculate the NAV and that the price at which a purchase or
redemption is effected is based on the next NAV calculation after the
order is placed. We are proposing to amend this disclosure to also
require, if applicable, that funds disclose that if an investor places
an order with a financial intermediary, the financial intermediary may
require the investor to submit its order earlier than the fund's
pricing time to receive the next calculated NAV. As discussed above,
intermediaries may set different times by which investors must have
their purchase or redemption orders in place to receive that day's
price. We believe that this proposed disclosure is important so that
investors may understand the potential variability in the time by which
intermediaries may require an order to be placed to receive a
particular day's price.
    We request comment on the proposed amendments to Form N-1A,
including:
    131. Would the proposed requirement for funds to disclose in their
prospectuses that orders placed with intermediaries may need to be
submitted earlier to receive that day's price be helpful to investors?
    132. In addition to the proposed disclosure requirements, are there
additional disclosures relating to the proposed hard close requirement
that we should require? Should funds be required to disclose the cut-
off times of their intermediaries in their distribution network? If so,
where should this disclosure be located (e.g., in the fund's
registration statement or on its website)? What potential challenges,
if any, would a fund encounter in providing an up-to-date list of
intermediary cut-off times?

D. Alternatives to Swing Pricing and a Hard Close Requirement

1. Alternatives to Swing Pricing
    In lieu of the proposed swing pricing requirement, we have also
considered whether there are alternative methods by which we could
require funds to pass on costs stemming from shareholder purchase or
redemption activity to the shareholders engaged in that activity. These
alternatives could be used independently or in combination with each
other. Some of these alternatives would be dependent on investor flow
information, similar to the proposed swing pricing requirement. In
those cases, an alternative could be paired with either a hard close
requirement or one of the alternatives to the hard close that we
discuss below.
a. Liquidity Fees
    One alternative we considered is a framework that would apply a
charge in the form of a liquidity fee rather than an adjustment to the
fund's price.\249\ A

liquidity fee would apply as a separate charge to a transacting
investor and would not change the fund's price. A liquidity fee could
be used to impose liquidity costs on purchasing or redeeming investors
and address dilution, much like a swing pricing-related price
adjustment. We recognize that a liquidity fee framework could have
certain advantages over a swing pricing requirement. For example,
liquidity fees provide greater transparency for redeeming or purchasing
investors of the liquidity costs they are incurring. Liquidity fees
also provide a mechanism for imposing liquidity costs directly on
purchasing or redeeming investors, without adjusting the transaction
price for investors who are trading in the other direction.\250\ In
addition, some funds and their intermediaries are currently equipped to
apply certain purchase and/or redemption fees.\251\
---------------------------------------------------------------------------

    \249\ Although certain U.S. funds may use liquidity fees for
redemptions, they are rarely used to address dilution, other than in
the case of short-term trading of fund shares. See rule 22c-2 under
the Act. The use of redemption fees and anti-dilution levies in
Europe varies to some extent by jurisdiction. For example, Irish-
domiciled funds are more likely to have adopted anti-dilution levies
than Luxembourg-domiciled funds. Overall, however, we understand
that swing pricing was more widely used by European fund complexes
in Mar. 2020 than redemption fees or anti-dilution levies. See ICI,
Experiences of European Markets, UCITS, and European ETFs During the
COVID-19 Crisis (Dec. 2020), available at https://www.ici.org/doc-server/pdf%3A20_rpt_covid4.pdf.
    \250\ For instance, on a day the fund has net redemptions, swing
pricing adjusts a fund's NAV downward, and investors who purchase
the fund's shares that day buy at a discount. On a day when a fund
has net purchases, swing pricing adjusts a fund's NAV upward, and
investors who sell the fund's shares that day sell at a premium.
Swing pricing must account for these discounts or premiums that
other investors are receiving to fully address dilution.
    \251\ For example, some funds impose redemption fees under rule
22c-2 under the Investment Company Act. See supra note 67 for a
discussion of how many funds we estimate apply redemption fees.
---------------------------------------------------------------------------

    However, the proposed swing pricing requirement may have several
advantages over liquidity fees for relevant open-end funds. With swing
pricing, a fund can pass liquidity costs on to redeeming or purchasing
investors in a fair and equal manner, without any reliance on
intermediaries to achieve fair and equal application of costs.
Liquidity fees may require more coordination with a fund's
intermediaries than swing pricing because fees need to be imposed on a
transaction-by-transaction basis by each intermediary involved--which
may be difficult with respect to omnibus accounts that intermediaries
may create to aggregate all customer activity and holdings in a
fund.\252\ Funds and their transfer agents may contract with
intermediaries to have them impose liquidity fees under these
circumstances, which may include a review of contractual arrangements
with fund intermediaries and service providers to determine whether any
contractual modifications are necessary or advisable to ensure that
liquidity fees are appropriately applied to beneficial owners of fund
shares. While we could require intermediaries to submit purchase and
redemption orders separately to transact in a fund's shares, which
could allow funds and their transfer agents to apply fees directly,
this type of requirement would also involve some operational costs.
Requiring intermediaries to submit purchase and redemption orders
separately would require operational changes for some intermediaries
because they would no longer be able to net otherwise offsetting
customer purchases and redemptions.\253\ In addition, the volume of
transactions that transfer agents and Fund/SERV process would increase
if netting were not permitted. Further, unlike swing pricing, the
amount collected from a liquidity fee is not available to the fund for
a period of time until the intermediary remits to the fund the amount
charged.\254\ If the fund is under stress, the unavailability of the
amount collected from fees might cause the fund to incur other costs it
might not have otherwise incurred, such as costs associated with
selling investments to pay redemptions when the fee amount, if
remitted, would have helped the fund pay those redemptions.
---------------------------------------------------------------------------

    \252\ See infra section III.E.2 (noting certain omnibus
accounting practices that may make a liquidity fee operationally
difficult). Swing pricing, on the other hand, would require some
funds and intermediaries to create new systems and operational
procedures, but once those are in place, swing pricing would be
incorporated in the process by which a fund strikes its NAV and sets
the transaction price (including any swing of the NAV).
Intermediaries would then effect customer transactions at the
transaction price, as they do today, without further operational
changes or coordination with the fund.
    \253\ See supra section II.C.3.a (discussing that some
intermediaries currently net orders, while others separately submit
purchase and redemption orders).
    \254\ While money collected from the fee would not be available
to the fund until the intermediary remits payment, we understand
that a fund would reflect the fee amount it is owed as an accrual
until the fund receives the fee payment. The accrual would help
prevent declines in the fund's NAV that would otherwise result from
any delay in remittal. Proper booking of the accrual would, however,
require the intermediary to inform the fund of the fee amount on an
accurate and timely basis.
---------------------------------------------------------------------------

    There are many potential variations of a liquidity fee framework.
The trigger for applying fees could be based on net flows, similar to
swing pricing, or other indicators that a fund's trading costs are
increasing (e.g., widening spreads or reduced liquidity of the fund's
portfolio investments). Alternatively, a fee could apply to all trades
of a given type (for example, all redemption orders). When a fee
applies, the determination of the size of the liquidity fee could be
either dynamic to reflect changing costs or simplified to remain
relatively static. As for how the fee is processed, it could be applied
to the purchase or sale or could be processed separately from the
trade.
    As an example, similar to the proposed swing pricing requirement, a
dynamic liquidity fee could be calculated to reflect certain costs
(e.g., spread, other transaction costs, and market impact) a fund is
likely to incur to meet redemptions or invest the proceeds from
subscriptions based on the direction and magnitude of that day's flows.
Dynamic liquidity fees that may change in size from one day to the next
may involve greater operational complexity and cost than swing pricing,
as intermediaries would have to identify and apply different fee
amounts for each fund in which their clients transact each day. This
approach also generally would necessitate timely flow information if
the fee were processed as part of a transaction, similar to the
proposed swing pricing requirement. If the fee were processed
separately from the transaction and applied to an investor's account on
a delayed basis, a fund would likely have more time to receive flow
information than under the proposed swing pricing requirement, which
could avoid the need for a hard close or related alternatives. Delayed
application of the fee, however, may raise complications related to
collecting fee amounts from investors, particularly when an investor
has otherwise redeemed the full amount of its holdings. Follow-on fees
also significantly increase the number of transactions to process, and
may complicate reporting for custodians and advisers in situations
where a transaction may occur in one reporting period but the fee
related to the transaction is not applied until the next reporting
period. In addition, an intermediary may face difficulties projecting
upcoming cash balances in its client accounts if there are upcoming
fees to be charged, but the amounts of those fees are unknown. The fund
itself may also have challenges with projecting its own cash balance if
it cannot predict when accrued fees will be received from each
intermediary.
    Instead of a dynamic liquidity fee, we could require a simplified
liquidity fee. A simplified liquidity fee, for example, could be a set
percentage of the transaction amount, such as 1%. Or it could be a
default fee, such as 1%, that a fund could adjust up (possibly up to a
cap) or down as it determines is in the best interest of the fund. A
simplified liquidity fee could apply to both purchases and redemptions,
given that both purchases and redemptions can contribute to dilution.
Under this type

of approach, fees could be equivalent for both transactions, or fees
could be higher on one side and lower on the other (for example, a
purchase fee of 0.25% and a redemption fee of 1%). Alternatively, we
could require a one-sided simplified fee that applies to redemptions
only or to purchases only, with the premise that a fee charged on
redemptions could also help to offset dilution that may result from
purchases (or vice versa). Because all shareholders purchase and redeem
the fund's shares during the life of an investment, a one-sided fee
would apply to all shareholders at some point and could help mitigate
dilution that fund investors collectively contribute to through their
purchase and redemption activity. A simplified liquidity fee would not
necessarily require flow information. For instance, if a simplified fee
applied only to redemptions, a set fee could apply to all redemptions
or only to redemptions when the fund's trading costs are significantly
increasing, such as in times of stress.\255\ If the dependency on flow
information is removed, a simplified liquidity fee likely could be
processed as part of a transaction, avoiding the need to process a fee
as a separate follow-on transaction.
---------------------------------------------------------------------------

    \255\ We discuss an alternative in which a liquidity fee would
apply when a fund's trading costs are significantly increasing in
more detail in section II.D.3.b.
---------------------------------------------------------------------------

    The size of a simplified liquidity fee likely would be more
predictable for investors and intermediaries than a dynamic fee or
swing pricing. This would enhance transparency and would likely be
easier to implement. While the size of the fee generally would be known
in advance, it may or may not be easy to predict when a fee would
apply. For example, if a fee applied to all redemptions, then investors
and intermediaries would have certainty on when fees would apply.
However, if fees applied only in certain circumstances, such as when
trading costs are materially increasing or the fund has experienced net
redemptions over multiple consecutive days, then application of a fee
may be more difficult to predict, particularly if a fund's threshold
for applying a fee is non-public or based on factors that are difficult
for other market participants to observe or predict. An approach where
it is difficult to predict when a fee would apply could help avoid
preemptive redemptions in anticipation of fees applying in the near
future, but it would also be less transparent. In addition, if
liquidity fees are applied rarely, then application of a fee might be
viewed as a sign that a fund is under stress, which could incentivize
further redemptions, particularly if the fee amount is viewed as
minimal.
    Between dynamic and simplified fees, a dynamic fee would better
reflect the costs associated with fund purchases or redemptions on a
given day. A simplified fee, however, would be less costly to implement
because, among other things, it would not necessarily require a hard
close or any alternatives to the hard close to provide actual or
estimated flow information. While a simplified fee would be less
sensitive to the fluctuating costs associated with fund purchases or
redemptions, this fee would aid in the offset of costs stemming from
purchase and redemption activity and could assist with the mitigation
of investor dilution.
    On balance, we are proposing a swing pricing requirement because it
may have operational advantages or be better tailored to mitigate
dilution relative to liquidity fee options, but we request comment on
using a liquidity fee framework to impose liquidity costs and whether a
liquidity fee alternative may have fewer operational or other burdens
than the proposed swing pricing requirement while still achieving the
same overall goals of reducing shareholder dilution.
    133. How do the operational implications of swing pricing, as
proposed, differ from the operational implications of a dynamic
liquidity fee framework (e.g., one where liquidity fees vary in size
and increase during periods of stress)? What are the operational
implications of a requirement for mutual funds to impose a liquidity
fee that can change in size and that may need to be applied with some
frequency (up to daily)? Are fund intermediaries equipped to apply
dynamic fees on a regular basis? Would funds have insight into whether
and how intermediaries apply these fees to redeeming investors?
    134. If we adopt a liquidity fee framework instead of a swing
pricing framework, should a fund be required to apply a liquidity fee
under the same circumstances in which a fund would be required to
adjust its net asset value under the proposed swing pricing
requirement? Should a fund be required to use the same approach to
calculating a liquidity fee as the proposed approach to calculating a
swing factor? Should the same board oversight framework apply under
this approach as the proposed swing pricing requirement (e.g., with the
board approving the fund's liquidity fee policies and procedures and
designating a liquidity fee administrator, and such administrator would
report periodically to the board)?
    135. Should funds be required to apply liquidity fees to all
redemption or purchase orders, or should liquidity fees apply only upon
a trigger event? If so, under what circumstances should a fee apply?
For example, should liquidity fees apply when trading costs are
materially increasing? \256\ Should liquidity fees apply when a fund
has had net outflows over multiple consecutive days? If so, should net
outflows be of a certain size (e.g., 2%, 5%, or 10%) and over what
period of time should net outflows trigger a fee (e.g., 2, 3, or 4
consecutive days)? Would this approach help mitigate dilution, or would
it contribute to first-mover advantages and potentially result in
unfair application of fees?
---------------------------------------------------------------------------

    \256\ See infra section II.D.3.b. for additional discussion and
requests for comment about such an approach.
---------------------------------------------------------------------------

    136. Should a liquidity fee apply to both purchasing and redeeming
investors? Alternatively, should a liquidity fee apply to redeeming
investors only or to purchasing investors only?
    137. Should funds be required to maintain records related to the
application of liquidity fees? For example, should funds be required to
maintain records of the dates on which the fund applied liquidity fees
and in what amount? If application of liquidity fees is subject to fund
or board discretion, should a fund be required to maintain records
documenting why the fund did or did not apply liquidity fees under
certain circumstances?
    138. Should liquidity fees apply to purchase or redemption orders
of a specific size only? If so, what size? How operationally feasible
would such an approach be? Would it create incentives for investors to
modify their order amounts in an effort to avoid a fee, such as by
holding smaller amounts of a fund's shares at multiple intermediaries
or splitting up a purchase or sale order over multiple days? How should
such an approach treat separate accounts managed by the same adviser,
such as separate accounts managed through a wrap program?
    139. Should a liquidity fee framework have an exclusion for
purchase or redemption orders of a de minimis amount? How should we
identify an order for a de minimis amount? Should it be a set dollar
figure (e.g., $2,500 or less), a set percentage of the fund's net
assets, or a set amount that would be collected from application of a
fee (e.g., $50 or less)? Should the amount of a de

minimis exclusion be adjusted for inflation over time?
    140. How should the amount of the liquidity fee be determined?
Should the liquidity fee be dynamic but based only on that day's
spreads? Should it include other transaction costs, including market
impact? Instead of a dynamic fee amount that could change daily, should
the fee amount be based on a fund's historical trading costs and
evaluated periodically, such as annually, quarterly, or monthly? Should
the fee be a flat percentage established by rule (such as 0.5%, 1%, or
2%), or should the fee increase as net redemptions or net purchases,
illiquidity, or other variables increase? Should the fee amount be
based on reasonably expected transaction costs but, if a fund cannot
reasonably estimate those costs, it can use a default fee amount set by
rule? If so, what should that default fee amount be (e.g., 0.5%, 1%,
2%, or 3%)? Should the rule include a default fee amount that funds can
always choose to use, with the option to use a higher or lower amount
if such amount is determined to be in the best interest of the fund?
Should there be a minimum or maximum fee amount, such as a 0.25%
minimum or a 2% maximum?
    141. If we adopt a liquidity fee framework instead of a swing
pricing framework, are there any ways to simplify the application of
fees to investors that invest through an intermediary, such as
investors in an omnibus account, to facilitate funds or fund transfer
agents applying fees directly to investor purchases or redemptions
occurring through an omnibus account? For example, should fund
intermediaries be required to separately submit purchase and redemption
orders, rather than net them, in order to transact in a fund's shares?
What would the operational consequences of such a requirement be for
fund intermediaries and for investors? To what extent do intermediaries
already submit purchase and redemption orders separately, and does this
practice vary by type of intermediary (for example, are broker-dealers
more likely to submit separate purchase and redemption orders than
retirement plan recordkeepers)? Would there be consequences for fund
transfer agents, Fund/SERV, or others associated with increased order
volume or other changes that would result from a requirement to submit
purchase and redemption orders separately? What changes, if any, would
funds or fund transfer agents need to make to be equipped to apply
liquidity fees directly? If submission of purchase and redemption
orders separately is necessary to implement a liquidity fee framework,
is it necessary for the Commission to mandate receipt of orders in this
way to ensure compliance by all market participants? If purchase and
redemption orders may be submitted on a net basis, as some
intermediaries do currently, how would a fund accrue for liquidity fees
in a timely manner? Should the Commission require fund transfer agents
to apply liquidity fees directly and, if so, why or why not?
    142. If we adopt a dynamic liquidity fee framework, would it be as
reliant on timely flow information as the proposed swing pricing
requirement? For example, could funds and intermediaries apply a
dynamic fee to a transacting investor after an order begins to be
processed at that day's NAV but before the trade settles? Could dynamic
fees be applied after settlement, or would that create challenges in
collecting a fee from investors who redeemed the full amount of their
holdings? If a fee applies on a delayed basis, how should investors be
notified of the application of a fee? Would it be preferable to apply a
simplified fee that may less accurately reflect the costs of investor
transactions and may mitigate dilution with less precision, but that
could be applied at the same time an order is processed? Are there any
other factors to consider when deciding between dynamic and simplified
liquidity fees?
    143. If we adopt a liquidity fee framework, should we require that
the same liquidity fee amount apply to all share classes (for example,
if a liquidity fee is 1% on a given day, the 1% fee must apply to all
share classes)? Alternatively, should we permit the fee amount to
differ among classes (for example, a 1% fee for one class and a 0.5%
fee for another class) and, if so, why?
    144. Should a liquidity fee apply differently based on the type of
fund or the type of intermediary through which an investor trades? If
so, what would be the basis for the differences in how a liquidity fee
applies?
    145. What investor flow information, if any, would be required to
implement a liquidity fee alternative? To the extent that a liquidity
fee alternative requires timely investor flow information, should the
alternative be paired with the proposed hard close requirement? Are
there different considerations or effects related to the proposed hard
close requirement if we were to require funds to use a liquidity fee?
Would it be effective to implement the liquidity fee alternative with
an alternative to the hard close requirement discussed below, such as
indicative flows, estimated flows, or delayed cut-off times for
intermediaries?
    146. Should a liquidity fee requirement be implemented through
amendments to rule 22c-2 or through a new rule? To what extent would
information that financial intermediaries agree to provide under a
shareholder information agreement be important for funds to receive
under a liquidity fee framework? \257\ Is there other information funds
would need to receive from financial intermediaries to determine that
liquidity fees are appropriately applied? Should we amend the
definition of shareholder information agreement to require that
information, or are there other mechanisms for funds to receive that
information (e.g., distribution agreements)? Are there other rules we
should amend if we adopt a liquidity fee requirement, such as rule 11a-
3 under the Act, which permits application of certain fees in
connection with an exchange offer notwithstanding section 11(a) of the
Investment Company Act? If we amend rule 11a-3, should the rule treat a
liquidity fee in the same way as a redemption fee, as defined in that
rule? \258\
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    \257\ See rule 22c-2(c)(5) (defining a shareholder information
agreement as a written agreement under which a financial
intermediary agrees, among other things, to provide certain
information to a fund promptly upon request, including taxpayer
identification number of all shareholders who have purchased,
redeemed, transferred, or exchanged fund shares held through an
account with the financial intermediary, and the amount and dates of
such activity).
    \258\ Under rule 11a-3, an offering company may cause a security
holder to be charged a redemption fee in connection with an exchange
offer, subject to certain conditions. See rule 11a-3(b)(2); rule
11a-3(a)(7) (defining a redemption fee as a fee that a fund imposes
pursuant to rule 22c-2).
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    147. How should funds be required to disclose liquidity fees to
investors? Should liquidity fees be reflected in the prospectus fee
table, as mutual fund (other than money market fund) redemption fees
currently are? \259\ Or, similar to money market fund liquidity fees,
should liquidity fees be excluded from the prospectus fee table? \260\
Should funds be required to disclose the circumstances in which they
would impose liquidity fees in the prospectus? If a liquidity fee only
applies on some days, should the fund be required to disclose on its
website that it is applying a liquidity fee that day and the size of
the fee? Should funds be required to report information about

liquidity fees that are imposed? For example, should a fund be required
to report on Form N-PORT the dates the fund imposed liquidity fees (or
the number of days on which fees were applied) and the amount of the
fee applied on each occurrence? If a fund or its board has discretion
on when to apply liquidity fees, should a fund be required to disclose
why a liquidity fee was or was not imposed under certain circumstances?
Should funds be required to report other information about liquidity
fees or report information in other locations, such as in shareholder
reports, on fund websites, or in Forms N-CEN or N-RN? Would any
existing items on Form N-PORT, Form N-CEN, Form N-1A, Form N-RN, or
other forms need to be modified if we were to adopt a liquidity fee
framework instead of swing pricing?
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    \259\ See Item 3 of Form N-1A.
    \260\ See Instruction 2(b) to Item 3 of Form N-1A (excluding
money market fund liquidity fees imposed in accordance with rule 2a-
7 from the definition of ``redemption fee'').
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    148. How quickly do intermediaries currently remit to funds the
amounts collected from purchase or redemption fees applied to customer
accounts? If remittal currently is delayed, what are the causes of
delay? If we adopted a liquidity fee, would funds reflect any delayed
liquidity fee payment as an accrual? Under a liquidity fee approach,
should intermediaries be required to remit payments to funds within a
certain amount of time after a purchase or redemption? If so, what is
an appropriate amount of time for remittal (e.g., on the day of
settlement or within one or two days after settlement)? For example,
should we adopt a rule that would provide that a fund must prohibit an
intermediary from purchasing the fund's shares in nominee name on
behalf of others if the intermediary does not remit payment on a timely
basis? Are there other appropriate consequences for an intermediary
that has a pattern or practice of late payments, such as a requirement
that orders from such an intermediary may not receive today's price and
will be executed on a subsequent day at that day's price in order to
otherwise limit the dilutive effects of purchase and sale orders
received through that intermediary since fees are not paid in a timely
manner? Should we require a fund to charge an additional surcharge to
an intermediary that does not remit payment on a timely basis? Should
funds be required to report the names of intermediaries who are delayed
in remitting payment and the amount due? If so, where should funds
provide this information (for example, Form N-PORT, Form N-CEN, fund
websites, or registration statements)?
    149. Would a liquidity fee requirement have different effects on
investor behavior than a swing pricing requirement? For example,
because application of liquidity fees is more observable than
application of swing pricing, would liquidity fees be more likely to
affect investors' decisions of whether to purchase or redeem fund
shares?
b. Dual Pricing
    We also considered the use of dual pricing as an anti-dilution
measure. A fund that uses dual pricing would quote two prices--one for
incoming shareholders (reflecting the cost of buying portfolio
securities in the market), and one for outgoing shareholders
(reflecting the proceeds the fund would receive from selling portfolio
securities in the market).\261\ Dual pricing is permitted and used by
some funds in certain foreign jurisdictions.\262\ In comparison to
swing pricing and liquidity fees, we believe that dual pricing may
impose additional operational burdens and complexity on fund
intermediaries, service providers, and other third parties as they
would need to handle two share prices on each trade date. We understand
that mutual fund order processing systems currently are designed to
accommodate only one price, which is applied both to trades and
valuation, and a fund's share price feeds into many analyses that
intermediaries, funds, or others would need to update if there were two
share prices, such as rebalancing activity. In addition, as recognized
above, there would be operational costs associated with intermediaries
needing to submit purchase and redemption orders separately, rather
than netting purchase and redemption orders.
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    \261\ See Swing Pricing Adopting Release, supra note 11, at
n.40. Swing pricing would permit a fund to continue to transact
using one price, as they do today (instead of transacting using
separate prices for purchasing and redeeming shareholders).
    \262\ For example, jurisdictions that permit dual pricing
include the UK, Ireland, Australia, and Hong Kong. See Jin, et al,
supra note 163, at n.6 and accompanying text.
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    In addition, with a dual pricing framework, we would also address
effects on a fund's financial statements and performance reporting, as
the Commission has already done for swing pricing.\263\ If we were to
adopt a dual pricing framework, we could use the same general framework
as in swing pricing. Under this approach, a fund would use its ``GAAP''
NAV (i.e., the amount of net assets attributable to each share of
capital stock outstanding at the close of the period) in its statement
of assets and liabilities and in performance reporting, while it would
use its two transaction prices in reporting the dollar amounts received
for shares sold and paid for shares redeemed in its statement of
changes in net assets and reflect the impact of dual pricing in the
fund's financial highlights.
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    \263\ See Swing Pricing Adopting Release, supra note 11, at
section II.A.3.g.
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    Similar to liquidity fees, dual pricing could be either dynamic
(e.g., calculated to reflect spread, other transaction costs, and
market impact a fund is likely to incur to meet redemptions or invest
the proceeds from subscriptions and based on the magnitude of those
flows) or simplified (e.g., a constant spread around a fund's NAV).
Dynamic dual pricing generally would necessitate timely flow
information, similar to the proposed swing pricing requirement.
However, simplified dual pricing may not necessitate timely flow
information. Between these two types of dual pricing, a dynamic
approach would better reflect the costs associated with the magnitude
of fund purchases or redemptions on a given day. Under a simplified
dual pricing framework, there also is the potential for either
redeeming or subscribing investors to be over-charged for transaction
costs that their investing activity does not trigger, because the fund
would adjust its NAV for both subscribing and redeeming investors daily
without regard to whether the fund has net inflows or net outflows on a
given day. A simplified approach, however, would be less costly to
implement because, among other things, it would not require a hard
close or any alternatives to the hard close to provide actual or
estimated flow information.
    On balance, we are proposing a swing pricing requirement because it
may have operational advantages over dual pricing. We request comment
on using a dual pricing framework to impose liquidity costs on
transacting shareholders and whether a dual pricing alternative may
have fewer operational or other burdens than the proposed swing pricing
requirement or a liquidity fee alternative while still achieving the
same overall goals of reducing shareholder dilution.
    150. How do the operational implications of swing pricing, as
proposed, differ from the operational implications of dual pricing? As
dual pricing involves calculating and applying two prices on each trade
date, would that approach involve operational burdens and complexity
for fund intermediaries, service providers, and other third parties
that would not exist with a single price under our proposed swing
pricing framework?
    151. If we adopt a dual pricing framework instead of a swing
pricing framework, how should the spread around the NAV be determined?
For example, should the spread around the

NAV be constant or calculated daily or at some other frequency to
reflect transaction costs? If the latter, which transaction costs
(e.g., spread, other transaction costs, and market impact)? Under a
dual pricing framework, would funds need the same investor flow
information that is needed for swing pricing, or would implementation
of dual pricing be less dependent on investor flow information?
    152. Should a dual pricing requirement apply differently based on
the type of fund or the type of intermediary through which an investor
trades? If so, what would be the basis for the differences in how dual
pricing applies?
    153. If we adopt a dual pricing framework, should we address the
effects of two transaction prices on a fund's financial statements and
performance reporting in a manner similar to how the Commission has
addressed the effects of swing pricing (i.e., by clarifying that the
GAAP NAV must be used in some cases, while transaction prices are used
in others)? Are there additional implications of two transaction prices
that we would need to address and that would lead to a different result
than our current swing pricing approach?
    154. Under a dual pricing framework, which value of the fund's
shares would market participants use for analyses that currently are
based on a fund's NAV, such as rebalancing a client's holdings of
different funds to achieve a desired asset allocation or reflecting the
value of an investor's holdings on an account statement? If we adopt
dual pricing, should we provide guidance on which value to use for
these or other purposes?
    155. Are there differences between liquidity fees and dual pricing
that make one a better framework than the other to address dilution? If
so, what are the differences and why is one better than the other
(e.g., differences in tax treatment, if any)?
    156. What investor flow information, if any, would be required to
implement a dual pricing alternative? To the extent that a dual pricing
alternative requires timely investor flow information, should the
alternative be paired with the proposed hard close requirement? Are
there different considerations or effects related to the proposed hard
close requirement if we were to require funds to use dual pricing?
Would it be effective to implement the dual pricing alternative with an
alternative to the hard close requirement discussed below, such as
indicative flows, estimated flows, or delayed cut-off times for
intermediaries?
    157. If we adopt a dual pricing framework, what other changes
should be made to the proposal as a result? For example, what reporting
should be required on Form N-PORT, Form N-CEN, Form N-1A, Form N-RN, or
other forms used by funds that would be subject to the framework? Would
any existing reporting items on these or other forms need to be
modified if we were to adopt a dual pricing framework instead of swing
pricing? Are there other rules (e.g., rule 11a-3 under the Act) that
would require changes if we adopt an alternative framework?
    158. Would a dual pricing framework affect investor behavior
differently than a swing pricing framework or a liquidity fee
framework?
2. Alternatives to a Hard Close
    We are proposing to require a hard close for open-end funds that
are subject to the proposed swing pricing requirement. Under this