[Federal Register Volume 81, Number 223 (Friday, November 18, 2016)]
[Rules and Regulations]
[Pages 82084-82139]
[FR Doc No: 2016-25347]

Vol. 81

Friday,

No. 223

November 18, 2016

Part III

Securities and Exchange Commission

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17 CFR Parts 210, 270, and 274

Investment Company Swing Pricing; Final Rule

Federal Register / Vol. 81 , No. 223 / Friday, November 18, 2016 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 270, and 274

[Release Nos. 33-10234; IC-32316; File No. S7-16-15]
RIN 3235-AL61

Investment Company Swing Pricing

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

DATES: Effective Date: November 19, 2018.
    Compliance Dates: See section II.C.

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

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the
``Commission'') is adopting amendments to rules 22c-1 [17 CFR 270.22c-
1] and 31a-2 [17 CFR 270.31a-2] under the Investment Company Act of
1940 [15 U.S.C. 80a-1 et seq.] (``Investment Company Act'' or ``Act'');
amendments to Form N-1A [referenced in 17 CFR 274.11A] under the
Investment Company Act and the Securities Act of 1933 (``Securities
Act'') [15 U.S.C. 77a et seq.]; amendments to Article 6 [17 CFR 210.6-
01 et seq.] of Regulation S-X [17 CFR 210]; and adopting a new item in
Form N-CEN [referenced in 17 CFR 274.101] under the Investment Company
Act.\1\
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    \1\ Unless otherwise noted, all references to statutory sections
are to the Investment Company Act, and all references to rules under
the Investment Company Act are to Title 17, Part 270 of the Code of
Federal Regulations [17 CFR part 270].
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Table of Contents

I. Introduction
II. Discussion
    A. Swing Pricing
    B. Disclosure and Reporting Requirements Regarding Swing Pricing
    C. Effective and Compliance Dates
III. Economic Analysis
    A. Introduction and Primary Goals of Regulation
    B. Economic Baseline
    C. Benefits and Costs, and Effects on Efficiency, Competition,
and Capital Formation
    D. Reasonable Alternatives
IV. Paperwork Reduction Act Analysis
    A. Introduction
    B. Rule 22c-1
    C. Rule 31a-2
    D. Form N-CEN
    E. Form N-1A
V. Final Regulatory Flexibility Act Analysis
    A. Need for the Rule
    B. Significant Issues Raised by Public Comment
    C. Small Entities Subject to the Rule
    D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
    E. Agency Action To Minimize Effect on Small Entities
VI. Statutory Authority and Text of Amendments
Text of Rules and Forms

I. Introduction

    Avoiding shareholder dilution is a key concern of the Investment
Company Act.\2\ In particular, section 22(c) gives the Commission broad
powers to regulate the pricing of redeemable securities for the purpose
of eliminating or reducing so far as reasonably practicable any
dilution of the value of outstanding fund shares.\3\ Under rule 22c-1
under the Investment Company Act, fund shareholders purchase and redeem
fund shares at a price based on the current NAV next computed after the
receipt of an order to purchase or redeem (the ``forward price'').\4\
Forward pricing addresses, in part, the risk of shareholder dilution
posed by the ``backward pricing'' method used by funds prior to the
adoption of the forward pricing rule.\5\ However, under rule 22c-1, the
NAV price that a purchasing or redeeming shareholder receives when
transacting shares typically does not take into account the transaction
costs (including trading costs and changes in market prices) that may
arise when the fund buys portfolio investments to invest proceeds from
purchasing shareholders or sells portfolio investments to meet
shareholder redemptions.\6\
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    \2\ See Investment Trusts and Investment Companies Investment
Trusts and Investment Companies: Hearings on S. 3580 before a
Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d
Sess. (1940), at 37, 137-145 (stating that, among the abuses that
served as a backdrop for the Act, were ``practices which resulted in
substantial dilution of investors' interests'', including backward
pricing by fund insiders to increase investment in the fund and thus
enhance management fees, but causing dilution of existing investors
in the fund).
    \3\ Section 22(a) of the Act authorizes securities associations
registered under section 15A of the Securities Exchange Act of 1934
(the ``Exchange Act'') to prescribe rules related to the method of
computing purchase and redemption prices of redeemable securities
and the minimum time period that must elapse after the sale or issue
of such securities before any resale or redemption may occur, for
the purpose of ``eliminating or reducing so far as reasonably
practicable any dilution of the value of other outstanding
securities of such company or any other result of such purchase,
redemption, or sale which is unfair to holders of such other
outstanding securities.''
     Section 22(c) of the Act authorizes the Commission to make
rules and regulations applicable to registered investment companies
and to principal underwriters of, and dealers in, the redeemable
securities of any registered investment company, whether or not
members of any securities association, to the same extent, covering
the same subject matter, and for the accomplishment of the same ends
as are prescribed in section 22(a) in respect of the rules which may
be made by a registered securities association governing its
members.
    \4\ See rule 22c-1(a). Prior to adoption of rule 22c-1, investor
orders to purchase and redeem could be executed at a price computed
before receipt of the order, allowing investors to lock-in a low
price in a rising market and a higher price in a falling market. The
forward pricing provision of rule 22c-1 was designed to eliminate
these trading practices and the dilution to fund shareholders that
occurred as a result of backward pricing. See Pricing of Redeemable
Securities for Distribution, Redemption, and Repurchase, Investment
Company Act Release No. 14244 (Nov. 21, 1984) [49 FR 46558 (Nov. 27,
1984)], at text following n.2.
    \5\ See Pricing of Redeemable Securities for Distribution,
Redemption and Repurchase and Time-Stamping of Orders by Dealers,
Investment Company Act Release No. 5519 (Oct. 16, 1968) [33 FR 16331
(Nov. 7, 1968)] (``Rule 22c-1 Adopting Release''), at 2 (``One
purpose of [rule 22c-1] is to eliminate or reduce so far as
reasonably practicable any dilution of the value of outstanding
redeemable securities of registered investment companies through (i)
the sale of such securities at a price below their net asset value
or (ii) the redemption or repurchase of such securities at a price
above their net asset value. Dilution through the sale of redeemable
securities at a price below their net asset value may occur, for
example, through the practice of selling securities for a certain
period of time at a price based upon a previously established net
asset value. This practice permits a potential investor to take
advantage of an upswing in the market and an accompanying increase
in the net asset value of investment company shares by purchasing
such shares at a price which does not reflect the increase.'').
    \6\ See Open-End Fund Liquidity Risk Management Programs; Swing
Pricing; Re-Opening of Comment Period for Investment Company
Reporting Modernization Release, Investment Company Act Release No.
31835 (Sept. 22, 2015) [80 FR 62273 (Oct. 15, 2015)] (``Proposing
Release''), at section III.F, 184-187. However, going forward, in a
fund that swing prices, the NAV of the fund would reflect such
costs, which would be borne by redeeming and purchasing
shareholders.

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    We sought to address the risk of shareholder dilution that can
result from such transaction costs, along with the risk that a fund
would be unable to meet its obligations to redeeming shareholders or
other obligations under applicable law (while mitigating investor
dilution) as a result of liquidity risk, with the proposal on fund
liquidity risk management that we published in 2015.\7\ In order to
provide funds with a tool to mitigate potential dilution and to manage
fund liquidity, the proposal included amendments to rule 22c-1 under
the Act to permit funds (except money market funds and exchange-traded
funds (``ETFs'')) to use ``swing pricing,'' a process of adjusting the
fund's NAV to effectively pass on more of the costs stemming from
shareholder transaction flows into and out of the fund to shareholders
associated with that activity.
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    \7\ See id.
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    We received more than 70 comment letters on the proposal,\8\ many
of which addressed the swing pricing amendments.\9\ Today, we are
adopting new rule 22c-1(a)(3) permitting funds (other than money market
funds and ETFs) to engage in swing pricing substantially as proposed,
with certain modifications to respond to commenters' suggestions and
concerns.\10\ We believe swing pricing could be an effective tool to
assist U.S. registered funds in mitigating potential shareholder
dilution. We also believe that swing pricing may be an additional tool
to manage a fund's liquidity risk.
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    \8\ The comment letters on the Proposing Release (File No. S7-
16-15) are available at http://www.sec.gov/comments/s7-16-15/s71615.shtml. We are adopting requirements for funds to adopt
liquidity risk management programs today in a companion release. See
Investment Company Liquidity Risk Management Programs, Investment
Company Act Release No. 32315 (Oct. 13, 2106) (``Liquidity Risk
Management Programs Adopting Release'').
    \9\ See, e.g., Comment Letter of the Mutual Fund Directors Forum
(Jan. 13, 2016) (``MFDF Comment Letter'') (recommending that the
Commission consider issuing a separate proposal for swing pricing
due to the difficult operational issues of swing pricing); Comment
Letter of Investment Company Institute (Jan. 13, 2016) (``ICI
Comment Letter I'') (arguing that, for funds to adopt swing pricing,
there must be widespread changes in market practices and significant
reengineering of fund operations). But see Comment Letter of Eaton
Vance Corp. (June 13, 2016) (``Eaton Vance Comment Letter'')
(expressing that there are investor protection concerns associated
with the implementation of swing pricing, but acknowledging the
significant costs to existing shareholders as a result of purchase
and redemption activity).
    \10\ If any provision of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given
effect without the invalid provision or application.
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    We are also adopting amendments to rule 31a-2 to require funds to
maintain records evidencing and supporting each computation of an
adjustment to the fund's NAV based on the fund's swing pricing policies
and procedures. Finally, we are adopting amendments to Form N-1A and
Regulation S-X and adopting a new item in Form N-CEN to require a fund
to publicly disclose certain information regarding its use of swing
pricing.\11\ We anticipate that this information will facilitate the
Commission's ability to monitor and assess compliance with rule 22c-1
as amended and may assist investors in making more informed investment
choices.
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    \11\ We are adopting Form N-CEN today in a companion release.
See Investment Company Reporting Modernization, Investment Company
Act Release No. 32314 (Oct. 13, 2016) (``Investment Company
Reporting Modernization Adopting Release'').
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II. Discussion

A. Swing Pricing

1. Background
    Under rule 22c-1, all investors who submit requests to redeem from
an open-end fund on any particular day must receive the NAV next
calculated by the fund after receipt of such redemption request.\12\ As
most funds, with the exception of money market funds, calculate their
NAV only once a day, this means that redemption requests submitted
during the day receive the end of day NAV, typically calculated as of 4
p.m. Eastern time.\13\ When calculating a fund's NAV, however, rule 2a-
4 requires funds to reflect changes in holdings of portfolio securities
and changes in the number of outstanding shares resulting from
distributions, redemptions, and repurchases no later than the first
business day following the trade date.\14\ We allow this calculation
method to provide funds with additional time and flexibility to
incorporate last-minute portfolio transactions into their NAV
calculations on the business day following the trade date, rather than
on the trade date.\15\ As a practical matter, this calculation method
also gave broker-dealers, retirement plan administrators, and other
intermediaries additional time to transmit transactions submitted
before the cut-off time on the trade date, which then may be reflected
in computation of the fund's NAV on the business day following the
trade date.\16\
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    \12\ The process of calculating or ``striking'' the NAV of the
fund's shares on any given trading day is based on several factors,
including the market value of portfolio securities, fund
liabilities, and the number of outstanding fund shares, among
others.
    \13\ Commission rules do not require that a fund calculate its
NAV at a specific time of day. Current NAV must be computed at least
once daily, subject to limited exceptions, Monday through Friday, at
the specific time or times set by the board of directors. See rule
22c-1(b)(1).
    \14\ Rule 2a-4(a)(2)-(3).
    \15\ See Adoption of Rule 2a-4 Defining the Term ``Current Net
Asset Value'' in Reference to Redeemable Securities Issued by a
Registered Investment Company, Investment Company Act Release No.
4105 (Dec. 22, 1964) [29 FR 19100 (Dec. 30, 1964)].
    \16\ See infra footnote 195. These redemptions are effected at
the trade date's NAV.
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    Nevertheless, we recognize that trading activity and other changes
in portfolio holdings associated with meeting redemptions may occur
over multiple business days following the redemption request. If these
activities occur (and their associated costs are reflected in NAV) in
days following redemption requests, the costs of providing liquidity to
redeeming investors could be borne by the remaining investors in the
fund, thus potentially diluting the interests of non-redeeming
shareholders.\17\ The less liquid the fund's portfolio holdings, the
greater these liquidity costs can become.\18\ The significant growth in
the assets managed by funds with strategies that focus on holding
relatively less liquid investments (such as fixed income funds,
including emerging

market debt funds, open-end funds with alternative strategies, and
emerging market equity funds), which could incur significant trading
costs, could give rise to increased dilution effects from redeeming and
subscribing shareholders in those funds.\19\
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    \17\ The transaction costs associated with redemptions can vary
significantly, with some costs having a more immediate impact on
shareholders than others. For example, during times of heightened
market volatility and wider bid-ask spreads for the fund's
underlying holdings, selling the fund's investments to meet
redemptions will necessarily result in costs to the fund, which in
turn may negatively impact investors who chose to redeem in the days
immediately following the stress event. The impact of such costs on
the remaining fund investors can vary depending on when a
shareholder choses to redeem. See, e.g., Comment Letter of Mutual
Fund Directors Forum on the Notice Seeking Comment on Asset
Management Products and Activities, Docket No. FSOC-2014-0001 (Mar.
25, 2015), at 6.
    \18\ See, e.g. Comment Letter of Morningstar, Inc. (Jan. 13,
2016) (``Morningstar Comment Letter''). See also Proposing Release,
supra footnote 6, at n.45 and accompanying text. We discuss the
extent to which swing pricing could effectively pass on to redeeming
shareholders more of the costs stemming from their trading activity,
as opposed to being borne by non-redeeming shareholders, in infra
section II.A.2. Furthermore, because shareholders' purchase activity
would provide liquidity to a fund, which could reduce the fund's
costs in meeting shareholders' redemption requests that day,
investors who purchase shares on a day that the fund adjusts its NAV
downward would not create dilution for non-redeeming shareholders.
See infra at text following footnote 123.
    \19\ See Liquidity Risk Management Programs Adopting Release,
supra footnote 8, at section II.C.
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    As we discuss more broadly in the Liquidity Risk Management
Programs Adopting Release, these factors in fund redemptions can create
incentives, at least in theory, in times of liquidity stress in the
markets for shareholders to redeem quickly to avoid further losses (or
a ``first-mover advantage'').\20\ If shareholder redemptions are
motivated by this first-mover advantage, they can lead to increasing
outflows, and as the level of outflows from a fund increases, the
incentive for remaining shareholders to redeem may also increase.\21\
Additionally, a fund experiencing large outflows as a result of
redemptions may be exposed to predatory trading activity in the
securities it holds.\22\ Regardless of whether investor redemptions are
motivated by a first-mover advantage or other factors, there can be
significant adverse consequences to remaining investors in a fund in
these circumstances, including material dilution of remaining
investors' interests in the fund.\23\
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    \20\ See id., at n.84 and accompanying text. But see Comment
Letter of Nuveen Investments on the Notice Seeking Comment on Asset
Management Products and Activities, Docket No. FSOC-2014-0001 (Mar.
25, 2015), at 10 (stating that there is no evidence that
shareholders are actually motivated by a first-mover advantage);
Comment Letter of BlackRock on the Notice Seeking Comment on Asset
Management Products and Activities, Docket No. FSOC-2014-0001 (Mar.
25, 2015), at 17 (stating that although incentives to redeem may
exist, this does not necessarily imply that investors will in fact
redeem en masse in times of market stress, but also noting that a
well-structured fund ``should seek to avoid features that could
create a `first-mover advantage' in which one investor has an
incentive to leave'' before others); Comment Letter of Association
of Institutional Investors on the Notice Seeking Comment on Asset
Management Products and Activities, Docket No. FSOC-2014-0001 (Mar.
25, 2015), at 10-11 (``The empirical evidence of historical
redemption activity, even during times of market stress, supports
the view that either (i) there are not `incentives to redeem' that
are sufficient to overcome the asset owner's asset allocation
decision or (ii) that there are disincentives, such as not
triggering a taxable event, that outweigh the hypothesized
`incentives to redeem.' ''); Comment Letter of The Capital Group
Companies on the Notice Seeking Comment on Asset Management Products
and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 8
(``We also do not believe that the mutualization of fund trading
costs creates any first mover advantage.''); Comment Letter of
Investment Company Institute on the Notice Seeking Comment on Asset
Management Products and Activities, Docket No. FSOC-2014-0001 (Mar.
25, 2015) (``Investor behavior provides evidence that any mutualized
trading costs must not be sufficiently large to drive investor
flows. We consistently observe that investor outflows are modest and
investors continue to purchase shares in most funds even during
periods of market stress.''). See also discussion of the potential
first-mover advantage in the Proposing Release, supra footnote 6, at
n.49.
    \21\ Id.
    \22\ See, e.g., Joshua Coval & Erik Stafford, Asset Fire Sales
(and Purchases) in Equity Markets, 86 J. Fin. Econ. 479 (2007)
(``Funds experiencing large outflows tend to decrease existing
positions, which creates price pressure in the securities held in
common by distressed funds. Similarly, the tendency among funds
experiencing large inflows to expand existing positions creates
positive price pressure in overlapping holdings. Investors who trade
against constrained mutual funds earn significant returns for
providing liquidity. In addition, future flow-driven transactions
are predictable, creating an incentive to front-run the anticipated
forced trades by funds experiencing extreme capital flows.'');
Teodor Dyakov & Marno Verbeek, Front-Running of Mutual Fund Fire-
Sales, 37 J. of Bank. and Fin. 4931 (2013) (``We show that a real-
time trading strategy which front-runs the anticipated forced sales
by mutual funds experiencing extreme capital outflows generates an
alpha of 0.5% per month during the 1990-2010 period . . . Our
results suggest that publicly available information of fund flows
and holdings exposes mutual funds in distress to predatory
trading.''). See discussion of predatory trading concerns in the
Proposing Release, supra footnote 6, at nn.805-809 and accompanying
text.
    \23\ See Proposing Release, supra footnote 6, at n.37.
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    As a means of addressing potential shareholder dilution from
redemptions, the Commission adopted in 2005 rule 22c-2 under the
Investment Company Act, which permits funds to impose redemption fees
under certain circumstances.\24\ Although the Commission adopted the
redemption fee rule to allow funds to recoup some of the direct and
indirect costs incurred as a result of short-term trading strategies,
such as market timing, rule 22c-2 is not limited to the context of
market timing and expressly contemplates that a fund board of directors
may approve a redemption fee in order to ``eliminate or reduce so far
as practicable any dilution of the value of the outstanding securities
issued by the fund,'' and thus the rule can also be used to mitigate
dilution arising from shareholder transaction activity generally.\25\
In adopting rule 22c-2, the Commission stated that the amount of the
redemption fee under rule 22c-2 may include indirect costs associated
with transactions in fund shares, such as liquidity costs.\26\
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    \24\ See Mutual Fund Redemption Fees, Investment Company Act
Release No. 26782 (Mar. 11, 2005) [70 FR 13328 (Mar. 18, 2005)]
(``Redemption Fees Adopting Release''). The redemption fee may be no
more than two percent of the value of the shares redeemed. Rule 22c-
2(a)(1)(i).
    \25\ See Redemption Fees Adopting Release, supra footnote 24, at
section II.A. (``Rule 22c-2 requires that each fund's board of
directors (including a majority of independent directors) either (i)
approve a redemption fee that in its judgment is necessary or
appropriate to recoup costs the fund may incur as a result of
redemptions, or to otherwise eliminate or reduce dilution of the
fund's outstanding securities, or (ii) determine that imposition of
a redemption fee is not necessary or appropriate.'') (internal
citation omitted). See also Comment Letter of Federated Investors,
Inc. (Jan. 13, 2016) (``Federated Comment Letter'') (stating that
redemption fees currently permitted under rule 22c-2 may be an
effective anti-dilution tool and presenting an illustrative
redemption fee structure assessed in an amount equal to expected
transaction costs, up to two percent, for transactions over a
certain dollar amount).
    \26\ See Redemption Fees Adopting Release, supra footnote 24.
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    Fund boards have flexibility under rule 22c-2 to adopt redemption
fees that address the needs of their funds.\27\ Rule 22c-2 provides
discretion for fund boards to structure redemption fees in way that
``in its judgment, is necessary or appropriate'' to achieve the anti-
dilution purposes of the rule.\28\ For example, we believe that a fund
board, consistent with its obligations under 22c-2, may determine that
it is appropriate to approve a redemption fee that would apply for an
indefinite time period after purchase of the security--that is,
whenever an investor redeems from the fund--in order to reduce
dilution.\29\ In addition, a fund board might determine it appropriate
to impose a redemption fee only on a subset of such redemptions that
the board determines are most likely to result in such costs or
dilution, such as all redemptions exceeding a certain size (e.g. over
$100,000 or $250,000) or on such large redemptions if advance notice is
not provided.\30\ The details of the redemption fee and the
circumstances under which it would (and would not) be imposed, as well
as

exceptions or waivers must be disclosed to fund investors.\31\
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    \27\ See id., at section II. (``[Rule 22c-2] permits each board
to take steps it concludes are necessary to protect its investors,
and provides the board flexibility to tailor the redemption fee to
meet the needs of the fund.''); and Mutual Fund Redemption Fees,
Investment Company Act Release No. 27504 (Sept. 27, 2006) [71 FR
58257 (Oct. 3, 2001)], at section II.C (``[T]he terms of redemption
fee policies are a matter for fund boards to determine.'').
    \28\ Rule 22c-2.
    \29\ While rule 22c-2 provides a minimum seven day ``time
period'' during which a redemption fee, if imposed, must apply,
(i.e. a fee may not apply only to shares redeemed in three days or
less after purchase, but must capture shares redeemed within at
least a seven-day period after purchase), it does not impose a
maximum duration of such a time period, and thus redemption fees may
be imposed on shares redeemed within a month, three months, or even
longer periods, depending on the duration deemed appropriate by the
fund board. See rule 22c-2(a)(1)(i).
    \30\ Redemption fees imposed for an indefinite time period after
purchase but only on redemptions exceeding a certain size--like
redemption fees imposed on all shares redeemed within a certain time
period--might potentially implicate the senior security concerns of
section 18(f)(1), but we note that in adopting rule 22c-2 we
explicitly provided exemptive relief from section 18(f)(1) for
redemption fees imposed under rule 22c-2. See Redemption Fees
Adopting Release, supra footnote 24, at n.30 (``By adopting the
rule, we are providing an exemption from . . . the Act's prohibition
against the issuance of a senior security.'').
    \31\ See id., at n.32 (``The details of the redemption fee, the
circumstances under which it would (and would not) be imposed, and
the specific exceptions to imposition of the fee are currently
disclosed to fund investors when they decide to invest in a fund,
and may include exceptions for particular transactions.''). See also
Item 11(c) of Form N-1A.
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    While we believe redemption fees may be an effective anti-dilution
tool, we acknowledge that these fees are viewed as unpopular with
investors and intermediaries \32\ and entail their own operational
complexities.\33\ As a result, redemption fees have not become
prevalent as a means of addressing dilution due to shareholder
transaction activity, and thus are used by a limited number of
funds.\34\
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    \32\ See Eaton Vance Comment Letter (``Even investors who
understand that transaction fees accrue to the benefit of the fund
(and thus, indirectly, to fund shareholders) often react negatively
when confronted with having to pay them.'').
    \33\ For example, we recognize the compliance burdens and
operational challenges certain types of redemption fees place on
intermediaries, who would be required to track various fund policies
for such fees by share class that may include varying fee rates,
applicability and waiver policies. Such data also would require
daily updating as it is sourced by systems that support both front-
end (customer facing) and back-end transaction processing to ensure
fees are accurately assessed. See Proposing Release, supra footnote
6 at text accompanying n.724 (acknowledging potential operational
complexity that could accompany the use of redemption fees). We
acknowledge that these operational challenges may be particularly
acute in circumstances where a fund's policies assess redemption
fees only in circumstances where the fund is experiencing heavy
redemptions or particular market stresses or where a fund assesses
redemption fees that may vary in size each time they are applied.
    \34\ See Eaton Vance Comment Letter (``Given a choice, most
investors appear to prefer funds that do not charge transactions
fees over funds that do. This creates a competitive disadvantage for
funds that impose transaction fees, accounting for their limited
use.'').
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    Funds may also attempt to address potential shareholder dilution by
reserving the right to redeem in kind instead of with cash.\35\ In-kind
redemptions may reduce transaction costs by reducing the need for cash
transactions, but they raise challenges of their own.\36\ There are
often logistical and operational issues associated with paying in-kind
redemptions, and this limits the availability of in-kind redemptions
under many circumstances.\37\ For instance, in-kind redemptions could
entail operational difficulties that result in manual processes, which
would be imposed on both the fund and on investors receiving portfolio
securities.\38\ Moreover, some shareholders are generally unable or
unwilling to receive in-kind redemptions.\39\
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    \35\ See, e.g., Adoption of (1) Rule 18f-1 Under the Investment
Company Act of 1940 to Permit Registered Open-End Investment
Companies Which Have the Right to Redeem In Kind to Elect to Make
Only Cash Redemptions and (2) Form N-18F-1, Investment Company Act
Release No. 6561 (June 14, 1971) [36 FR 11919 (June 23, 1971)]
(``Rule 18f-1 and Form N-18F-1 Adopting Release'') (stating that the
definition of ``redeemable security'' in section 2(a)(32) of the
Investment Company Act ``has traditionally been interpreted as
giving the issuer the option of redeeming its securities in cash or
in kind.'').
    \36\ Mutual funds that reserve the right to redeem their shares
in kind may use such redemptions to manage liquidity risk under
exceptional circumstances. See Karen Damato, `Redemptions in Kind'
Become Effective for Tax Management, Wall Street Journal (Mar. 10,
1999), available at http://www.wsj.com/articles/SB921028092685519084
(`` `Redemptions in kind' are typically viewed by fund managers as
an emergency measure, a step they could take to meet massive
redemptions in the midst of a market meltdown.''). Funds may also
use in-kind redemptions for other reasons. For example, funds may
wish to redeem certain investors (particularly, large, institutional
investors) in kind, because in-kind redemptions could have a lower
tax impact on the fund than selling portfolio securities in order to
pay redemptions in cash. This, in turn, could benefit the remaining
shareholders in the fund. See, e.g., id. See also Liquidity Risk
Management Programs Adopting Release, supra footnote 8, at section
III.F.
    \37\ See, e.g., Comment Letter of Invesco on the Notice Seeking
Comment on Asset Management Products and Activities, Docket No.
FSOC-2014-0001 (Mar. 25, 2015), at 11 (noting that while ``Invesco
has on occasion exercised rights to redeem in kind, in practice such
rights are exercised infrequently'').
    \38\ See Money Market Fund Reform; Amendments to Form PF,
Investment Company Act Release No. 31166 (July 23, 2014) [79 FR
47736 (Aug. 14, 2014)] (``2014 Money Market Fund Reform Adopting
Release''), at section II.L.1.f (discussing ``complex valuation and
operational issues'' associated with in-kind redemptions). See also
Money Market Fund Reform; Amendments to Form PF, Investment Company
Act Release No. 30551 (June 5, 2013) [78 FR 36834, (June 19, 2013)]
(``2013 Money Market Fund Reform Proposing Release''), at n.473 and
accompanying text.
    \39\ See Comment Letter of BlackRock Inc. (Jan. 13, 2016)
(``BlackRock Comment Letter'') (``[R]edemptions in-kind are not
practical for retail investors, as retail investors may lack the
proper custodial accounts to hold a particular security and they may
be less likely to have the necessary expertise and/or the
operational ability to trade the securities that could be held in a
fund. For example, a retail investor may not have a custodial
account set up to hold a security that is traded in another country,
nor the sophistication to be able to trade such a security.''). See
also Comment Letter of Invesco Ltd. (Jan. 13, 2016) (``Invesco
Comment Letter'') (``The primary problem with using redemptions in-
kind to meet large redemptions is the willingness and ability of the
redeeming entity to receive securities instead of cash.''); Peter
Fortune, Mutual Funds, Part I: Reshaping the American Financial
System, New England Econ. Rev. (July/Aug. 1997), at 47, available at
http://www.bostonfed.org/economic/neer/neer1997/neer497d.htm. (``A
fund redeeming in kind does so at the risk of its reputation and
future business . . .''). In the context of money market funds, we
requested comment on whether we should require redemptions in kind
for redemptions in excess of a certain size threshold, to ease
liquidity strains on the fund and reduce the risks and unfairness
posed by significant sudden redemptions. See Money Market Fund
Reform; Proposed Rule, Investment Company Act Release No. 28807
(June 30, 2009) [74 FR 32688 (July 8, 2009)] (``2009 Money Market
Fund Reform Proposing Release''), at section III.B. Commenters
generally opposed this type of reform for a variety of reasons, all
of which likely would apply equally to funds other than money market
funds. For example, most commenters stated that in-kind redemptions
would be technically unworkable due to complex valuation and
operational issues that would be imposed on both the fund and on
investors receiving the in-kind distribution. See 2013 Money Market
Fund Reform Proposing Release, supra footnote 38, at section
III.B.9.c.
---------------------------------------------------------------------------

    Funds may still mitigate shareholder dilution using redemption fees
and redemptions in kind, but each has downsides (as described above)
and they are not broadly utilized by funds. Therefore, for the reasons
discussed throughout this section, we believe that providing funds the
option to use swing pricing as another anti-dilution tool is likely to
benefit investors and may complement or be an alternative to the tools
currently available to funds.
    Finding efficient and cost-effective ways to protect fund
shareholders from the dilutive impacts of trading activity and related
costs is challenging, and many tools have been used in different
jurisdictions to address these issues.\40\ As discussed in detail in
the Proposing Release, one particularly successful tool, which has been
applied in the Luxembourg fund industry for over 15 years, is swing
pricing.\41\ Swing pricing is regarded abroad as an efficient mechanism
to protect non-transacting shareholders from dilution, as well as an
additional tool to help funds manage liquidity risks.\42\ Asset
managers have

implemented swing pricing for a range of fund types and asset classes,
including equity, fixed income and multi-asset funds.\43\ A number of
other jurisdictions also permit the use of swing pricing within their
domestic markets, or are considering allowing its use.\44\ Although
swing pricing may be more or less widely implemented in different
jurisdictions (due to a particular home market's regulatory regime,
investor profiles and operational infrastructure), when implemented it
has been shown to provide performance benefits to funds,\45\ which is
consistent with a reduction in dilution attributable to the
transactions costs associated with shareholder activity.\46\
---------------------------------------------------------------------------

    \40\ See Proposing Release, supra footnote 6, at text preceding
n.423 (``While redemption fees (or purchase fees) could mitigate
dilution arising from shareholder transaction activity, implementing
a fee requires coordination with the fund's service providers, which
could entail operational complexity.''); see also id., at text
accompanying and following n.445 (``In considering the swing pricing
proposal, we considered proposing a rule that would permit `dual
pricing' as opposed to swing pricing. We understand that certain
foreign funds use dual pricing as an alternative means of mitigating
potential dilution arising from shareholder transaction activity. A
fund using dual pricing would not adjust the fund's NAV by a swing
factor when it faces high levels of net purchases or net
redemptions, but instead would quote two prices--one for incoming
shareholders (reflecting the cost of buying portfolio securities at
the ask price in the market), and one for outgoing shareholders
(reflecting the proceeds the fund would receive from selling
portfolio securities at the bid price in the market). While we
believe that dual pricing also could mitigate potential dilution, we
believe that swing pricing is a preferable alternative because we
believe it would be simpler to implement and for investors to
understand.'') (internal citation omitted).
    \41\ See Proposing Release supra footnote 6, at n.418 and
accompanying text. Luxembourg is a significant jurisdiction for the
organization of UCITS funds in Europe.
    \42\ See, e.g., Association of the Luxembourg Fund Industry,
Swing Pricing Update 2015 (Dec. 2015) (``ALFI Survey 2015''), at 21,
available at http://www.alfi.lu/sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015-FINAL.pdf (noting that it is ``increasingly
evident . . . that swing pricing is an accepted and well established
anti-dilution standard in the marketplace and has become the most
commonly practiced form of anti-dilution protection''); and id., at
17 (noting that a significant percentage of survey respondents
indicated that ``there is potential to apply swing pricing as part
of a range of measures to assist with fund liquidity issues'').
    \43\ See id., at 8-9.
    \44\ See id., at 6, 20.
    \45\ See infra footnote 88 and accompanying text.
    \46\ See also BlackRock, Fund Structures as Systemic Risk
Mitigants, Viewpoint (Sept. 2014) (``BlackRock Fund Structures
Paper''), available at https://www.blackrock.com/corporate/en-fi/literature/whitepaper/viewpoint-fund-structures-as-systemic-risk-mitigants-september-2014.pdf.
---------------------------------------------------------------------------

    Against this background, today we are adopting amendments to rule
22c-1 that will enable funds to choose to use ``swing pricing'' as a
tool to mitigate shareholder dilution. After further consideration and
after evaluating comments, we have modified several aspects of the
final rule from the proposal, including eliminating the consideration
of ``market impact'' when setting a fund's swing factor; requiring
funds to establish and disclose an upper limit on the fund's swing
factor, which may not exceed two percent of the fund's NAV per share;
and refining certain financial statement and performance reporting
requirements related to swing pricing. The amendments as adopted also
incorporate certain modifications to the board's approval and oversight
role associated with swing pricing. The fund's board does not have to
specifically approve changes to the fund's swing pricing policies and
procedures. However, under the final rule, the fund's board will be
required to approve the fund's swing pricing policies and procedures
and periodically review a written report prepared by the persons
responsible for administering swing pricing that describes, among other
things, the swing pricing administrator's review of the adequacy of the
fund's swing pricing policies and procedures and the effectiveness of
their implementation, including the impact on mitigating dilution. This
report also must describe the administrator's review and assessment of
the fund's swing threshold(s), swing factor(s), and swing factor upper
limit considering the requirements of the rule, including the
information and data supporting these determinations. The board-
approved policies and procedures must specify the process for setting
the swing threshold, swing factor, and swing factor upper limit. In
addition, the board will be required to approve the swing threshold(s)
and the upper limit on the swing factor(s) used by the fund, and any
changes thereto. We are also providing for an extended effective date
to help alleviate concerns raised by commenters regarding operational
changes that will be necessary before this new pricing method becomes
available in the marketplace, because we believe that efficient,
coordinated efforts to implement such operational changes will
ultimately benefit investors. We have directed our staff to review, two
years after the rule's effective date, market practices associated with
funds' use of swing pricing under rule 22c-1(a)(3) to mitigate dilution
and to provide the Commission with the results of this review.
2. Overview of Swing Pricing Proposal and Comments Received
    We proposed amendments to rule 22c-1 that would permit a registered
open-end fund (but not a money market fund or ETF) to choose to
establish and implement swing pricing.\47\ Under the proposal, a fund
that chooses to use swing pricing would need to have policies and
procedures that would require the fund to adjust its NAV per share by
an amount known as the ``swing factor'' once the level of net purchases
or net redemptions has exceeded a set, specified percentage of the
fund's NAV, known as the ``swing threshold.'' A fund would be required
to consider certain factors in determining its swing threshold, and the
fund's board would be required to approve the swing threshold.
Likewise, a fund would have to consider certain factors in determining
the ``swing factor,'' which is the amount that the funds NAV would
swing in response to the costs associated with the shareholder purchase
and redemption activity, and the board would have to approve any swing
factor upper limit.
---------------------------------------------------------------------------

    \47\ See Proposing Release, supra footnote 6, at section III.F.
---------------------------------------------------------------------------

    Nearly all commenters supported the goals of swing pricing, and the
ability of swing pricing in theory to achieve these goals.\48\ However,
commenters also highlighted a variety of concerns, many stemming from
operational hurdles to implementing swing pricing in the United States
that would require significant changes to fund processing
infrastructure and systems.\49\ Several commenters urged the Commission
to assist the industry in addressing the operational challenges before
swing pricing is implemented,\50\ by seeking input from industry
participants and other regulators about what could be done to make
swing pricing a viable option in the U.S.\51\ Commenters indicated that
funds, intermediaries and service providers will have different levels
of operational changes and burdens to consider, and certain funds may
have the ability to implement swing pricing sooner than other funds
(e.g., some fund complexes have experience with implementing swing
pricing in other jurisdictions, or are larger and may have more
resources available to implement swing pricing, or are otherwise in a
better position to be able to receive sufficient information to allow
them to reasonably estimate whether they have crossed a swing threshold
with high confidence). Commenters noted that such disparities could
allow some funds to implement swing pricing faster than others, and
that allowing time to work through operational issues in an efficient
manner for all funds should help facilitate its implementation.\52\
---------------------------------------------------------------------------

    \48\ See, e.g., Comment Letter of Americans for Financial Reform
(Jan. 13, 2016) (``AFR Comment Letter''); Federated Comment Letter;
Comment Letter of Global Association of Risk Professionals (Jan. 12,
2016) (``GARP Comment Letter''); Comment Letter of Vanguard (Jan. 6,
2016) (``Vanguard Comment Letter'').
    \49\ While most commenters supported the idea of swing pricing
(with certain reservations), a few opposed swing pricing outright.
See, e.g., Comment Letter of ETF Consultants (Jan. 25, 2016) (``ETF
Consultants Comment Letter''); Comment Letter of Voya Investment
Management (Jan. 12, 2016) (``Voya Comment Letter''); Comment Letter
of Eaton Vance Investment Managers (Jan. 13, 2016). See also infra
section II.A.3.b. for a detailed discussion on operational
challenges.
    \50\ See, e.g., BlackRock Comment Letter; Comment Letter of
Dodge & Cox (Jan. 21, 2016) (``Dodge & Cox Comment Letter'');
Comment Letter of Pacific Investment Management Company LLC (Jan.
13, 2016) (``PIMCO Comment Letter''); Comment Letter of Securities
Industry and Financial Markets Association (Jan. 13, 2016) (Comments
on Swing Pricing Proposal) (``SIFMA Comment Letter II'').
    \51\ See, e.g., Morningstar Comment Letter; SIFMA Comment Letter
II; Vanguard Comment Letter.
    \52\ See, e.g., BlackRock Comment Letter; Comment Letter of
Capital Research and Management Company (Jan. 13, 2016) (``CRMC
Comment Letter''); Comment Letter of Fidelity Management & Research
Company (Jan. 13, 2016) (``Fidelity Comment Letter''); ICI Comment
Letter I (suggesting that the SEC consider a delayed effective date
(of two years or 30 months) to permit funds and intermediaries to
work through operational issues, and to reduce potential competitive
disadvantages that may result for funds that may be less ready to
adopt swing pricing).

---------------------------------------------------------------------------

    In response to commenters' concerns regarding swing pricing's
operational challenges and costs and to help facilitate efficient
implementation of swing pricing, the Commission is adopting amendments
to rule 22c-1 permitting swing pricing with a two-year extended
effective date. Delaying the effective date should provide funds,
intermediaries, and service providers a reasonable amount of time to
evaluate and implement in an orderly and more cost-effective manner the
necessary operational changes to conduct swing pricing, regardless of
the unique operational hurdles a particular entity may face.\53\
Providing this extended effective date may result in long-term benefits
for many funds and investors as it may allow the industry to develop
and implement standardized operations solutions for swing pricing that
likely would result in lower costs, processing efficiencies and reduced
operational risks that ultimately benefit investors.\54\ We also
appreciate the extent of operational changes that will be necessary for
many funds to conduct swing pricing and that these changes may still be
costly to implement, but we were not persuaded by commenters who argued
that these changes are insurmountable, and indeed one stated that
despite these challenges ``the long-term benefits of enabling swing
pricing for U.S. open-end mutual funds outweigh the one-time costs
related to implementation for industry participants.'' \55\ These
issues are discussed in detail below.
---------------------------------------------------------------------------

    \53\ Id.
    \54\ See infra footnote 212 and accompanying paragraph. We note
that providing an extended effective date to address such
operational changes may also, consequently, alleviate some of the
competitive concerns raised by commenters regarding certain funds
being in a better position than others to rapidly implement swing
pricing.
    \55\ GARP Comment Letter.
---------------------------------------------------------------------------

    As discussed in section II.A.3.b. below, commenters highlighted the
various benefits of swing pricing for investors, including how the tool
may be used to address the dilutive effect of shareholder transaction
activity effectively and efficiently, and with observable performance
benefits to the non-transacting shareholders in such funds.\56\ Also,
as discussed in section II.A.3.b. below, commenters raised overarching
concerns regarding swing pricing generally, including shareholder
fairness, alternatives to swing pricing such as redemption fees or
redemptions in kind, the impacts swing pricing will have on the current
NAV and potential performance volatility, and transparency, disclosure,
and potential gaming behavior concerns.
---------------------------------------------------------------------------

    \56\ See infra footnote 88 and accompanying text.
---------------------------------------------------------------------------

    With respect to the more detailed elements of the proposed swing
pricing rules, multiple commenters raised various additional concerns,
and in some cases provided suggestions on the processes for determining
the swing threshold, calculating the swing factor, estimating net
shareholder flows, pricing errors and materiality, impacts on financial
statement presentation and other disclosures, and board approval and
oversight, all of which are discussed in the sections below.
3. Discussion of Final Swing Pricing Rules
a. Scope of New Swing Pricing Rules
    Under the final rule, all registered open-end management investment
companies, with the exception of money market funds and ETFs, may
choose to use swing pricing.\57\ Although rule 22c-1(a) generally
applies to all registered investment companies issuing redeemable
securities,\58\ we believe money market funds, while potentially
susceptible to the risk of dilution, already have extensive tools at
their disposal to mitigate potential shareholder dilution, and ETFs,
because they redeem directly only with authorized participants, are
generally able to utilize transaction fees to pass on certain costs
associated with redemptions.
---------------------------------------------------------------------------

    \57\ For purposes of the new amendments to rule 22c-1,
``exchange-traded fund'' includes an exchange-traded managed fund
(``ETMF''). See Liquidity Risk Management Programs Adopting Release,
supra footnote 8 at n.30 and accompanying text (discussing ETMFs in
greater detail).
    \58\ Rule 2a-7 provides exemptions from rule 22c-1 for money
market funds to permit certain money market funds to use the
amortized cost method and/or the penny-rounding method to calculate
its NAV, and to permit a money market fund to impose liquidity fees
and temporarily suspend redemptions. See rule 2a-7(c)(1)(i); rule
2a-7(c)(2).
---------------------------------------------------------------------------

    A fund may decide to adopt swing pricing policies and procedures as
part of the liquidity risk management program it is required to
implement under rule 22e-4.\59\ Some fund complexes may decide to use
swing pricing for certain funds within the complex but not others, or
establish different swing thresholds for different funds within the
complex.\60\ As discussed below, funds utilizing swing pricing are
required to exclude any purchases and redemptions that are made in kind
in determining whether the fund's level of net purchases or net
redemptions has exceeded the fund's swing threshold.\61\ We are not
permitting closed-end investment companies (``closed-end funds''), unit
investment trusts (``UITs''), ETFs and money market funds to use swing
pricing under the final rule, as discussed in more detail below.
---------------------------------------------------------------------------

    \59\ See Liquidity Risk Management Programs Adopting Release,
supra footnote 8. Under rule 22e-4, each open-end fund, including
open-end ETFs but not including money market funds, is required to
adopt and implement a written liquidity risk management program
reasonably designed to assess and manage the fund's liquidity risk.
See id.
    \60\ Outside the U.S., it is a common industry practice for
funds within a fund complex each to have an individual swing
threshold, or for some funds within a complex to use swing pricing
while others do not. See, e.g., BlackRock Fund Structures Paper,
supra footnote 46; and J.P. Morgan Asset Management, Swing Pricing:
The J.P. Morgan Asset Management Approach in the Luxembourg
Domiciled SICAVs (June 2014), available at http://www.jpmorganassetmanagement.de/DE/dms/Swing%20Pricing%20%5bMKR%5d%20%5bIP_EN%5d.pdf (``J.P. Morgan Asset
Management Swing Pricing Paper'').
    \61\ We note that although redemptions in kind are excluded from
the swing threshold, any such redemptions would still receive the
swung NAV if the fund were to swing price on that day. This is
because the swung NAV would apply to all redemption transactions on
that day, regardless of how the proceeds are paid. We recognize that
funds have discretion in determining whether to satisfy redemptions
in kind, and that a fund that does satisfy redemptions in kind is
less likely to cross its swing threshold. As a result, a fund can
control how much it engages in swing pricing through its use of
redemptions in kind. We believe this flexibility is appropriate,
however, because funds have discretion on whether to use swing
pricing, and redemptions in kind reduce dilution, which lessens the
need for swing pricing.
---------------------------------------------------------------------------

Closed-End Funds
    Closed-end funds do not issue redeemable securities and therefore
do not incur the same costs as open-end funds, associated with
shareholder purchase and redemption activity, that swing pricing is
intended to address.\62\ One commenter suggested that swing pricing
should be permitted for closed-end funds, indicating that certain
closed-end funds (e.g., those that rely on rule 23c-3) may incur
transaction costs that may be mitigated by swing pricing.\63\ The same
commenter

conceded, however, that the ``the risk of investor dilution in
connection with any offering or tender process is low for closed-end
funds,'' that ``the goals of the `swing-pricing' option for open-end
funds are already met for closed-end funds through existing
mechanisms,'' and that the commenter would not expect many closed-end
funds to utilize swing pricing. Because closed-end funds do not issue
redeemable securities,\64\ and therefore are much less likely to
encounter much of the dilution that swing pricing is intended to
address,\65\ we agree that the goals of swing pricing are already met
for closed-end funds and, as proposed, we are not permitting closed-end
funds to utilize swing pricing.\66\
---------------------------------------------------------------------------

    \62\ See section 2(a)(32) (defining ``redeemable security'') and
section 5(a)(1)-(2) (defining ``open-end company'' and ``closed-end
company'') of the Act.
    \63\ See Comment Letter of Simpson Thacher & Bartlett LLP (Jan.
14, 2016) (``[A] closed-end fund that continuously offers its shares
may determine that the subscribing shareholders should bear the
costs of the fund investing the new cash. In such situations, a fund
and its board may determine that the use of the swing-pricing
mechanism is appropriate. Accordingly, there may be potential
benefits in allowing closed-end funds the option to use swing
pricing.'').
     Certain closed-end funds (``closed-end interval funds'') do
elect to repurchase their shares at periodic intervals pursuant to
rule 23c-3 under the Investment Company Act. See Liquidity Risk
Management Program Adopting Release, supra footnote 8, at n.145.
    \64\ If a closed-end fund were to repurchase shares, it would
have control over the timing and amount of any such repurchases
(subject to the requirements of rule 23c-3, in the case of interval
funds), and thus would not face the same liquidity pressures as
open-end funds.
    \65\ See supra section I.
    \66\ We believe that the risk of investor dilution targeted by
swing pricing is already sufficiently mitigated for closed-end
interval funds by the requirements in rule 23c-3 and, therefore, it
would not be appropriate to permit such funds to utilize swing
pricing.
---------------------------------------------------------------------------

UITs
    Although UITs issue redeemable securities, we are not permitting
UITs to utilize swing pricing for a number of reasons. First, most
assets currently held in UITs serve as separate account vehicles used
to fund variable annuity and variable life insurance products, and
these UITs essentially function as pass-through vehicles, investing
principally in securities of one or more open-end funds that could
implement swing pricing.\67\ UITs are not actively managed, and their
portfolios are not actively traded. Unlike an open-end fund, a UIT
generally does not have personnel available to actively manage the
UIT's liquidity level. Because of the lack of a manager, we do not
believe it would be feasible for a UIT to engage in the active
administration of the swing pricing threshold and factor required by
the rule. Also, UITs whose sponsor maintains a secondary market for the
purchase and sale of units do not incur the dilutive transaction costs
that swing pricing targets. Finally, we are not permitting UITs that
are ETFs to utilize swing pricing for the reasons discussed in the ETFs
section immediately below. We did not receive any comments on the
Proposing Release indicating that UITs should be permitted to utilize
swing pricing.
---------------------------------------------------------------------------

    \67\ See Proposing Release, supra footnote 6, at n.139 and
accompanying text. We currently estimate that approximately 92.9% of
UITs serve as separate account vehicles (based on data as of
December 31, 2015).
---------------------------------------------------------------------------

ETFs
    As proposed, we are not permitting ETFs to use swing pricing
because, unlike mutual funds, which typically internalize the costs
associated with purchases and redemptions of shares, ETFs typically
externalize these costs by redeeming in kind and by charging a fixed
and/or variable fee to authorized participants who purchase creation
units from, and sell creation units to, an ETF to cover liquidity and
transaction costs.\68\ We also are not including ETFs within the scope
of rule 22c-1(a)(3) because we believe that swing pricing could impede
the effective functioning of an ETF's arbitrage mechanism.\69\ The
effective functioning of the arbitrage mechanism is necessary in order
for an ETF's shares to trade at a price that is at or close to the NAV
of the ETF.\70\ If an ETF were to adopt swing pricing policies and
procedures, an authorized participant would not know whether the ETF's
NAV would be adjusted by a swing factor on any given day and therefore
may not be able to assess whether an arbitrage opportunity exists.\71\
The Commission historically has considered the effective functioning of
the arbitrage mechanism to be central to the principle that all
shareholders be treated equitably when buying and selling their fund
shares (i.e., that shareholders would not transact in shares of an ETF
at market prices significantly diverging from the ETF's NAV).\72\
Therefore, we believe that the implementation of swing pricing by an
ETF could raise concerns about the equitable treatment of shareholders,
to the extent that swing pricing could impede the effective functioning
of the arbitrage mechanism. No commenters disagreed with our proposal
not to allow ETFs to use swing pricing. We are, as proposed, not
permitting ETFs to utilize swing pricing.
---------------------------------------------------------------------------

    \68\ The fixed and/or variable fees are imposed to offset both
transfer and other transaction costs that may be incurred by the ETF
(or its service providers), as well as brokerage, tax-related,
foreign exchange, execution, market impact and other costs and
expenses related to the execution of trades resulting from such
transaction. The amount of these fixed and variable fees typically
depends on whether the authorized participant effects transactions
in kind or with cash and is related to the costs and expenses
associated with transactions effected in kind versus in cash. When
an authorized participant redeems ETF shares by selling a creation
unit to the ETF, for example, the fees imposed by the ETF defray the
costs of the liquidity that the redeeming authorized participant
receives, which in turn mitigates the risk that dilution of non-
redeeming authorized participants would result when an ETF redeems
its shares. See Invesco Comment Letter (``When an authorized
participant redeems in cash, the variable transaction fee that an
ETF may impose to offset transaction costs should address both
dilution and liquidity concerns.'').
    \69\ ETMF market makers would not engage in the same kind of
arbitrage as ETF market makers because all trading prices of ETMF
shares are linked to NAV. See Liquidity Risk Management Programs
Adopting Release, supra footnote 8, at n.834 and accompanying text.
ETMFs would charge transaction fees that mitigate the risk of
dilution, however, and therefore we do not include ETMFs within the
scope of rule 22c-1(a)(3).
    \70\ By this we mean that, and we generally expect that, each
day and over time an ETF's shares will trade at or close to the
ETF's intraday value. See Request for Comment on Exchange-Traded
Products, Securities Exchange Act Release No. 75165 (June 12, 2015)
[80 FR 34729 (June 17, 2015)] (``2015 ETP Request for Comment'')
(``When providing exemptive or no-action relief under the Exchange
Act, the Commission and its staff have analyzed and relied upon the
representations from ETP issuers regarding the continuing existence
of effective and efficient arbitrage to help ensure that the
secondary market prices of ETP Securities do not vary substantially
from the value of their underlying portfolio or reference
assets.''). See also Liquidity Risk Management Programs Adopting
Release, supra footnote 8 at n.844. Because an ETF does not
determine its NAV in real time throughout the trading day, in
assessing whether this expectation is met, one looks to the
difference between the ETF shares' closing market price and the
ETF's end-of-day net asset value (i.e., its ``premium'' or
``discount''). See 2015 ETP Request for Comment.
    \71\ See infra paragraph accompanying footnote 128 (noting that
a fund is not required to disclose its swing threshold under the
final rule).
    \72\ See, e.g., Spruce ETF Trust, et al., Investment Company Act
Release No. 31301 (Oct. 21, 2014) [79 FR 63964 (Oct. 27, 2014)]
(``ETFs require various exemptions from the provisions of the
[Investment Company Act] and the rules thereunder. Critically, in
granting such exemptions to date, the Commission has required that a
mechanism exist to ensure that ETF shares would trade at a price
that is at or close to the NAV per share of the ETF.''); and
Precidian ETFs Trust, et al., Investment Company Act Release No.
31300 (Oct. 21, 2014) [79 FR 63971 (Oct. 27, 2014)] (notice of
application).
---------------------------------------------------------------------------

Money Market Funds
    Under the final rule, like under the proposal, money market funds
would not be able to use swing pricing. No commenters suggested that
money market funds be allowed to use swing pricing. Money market funds
are subject to extensive requirements concerning the liquidity of their
portfolio investments. Also, a money market fund is permitted to impose
a liquidity fee on redemptions if its weekly liquid investments fall
below a certain threshold, and these fees serve a similar purpose as
the NAV adjustments contemplated by swing pricing.\73\ That is, money
market fund liquidity fees allocate at least some of the costs of
providing liquidity to redeeming rather

than non-transacting shareholders,\74\ and generate additional
liquidity to meet redemption requests.\75\ We therefore believe that
money market funds already have liquidity risk management tools at
their disposal that could accomplish comparable goals to the swing
pricing permitted for other funds under rule 22c-1(a)(3).
---------------------------------------------------------------------------

    \73\ See rule 2a-7(c)(2); see also 2014 Money Market Fund Reform
Adopting Release, supra footnote 38, at section III.A.
    \74\ See, e.g., 2014 Money Market Fund Reform Adopting Release,
supra footnote 38, at n.139 and accompanying text.
    \75\ See id., at n.120.
---------------------------------------------------------------------------

    We also believe that the liquidity fee regime permitted under rule
2a-7 is a more appropriate tool for money market funds to manage the
allocation of liquidity costs than swing pricing.\76\ Money market
funds also have unique minimum liquid investment requirements, and we
believe the use of liquidity fees is appropriately tied to those
requirements. We also anticipate that open-end funds that adopt swing
pricing policies and procedures may be required under such procedures
to adjust their NAV from time to time (whenever the fund's net
purchases or net redemptions exceed the fund's swing threshold). In
contrast, money market fund investors (particularly, investors in
stable-NAV money market funds) are particularly sensitive to price
volatility,\77\ and we anticipate liquidity fees will be used only in
times of stress when money market funds' internal liquidity has been
partially depleted.
---------------------------------------------------------------------------

    \76\ While funds may adopt swing pricing policies and procedures
at their discretion, rule 2a-7 requires a money market fund under
certain circumstances to impose a one percent liquidity fee on each
shareholder's redemption, unless the fund's board of directors
(including a majority of its independent directors) determines that
such fee is not in the best interests of the fund, or determines
that a lower or higher fee (not to exceed two percent) is in the
best interests of the fund. See rule 2a-7(c)(2)(ii).
    \77\ For example, retail and government money market funds are
permitted to maintain a stable NAV, reflecting in part our
understanding that investors in these products have a low tolerance
for NAV volatility. See 2014 Money Market Fund Reform Adopting
Release, supra footnote 38, at section III.B.3.c. Investors in
floating NAV money market funds also could be sensitive to principal
volatility, as we recognized in adopting requirements that all money
market funds disclose their daily net asset value (rounded to the
fourth decimal place) on their Web sites, and as we discussed in the
economic analysis of the 2014 Money Market Fund Reform Adopting
Release. See id., at section III.E.9 and section III.K.
---------------------------------------------------------------------------

    We note that some foreign jurisdictions have a similar conception
of liquidity fees as a distinct tool separate from swing pricing. For
example, in Europe, UCITS may use swing pricing and apply ``dilution
levies,'' which are in many respects similar to liquidity fees.\78\
While many UCITS use swing pricing as a matter of normal course,
dilution levies may be considered a liquidity risk management tool that
is used in connection with stressed conditions.\79\
---------------------------------------------------------------------------

    \78\ See, e.g., BlackRock Fund Structures Paper, supra footnote
46, at 6; see also supra footnote 24 and accompanying and following
text (discussing redemption fees that are currently permitted under
rule 22c-2).
    \79\ See BlackRock Fund Structures Paper, supra footnote 46, at
6.
---------------------------------------------------------------------------

b. General Considerations Relating to Swing Pricing
    As highlighted above, most commenters expressed general support for
the goals of swing pricing, as well as the ability of swing pricing to
achieve these goals if successfully implemented.\80\ These commenters
highlighted the value of swing pricing for investors, and noted that
the tool may address the dilutive effect of shareholder transaction
activity effectively and through a more efficient means than many other
tools.\81\
---------------------------------------------------------------------------

    \80\ See, e.g., GARP Comment Letter; Comment Letter of J.P.
Morgan Asset Management (Jan. 13, 2016) (``J.P. Morgan Comment
Letter''); SIFMA Comment Letter II.
    \81\ Some of these commenters noted investor and intermediary
omnibus account issues, as well as systems and operational
disadvantages associated with alternative tools, such as redemption
fees, dual pricing and redemptions in kind. See, e.g., Comment
Letter of Charles Schwab Investment Management (Jan. 13, 2016)
(``Charles Schwab Comment Letter''); Federated Comment Letter;
Comment Letter of HSBC Global Asset Management (Jan. 13, 2016)
(``HSBC Comment Letter'').
---------------------------------------------------------------------------

    Several commenters suggested that, in addition to mitigating
potential dilution arising from purchase and redemption activity, swing
pricing also could help deter redemptions motivated by any first-mover
advantage.\82\ That is, if non-transacting shareholders understood that
redeeming shareholders--especially shareholders seeking to redeem large
holdings--would bear the estimated costs of their redemption activity,
it would reduce shareholders' incentive to redeem large holdings
quickly because there would be less risk that non-transacting
shareholders would bear the costs of other shareholders' redemption
activity. We agree that this may be an additional useful effect of
swing pricing for the funds that choose to use it.
---------------------------------------------------------------------------

    \82\ See, e.g., BlackRock Comment Letter; Comment Letter of CFA
Institute (Jan. 12, 2016) (``CFA Comment Letter''); GARP Comment
Letter.
---------------------------------------------------------------------------

    As discussed in more detail in section II.A.3.d. below, swing
pricing would require a fund, in determining whether the fund's level
of net purchases or net redemptions has exceeded the swing threshold,
to make such a determination based on receipt of sufficient information
about the fund's net shareholder flows to allow the fund to reasonably
estimate whether it has crossed the swing threshold with high
confidence. We understand that, to the extent that funds engage in
swing pricing, funds may be able to use the earlier receipt of net flow
information in other ways, in particular, receiving net flow data
earlier than current practice may provide valuable and improved
information to fund managers for portfolio management and liquidity
risk management, allowing them to better manage the portfolio. For
example, the receipt of earlier net flow data will enable a more timely
analysis of potential portfolio adjustments.\83\ Even on days where a
fund does not meet the swing threshold, the shareholder flow data that
the fund receives may be useful, allowing portfolio managers to better
manage the fund's portfolio in response to expected shareholder
transaction activity.\84\
---------------------------------------------------------------------------

    \83\ It is our understanding that most portfolio securities
trading occurs early morning (when markets open) or close to the end
of the trading day. Thus the best market prices may be missed if net
flow information is not received by the fund until, for example,
late morning on T+1 as often happens today with respect to some
funds. See GARP Comment Letter.
    \84\ We recognize that not all funds would be in a position to
implement swing pricing quickly but note that such earlier receipt
of shareholder flow data may provide an additional incentive for
funds to adopt swing pricing beyond the anti-dilutive benefits it
may provide.
---------------------------------------------------------------------------

    Some commenters also suggested that swing pricing and redemption
fees can accomplish many of the same goals.\85\ Although swing pricing
has similar anti-dilutive effects as redemption or liquidity fees,
swing pricing has the benefit of not requiring transfer agents or
intermediaries to process, reconcile, and remit to funds the additional
fees charged on shareholder transactions. The swing pricing adjustment
would be applied when a fund calculates its NAV, thus potentially
allowing for a more efficient and cost-effective tool.\86\ We agree
with commenters that swing pricing may have significant anti-dilutive
benefits for the funds that choose to utilize it, and that it may be
more advantageous to use in many respects than other potential tools
designed to address the same concern, such as dual pricing.\87\
---------------------------------------------------------------------------

    \85\ See Federated Comment Letter; Eaton Vance Comment Letter.
    \86\ However, as discussed in greater detail in section
II.A.3.d. below, operational changes will need to be made in order
to accurately apply the swing pricing factor. Funds would need to
receive timely daily net shareholder flow information from
intermediaries prior to the calculation of the NAV, in order to
determine whether the swing threshold has been exceeded, and the NAV
requires adjustment in accordance with the fund's policies and
procedures.
    \87\ See HSBC Comment Letter: Charles Schwab Comment Letter. See
also supra footnote 24 and accompanying and following text
(discussing rule 22c-2 and redemption fees).

---------------------------------------------------------------------------

    We have noted that performance benefits have been identified in
UCITs that use swing pricing, which suggests that it is consistent with
swing pricing having the effect of mitigating dilution costs for the
non-transacting shareholders in some funds, thus providing observable
benefits to those investors.\88\ One commenter disputed this notion,
indicating that ``the aggregate returns of fund shareholders, before
expenses, are exactly the same whether or not a fund uses swing
pricing'' because ``the observed improvement in fund pricing is sourced
from, and equally offset by, the net transaction costs paid by buyers
and sellers of fund shares. . . .'' \89\ We believe the commenter's
analysis fails to take into account the value that the fund and its
non-transacting shareholders realize by reallocating such costs to
transacting shareholders (i.e., we believe the commenter is
disregarding the value of better aligning transaction costs to
transacting, rather than non-transacting, shareholders).\90\
---------------------------------------------------------------------------

    \88\ See Association of the Luxembourg Fund Industry, Swing
Pricing Guidelines (Dec. 2015) (``ALFI Swing Pricing Guidelines
2015''), at 6, available at http://www.alfi.lu/sites/alfi.lu/files/Swing-Pricing-guidelines-final.pdf (``Funds that apply swing pricing
show superior performance over time compared to funds (with
identical investment strategies and trading patterns) that do not
employ anti-dilution measures. Swing pricing helps preserve
investment returns.''). We are not aware of differences between
UCITs and US mutual funds or swing pricing practices that would
cause performance benefits in U.S. mutual funds to be dissimilar, as
swing pricing in UCITs regimes is also designed to reduce dilution
and recapture the costs imposed by purchasing and redeeming
shareholders on the fund. As discussed previously, commenters noting
differences in the US and UCITs regimes largely pointed to
differences in operational practice that made swing pricing easier
to implement, and did not suggest that the benefits of swing
pricing, once implemented, would differ.
    \89\ See Eaton Vance Comment Letter.
    \90\ We note that ETFs operating as open-end funds already
externalize much of their transaction costs to their authorized
participants.
---------------------------------------------------------------------------

    A few commenters advocated for the Commission to require all funds
to adopt swing pricing policies and procedures.\91\ These commenters
suggested that swing pricing has significant benefits for investors,
and that if left permissive, rather than mandatory, few funds would be
likely to undertake the operational costs and challenges of
implementing it.\92\ However, the majority of commenters argued that,
if the Commission were to adopt swing-pricing rules, it should maintain
the proposal's permissive (not mandatory) approach.\93\ These
commenters agreed that although swing pricing could mitigate potential
shareholder dilution on days when a fund experiences heavy redemptions
or purchases \94\ and could help deter redemptions motivated by any
first-mover advantage, it does so at a cost that may be significant for
some funds.\95\ They also argued that swing pricing may not necessarily
be appropriate for all funds, as some funds may be more susceptible to
significant and costly shareholder transaction activity than others,
and thus requiring all funds to implement swing pricing and bear its
associated costs is not justified. They argued that funds would be best
situated to determine whether the benefits of swing pricing outweigh
the costs.
---------------------------------------------------------------------------

    \91\ See Comment Letter of Chris Barnard (Nov. 30, 2015)
(``Barnard Comment Letter''); Invesco Comment Letter.
    \92\ See Invesco Comment Letter (``Partial swing pricing must be
mandatory across open-end mutual funds if it is to be used
effectively . . . Making implementation optional would enable gaming
and permit conflicts of interest.'').
    \93\ See, e.g., CFA Comment Letter; Comment Letter of Dechert
LLP (Jan. 13, 2016) (``Dechert Comment Letter''); ICI Comment Letter
I; J.P. Morgan Comment Letter.
    \94\ See, e.g., BlackRock Comment Letter; Comment Letter of MFS
Investment Management (Jan. 13, 2016) (``MFS Comment Letter'');
Charles Schwab Comment Letter; SIFMA Comment Letter II.
    \95\ See, e.g., BlackRock Comment Letter; GARP Comment Letter;
MFS Comment Letter; Charles Schwab Comment Letter.
---------------------------------------------------------------------------

    We appreciate the commenters' concerns that swing pricing may have
costs that, for some funds, may not be justified by the benefits.\96\
We believe that as funds begin to implement swing pricing, they will be
able to better evaluate the benefits and costs, and determine whether
swing pricing is appropriate for each particular fund. Accordingly, we
believe that the use of swing pricing by funds as an anti-dilution tool
at this time should be optional rather than mandatory, and are adopting
this permissive approach as proposed.
---------------------------------------------------------------------------

    \96\ See infra section III.
---------------------------------------------------------------------------

    While most commenters supported swing pricing in concept, a few
opposed swing pricing outright, arguing that it may have negative
effects on certain shareholders and may add to fund performance
volatility.\97\ Many commenters who expressed general support for swing
pricing also raised other concerns and challenges, many of which were
also discussed in the Proposing Release.
---------------------------------------------------------------------------

    \97\ See Comment Letter of Anonymous (Sept. 23, 2015); Eaton
Vance Comment Letter (discussing a study it conducted that concludes
that shareholder capital activity does not meaningfully impact the
performance of most mutual funds); ETF Consultants Comment Letter;
Voya Comment Letter.
---------------------------------------------------------------------------

Operational Challenges
    Commenters raised a variety of operational challenges with respect
to the implementation of swing pricing.\98\ As discussed in greater
detail in section II.A.3.d. below, it is critical that funds obtain
sufficient data about shareholder purchase and redemption activity from
intermediaries in a timely manner in order to reasonably estimate with
high confidence whether a fund should use swing pricing on any given
day; this process presents operational challenges at the present time,
particularly for some funds.
---------------------------------------------------------------------------

    \98\ See, e.g., CRMC Comment Letter; Dechert Comment Letter;
PIMCO Comment Letter; Comment Letter of Securities Industry and
Financial Markets Association (Jan. 13, 2016) (Comments on Proposal
to Require Liquidity Risk Management Programs and Related Liquidity
Disclosures) (``SIFMA Comment Letter I'').
---------------------------------------------------------------------------

    Several commenters noted that many current systems for processing
fund orders are not set up to provide data on shareholder flows until
well after a fund's NAV has already been struck, and that some of these
systems depend on receiving the fund's NAV before the processing of
shareholder purchase and redemptions transactions can begin.\99\
Commenters pointed to systems issues and processing issues associated
with swing pricing as their greatest concern, and suggested that few
funds may adopt swing pricing immediately if the rule was effective
upon adoption. Commenters suggested a variety of approaches to
addressing these issues, including delayed effective dates for swing
pricing to allow for systems changes and industry coordination efforts
to be completed,\100\ delaying the striking of a fund's NAV to allow
more time for shareholder flow data to reach funds,\101\ and potential
regulatory action

to require intermediaries to assist in providing necessary data to
funds.\102\
---------------------------------------------------------------------------

    \99\ See, e.g., Eaton Vance Comment Letter; GARP Comment Letter;
ICI Comment Letter I; Comment Letter of LPL Financial (Jan. 13,
2016) (``LPL Comment Letter''). Commenters noted that certain
platforms of third-party distributors (e.g., retirement plan record
keepers, insurance companies, trust companies) require that actual
fund NAVs are received before making trade allocations and
processing transactions across accounts. For example, once orders in
a retirement plan are created, investor transactions must be
evaluated against the retirement plan's rules for determining a
valid transaction, and the amounts invested are percentage
allocations, using the NAV for each applicable fund when calculating
the final transaction order. It was also noted that for some funds,
a large percentage of purchases and redemptions are from the
retirement channel (e.g., approximately 30%)). See ICI Comment
Letter I.
    \100\ See, e.g., BlackRock Comment Letter; CRMC Comment Letter;
Fidelity Comment Letter; ICI Comment Letter I. See also infra
footnote 212 and accompanying paragraph (discussing competitive
concerns and an extended effective date).
    \101\ See GARP Comment Letter; J.P. Morgan Comment Letter (also
discussing potentially delaying NAV publication time from 6 p.m. ET
to 8 p.m. ET, and generally concurring with GARP discussion of
operational challenges).
    \102\ See, e.g., CRMC Comment Letter; GARP Comment Letter;
Invesco Comment Letter; T. Rowe Comment Letter.
---------------------------------------------------------------------------

    We recognize that most current systems for funds and intermediaries
are not set up to accommodate swing pricing, and that certain changes
would need to be made before swing pricing can be adopted in the U.S.
We also anticipate that certain funds are better positioned to
reasonably estimate their net flows, and thus could be ready to
implement swing pricing sooner than other funds.\103\ As discussed in
greater detail in section II.A.3.d. below, we believe that the
challenges to implementing swing pricing can be addressed by the fund
industry and overcome. Two commenters also noted that the aggregate
long-term benefits to both shareholders and to the stability of the
overall financial system from swing pricing should be significant,
likely outweighing the transition costs.\104\ Although funds and
intermediaries may incur costs in changing operational systems and
developing new processes, because swing pricing is optional (not
mandatory) these costs would only be incurred if funds elect to adopt
swing pricing.
---------------------------------------------------------------------------

    \103\ For example, we understand that some funds may have larger
retail shareholder bases that transact directly with the fund's
transfer agent or may be primarily distributed through affiliates or
broker-dealers (that could potentially provide timely flow data)
and/or do not have a substantial number of investors transacting in
retirement plans or insurance products, where it may be more
challenging to obtain timely estimates. Such funds may also have a
high confidence in reasonable estimates used by back-testing their
estimated flow information to actual trade flows.
    \104\ See BlackRock Comment Letter; GARP Comment Letter.
---------------------------------------------------------------------------

    As mentioned above, the operational difficulties associated with
swing pricing are not uniform among all funds. Certain funds that may
have more direct relationships with shareholders, instead of being
heavily intermediated, and funds that may have more transparency into
shareholder flows due to different shareholder bases, or affiliate
relationships, or more up-to-date systems may be more easily able to
implement swing pricing. We believe, however, that an extended
effective date can help ease the overall burden incurred by funds,
intermediaries and service providers (and ultimately, the burden
incurred by investors) by allowing sufficient time for the development
and implementation of efficient and cost effective industry-wide
operational solutions.\105\ Further, we believe that even if only a
limited number of funds adopt swing pricing immediately following the
extended effective date, as funds begin to gain familiarity with the
process, more funds may choose to adopt it over time.\106\ In addition,
once a few funds have adopted swing pricing, it may pave the way for
other funds to leverage broader industry solutions implemented by
intermediaries and service providers in support of swing pricing.\107\
Finally, we are adopting swing pricing as a permissive tool, with no
expectation that funds will utilize swing pricing by a certain date.
This means that as funds, service providers and intermediaries upgrade
systems over time, they may re-evaluate their ability to use swing
pricing, or build the necessary changes into new systems, allowing more
funds to use it in the future, even if they do not make immediate
changes in response to our final rule by the extended effective date.
---------------------------------------------------------------------------

    \105\ See infra at footnotes 212-214 and accompanying text.
    \106\ See, e.g., ALFI Survey 2015, supra footnote 42, at 6-7
(noting the trend observed in 2011 towards greater adoption of swing
pricing in the Luxembourg fund industry has continued).
    \107\ We believe that the extended effective date for swing
pricing mitigates competitive concerns by allowing time for funds
that choose to implement swing pricing to confront the operational
hurdles of doing so. This does not preclude, however, the
possibility that certain funds will find it advantageous to wait
until swing pricing is more widely established in the market before
choosing to implement swing pricing.
---------------------------------------------------------------------------

Impacts on Current NAV and Performance Volatility
    Several commenters voiced reservations about whether the swung NAV
could appropriately be viewed as a fund's current NAV (particularly in
light of the use of estimates to determine whether the fund has crossed
the swing threshold and the swing factor) and may raise questions about
the accuracy of the fund's NAV.\108\ Although reasonable high-
confidence estimates may be used to implement swing pricing, we believe
the standards and guidance provided in this Release for establishing
these estimates, as well as processes and procedures that funds may
implement (including back-testing and adjusting estimates used based on
actual or final data related to flows and transaction costs associated
with subsequent portfolio trades), should mitigate concerns regarding
the impact of using estimates for swing pricing on current NAVs.\109\
We note that current NAV calculation processes already include
subjective judgments and estimates, including, for example, fair-value
determinations for assets that lack readily available market
quotations. Additionally, we believe a swung NAV can reflect a more
appropriate allocation of transaction costs to the redeeming
shareholders whose redemptions caused these costs for those funds.
---------------------------------------------------------------------------

    \108\ See Eaton Vance Comment Letter (``In our view, the
provisions of the Swing Pricing Proposal that would require funds
adopting swing pricing to refer to their adjusted transaction prices
as NAV are inconsistent with Chair White's recent statement
emphasizing the importance of NAV accuracy.''); see also ETF
Consultants Comment Letter; ICI Comment Letter I; MFDF Comment
Letter.
    \109\ See infra footnote 187 and accompanying paragraph for
further discussion on the nature of these estimates.
---------------------------------------------------------------------------

    Commenters also noted concerns that swing pricing could lead to
increased performance volatility.\110\ The swing pricing requirements
adopted today under rule 22c-1 aim to minimize NAV volatility (and
related tracking error) associated with swing pricing to the extent
possible. Swing pricing could increase the volatility of a fund's NAV
in the short-term because NAV adjustments would occur when the fund's
net purchases or net redemptions pass the fund's swing threshold. Thus,
the fund's day-to-day NAV would show greater fluctuation than would be
the case in the absence of swing pricing. This volatility might
increase short-term tracking error (i.e., the difference in return
based on the swung NAV compared to the fund's benchmark) \111\ during
the daily period of NAV adjustment, and could make a fund's short-term
performance deviate from the fund's benchmark to a greater degree than
if swing pricing had not been used, especially if the NAV is swung on
the first or last day of a performance measurement period.\112\
However, swing pricing may also result in reduced tracking error over
time, as benchmarks typically do not take into account transaction
costs associated with responding to daily transactions, and if swing
pricing recoups such costs, it may result in a fund that implements
swing pricing better matching its benchmark on a long-term basis.
---------------------------------------------------------------------------

    \110\ See Federated Comment Letter; HSBC Comment Letter; Voya
Comment Letter; Eaton Vance Comment Letter.
    \111\ We note that tracking error created by allocating some
liquidity costs to transacting investors is inevitable for an open-
end fund conducting swing pricing just as it is for any fund whose
transactions create liquidity costs.
    \112\ See Proposing Release, supra footnote 6, at 196-198.
---------------------------------------------------------------------------

    We recognize the desire to balance performance volatility with a
fairer allocation of transaction costs. We believe that the use of
swing pricing above a swing threshold, which we are permitting as
proposed, may reduce the performance volatility potentially

associated with swing pricing.\113\ In addition, we are not aware of
investors in funds that utilize swing pricing in Europe negatively
reacting to funds that swing price because of concerns related to
performance volatility or tracking error.\114\ Taking these
considerations into account, we do not believe that potential
volatility and tracking error will necessarily make funds conclude that
the potential concerns about swing pricing outweigh its benefits, and
thus we continue to believe that we should make this anti-dilution tool
available to funds that choose to use it.
---------------------------------------------------------------------------

    \113\ See id., at paragraph accompanying n.447 (discussing
partial swing pricing in greater detail).
    \114\ See supra footnote 88 and accompanying text.
---------------------------------------------------------------------------

Shareholder Fairness Concerns
    A number of commenters suggested that swing pricing could raise
shareholder fairness concerns, as the proposed swing pricing rules
would apply a single adjusted NAV per share to all shareholder orders,
regardless of order size. These commenters maintained that swing
pricing could thus penalize certain investors disproportionately or
give other investors inappropriate ``windfalls.'' \115\ As noted in our
proposal, we recognize that there are a variety of trade-offs that a
fund would have to consider in determining to implement swing
pricing.\116\ These concerns, however, are partially mitigated by the
fact that shareholders could be assured that the threshold level(s) of
net purchase or net redemption activity (as included in a fund's swing
pricing policies and procedures) would consistently trigger the use of
swing pricing when applicable. A board is subject to duties of loyalty
and care in the approval of policies and procedures implementing swing
pricing, and the fund's adviser is subject to a fiduciary duty to the
fund. We believe that such policies, procedures, and controls, as well
as board oversight, should help mitigate concerns raised by one
commenter of potential fraud and abuses by unscrupulous fund managers
and market timers.\117\ Moreover, the final rule requires that the
swing factor used must be reasonable in relationship to 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. It
also requires that the board approve policies and procedures specifying
the process for how the swing threshold(s), swing factor(s), and swing
factor upper limit are determined,\118\ and that the board review at
least annually a report reviewing the adequacy of the fund's swing
pricing policies and procedures and the effectiveness of their
implementation, including the impact on mitigating dilution.\119\ This
report also must describe the swing pricing administrator's review and
assessment of the fund's swing threshold(s), swing factor(s), and swing
factor upper limit considering the requirements of the rule, including
the information and data supporting these determinations.\120\ In
addition, shareholders will have transparency into a fund's use of
swing pricing because a fund will be required to establish and disclose
a board-approved upper limit on the swing factor(s) used by the fund,
which may not be greater than two percent of the fund's NAV per
share.\121\ All of these changes are designed to enhance the fair
treatment of shareholders in any use of swing pricing and to prevent
any abusive practices.
---------------------------------------------------------------------------

    \115\ See, e.g., CFA Comment Letter; Eaton Vance Comment Letter;
Federated Comment Letter. But see Morningstar Comment Letter
(recognizing this concern, but noting that, when an investor sells
fund shares during a time of heightened market volatility and wider
bid-ask spreads for the fund's underlying holdings, selling the
fund's investments to meet redemptions will necessarily result in
costs to the fund, and it is fairer for those who are selling fund
shares to bear these costs than those who remain in the fund).
    \116\ See Proposing Release, supra footnote 6, at n.450 and
preceding and accompanying text (noting, for example, that
application of a swing factor could cause certain shareholders to
experience benefits or costs, relative to the other shareholders in
the fund, that otherwise would not exist).
    \117\ See Eaton Vance Comment Letter.
    \118\ See rule 22c-1(a)(3)(ii)(A).
    \119\ See rule 22c-1(a)(3)(ii)(D).
    \120\ See id.
    \121\ See rule 22c-1(a)(3)(i)(C) and rule 22c-1(a)(3)(ii)(B).
See infra section II.B for further details on disclosure and
reporting requirements for swing pricing.
---------------------------------------------------------------------------

    We also observe that transaction costs of purchasing and redeeming
investors are today allocated to all non-transacting investors in a
mutual fund, and as a result, long-term investors may incur a more
substantial burden of such costs than purchasing and redeeming
shareholders.\122\ However, partial swing pricing would allow funds to
more closely align such transactions costs with purchasing and
redeeming shareholders, and non-transacting investors would not be
paying for the trading activity of such shareholders, which, as some
commenters indicated, enhances shareholder fairness overall.\123\
Furthermore, we believe that investors who purchase shares on a day
that a fund adjusts its NAV downward would not create dilution for non-
redeeming shareholders (even though the purchasing shareholders may be
receiving a lower price than would be the case if the NAV was not
adjusted downward). Under these circumstances, shareholders' purchase
activity would provide liquidity to the fund, which could reduce the
fund's costs in meeting shareholders' redemptions requests that day. We
also note that in circumstances where the flows of purchases and
redemptions are fairly balanced, it is unlikely that a fund will cross
its swing threshold. Thus, purchasing shareholders are only likely to
receive a NAV that is adjusted downward when the fund experiences
substantial outflows. After considering the comments received, we
believe it is appropriate to apply the swung NAV equally to all
transacting shareholders in the fund.
---------------------------------------------------------------------------

    \122\ We note that transacting investors on any given day also
may remain long-term investors in a fund if they have not redeemed
their entire position.
    \123\ See GARP Comment Letter; HSBC Comment Letter.
---------------------------------------------------------------------------

Swing Pricing Transparency and Disclosures
    Several commenters raised concerns regarding investor confusion to
the extent that a fund's swing threshold and swing factor are not made
transparent.\124\ We agree that an adequate level of transparency about
swing pricing is critical for investors to understand the risks
associated with investing in a particular fund. However, we do not
believe disclosure of a fund's swing threshold or swing factor is
required to provide such transparency. As discussed in greater detail
below, we are adopting, with some changes from the proposal, disclosure
and reporting requirements regarding swing pricing to assist
shareholders in understanding whether a particular fund has implemented
swing pricing policies and procedures and whether the fund has utilized
swing pricing.\125\ As part of the disclosure changes, a fund will be
required to disclose the fund's swing factor upper limit and include a
description of the effects of swing pricing on a fund's performance.
---------------------------------------------------------------------------

    \124\ See, e.g., AFR Comment Letter; Eaton Vance Comment Letter;
ETF Consultants Comment Letter; MFDF Comment Letter.
    \125\ See infra section II.B. for further details on disclosure
and reporting requirements for swing pricing. See also infra section
II.A.3.g. for a discussion of swing pricing impacts on financial
statement reporting, performance reporting and pricing errors.
---------------------------------------------------------------------------

    Other commenters expressed concern that swing pricing could give
rise to gaming behavior if certain shareholders were to attempt to time
their trading activity to avoid (or take advantage of) pricing
adjustments.\126\ Requiring a fund

to publicly disclose its swing threshold could create the potential for
shareholder gaming behavior because a fund's shareholders could attempt
to time their purchases and redemptions based on the likelihood that a
fund would or would not adjust its NAV. One commenter suggested, for
example, that certain vendors may have access to fund flow information
through non-fund sources (such as by observing intermediary trading
behavior) and that market timers may try to use any such information to
detect patterns in swing pricing by funds, suggesting that those market
timers might seek to transact on days when there is an advantageous
change in the fund's NAV.\127\
---------------------------------------------------------------------------

    \126\ See CFA Comment Letter; Federated Comment Letter; HSBC
Comment Letter; Invesco Comment Letter.
    \127\ See Eaton Vance Comment Letter.
---------------------------------------------------------------------------

    For a shareholder to effectively game swing pricing, the
shareholder would have to know the fund's swing threshold and net flow
information on the day that the shareholder was purchasing or redeeming
and that flow information would have to not materially change after the
shareholder placed its order. Accordingly, without disclosure of this
information, it will be difficult for shareholders to determine when
the fund's net purchases or net redemptions exceed the swing threshold.
After weighing these considerations, we are not requiring a fund to
disclose its swing threshold or swing factor under the final rule, and
we believe that a fund generally should not disclose its swing
threshold unless it has determined that it is in the best interests of
the fund to do so. In making this assessment, the fund should consider
the nature of the fund's shareholders and whether disclosure of the
swing threshold would result in significant shareholder harm. We note
that, to the extent a fund does decide to disclose its swing threshold,
we believe it would not be appropriate for a fund to disclose it
selectively to certain investors (e.g., to only disclose the fund's
swing threshold to institutional investors), as we believe this could
assist certain groups of shareholders in strategically timing purchases
and redemptions of fund shares, potentially disadvantaging shareholders
who do not know the fund's swing threshold.\128\
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    \128\ The Commission has brought enforcement actions against
fund managers for selective disclosure. See In the Matter of
Evergreen Investment Management Company, LLC and Evergreen
Investment Services, Inc., Investment Company Act Release No. 28759
(June 8, 2009) (settled order) (``Evergreen Order''); In the Matter
of Alliance Capital Management, L.P., Investment Company Act Release
No. 26312 (Dec. 18, 2003) (settled order).
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    With respect to market timing concerns, we note that a fund's
market timing policies and procedures should address and seek to
resolve such issues for a fund that uses swing pricing. We note that
funds have a variety of tools to prevent any such market timing should
it occur, such as redemption fees, purchase blocks, and roundtrip
restrictions, which we believe should mitigate this risk. In addition,
investors will not be able to purposefully take advantage of swing
pricing to obtain a better price without knowledge of contemporaneous
intraday flows and a fund's swing thresholds, neither of which funds
are required to publicly disclose under the rule.
c. Swing Threshold
    Under the final rule, as under the proposed rule, a fund's swing
pricing policies and procedures must provide that the fund is required
to adjust its NAV once the level of net purchases or net redemptions
from the fund has exceeded a set, specified percentage of the fund's
net asset value known as the ``swing threshold.'' \129\ A fund must
adopt policies and procedures that specify the process for how the
fund's swing threshold is determined,\130\ and the policies and
procedures must be approved by the fund's board of directors.\131\ In
addition, the fund board will review a periodic report that describes,
among other things, a review and assessment of the fund's swing
threshold.\132\ Finally, the fund board will be required to approve the
fund's swing threshold and any changes thereto.\133\
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    \129\ Rule 22c-1(a)(3)(i)(A). Under the rule, ``swing
threshold'' is defined as ``the amount of net purchases into or net
redemptions from a fund, expressed as a percentage of the fund's net
asset value, that triggers the initiation of swing pricing.'' Rule
22c-1(a)(3)(v)(D).
    \130\ Rule 22c-1(a)(3)(i)(B).
    \131\ Rule 22c-1(a)(3)(ii)(A).
    \132\ Rule 22c-1(a)(3)(ii)(D).
    \133\ Rule 22c-1(a)(3)(ii)(B).
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    In determining whether the fund's level of net purchases or net
redemptions has exceeded the swing threshold, the person(s) responsible
for administering the fund's swing pricing policies and procedures will
be permitted to make this determination based on receipt of sufficient
information about the fund shareholders' daily purchase and redemption
activity to allow the fund to reasonably estimate whether it has
crossed the swing threshold with high confidence.\134\ This shareholder
flow information may be individual, aggregated, or netted orders, may
include reasonable estimates where necessary, and shall exclude any
purchases or redemptions that are made in kind and not in cash.\135\
The fund's policies and procedures should describe how such
determinations will be made.\136\ We are adopting a requirement that,
in specifying the process for how the swing threshold is determined, a
fund consider:
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    \134\ Rule 22c-1(a)(3)(i)(A).
    \135\ Id. As noted in the Proposing Release, when a fund
investor purchases or redeems shares of a fund in kind as opposed to
in cash, this does not necessarily cause the fund to trade any of
its portfolio assets. The risk of dilution as a result of
shareholder purchase and redemption activity, therefore, is lower
with respect to in-kind purchases and in-kind redemptions, and thus
swing pricing would not be permitted unless a fund's net purchases
or net redemptions that are made in cash (and not in kind) exceed
the fund's swing threshold. See Proposing Release, supra footnote 6,
at n.439 and accompanying paragraph.
    \136\ See infra footnote 179.
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     The size, frequency, and volatility of historical net
purchases or net redemptions of fund shares during normal and stressed
periods;
     The fund's investment strategy and the liquidity of the
fund's portfolio investments;
     The fund's holdings of cash and cash equivalents, as well
as borrowing arrangements and other funding sources; and
     The costs associated with transactions in the markets in
which the fund invests.\137\
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    \137\ Rule 22c-1(a)(3)(i)(B).
     These factors overlap significantly with factors that we
understand are commonly considered by funds that use swing pricing
in other jurisdictions, in order to determine a fund's swing
threshold. For example, the Luxembourg Swing Pricing Survey, Reports
& Guidelines provides that factors influencing the determination of
the swing threshold ordinarily include: (i) Fund size; (ii) type and
liquidity of securities in which the fund invests; (iii) costs (and
hence, the dilution impact) associated with the markets in which the
fund invests; and (iv) investment manager's investment policy and
the extent to which the fund can retain cash (or near cash) as
opposed to always being fully invested). See ALFI Survey 2015, supra
footnote 42, at 14.
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    We requested comment on the process a fund would use to determine
its swing threshold, including the factors that a fund would be
required to consider, and also requested comment on whether there were
certain procedures that we should require a fund to use when reviewing
its swing threshold. Commenters on the proposed rule expressed a
variety of views regarding the factors a fund must consider in
specifying the fund's swing threshold. Some commenters indicated that
the Commission should be less prescriptive in establishing the factors,
arguing that not all of the factors are equally applicable to all
funds, that requiring funds to consider all these factors may lead
funds to create overly mechanistic checklists, and that a principles-
based approach would better allow funds to

tailor their swing pricing processes to their unique
circumstances.\138\ Other commenters indicated that the rule's factors
as proposed grant ``excessive'' discretion concerning the threshold for
swing pricing,\139\ and expressed concern that ``fund shareholders will
frequently bear swing pricing transaction costs that have little or no
relation to the actual impact of their transaction on the fund and its
continuing shareholders.'' \140\ One commenter stated that the factors
are in line with the commenter's expectations.\141\
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    \138\ See ICI Comment Letter I; J.P. Morgan Comment Letter;
Charles Schwab Comment Letter.
    \139\ See AFR Comment Letter.
    \140\ See Eaton Vance Comment Letter.
    \141\ See HSBC Comment Letter.
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    We recognize the potential dangers of being overly prescriptive in
this area, but believe that the factors reflect common areas that a
fund would consider in establishing its swing pricing process and are
consistent with factors that are considered by funds that use swing
pricing in other jurisdictions.\142\ In addition, we note that the rule
does not preclude a fund from considering other factors that the fund
believes may be relevant.\143\ Similarly, we recognize the potential
dangers of providing complete discretion in this area, but note that
further constraining funds' decision-making processes in setting the
swing threshold may unduly restrict the ability of each fund to select
an appropriate threshold that best suits the particular needs of the
fund. Both extremes present a risk that transacting shareholders will
bear swing pricing costs via the swing factor that are divorced from
the fund's transaction costs. After considering commenters' concerns,
therefore, we are adopting the factors related to setting a fund's
swing threshold as proposed.
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    \142\ See supra footnote 137.
    \143\ In contrast, we have given more limited discretion to
funds when setting a fund's swing factor(s), but are not requiring
board approval of the fund's swing factors. See rule 22(c)-
1(a)(3)(i)(C) (providing that the person(s) responsible for
administering swing pricing may take into account only the near-term
costs expected to be incurred by the fund as a result of net
purchases or net redemptions that occur on the day the swing
factor(s) is used). Together, these modifications are designed to
enhance the fair treatment of shareholders in the use of swing
pricing and to prevent abusive practices, while also providing funds
with the ability to tailor a fund's use of swing pricing after
consideration of the swing threshold factors. See also AFR Comment
Letter (expressing concern regarding the degree of discretion
afforded to funds in setting both the swing threshold and swing
factor).
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    We continue to believe that evaluating all four factors will assist
a fund in determining what level of net purchases or net redemptions
would generally lead to the trading of portfolio assets that would
result in material costs to the fund, and thus they are relevant to
setting a fund's swing threshold.\144\ Two of the factors a fund is
required to consider in specifying the fund's swing threshold, relating
to a fund's investment strategy and cash holdings, are similar
(investment strategy factor) or the same (cash holdings factor) as two
of the factors a fund is required to consider in assessing its
liquidity risk under rule 22e-4.\145\ Overlap between the factors is
not surprising, because evaluating a fund's liquidity risk may be
relevant to determining the fund's swing threshold (i.e., determining
the appropriate circumstances under which the fund should employ swing
pricing to combat shareholder dilution).\146\ Such overlap may also
lead to efficiencies in both analyses, as funds become more familiar
with the interaction between the factors, the risk of dilution, and
efforts to combat dilution. A third factor (the size, frequency, and
volatility of historical net purchases or net redemptions of fund
shares during normal and stressed periods) is a consideration in
determining how frequently a fund may expect a specified swing
threshold to be exceeded.\147\ The fourth factor, the costs associated
with transactions in the markets in which the fund invests, is a
consideration in determining whether costs of responding to shareholder
transaction activity are significant enough at a specified threshold
level that the fund should utilize swing pricing to address their
dilutive impact.\148\
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    \144\ Assessing the size, frequency, and volatility of
historical net purchases and net redemptions of fund shares will
permit a fund to determine its typical levels of net purchases and
net redemptions and the levels the fund could expect to encounter
during periods of unusual market stress, as well as the frequency
with which the fund could expect to see periods of unusually high
purchases or redemptions. We continue to believe that comparing the
fund's historical flow patterns with the fund's investment strategy,
the liquidity of the fund's portfolio holdings, the fund's holdings
of cash and cash equivalents and borrowing arrangements and other
funding sources, and the costs associated with transactions in the
markets in which the fund invests will allow a fund to predict what
levels of purchases and redemptions would result in material costs
under a variety of scenarios.
    \145\ See rule 22e-4(b)(2)(ii)(A) (requiring a fund to consider,
in assessing its liquidity risk, the fund's ``investment strategy
and liquidity of portfolio investments during both normal and
reasonably foreseeable stressed conditions (including whether the
investment strategy is appropriate for an open-end fund, the extent
to which the strategy involves a relatively concentrated portfolio
or large positions in particular issuers, and the use of borrowings
for investment purposes and derivatives)''; and rule 22e-
4(b)(2)(ii)(C) (requiring a fund to consider, in assessing its
liquidity risk, the fund's ``holdings of cash and cash equivalents,
as well as borrowing arrangements and other funding sources''). See
also Liquidity Risk Management Programs Adopting Release, supra
footnote 8.
    \146\ See rule 22e-4(a)(11) (defining liquidity risk). We note
that, in the Proposing Release, three of the factors a fund would
have been required to consider in specifying the fund's swing
threshold aligned with factors a fund is required to consider in
assessing its liquidity risk. The change from three to two
overlapping factors is due to a change in the liquidity risk
assessment factors. See Liquidity Risk Management Programs Adopting
Release, supra footnote 8, at section III.B.2.
    \147\ This factor is similar to a factor for assessing liquidity
risk, however, it has been tailored to be a more precise
consideration for setting the swing threshold. See id.
    \148\ As discussed in the Proposing Release, a fund may wish to
consider, as applicable, market impact costs and spread costs that
the fund typically incurs when it trades its portfolio assets (or
assets with comparable characteristics if data concerning a
particular portfolio asset is not available to the fund). A fund
also may wish to consider, as applicable, the transaction fees and
charges that the fund typically is required to pay when it trades
portfolio assets. These could include brokerage commissions and
custody fees, as well as other charges, fees, and taxes associated
with portfolio asset purchases or sales (for example, transfer taxes
and repatriation costs for certain foreign securities, or
transaction fees associated with portfolio investments in other
investment companies).
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    In order to effectively mitigate possible dilution arising in
connection with shareholder purchase and redemption activity, a fund's
swing threshold should generally reflect the estimated point at which
net purchases or net redemptions would trigger the fund's investment
adviser to trade portfolio assets in the near term, to a degree or of a
type that may generate material liquidity or transaction costs for the
fund. We believe that a consideration of the factors set forth above
will promote a fund estimating this threshold point.\149\
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    \149\ In circumstances where fund purchases and redemptions are
fairly balanced, we believe that it is unlikely that the purchases
or redemptions would trigger the fund's investment adviser to trade
portfolio assets in the near term, to a degree or of a type that may
generate material liquidity or transaction costs for the fund.
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Full Swing Pricing vs. Swing Pricing Above a Threshold
    Like the proposal, the final rule does not impose a minimum
``floor'' for a fund's swing threshold. We believe that different
levels of net purchases and net redemptions would create different
risks of dilution for funds with different strategies, shareholder
bases, and other liquidity-related characteristics, and thus we do not
believe that it would be appropriate to determine a single swing
threshold floor to apply to all funds that elect to use swing
pricing.\150\ Rather, we believe it is appropriate to constrain the
swing threshold through the factors that a fund must consider in
setting the

swing threshold, which are designed to prevent a fund from setting a
swing threshold that is inappropriate and does not reflect the size and
nature of the liquidity costs likely to be incurred by the fund. We
believe that the consideration of the swing threshold factors would
lead a fund to set a threshold at a level that would trigger the fund's
investment adviser to trade portfolio assets in the near term to a
degree or of a type that may generate material liquidity or transaction
costs for the fund. We further believe that, after considering the
swing threshold factors, a fund would be unable to set the swing
threshold at zero.
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    \150\ We note that, in Europe, there are no across-the-board
swing threshold floors applicable to UCITS that use swing pricing.
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    Commenters generally supported the approach taken under the
proposal of not setting a minimum threshold for swing pricing. Some
commenters indicated that the Commission should permit full swing
pricing because a fund may find it more appropriate for its particular
circumstances \151\ and would mitigate any potential first-mover
advantage inadvertently caused by swing pricing.\152\ One commenter
also suggested that full swing pricing is more transparent and easier
to understand than partial swing pricing.\153\ On the other hand, some
commenters stated that the Commission should permit only partial swing
pricing, arguing that the tracking error and volatility associated with
full swing pricing would outweigh its benefits.\154\
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    \151\ See Dechert Comment Letter. Full swing pricing is the
process of adjusting the fund's NAV whenever there is any level of
net purchases or net redemptions, instead of swing pricing above a
threshold (i.e., partial swing pricing).
    \152\ See Federated Comment Letter.
    \153\ See HSBC Comment Letter (noting advantages of full swing
pricing but also acknowledging benefits of partial swing pricing,
such as ``a lower impact on net asset value volatility, tracking
error and fund performance.'').
    \154\ See AFR Comment Letter (``We understand that full swing
pricing--allowing NAV adjustments anytime there are net purchases or
redemptions--may increase volatility, tracking errors, and investor
misperceptions about funds' performance that could lead to market
distortions. Instead, we support the proposed partial swing pricing
that would allow NAV adjustments only when net purchases or
redemptions exceed an established threshold. We agree that this
approach will result in lower volatility than full swing pricing,
while still reducing dilution on assets. To that end, we do not
support an option allowing funds to choose to use full swing
pricing.''). See also MFS Comment Letter.
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    On balance, we continue to believe that setting a minimum threshold
for all funds would not be appropriate, and that funds should be
provided the flexibility to implement swing pricing at a threshold
level that best fits their particular circumstances based on the
required factors and the guidance set forth herein. We expect that as
part of the process of determining whether the benefits of implementing
swing pricing are justified given the costs, funds will evaluate the
appropriate threshold level and select a level that is suitable for the