pricing merge, the boards of merging funds may want to consider whether
to temporarily suspend a fund's swing pricing policies and procedures
ahead of the merger.\299\ Similarly, the swing threshold of the
absorbing fund generally should be reviewed following a merger, and the
persons in charge of administering the absorbing fund's swing pricing
policies and procedures should consider the effects of the merger when
considering what swing factor would be appropriate to use if the fund's
swing threshold is exceeded following the merger.\300\
---------------------------------------------------------------------------

    \297\ See Proposing Release, supra footnote 6, at n.533 and
accompanying text.
    \298\ Directors overseeing fund mergers must take into account
rule 17a-8 under the Act (which sets forth requirements for mergers
of affiliated investment companies), if applicable, as well as any
relevant state law requirements. Rule 17a-8 requires a board,
including a majority of the independent directors, to consider the
relevant facts and circumstances with respect to a merger of
affiliated funds and determine that the merger is in the best
interests of each of the merging funds and that the interests of the
shareholders of both the fund being acquired and the acquiring fund
are not being diluted. The board may want to consider the swing
pricing policies and procedures of the merging funds including any
appropriate modifications.
    See ALFI Swing Pricing Guidelines 2015, supra footnote 88, at
19-20 (discussing issues associated with the use of swing pricing to
adjust the value of the absorbed fund's assets).
    \299\ See Proposing Release, supra footnote 6, at n.536 and
accompanying text.
    \300\ See id., at text following n.536.
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Recordkeeping Requirements
    Like under the proposal, the final rule requires a fund to maintain
the swing pricing policies and procedures adopted by the fund that are
in effect, or at any time within the past six years were in effect, in
an easily accessible place.\301\ Additionally, as proposed, we are
expanding current rule 31a-2(a)(2), which requires a fund to keep
records evidencing and supporting each computation of the fund's
NAV,\302\ to reflect the NAV adjustments based on a fund's swing
pricing policies and procedures. Specifically, a fund that adopts swing
pricing policies and procedures will be required to preserve records
evidencing and supporting each computation of an adjustment to the
fund's NAV based on the fund's swing pricing policies and
procedures.\303\ For each NAV adjustment, such records should generally
include, at a minimum, the fund's unswung NAV, the level of net
purchases or net redemptions that the fund encountered (and estimated)
that triggered the application of swing pricing, the swing factor that
was used to adjust the fund's NAV, relevant data supporting the
calculation of the swing factor, and any back-testing data used by the
fund in assessing the swing factor (and its relationship to 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).
The records required under the amendments to rule 31a-2(a)(2) are
required to be preserved for at least six years from the date that the
NAV adjustment occurred, the first two years in an easily accessible
place.\304\ The six-year period for a fund to maintain a copy of its
swing pricing policies and procedures in rule 22c-1(a)(3) corresponds
to the six-year recordkeeping period currently incorporated in rule
31a-2(a)(2). We believe that consistency in these retention periods is
appropriate in order to permit a fund or Commission staff to review
historical instances of NAV adjustments effected pursuant to the fund's
swing pricing policies and procedures in light of the policies and
procedures that were in place at the time the NAV adjustments occurred.
Commenters generally found these proposed requirements appropriate, and
we are adopting them as proposed.\305\
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    \301\ Rule 22c-1(a)(3)(iii).
    \302\ See rule 31a-2(a)(2) (every registered investment company
shall . . .``[p]reserve for a period not less than six years from
the end of the fiscal year in which any transactions occurred, the
first two years in an easily accessible place . . . all schedules
evidencing and supporting each computation of net asset value of the
investment company shares'').
    \303\ See amendment to rule 31a-2(a)(2).
    \304\ See id.
    \305\ See, e.g., HSBC Comment Letter (``[HSBC] AMG believes the
recordkeeping requirements are sufficient.''). But see Voya Comment
Letter (listing recordkeeping requirements as one of many aspects of
the proposed rule that would make swing pricing too administratively
burdensome to implement in a manner outweighed by swing pricing's
benefits). We note that the rule amendments we adopt today permit,
but do not require, a fund to implement swing pricing and allow a
fund to weigh recordkeeping and other costs to administer swing
pricing against swing pricing benefits as the fund deems
appropriate.
---------------------------------------------------------------------------

    In addition, and based on the same rationale as that of the other
aforementioned swing pricing-related recordkeeping requirements, the
final rule requires a fund to maintain all written periodic reports
provided to the board under rule 22c-1(a)(3)(ii)(D) relating to swing
pricing for six years, the first two years in an easily accessible
place.\306\
---------------------------------------------------------------------------

    \306\ See rule 22c-1(a)(3)(iii).
---------------------------------------------------------------------------

g. Impacts on Financial Statements, Performance Reporting, and Pricing
Errors
    The application of swing pricing will impact a fund's financial
statements and disclosures in a number of areas, including a fund's
statement of assets and liabilities, statement of changes in net
assets, financial highlights, and the notes to the financial
statements. While commenters were generally supportive of the swing
pricing disclosures in the notes to the financial statements required
by the proposal,\307\ commenters did ask for clarification and
suggested the Commission also consider the impact swing pricing
disclosures

will have on other aspects of financial statement reporting,\308\ which
we address below.
---------------------------------------------------------------------------

    \307\ See ICI Comment Letter I.
    \308\ See Comment Letter of Ernst & Young LLP (Jan. 14, 2016)
(``EY Comment Letter''); Comment Letter of KPMG LLP (Jan. 26, 2016)
(``KPMG Comment Letter''); Comment Letter of PricewaterhouseCoopers
LLP (Jan. 13, 2016) (``PwC Comment Letter'').
---------------------------------------------------------------------------

Statement of Assets and Liabilities
    Today we are clarifying, after consideration of the comments
received, that for funds that utilize swing pricing the statement of
assets and liabilities would continue to be presented as currently
required by Regulation S-X rule 6-04.19 \309\ and U.S. Generally
Accepted Accounting Principles or ``GAAP.'' Under Regulation S-X and
GAAP, funds are required to state on the statement of assets and
liabilities their NAV per share, which is defined as ``the amount of
net assets attributable to each share of capital stock outstanding at
the close of the period,'' \310\ and which we refer herein to as the
``GAAP'' NAV. We proposed to amend rule 6-04.19 to require presentation
of the NAV per share as adjusted pursuant to its swing pricing policies
and procedures (if applicable), the ``Swung NAV,'' on the statement of
assets and liabilities.\311\ However, commenters questioned how the
effects of swing pricing are captured within the financial reporting
process and interact with the normal trade date reporting adjustments
that go into a GAAP NAV.\312\ Commenters also pointed out that a user
of the financial statements would not be able to divide the net assets
of the fund (or class) by the shares outstanding to arrive at the Swung
NAV per share and that there was no proposed reconciliation of these
amounts.\313\ Generally, commenters suggested consideration of whether
the GAAP NAV per share should be presented in addition to or in lieu of
the Swung NAV, as proposed,\314\ and asked for further clarification on
how swing pricing would impact the financial highlights, including the
total return calculations.\315\
---------------------------------------------------------------------------

    \309\ See 17 CFR 210.6-04, paragraph 19.
    \310\ See FASB ASC 946-10-20 for definition of NAV per share.
    \311\ See proposed amendments to section 210.6-04 of Regulation
S-X; see also, Proposing Release, supra footnote 6, at section
III.F.1.g.
    \312\ See KPMG Comment Letter; EY Comment Letter; PwC Comment
Letter. See also EY Comment Letter; PwC Comment Letter (on whether
the NAV should be adjusted for trade date activity). Rule 2a-4 of
the Act permits registered investment companies to record security
transactions as of one day after the trade date for purposes of
determining net asset value. However, FASB ASC 946-320-25-1 notes
that for financial reporting purposes, security transactions should
be recorded on trade date. Consistent with current practice, trade
date adjustments for portfolio transactions or capital share
transactions occurring on the balance sheet date (otherwise known as
``as of'' adjustments) are included in the GAAP NAV per share.
    \313\ See KPMG Comment Letter.
    \314\ See Proposing Release, supra footnote 6, at section
III.F.1.g.
    \315\ See EY Comment Letter; KPMG Comment Letter.
---------------------------------------------------------------------------

    One commenter also noted that, under the proposal, there would be a
difference between the Swung NAV per share disclosed in accordance with
proposed rule 6-04.19 and the GAAP NAV per share.\316\ For a fund that
chooses to implement swing pricing, the GAAP NAV would include both the
effects of swing pricing throughout the period, if applicable, as well
as any trade date financial reporting adjustments for portfolio
transactions (including any related income, expense, gain and loss) and
capital share transactions occurring on the balance sheet date. The
Swung NAV would be the NAV that investors transacted at on the last day
of the financial reporting period and would not include the GAAP trade
date adjustments.\317\ For funds that adopt swing pricing, if the NAV
is swung on the last day of the reporting period it could be higher or
lower than the GAAP NAV presented in the financial statements,
depending on the direction of the swing. For example, as one commenter
noted, if a fund on the last day of the financial reporting period
(when considering subscriptions or redemptions that day) in calculating
its daily NAV made a determination to adjust or swing the NAV according
to its swing pricing policies and procedures, and applied the swing
pricing factor to its unswung NAV of $10.00, which resulted in a Swung
NAV of $9.90 (as a result of large redemptions), shareholder redemption
(and subscription) transactions would be processed at the Swung NAV of
$9.90 on the last day of the reporting period.\318\ Assuming that the
effect of processing transactions at $9.90 increases the fund's NAV to
$10.01, and there were no other financial reporting trade date
adjustments, the GAAP NAV would be $10.01.
---------------------------------------------------------------------------

    \316\ See KPMG Comment Letter.
    \317\ We also note that today, without the use of swing pricing,
there could be differences between the GAAP NAV and the
transactional NAV calculated and used by funds to process investor
orders, due to the fact that GAAP NAV is calculated as of T+0 for
financial statement purposes (i.e., includes trade date adjustments
for portfolio investments and capital share activity as noted above)
and fund complexes generally calculate NAV and transact on a T+1
basis in accordance with rule 2a-4. Thus, some of the adjustments
between the GAAP NAV and the transactional NAV that currently exist
are due to, among other things, the financial reporting adjustments
for trade date (T+0) activity.
    \318\ See KPMG Comment Letter.
---------------------------------------------------------------------------

    To further clarify, for funds that implement swing pricing, the
GAAP NAV would include any of the effects of swing pricing throughout
the entire period (if applicable), and the Swung NAV (if it swings at
period end) would represent the transactional NAV on the last day of
the period, which has been adjusted by the swing factor.
    Commenters questioned whether the GAAP NAV per share or the Swung
NAV per share would be more meaningful to users of the financial
statements.\319\ After consideration of the concerns raised above, we
believe that disclosure of the GAAP NAV per share (which will reflect
the effects of swing pricing throughout the reporting period, if
applicable), continues to be the appropriate disclosure on the
statement of assets and liabilities as it allows users of the financial
statements to understand the actual amount of net assets attributable
to the fund's remaining shareholders at period end. The population of
investors that typically transact as of the financial reporting date is
generally less than those investors that do not transact and are still
invested in the fund as of the financial reporting date. Therefore, we
believe that the GAAP NAV is likely to be more meaningful to a larger
population of shareholders.
---------------------------------------------------------------------------

    \319\ See EY Comment Letter; KPMG Comment Letter.
---------------------------------------------------------------------------

    Furthermore, users of the financial statements can easily
recalculate the GAAP NAV per share on the statement of assets and
liabilities by dividing the net assets of the fund (or share class) by
the outstanding shares of the fund (or share class) as presented on the
statement of assets and liabilities. As proposed, users of the
financial statements would not have been able to recalculate the Swung
NAV disclosed based on the information on the statement of assets and
liabilities. Therefore, we are not adopting the proposed amendment to
Regulation S-X rule 6-04.19 to require funds to disclose the Swung NAV
on the Statement of Assets and Liabilities in lieu of or in addition to
the GAAP NAV on the balance sheet, and funds will continue to disclose
the GAAP NAV as currently required.
    However, as we discuss below in the financial highlights section,
we believe that transparency of the Swung NAV is still meaningful for
investors and should be disclosed in the financial highlights section
of the financial statements in addition to the GAAP NAV. Furthermore,
while we are not

requiring funds to present the Swung NAV on the balance sheet, this
does not preclude funds or preparers of financial statements from
including the Swung NAV on the balance sheet or elsewhere in the
financial statements if funds believe such disclosures are beneficial
for investors and provided there is an explanation of the differences
between the Swung NAV and the GAAP NAV as presented.
Statement of Changes in Net Assets
    As we noted in the Proposing Release, swing pricing also impacts
disclosures of capital share transactions included in a fund's
statement of changes in net assets.\320\ A fund using swing pricing to
adjust its NAV makes payments for shares redeemed and receives payments
for shares purchased net of the swing pricing adjustment. Using the
example above, if a fund had an unswung NAV of $10.00 on a given day
before considering swing pricing and the Swung NAV after applying the
swing factor pursuant to the fund's swing pricing policies and
procedures was $9.90, shareholders would transact at $9.90 multiplied
by the number of shares purchased or redeemed. The $0.10 difference
between the swung and unswung NAV would be retained by the fund for its
net redemptions to offset transaction and liquidity costs. This $0.10
difference per share should be accounted for as a capital transaction
and not included as income to the fund, because it is an adjustment
made to offset the near-term transactional and liquidity costs incurred
as a result of satisfying shareholder transactions. Funds are required
by Regulation S-X rule 6-09.4(b) to disclose the number of shares and
dollar amounts received for shares sold and paid for shares
redeemed.\321\ Thus, for funds that implement swing pricing (and in the
example above where transactions were processed using the swung NAV of
$9.90 per share), Regulation S-X would require the dollar amount
disclosed to be based on the transactional NAVs used to process
investor subscriptions and redemptions, including those processed using
Swung NAVs during the reporting period. Commenters generally agreed
with this approach and noted that the statement of changes in net
assets should reflect the actual amounts that would be received by the
fund and that would be paid to its shareholders.\322\
---------------------------------------------------------------------------

    \320\ See Proposing Release, supra footnote 6, at section
III.F.4.
    \321\ See 17 CFR 210.6-09.4(b).
    \322\ See EY Comment Letter; Invesco Comment Letter.
---------------------------------------------------------------------------

Financial Highlights
    We continue to believe, as we discussed in the proposal,\323\ that
a fund should include the impact of swing pricing in its financial
highlights,\324\ and the per share impact of amounts retained by the
fund due to swing pricing should be included in the fund's disclosures
of per share operating performance.\325\ However, commenters also asked
for clarification on how to present the cumulative impact of swing
pricing on NAV throughout the year as opposed to the impact of swing
pricing as of the financial reporting period end date. In response to
these concerns, we are modifying our proposal and amending Item 13 of
N-1A \326\ to require disclosure of the Swung NAV per share, if
applicable, as a separate line item below the ending GAAP NAV per share
on the financial highlights.\327\ We are also amending, as proposed,
Item 13 of Form N-1A to specifically require that the per share impact
of amounts related to swing pricing be disclosed below the total
distributions line in a fund's financial highlights.\328\ We are also
requiring a general description of the effects of swing pricing on the
fund's financial statements.\329\ This presentation addresses
commenters' questions around the impact of swing pricing throughout the
year and as of the period end date, as the cumulative impact of swing
pricing during the period will be presented within the financial
highlight's GAAP NAV per share roll-forward as a separate line item
under total distributions, and the impact of swing pricing as of the
period end date, if any, would be disclosed by presenting the Swung
NAV. One commenter noted that presenting two NAVs is conceptually
consistent with the current requirement for closed-end funds.\330\ Item
4 of Form N-2 requires closed-end funds to present both the net asset
value at the end of the period as well as the per-share market value at
the end of the period, which is a transaction price, in the per-share
operating performance.
---------------------------------------------------------------------------

    \323\ See supra footnote 315.
    \324\ See Item 13 of Form N-1A.
    \325\ FASB ASC 946-205-50-7 requires specific per share
information to be presented in the financial highlights for
registered investment companies, including disclosure of the per
share amount of purchase premiums, redemption fees, or other capital
items.
    \326\ See supra footnote 315. Funds follow the instructions to
Item 13 of Form N-1A for the Financial Highlights presentation in
fund registration statements.
    \327\ Id. See Item 13(a) of Form N-1A.
    \328\ Id.
    \329\ See infra section II.A.3.g (Financial Statement Footnote
Disclosure discussion).
    \330\ See EY Comment Letter.
---------------------------------------------------------------------------

Performance Reporting
    We proposed to require funds to calculate total return within the
financial highlights and performance information based on the Swung
NAV.\331\ Commenters questioned whether total return should be based on
other measures such as the GAAP NAV, which as clarified above, would
include the cumulative effect of swing pricing along with financial
reporting adjustments, or an unadjusted NAV, which would not include
any of the effects of swing pricing.\332\ Commenters had mixed
responses on what total return was more meaningful to users of the
financial statements. Some commenters agreed with the proposed approach
of presenting total return using only the Swung NAV as it was
consistent with how funds in Europe present total return, while
acknowledging that it would require investor education in the U.S.\333\
We note that certain European funds disclose both the swung and unswung
\334\ total returns for financial statement purposes. Other commenters
pointed out that presenting total return based only on the Swung NAV
introduced volatility unrelated to fund performance, and felt that
performance benefits of swing pricing could lead to manipulation by
managers and lead them to adopt aggressive swing policies.\335\ Along
the same lines, some commenters felt that total return based on an
unadjusted NAV (that excludes the effects of swing pricing) may provide
useful information for comparative purposes with other funds and
benchmarks that do not use swing pricing.\336\ Some commenters noted
that total return calculated based on the GAAP NAV may also be
meaningful for shareholders that remain in the fund and that did not
transact or redeem shares during the year,\337\ similar to the logic
supporting presenting the GAAP NAV on the balance sheet.
---------------------------------------------------------------------------

    \331\ See supra footnote 315.
    \332\ See EY Comment Letter; KPMG Comment Letter.
    \333\ See ICI Comment Letter I; BlackRock Comment Letter.
    \334\ See ALFI Survey 2015, supra footnote 42 (defining
``unswung NAV'' as the NAV without application of a swing factor).
    \335\ See EY Comment Letter; Eaton Vance Comment Letter.
    \336\ See ICI Comment Letter I.
    \337\ See EY Comment Letter.
---------------------------------------------------------------------------

    After further consideration, we still believe that it is important
for investors to understand the impact of swing pricing on the return
they would have

received for the period presented in the fund's financial statements,
but we think this is best represented by the GAAP NAV, which does
incorporate the effects of swing pricing if applicable throughout the
period. Presenting a total return based on the transactional, or Swung
NAV could introduce elements of variability depending on whether or not
the fund had swung the NAV as of the last or first day in the reporting
period. Thus, along the same lines for not requiring the Swung NAV on
the balance sheet, we do not believe the total return based on the
Swung NAV, if applicable, would provide any additional significant
information to shareholders. Even those investors transacting as of the
last day in the period would not receive the total return based on the
Swung NAV for the period, except in a rare circumstance in which they
had bought into the fund on the first day of the period and sold out of
the fund on the last day of the period and swing pricing was
implemented on those days.
    Therefore, we believe presenting the total return based on the GAAP
NAV in the financial highlights, which will include the cumulative
effects of swing pricing, if applicable, is more meaningful to
shareholders that remain in the fund as of the end of the reporting
period. Thus, we are not adopting the proposed amendments to Form N-1A
with respect to the calculation of total return within Instructions
3(a) and 3(d) to Item 13, and to Item 26, which also would have
required disclosure of the total return based on the Swung NAV.
    However, we are including an additional disclosure requirement
related to performance data presented in the prospectus, if a fund's
swing pricing policies and procedures were applied during any of the
periods presented. This new disclosure would require a fund to include
a general description of the effects of swing pricing on a fund's
annual and average total returns for the applicable periods presented
in a footnote.\338\ We requested comment in the Proposing Release on
whether funds should be required to disclose additional information
regarding swing pricing on Form N-1A and, if so, what information
should be disclosed. We also requested comment on whether we should
require disclosure of more information on amounts retained by the fund
because of swing pricing and certain additional information that would
highlight the effect of swing pricing on the fund's returns. Several
commenters recommended that the Commission require additional
transparency regarding a fund's use of swing pricing.\339\ The
additional disclosure would provide transparency to investors by
highlighting that the cumulative effect of swing pricing, where
applicable, is reflected in the performance data presented for the
fund.
---------------------------------------------------------------------------

    \338\ Item 4(b)(2)(ii) and Item 4(b)(2)(iv)(E) of Form N-1A.
    \339\ See Eaton Vance Comment Letter; AFR Comment Letter.
---------------------------------------------------------------------------

    Furthermore, while we are not requiring total return to be
presented based on the Swung NAV within the financial statements, we
are not prohibiting funds from disclosing the total return based on the
Swung NAV outside of the financial statements in other performance
information. We also acknowledge that presenting total return based on
an unadjusted NAV could be useful for comparative purposes, but we note
that it is a hypothetical measure not derived from the NAV that
shareholders would have transacted at or the GAAP NAV as presented in
the financial statements which is attributable to the fund's remaining
shareholders. Therefore, while we do not believe an unadjusted NAV
should be disclosed in the audited financial statements, we are not
prohibiting funds from disclosing an unadjusted NAV outside of the
financial statements in other performance information.\340\
---------------------------------------------------------------------------

    \340\ Item 26 (b)(6) of Form N-1A, Non-Standardized Performance
Quotation, notes that a fund may calculate performance using any
other, non-standardized historical measure of performance (not
subject to any prescribed method of computation) if the measurement
reflects all elements of return. Funds should consider this
provision when contemplating presentation of a total return based on
an unadjusted NAV that does not reflect the effects of swing pricing
for the period presented.
---------------------------------------------------------------------------

Financial Statement Footnote Disclosure
    Commenters were generally supportive of the swing pricing
disclosures in the notes to the fund's financial statements that would
have been required by the proposal.\341\ We are adopting the
requirement, as proposed, for a fund that adopts swing pricing policies
and procedures to disclose in a footnote to its financial statements:
(i) The general methods used in determining whether the fund's net
asset value per share will swing, (ii) whether the fund's net asset
value per share has swung during the period, and (iii) a general
description of the effects of swing pricing on the fund's financial
statements.\342\ This would include a description of the differences
between the ending US GAAP NAV and ending NAV adjusted for its swing
policies and procedures, if applicable, as presented in the financial
highlights included in the financial statements. Based on comments
received as noted above, we continue to believe that this information
will be useful in understanding the impact of swing pricing on a fund.
---------------------------------------------------------------------------

    \341\ See ICI Comment Letter I.
    \342\ See supra footnote 315; see also rule 6-03(n) of
Regulation S-X.
---------------------------------------------------------------------------

NAV Pricing Errors
    Commenters noted that certain components of the swing pricing
process will be based on estimates. Commenters were concerned that
swing pricing could introduce a new source of pricing errors and
potentially cause a fund to misstate its NAV if these estimates were
materially incorrect. These concerns primarily relate to estimating
daily net investor transaction flows that would be used to determine
whether a fund's swing threshold has been exceeded, which would require
adjusting the fund's NAV in accordance with the fund's swing pricing
policies and procedures.\343\ Certain commenters called for additional
Commission guidance regarding circumstances that would constitute
pricing errors under the swing pricing rules, as proposed.\344\ Other
commenters suggested that the Commission provide guidance and/or adopt
a ``safe harbor'' or a standard of liability with respect to any
pricing errors that could result from a fund's use of flow estimates to
determine whether to adjust the fund's NAV for swing pricing.\345\
Several commenters also noted that certain components of the swing
pricing process, such as thresholds and factors, will incorporate some
degree of estimation in determining when transaction costs (incurred as
a result of the disposition or purchase of fund assets associated with
net flows) will have a material impact on the fund.\346\
---------------------------------------------------------------------------

    \343\ See BlackRock Comment Letter.
    \344\ See, e.g., Dechert Comment Letter.
    \345\ See, e.g., BlackRock Comment Letter; MFS Comment Letter;
Charles Schwab Comment Letter; SIFMA Comment Letter III.
    \346\ Id.
---------------------------------------------------------------------------

    We believe fund management with oversight by the fund's board of
directors is in the best position to tailor and oversee any error
correction policies that may relate to conducting swing pricing for a
fund. Accordingly, we believe funds should consider how their error
correction policies and procedures will address swing pricing to the
extent necessary to address the use of reasonable estimates related to
swing pricing,\347\ including appropriate

parameters around what constitutes an error with respect to their swing
pricing policies and procedures.
---------------------------------------------------------------------------

    \347\ See supra section II.A.3.d. (discussing the use of
reasonable estimates in determining net transaction flows for swing
pricing). The rule as adopted permits the person(s) responsible for
administering the fund's swing pricing policies and procedures, in
determining whether the fund's level of net purchase or net
redemptions has exceed the applicable threshold, to make a
determination based on receipt of sufficient information about a
fund's daily shareholder flows to allow the fund to reasonably
estimate whether it has crossed the swing threshold(s) with high
confidence, and may include reasonable estimates where necessary.
---------------------------------------------------------------------------

    Funds should consider making any estimates with respect to the
different swing pricing components (e.g., net flows, thresholds and
factors) utilizing reasonable processes and procedures. Such estimates
generally should be based on sufficient and appropriate
information.\348\ We recognize that funds may take different approaches
in determining such estimates, based on the particular circumstances of
the fund and in developing formal or informal policies and procedures.
Funds also may wish to conduct back-testing of estimated fund flows and
other estimates using complete or final data to refine their estimation
processes as appropriate over time and help ensure that estimates
utilized for swing pricing are reasonable.
---------------------------------------------------------------------------

    \348\ See id.
---------------------------------------------------------------------------

    We acknowledge the concerns expressed above about the use of
estimates, including that a fund following its swing pricing policies
and procedures could gather sufficient information in order to make a
reasonable estimate of investor flows in good faith in determining
whether or not it has crossed the swing threshold with high confidence,
which subsequently is determined to differ from its actual fund flows.
For example, differences in actual versus estimated net flows could
arise from adjustments subsequently made to certain transactions
processed, or because certain fund flows were not included in the
estimates received at the point the fund decided to swing or not swing
the fund's NAV, or by using the prior day's NAV to estimate certain
price-dependent transaction orders.\349\ We believe that as long as the
fund has followed reasonable practices, policies and procedures in
gathering sufficient information in determining whether net investor
flows (which may include reasonable estimates) have exceeded the
applicable threshold used for swing pricing, such differences would not
in and of itself result in a determination of a NAV pricing error
requiring reprocessing of transactions or a financial statement
adjustment to the fund's NAV.
---------------------------------------------------------------------------

    \349\ See id.
---------------------------------------------------------------------------

    A fund should follow its error correction policies, which likely
would include a quantitative and qualitative analysis of the facts and
circumstances of a particular scenario to determine whether a pricing
error has occurred. In the context of swing pricing, such errors may
result from inputs used, or the application of the decision to swing
price or not, or when applying a factor in calculating the swung NAV.
For example, differences in estimated net investor flows versus final
flow data could result from a processing error, such as inadvertent
exclusion of significant estimated flow data provided to the fund's
transfer agent by an intermediary, impacting the fund's decision to
swing or not on a particular day (or days). Or an error could occur in
applying an incorrect swing factor to a fund's NAV, for example, if a
fund's swing pricing policies and procedures incorporate multiple
thresholds and factors. As with any other NAV calculation or processing
error, the fund generally should consider these types of errors and
whether it would be appropriate to adjust the fund's NAV and reprocess
in accordance with their error correction policies.
Auditor's Role in Examining the Use of Swing Pricing
    Certain commenters also expressed concerns with the auditor's role
in evaluating the application of swing pricing, including that auditors
do not have the expertise to assess the reasonableness of the swing
threshold and the swing factor that are being used by a fund.\350\ We
agree that assessing the reasonableness of the swing threshold and the
swing factor is the responsibility of the swing pricing administrator
overseen by the board of directors. We do not believe the auditor
should have the responsibility to assess the reasonableness of the
swing threshold and swing factor provided there is no indication of
noncompliance with the Commission's rule.\351\ However, we believe that
verifying that the swing policies and procedures have been approved by
the fund's board and have been consistently applied, in all material
respects, by the fund throughout the period, including as of the
balance sheet date, is within the scope of an auditor's engagement and
expertise.
---------------------------------------------------------------------------

    \350\ See EY Comment Letter; KPMG Comment Letter.
    \351\ However, in evaluating the application of swing pricing
the auditor must still comply with applicable professional standards
(e.g., PCAOB Auditing Standard (``AS'') No. 8, Audit Risk, AU sec.
316, Consideration of Fraud in a Financial Statement Audit, and AU
sec. 317, Illegal Acts by Clients). This includes considering and
addressing instances of noncompliance of which the auditor becomes
aware, which includes but is not limited to indications of potential
fraudulent practices.
---------------------------------------------------------------------------

B. Disclosure and Reporting Requirements Regarding Swing Pricing

    Receiving relevant information about the operations of a fund and
its principal investment risks is important to investors in choosing
the appropriate fund for their risk tolerances. We are adopting,
substantially as proposed, with some modifications in response to
comments, amendments to Form N-1A that require funds that use swing
pricing to provide an explanation of the fund's use of swing pricing;
including what it is, the circumstances under which the fund will use
swing pricing, and the effects of using swing pricing.\352\ A fund that
uses swing pricing will also be required to disclose the upper limit
the fund has set on the swing factor.\353\ These form amendments are in
addition to amendments to Form N-1A and Regulation S-X discussed above
regarding financial and performance reporting related to swing
pricing.\354\ We are also adopting a requirement that a fund report on
Form N-CEN information regarding the use of swing pricing, including a
fund's swing factor upper limit.\355\
---------------------------------------------------------------------------

    \352\ See Item 6(d) of Form N-1A.
    \353\ See id.
    \354\ See Item 4(b)(2)(ii); Item 4(b)(2)(iv)(E); Item 6(d); and
Instructions to Item 13 of Form N-1A; see also rule 6-02(n); and
rule 6-04.19 of Regulation S-X. We are also amending rule 6-02(e) of
Regulation S-X to define the term ``swing pricing'' to have the
meaning given in rule 22c-1(a)(3)(v)(C).
    \355\ See Item C.21 of Form N-CEN.
---------------------------------------------------------------------------

1. Amendments to Form N-1A
    Form N-1A is used by open-end funds, including money market funds
and ETFs, to register under the Investment Company Act and to register
offerings of their securities under the Securities Act. Form N-1A
currently requires a fund to describe its procedures for pricing fund
shares, including an explanation that the price of fund shares is based
on the fund's NAV and the method used to value fund shares.\356\ If the
fund is an ETF, an explanation that the price of fund shares is based
on market price is required.\357\ As discussed above, under rule 22c-
1(a)(3), a fund (with the exception of a money market fund or ETF) is
permitted, under certain circumstances, to use swing pricing to adjust
its current NAV as an additional tool to lessen dilution of the value
of outstanding redeemable securities through

shareholder purchase and redemption activity.\358\
---------------------------------------------------------------------------

    \356\ See Item 11(a)(1) of Form N-1A.
    \357\ Id.
    \358\ See supra section II.B.
---------------------------------------------------------------------------

    We are adopting, with some modifications from what was proposed,
amendments to Item 6 of Form N-1A to account for this swing pricing
procedure. Specifically, Item 6, as amended, requires a fund that uses
swing pricing to explain the fund's use of swing pricing; including its
meaning, the circumstances under which the fund will use it, and the
effects of swing pricing on the fund and investors. Item 6, as amended,
will also require a fund that uses swing pricing to disclose the swing
factor upper limit it has set with respect to the fund's use of swing
pricing.\359\ For a fund that invests in other funds (e.g., a fund-of-
funds, a master-feeder fund) and those other funds use swing pricing,
the fund is required to include a statement that its NAV is calculated
based on the NAVs of the funds in which the fund invests, and that the
prospectuses for those funds explain the circumstances under which
those funds will use swing pricing and the effects of using swing
pricing.
---------------------------------------------------------------------------

    \359\ See Item 6(d) of Form N-1A.
---------------------------------------------------------------------------

    Together with the changes described above regarding financial and
performance reporting on Form N-1A,\360\ we believe these disclosures
will improve public understanding regarding a fund's use of swing
pricing as well as the potential advantages and disadvantages of using
swing pricing to manage dilution arising from shareholder purchase and
redemption activity. In particular, the disclosure regarding a fund's
swing factor upper limit will provide transparency regarding the
maximum amount that a shareholder could expect the share price that he
or she receives upon purchase or redemption to be adjusted on account
of swing pricing.
---------------------------------------------------------------------------

    \360\ See supra section II.A.3.g. (discussing amendments to Item
4(b)(2)(ii), Item 4(b)(2)(iv)(E), Item 6(d), Instructions to Item
13).
---------------------------------------------------------------------------

    Some commenters expressed general support for the proposed swing
pricing prospectus disclosure requirements, explaining that swing
pricing disclosures would provide investors with important general
information about why and under what circumstances a fund would adjust
its NAV and would complement existing Form N-1A disclosure requirements
on how fund shares are priced.\361\ One of these commenters, however,
recommended that the Commission clarify what statements concerning
swing pricing should be included in a fund's prospectus and require any
additional information about swing pricing be disclosed in a fund's
statement of additional information.\362\ Other commenters, however,
supported swing pricing disclosure requirements, as proposed, without
any request for additional guidance from the Commission.\363\ In
response to these comments, we have modified the proposed Item 6
disclosure to require a fund that uses swing pricing to provide an
explanation of swing pricing as well as its effects.\364\ We agree with
commenters that these requirements will provide investors with
important general information about swing pricing.\365\ Existing
disclosure requirements in the prospectus and statement of additional
information related to the pricing of fund shares, would apply to a
fund's use of swing pricing.\366\
---------------------------------------------------------------------------

    \361\ See, e.g., ICI Comment Letter I; see also CFA Comment
Letter.
    \362\ See CFA Comment Letter.
    \363\ See Charles Schwab Comment Letter (recommending swing
pricing policies be disclosed in the fund's prospectus and easily
accessible to the public online); see also ICI Comment Letter I.
    \364\ See Item 6(d) of Form N-1A. We are also making a technical
revision to Item 6(d) to clarify that, if applicable, funds
investing in other funds are required to state that prospectuses of
the underlying funds provide swing pricing information only where
underlying funds are using swing pricing.
    \365\ See, e.g., Instruction to Item 11(a)(1) of Form N-1A
(disclosure requirements regarding a fund's use of fair value
pricing).
    \366\ See, e.g., Item 11(a)(1) of Form N-1A (requiring a
description of the procedures for pricing fund shares, including an
explanation that the price of fund shares is based on a fund's NAV
and the method used to value fund shares); and Item 11(a)(2) of Form
N-1A (requiring a statement as to when calculations of NAV are made
and that the price at which a purchase or redemption is effected is
based on the next calculation of NAV after the order is placed); see
also Item 23 of Form N-1A (requiring in the statement of additional
information a description of the method followed or to be followed
by a fund in determining the total offering price at which its
shares may be offered to the public and the method(s) used to value
the fund's assets).
---------------------------------------------------------------------------

    As we proposed, we have determined not to require funds to disclose
their swing pricing threshold or swing factor in their prospectus
disclosures on Form N-1A. Some commenters supported this determination
and, for example, expressed concerns that public disclosures of a
fund's swing pricing threshold or swing factor could result in unfair
trading practices, thereby creating a new type of material non-public
information (i.e., the trading intent of other shareholders).\367\ One
commenter recommended that the Commission prohibit funds from
selectively disclosing swing thresholds to certain investors to prevent
potential gaming where, for example, larger shareholders may attempt to
take advantage of pricing adjustments when a swing threshold is
crossed.\368\ We share commenters' concerns regarding unfair trading,
gaming, and other negative fund and market impacts that could occur if
swing pricing thresholds were shared with the public and recommend that
a fund consider these concerns (and determine that disclosure of a
fund's swing threshold is in the best interests of the fund) before
disclosing this information in its prospectus or elsewhere. Indeed,
funds and advisers to funds generally should take into consideration
the potential for gaming into account and any other potential
consequences before making any such disclosure.\369\ As noted above, we
are requiring a fund to disclose the swing factor upper limit to
provide shareholders with additional transparency regarding a fund's
use of swing pricing and the potential impact of that usage.
---------------------------------------------------------------------------

    \367\ See Federated Comment Letter.
    \368\ See CFA Comment Letter.
    \369\ See, e.g., In re Alliance Capital Management, L.P.,
Investment Advisers Act Release No. 2205A (Jan. 15, 2004) (settled
action) (finding a mutual fund adviser willfully violated section
204A of the Advisers Act by failing to establish, maintain, and
enforce written policies and procedures reasonably designed to
prevent the misuse of material, nonpublic information by releasing
material, nonpublic information about the portfolio holdings of
certain mutual funds to select market timers in those funds and
thereby defrauding mutual fund investors).
---------------------------------------------------------------------------

2. New Item in Form N-CEN
    We proposed a new reporting item under Part C of Form N-CEN to
allow the Commission and other users to track a fund's use of swing
pricing.\370\ We are adopting this reporting requirement substantially
as proposed but with a modification to require funds to disclose the
fund's swing factor upper limit.\371\ Specifically, a fund, other than
a money market fund or ETF, is required to disclose whether it engaged
in swing pricing during the reporting period, and if so, the swing
factor upper limit set by the fund.\372\ This disclosure will inform
our staff and potential users about

whether funds use swing pricing as a tool to mitigate dilution of the
value of outstanding redeemable securities through shareholder purchase
and redemption activity and the potential maximum amount the fund's
price may be swung. While several commenters expressed general support
for the Form N-CEN reporting requirements included in the
proposal,\373\ we received no comments on this aspect of the proposal.
---------------------------------------------------------------------------

    \370\ See Proposing Release, supra footnote 6, at section
III.G.3.
    \371\ See Item C.21 of Form N-CEN. Under the proposal, questions
regarding swing pricing were included as part of proposed Item C.44
of Form N-CEN. See id. We have modified the numbering convention for
items within Form N-CEN from the proposal to be consistent with Form
N-CEN as adopted in the Investment Company Reporting Modernization
Adopting Release. See Investment Company Reporting Modernization
Adopting Release, supra footnote 11. Reporting requirements
regarding lines of credit, interfund lending, and interfund
borrowing (which were included in the same item as swing pricing in
the proposal), are now part of Item C.20 of Form N-CEN. See
Liquidity Risk Management Programs Adopting Release, supra footnote
8, at section III.M.3.a.
    \372\ Item C.21 of Form N-CEN.
    \373\ See, e.g., CFA Comment Letter; Federated Comment Letter;
SIFMA Comment Letter II; Vanguard Comment Letter.
---------------------------------------------------------------------------

C. Effective and Compliance Dates

1. Swing Pricing Rule
    Rule 22c-1(a)(3) permits (but does not require) a fund (with the
exception of a money market fund or ETF) to adopt swing pricing
policies and procedures. The Commission is delaying the effective date
of rule 22c-1(a)(3) until 24 months after the date this release is
published in the Federal Register. In the Proposing Release, the
Commission stated that a fund could rely on the rule as soon as the
fund could comply with the rule and related records, financial
reporting, and prospectus disclosure requirements.\374\ As discussed in
section II.A.3. above, we agree with the commenters who suggested that
funds, service providers and intermediaries may need to work through
operational issues,\375\ and believe that delaying the effectiveness of
swing pricing may allow for the creation of industry-wide operational
solutions in a more efficient manner and that therefore providing an
extended effective date may more effectively facilitate the adoption of
swing pricing. In light of the extended effective date and
discretionary nature of swing pricing, we believe that a compliance
period is unnecessary.
---------------------------------------------------------------------------

    \374\ Proposing Release, supra footnote 6, at section III.H.
    \375\ See, e.g., BlackRock Comment Letter; CRMC Comment Letter;
Fidelity Comment Letter; ICI Comment Letter I.
---------------------------------------------------------------------------

2. Amendments to Form N-1A and Regulation S-X and New Item in Form N-
CEN
    In the Proposing Release, the Commission expected to require all
initial registration statements on Form N-1A, and all post-effective
amendments that are annual updates to effective registration statements
on Form N-1A, filed six months or more after the effective date, to
comply with the proposed amendments to Form N-1A.\376\ Few commenters
discussed the Form N-1A amendments. One commenter agreed that 6 months
was sufficient to comply with the amendments; \377\ another commenter
requested 30 months to comply.\378\ Because we do not expect that funds
will require significant amounts of time to prepare the additional
disclosures regarding swing pricing,\379\ and we believe that a fund
should disclose the use of swing pricing to investors before it is
used, the compliance date for the amendments to Form N-1A discussed
herein is the same as the effective date for rule 22c-1(a)(3).
Likewise, we believe the additional disclosures regarding swing pricing
within the financial statements related to the Regulation S-X
amendments discussed above should be included in any financial
statements in which swing pricing is implemented on or after the
effective date. We note that only funds using swing pricing are
required to provide the Form N-1A and financial statement disclosure
amendments we are adopting today as part of this Release.
---------------------------------------------------------------------------

    \376\ See Proposing Release, supra footnote 6, at section III.H.
The proposal included amendments to Form N-1A related to swing
pricing, as well as amendments to Form N-1A related to a fund's
redemption practices. See id.
    \377\ See ICI Comment Letter I.
    \378\ See Vanguard Comment Letter.
    \379\ See Proposing Release, supra footnote 6, at section III.H.
---------------------------------------------------------------------------

    For Form N-CEN, we proposed a compliance date of 18 months after
the effective date to comply with the new reporting requirements.\380\
No commenters specifically addressed the compliance date for the
reporting requirements applicable to swing pricing, but several
commenters expressed concerns about operational limitations and
requested 30 months for all entities to comply with the new reporting
requirements on Form N-CEN.\381\ As with the amendments to Form N-1A,
the compliance date for the new reporting requirements related to swing
pricing on Form N-CEN will be the same as the effective date for rule
22c-1(a)(3).
---------------------------------------------------------------------------

    \380\ Id. The proposal included new items on Form N-CEN related
to a fund's lines of credit, interfund lending, and interfund
borrowing. See also Liquidity Risk Management Programs Adopting
Release, supra footnote 8, at section III.L.3.
    \381\ See Cohen & Steers Comment Letter; Fidelity Comment
Letter; ICI Comment Letter I; Vanguard Comment Letter.
---------------------------------------------------------------------------

III. Economic Analysis

A. Introduction and Primary Goals of Regulation

1. Introduction
    As discussed above, the Commission is adopting regulatory changes
to permit funds to use swing pricing under rule 22c-1(a)(3) and to
require new disclosures regarding swing pricing (collectively, the
``swing pricing regulations''). In summary, and as discussed in greater
detail in section II above, the swing pricing regulations include:
    [cir] Final rule 22c-1(a)(3) will permit (but not require) a fund
(except a money market fund or ETF) to establish and implement swing
pricing policies and procedures that would, under certain
circumstances, require the fund to use swing pricing to adjust its
current NAV to lessen potential dilution of the value of outstanding
redeemable securities caused by shareholder purchase and redemption
activity. A fund that engages in swing pricing will be subject to
certain disclosure and reporting requirements. Relative to the proposed
rule, the final rule provides funds greater flexibility in setting
multiple swing thresholds and threshold-specific swing factors, but
imposes certain additional conditions, primarily a cap for the swing
factor and limitations on how the swing factor can be set.
    [cir] Amendments to Form N-1A and Regulation S-X and an item on new
Form N-CEN will require enhanced fund disclosure and reporting
regarding swing pricing.
    [cir] Amendments to rule 31a-2 will require a fund that chooses to
use swing pricing to create and maintain a record of support for each
computation of an adjustment to the NAV of the fund's shares based on
the fund's swing policies and procedures.
    The Commission is sensitive to the economic effects of the swing
pricing regulations, including the benefits and costs as well as the
effects on efficiency, competition, and capital formation. The economic
effects are discussed below in the context of the primary goals of the
swing pricing regulations.
2. Primary Goals
    The primary goals of the swing pricing regulations are to promote
investor protection by allowing a fund, if it chooses, to use swing
pricing to mitigate potential dilution of non-transacting shareholders'
interests that could occur when the fund incurs costs as a result of
other investors' purchase or redemption activity.\382\ To the extent
that such costs are not borne by redeeming or subscribing shareholders
when exiting or entering a fund, such shareholders have no incentive to
consider transaction costs that occur when the fund needs to sell or
buy

assets because they can do so at the daily NAV. Swing pricing allows a
fund to address this dilution effect by allocating certain of the
fund's anticipated transaction costs to redeeming and subscribing
shareholders. Furthermore, because redeeming shareholders do not bear
the cost of exiting a fund, shareholders might have an incentive for
early redemptions in times of liquidity stress because of a first-mover
advantage, which could result in further dilution of non-transacting
shareholders' interests.\383\ To the extent that such a first-mover
advantage triggers the sale of less liquid portfolio investments at
discounted or even fire sale prices, correlated investments and funds
and other investors holding these and correlated investments will be
negatively impacted.\384\ For reasons discussed in detail below, we
believe that the ability for a fund to adopt swing pricing policies and
procedures should mitigate the risk of potential shareholder dilution
and decrease the incentive for early redemption in times of liquidity
stress.
---------------------------------------------------------------------------

    \382\ We use the term ``non-transacting shareholder'' to
reference shareholders that either remain in the fund or are already
in the fund as opposed to redeeming or subscribing shareholders.
    \383\ See supra footnote 20 and accompanying text; infra
sections III.B.1. and III.B.2.
    \384\ See Proposing Release, supra footnote 6, at n.54.
---------------------------------------------------------------------------

    Swing pricing regulations also are meant to address 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 and hence could give rise to increased
dilution effects from redeeming and subscribing shareholders in those
funds.\385\ Furthermore, there has also been considerable growth in
assets managed by funds that exhibit characteristics, for example high
investor flow volatility, that also could give rise to increased
dilution effects.\386\ Collectively, these industry trends emphasize
the importance of allowing funds to choose to use swing pricing.
---------------------------------------------------------------------------

    \385\ See supra section II.C.1.; infra section III.B.2; see also
Paul Hanouna, Jon Novak, Tim Riley & Christof Stahel, Liquidity and
Flows of U.S. Mutual Funds, Division of Economic and Risk Analysis
White Paper (Sept. 2015) (``DERA Study''), at 6-9, available at
https://www.sec.gov/dera/staff-papers/white-papers/liquidity-white-paper-09-2015.pdf (``DERA Study''). Relevant statistics from the
DERA Study were updated through 2015 using the CRSP US Mutual Fund
Database.
    \386\ See infra section III.B.2.
---------------------------------------------------------------------------

B. Economic Baseline

    The swing pricing regulations will affect, directly or indirectly,
all funds and their investors, investment advisers and other service
providers, all issuers of the portfolio securities in which funds
invest, and other market participants potentially affected by fund and
investor behavior. The economic baseline of the swing pricing
regulations includes funds' current practices regarding swing pricing
as well as the recent development of the fund industry.
1. Funds' Current Practices Regarding Swing Pricing
    Commission rules and guidance do not currently address the ability
of an open-end fund to use swing pricing to mitigate potential dilution
of fund shareholders, and U.S. registered funds do not currently use
swing pricing. However, as discussed above, certain foreign funds
currently do use swing pricing.\387\ We understand that some fund
complexes that include U.S. registered funds also include foreign-
domiciled funds that currently use swing pricing.
---------------------------------------------------------------------------

    \387\ See supra footnotes 41-44 and accompanying text.
---------------------------------------------------------------------------

2. Fund Industry Developments Related to Swing Pricing
a. Overview
    Below we discuss the size and growth of the U.S. fund industry
generally, as well as the growth of various investment strategies
within the industry. We show that the fund industry has grown
significantly in the past two decades, and, during this period, funds
with international strategies, fixed income funds, and funds with
alternative strategies have grown particularly quickly. Generally,
funds with these strategies are more likely to invest in assets that
are less liquid, for example, when compared to domestic large
capitalization equity, and therefore redeeming and subscribing
investors are more likely to dilute non-transacting investors'
interests. We also examine trends regarding the volatility of fund
flows, discussing in particular those types of funds that demonstrate
notably volatile flows. Because funds with larger flow volatility can
experience higher levels of redemptions and subscriptions, which can
dilute the interests of non-transacting shareholders, assessing trends
regarding flow volatility can provide information about sectors of the
fund industry that could be particularly susceptible to dilution
effects.
b. Size and Growth of the U.S. Fund Industry and Various Investment
Strategies Within the Industry
    Open-end funds and ETFs manage a significant and growing amount of
assets in U.S. financial markets. As of the end of 2015, there were
10,633 open-end funds (excluding money market funds, but including
ETFs), as compared to 5,279 at the end of 1996.\388\ The assets of
these funds were $15.0 trillion in 2015, having grown from about $2.63
trillion in 1996.\389\
---------------------------------------------------------------------------

    \388\ See Investment Company Institute, 2016 Investment Company
Fact Book (2016) (``2016 ICI Fact Book''), available at https://www.ici.org/pdf/2016_factbook.pdf, at 22, 176, 183. Specifically, as
of the end of 2015, there were 9,039 open-end mutual funds
(including funds that invest in other funds) and 1,594 ETFs. There
were approximately 50 ETFs that invest in other ETFs, which are not
included in our figures.
    \389\ See id., at 174, 182.
---------------------------------------------------------------------------

    U.S. equity funds represent the greatest percentage of U.S. open-
end fund industry assets.\390\ As of the end of 2015, excluding ETFs,
money market funds and variable annuities, open-end U.S. equity funds
held 44.7% of U.S. fund industry assets. The investment strategies with
the next-highest percentages of U.S. fund industry assets are foreign
equity funds (16.7%), general bond funds (13.2%), and mixed strategy
funds (12.3%).\391\ Funds with alternative strategies \392\ only
represent a small percentage of the U.S. fund industry assets, but as
discussed below, the number of alternative strategy funds and the
assets of this sector have grown considerably in recent years.\393\
---------------------------------------------------------------------------

    \390\ DERA Study, supra footnote 385, at Table 1.
    \391\ Id. The figure for general bond funds does not include
assets attributable to foreign bond funds (1.9%), U.S. corporate
bond funds (0.8%), U.S. government bond funds (1.4%), and U.S.
municipal bond funds (4.7%).
    \392\ Alternative funds are funds that seek total returns
through the use of alternative investment strategies, including but
not limited to equity market neutral, long/short equity, global
macro, event driven, credit focus strategies.
    \393\ Id., at 7-8.
---------------------------------------------------------------------------

    While the overall growth rate of funds' assets has been generally
high (about 7.2% per year, between the years 2000 and 2015 \394\), it
has varied significantly by investment strategy.\395\ U.S. equity
funds' assets grew substantially in terms of dollars from the end of
2000 to 2015,\396\ but this sector's assets as a percentage of total
U.S. fund industry assets decreased from about 65% to about 45% during

that same period.\397\ Like U.S. equity funds, the assets of U.S.
corporate bond funds, government bond funds, and municipal bond funds
also increased in terms of dollars from 2000 to 2015, but each of these
sectors' assets as a percentage of the fund industry decreased during
this period.\398\ On the other hand, the assets of foreign equity
funds, general bond funds, and foreign bond funds increased steadily
and substantially as a percentage of the fund industry over the same
period.\399\ For example, foreign equity funds increased steadily from
10.6% of total industry assets in 2000 to 16.7% in 2015. And within
these three investment strategies, certain investment subclasses
(emerging market debt and emerging market equity) have grown
particularly quickly from 2000 to 2015.\400\ The overall growth rate of
funds' assets between the years 2000 and 2015 was greater for index
funds (12.3%) than actively managed funds (4.9%).\401\
---------------------------------------------------------------------------

    \394\ Id., at Table 2.
    \395\ The figures in this paragraph and the following paragraph,
discussing the variance in growth rate of funds' assets by
investment strategy, exclude ETF assets.
    \396\ U.S. equity funds held about $5.6 trillion as the end of
2015, compared to about $2.9 trillion at the end of 2000. DERA
Study, supra footnote 385, at Table 2.
    \397\ Id., at Table 2.
    \398\ Id. U.S. corporate bond funds held about $95 billion at
the end of 2015, as opposed to $66 billion in 2000; these funds'
assets as a percentage of the U.S. fund industry decreased from 1.5%
in 2000 to 0.8% in 2015. U.S. government bond funds held about $174
billion at the end of 2015, as opposed to $91 billion in 2000; these
funds' assets as a percentage of the U.S. fund industry decreased
from 2.1% in 2000 to 1.4% in 2015. U.S. municipal bond funds held
about $592 billion at the end of 2015, as opposed to $278 billion in
2000; these funds' assets as a percentage of the U.S. fund industry
decreased from 6.3% in 2000 to 4.7% in 2015.
    \399\ Id. Foreign equity funds held about $2.1 trillion in 2015,
as opposed to $465 billion in 2000. U.S. general bond funds held
about $1.7 trillion at the end of 2015, as opposed to $240 billion
in 2000; these funds' assets as a percentage of the U.S. fund
industry increased from 5.4% in 2000 to 13.2% in 2015. Foreign bond
funds held about $244 billion at the end of 2015, as opposed to $19
billion in 2000; these funds' assets as a percentage of the U.S.
fund industry increased from 0.4% in 2000 to 1.9% in 2015.
    \400\ Id., at 9. Emerging market debt and emerging market equity
funds held about $289 billion at the end of 2015, as opposed to $20
billion in 2000. The assets of emerging market debt funds and
emerging market equity funds grew by an average of 18.1% and 19.8%,
respectively, each year from 2000 through 2015.
     These investment subclasses represent a small portion of the
U.S. mutual fund industry (the combined assets of these investment
subclasses as a percentage of the U.S. fund industry was 2.3% at the
end of 2015).
    \401\ See 2016 ICI Fact Book, supra footnote 388, at 174, 218.
---------------------------------------------------------------------------

    The assets of funds with alternative strategies \402\ also have
grown rapidly in recent years. From 2005 to 2015, the assets of
alternative strategy funds grew from $366 million to $310 billion, and
from the end of 2011 to the end of 2013, the assets of alternative
strategy funds grew by an average rate of almost 80% each year.
However, as discussed above, funds with alternative strategies remain a
relatively small portion of the U.S. fund industry as a percentage of
total assets.\403\
---------------------------------------------------------------------------

    \402\ While there is no clear definition of ``alternative'' in
the mutual fund space, an alternative mutual fund is generally
understood to be a fund whose primary investment strategy falls into
one or more of the three following buckets: (i) Non-traditional
asset classes (for example, currencies or managed futures funds);
(ii) non-traditional strategies (such as long/short equity, event
driven); and/or (iii) less liquid assets (such as private debt).
Their investment strategies often seek to produce positive risk-
adjusted returns that are not closely correlated to traditional
investments or benchmarks, in contrast to traditional mutual funds
that historically have pursued long-only strategies in traditional
asset classes.
    \403\ See supra footnote 393 and accompanying text.
---------------------------------------------------------------------------

c. Significance of Fund Industry Developments
    The industry developments discussed above are notable for several
reasons. The growth of funds generally over the past few decades
demonstrates that investors have increasingly come to rely on
investments in funds to meet their financial needs.\404\ These trends
also demonstrate growth in particular types of funds that may entail
increased concerns about dilution of non-transacting shareholder
interests. In particular, there has been significant growth in high-
yield bond funds, emerging market debt funds, and funds with
alternative strategies, which generally invest in less liquid assets.
Commissioners and Commission staff have previously spoken about the
need to focus on potential liquidity risks relating to fixed income
assets and fixed income funds,\405\ and within this sector, funds that
invest in high-yield bonds could be subject to greater liquidity risk
as they invest in lower-rated bonds that tend to be less liquid than
investment grade fixed income securities.\406\ Similarly, emerging
market debt funds may invest in relatively illiquid securities with
lengthy settlement periods.\407\ Likewise, funds with alternative
strategies may hold portfolio investments that are relatively
illiquid.\408\ Moreover, Commission staff economists have found that
both foreign bond funds (including emerging market debt funds) and
alternative strategy funds have historically experienced relatively
more volatile flows than the average mutual fund,\409\ which would
indicate the possibility of increased dilution effects from redeeming
and subscribing shareholders in these funds.
---------------------------------------------------------------------------

    \404\ See Proposing Release, supra footnote 6, at section II.A.
    \405\ Id., at n.62 and accompanying text.
    \406\ The Commission and Commission staff have cautioned that
high yield securities may be considered to be illiquid, depending on
the facts and circumstances. See Periodic Repurchases by Closed-End
Management Investment Companies; Redemptions by Open-End Management
Investment Companies and Registered Separate Accounts at Periodic
Intervals or with Extended Payment, Investment Company Act Release
No. 18869 (July 28, 1992) [57 FR 34701 (Aug. 6, 1992)]; see also SEC
Investor Bulletin, What Are High-Yield Corporate Bonds?, SEC Pub.
No. 150 (June 2013), available at http://www.sec.gov/investor/alerts/ib_high-yield.pdf (noting that high-yield bonds may be
subject to more liquidity risk than, for example, investment-grade
bonds). But see BlackRock, Who Owns the Assets? A Closer Look at
Bank Loans, High Yield Bonds and Emerging Market Debt, Viewpoint
(Sept. 2014) (``Who Owns the Assets?''), available at https://www.blackrock.com/corporate/en-fi/literature/whitepaper/viewpoint-closer-look-selected-asset-classes-sept2014.pdf (discussing the
liquidity characteristics of high-yield bond funds in depth, and
noting that these funds have weathered multiple market environments,
and are generally managed with multiple sources of liquidity).
    \407\ See, e.g., Comment Letter of the Global Foreign Exchange
Division to the European Commission and the European Securities and
Markets Authority re: Consistent Regulatory Treatment for Incidental
Foreign Exchange (FX) Transactions Related to Foreign Securities
Settlement--``FX Security Conversions'' (Mar. 25, 2014), available
at www.gfma.org/Initiatives/Foreign-Exchange-(FX)/GFMA-FX-Division-
Submits-Comments-to-the-HKMA-on-the--Treatment-of-Securities-
Conversion-Transactions-under-the-Margin-and-Other-Risk-Mitigation-
Standards (``Typically, the settlement cycle for most non-EUR
denominated securities is trade date plus three days (`T+3').
Accordingly, the bank custodian or broker-dealer would enter into a
FX transaction on a T+3 basis as well. In some securities markets,
for example in South Africa, the settlement cycle can take up to
seven days (T+7).''). But see Who Owns the Assets?, supra footnote
406 (noting that emerging market debt funds tend to hold a portion
of their assets in developed market government bonds (providing
further liquidity), generally establish limits on less liquid
issuers, and generally maintain allocations to cash for liquidity
and rebalancing purposes).
    \408\ See Proposing Release, supra footnote 6, at nn.71-72 and
accompanying text.
    \409\ DERA Study, supra footnote 385, at 16-24.
---------------------------------------------------------------------------

    One commenter has argued that flow volatility, which staff
economists have used as a measure of liquidity risk, does not
necessarily translate into liquidity risk.\410\ While we agree that
flow volatility is not the sole determinant of liquidity risk for a
fund, flow volatility reflects flows out of and into funds and hence is
associated with transactions in fund investment assets, which can
dilute non-transacting shareholders' interest.
---------------------------------------------------------------------------

    \410\ Comment Letter of Investment Company Institute (May 17,
2016).
---------------------------------------------------------------------------

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

    Taking into account the goals of the final swing pricing
regulations and the economic baseline, as discussed above, this section
discusses the benefits and costs of the swing pricing regulations, as
well as the potential effects of the swing pricing regulations on
efficiency, competition, and capital formation. This section also
discusses the disclosure,

reporting, and recordkeeping requirements regarding swing pricing and
reasonable alternatives to rule 22c-1(a)(3).
1. Requirements of Rule 22c-1(a)(3)
    Under rule 22c-1(a)(3), a fund (with the exception of a money
market fund or ETF) would be permitted to establish and implement swing
pricing policies and procedures that would, under certain
circumstances, require the fund to use swing pricing to adjust its
current NAV as an additional tool to lessen potential dilution of the
value of outstanding redeemable securities caused by shareholder
purchase or redemption activity. In order to use swing pricing under
the rule, a fund would be required to establish and implement swing
pricing policies and procedures.\411\ These policies and procedures
must: (i) Provide that the fund will adjust its NAV by amounts
designated as the ``swing factor(s)'' once the level of net purchases
or net redemptions from the fund has exceeded specified strictly
positive percentage(s) of the fund's net asset value known as the
``swing threshold(s)''; \412\ (ii) specify the process for how the
fund's swing threshold(s) are determined, considering certain specified
factors; \413\ and (iii) specify the process for how the swing
factor(s) are determined, which must include the establishment of an
upper limit on the swing factor(s) used, taking into account certain
considerations and not exceeding a maximum of two percent of the fund's
NAV per share.\414\
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    \411\ Proposed rule 22c-1(a)(3)(i).
    \412\ Rule 22c-1(a)(3)(i)(A).
    \413\ Rule 22c-1(a)(3)(i)(B).
    \414\ Rule 22c-1(a)(3)(i)(C).
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    A fund's board, including a majority of the fund's independent
directors, will be required to approve the fund's swing pricing
policies and procedures, which policies and procedures must specify the
process for setting swing thresholds, swing factor(s), and swing factor
upper limits.\415\ In addition, the board must approve the fund's swing
threshold(s) and swing factor upper limit (including any changes
thereto).\416\ The board also will be required to designate the fund's
investment adviser or officers responsible for administration of the
fund's swing pricing policies and procedures.\417\ Additionally, the
board will be required to review, no less frequently than annually, a
written report prepared by the swing pricing administrator that
describes: (i) Its 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; (ii) any material changes
to the fund's swing pricing policies and procedures since the date of
the last report; and (iii) its 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.\418\
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    \415\ Rule 22c-1(a)(3)(ii)(A).
    \416\ Rule 22c-1(a)(3)(ii)(B).
    \417\ Rule 22c-1(a)(3)(ii)(C).
    \418\ Rule 22c-1(a)(3)(ii)(D).
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    A fund that adopts swing pricing policies and procedures will be
required to keep certain records, including its swing pricing policies
and procedures and a written copy of the periodic report provided to
the board,\419\ as well as records of support for each computation of
an adjustment to the fund's NAV based on the fund's swing pricing
policies and procedures.\420\ A fund that engages in swing pricing will
be required to make certain disclosures, including disclosure of the
fund's swing factor upper limit, on Form N-1A and Form N-CEN.\421\ A
fund that uses swing pricing will also be required to reflect its use
of swing pricing in its financial statements and on Form N-1A.\422\
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    \419\ Rule 22c-1(a)(3)(iii).
    \420\ Amendment to rule 31a-2(a)(2).
    \421\ See Item 4(b)(2)(ii), Item 4(b)(2)(iv)(E), and Item 6(d)
of Form N-1A; Item C.21 of Form N-CEN.
    \422\ See Item 13 of Form N-1A and amendments to Regulation S-X.
---------------------------------------------------------------------------

    The final rule modifies the proposal's swing pricing provisions in
several ways that may have economic consequences, including: (1) Funds
may establish multiple swing thresholds, each with a separate
corresponding swing factor, and these factors can differ for
subscriptions and redemptions; (2) a fund's board is still required to
approve the fund's swing pricing policies and procedures, but the final
rule also requires that the policies and procedures specify the process
for determining a swing threshold(s), factor(s), and swing factor upper
limit; (3) funds must report the upper limit of the swing factor(s)--
but not swing factor(s) or threshold(s)--on Form N-CEN and in their
prospectus, along with disclosure of the effects of swing pricing; (4)
the fund board must approve the fund's swing threshold(s) and an upper
limit on the swing factor(s) that are used by a fund (which may not
exceed two percent of NAV per share), and any changes to the swing
threshold or swing factor upper limit; and (5) the board must
periodically review a written report from the swing pricing
administrator that describes: (a) 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; (b) any material changes to the fund's
swing pricing policies and procedures since the date of the last
report; and (c) 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.
a. Benefits
    We believe rule 22c-1(a)(3) will promote investor protection by
providing funds with a tool to reduce the potentially dilutive effects
of shareholder purchase or redemption activity. Rule 22c-1 under the
Investment Company Act, the ``forward pricing'' rule, requires a fund
to price its shares based on the current market prices of its portfolio
assets next computed after receipt of an order to buy or redeem
shares.\423\ Swing pricing may allow funds to more fairly distribute
transactions costs, resulting from either subscriptions or redemptions,
to the investors who initiate those transactions. For example, net
redemptions may require a fund to sell a portion of its assets. Any
difference between the sale price of these assets (which may occur on
or after the redemption date depending on when fund flows are received)
and the price at which they are valued when the fund's NAV is struck on
the redemption date (which may not yet reflect transactions executed on
that date under rule 2a-4) is shared across all fund shareholders. Non-
transacting shareholders may benefit or suffer depending on this
difference, but on average are likely to experience dilution because of
the trading costs incurred when assets are sold. Similarly, while net
subscriptions do not require a fund to purchase assets immediately,
non-transacting shareholders will share the costs of investing the
subscription proceeds if and when that occurs, and these costs will not
be reflected in the NAV on the subscription date.
---------------------------------------------------------------------------

    \423\ See rule 22c-1(a).
---------------------------------------------------------------------------

    While swing pricing does not eliminate non-transacting investors'
exposure to this dilution risk--for example, it is possible the swung
adjusted NAV on a given day under or overestimates the costs incurred
by the fund, or that the fund would not be able to swing in an amount
sufficient to recoup all transactions costs because of

the swing factor upper limit, or that costs related to redemptions or
subscriptions other than the costs permitted to be considered in
setting the swing factor are incurred--to the extent that funds are
able to effectively calibrate their swing factors, non-transacting
investors should, on average, pay a reduced share of the trading costs
imposed on the fund by redeeming and subscribing investors on days when
swing pricing is triggered. Swing pricing provides funds with an
additional tool to pass estimated near-term costs stemming from
shareholder purchase or redemption activity on to the shareholders
associated with that activity, and could therefore lessen dilution of
non-transacting shareholders and limit any possible redemptions
motivated by a potential first-mover advantage.
    Commission rules and guidance do not currently address the ability
of a fund to use swing pricing to mitigate potential dilution of fund
shareholders, and the Commission's current valuation guidance could
raise questions about making such a NAV adjustment. The swing pricing
rule provides the regulatory framework that a fund can optionally apply
to adjust its NAV in order to effectively pass on estimated trading
costs to purchasing or redeeming shareholders, and requires a fund that
conducts swing pricing to do so in accordance with policies,
procedures, and other restrictions designed to promote all
shareholders' interests. Because we cannot prospectively measure the
extent to which the swing pricing policies and procedures that a fund
may adopt would mitigate potential dilution, we are unable to quantify
the total potential benefits discussed in this section.\424\ However,
analysis by fund groups of their funds domiciled in regions that allow
swing pricing indicates that return performance is significantly
improved for funds that use swing pricing,\425\ which is consistent
with a reduction in dilution, though some commenters did point out that
swing pricing can lead to an improvement in fund performance even if
the swing pricing policy is unrelated to costs incurred by the
fund.\426\
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    \424\ There is no database currently available that identifies
whether a foreign-domiciled fund uses swing pricing or the structure
of a fund's swing pricing program (e.g., full swing pricing versus
partial swing pricing).
    \425\ See BlackRock Fund Structures Paper, supra footnote 46.
The study does not show the extent to which the costs assessed to
transacting investors via swing pricing accurately reflect realized
trading costs.
    \426\ Eaton Vance Comment Letter.
---------------------------------------------------------------------------

    Relative to the proposal, the final rule's additional flexibility
in defining swing pricing policies--the options to employ multiple
swing thresholds with attendant swing factors--should allow a fund to
more accurately reflect its estimated trading costs when the fund
chooses to swing its NAV, and may encourage funds that otherwise would
not have employed swing pricing to use it, potentially reducing
investor dilution further.
    Requiring the fund to set an upper limit (which may not exceed two
percent of NAV per share) on the swing factor(s), as the final rule
does, could reduce the benefits of swing pricing to non-transacting
investors in that funds are less able to use swing pricing to
reallocate all of the costs of transactions to redeeming or subscribing
shareholders, because costs would exceed the upper limit. However,
transacting investors could benefit from an upper limit (and the
required disclosure of an upper limit), in that there would be a
maximum cost that they could face were they to purchase or redeem
shares on a day when the fund swings its NAV and hence reduce some of
the uncertainty when making the decision to enter or exit a fund.
    The final rule's limitation on the types of costs that can be
considered in setting a swing factor has similar trade-offs: The
benefits of swing pricing to non-transacting shareholders are
constrained, given that certain costs that are incurred as a result of
the redemption or subscription activity could not be allocated to
transacting investors. However, transacting shareholders could benefit
from the limitation, in that the fund would have less flexibility to
allocate to transacting investors costs that are less directly related
to the fund's actual transaction costs. Constraining a fund's
flexibility in this manner could limit potential abusive uses of swing
pricing (e.g., swinging in an amount greater than the costs of
redemptions or subscriptions in order to artificially enhance fund
returns). The final rule's express requirement that the swing factor
reasonably relate to the cost of meeting subscriptions or redemptions
could similarly help protect transacting investors against potential
abusive uses of swing pricing.
    Finally, investors should benefit from the increased accountability
that the final rule provides in requiring a fund's board to approve
swing pricing policies and procedures, approve the fund's swing factor
upper limit (which may not exceed two percent of NAV per share),
approve the fund's swing threshold(s), and approve any changes to a
fund's swing factor upper limit or swing threshold(s). The final rule
also requires the fund board to periodically review a written report
from the swing pricing administrator describing: (i) Its review of the
adequacy of the swing pricing policies and procedures and the
effectiveness of their implementation, including the impact on
mitigating dilution; (ii) any material changes to the fund's swing
pricing policies and procedures since the date of the last report; and
(iii) its 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. Given that our rule permits the use of swing pricing
for the first time in the U.S., additional board attention to the
fund's swing pricing practices could be beneficial. Similarly, board
review of a report that reviews and assesses 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, could raise the quality and rigor of
funds' formulating these important determinations, which also benefits
investors.
    Commenters generally agreed with the proposal's assessment of swing
pricing's potential benefits, but they also brought up technological
and operational hurdles that could impede its implementation by most
funds, which we discuss below. Without a change in industry practice,
the operational issues cited by commenters may prevent the benefits of
swing pricing from being achieved by some funds, but it is still likely
that a small fraction of funds will be able to implement it, and the
rule does not require funds to use swing pricing (it is a discretionary
tool). Additionally, sufficiently high investor demand for implementing
swing pricing after the rule is adopted may spur market-wide
operational innovations which reduce these operational hurdles.
    One commenter stated that the nature by which swing pricing
reallocates costs was a ``zero-sum game'' across different investors
(subscribing, redeeming, and non-transacting) and that in aggregate
swing pricing reduces shareholder value after incurring the costs of
operating the policy.\427\ While it is true that swing pricing does
transfer costs across different investors, the goal of swing pricing is
to allow for a more fair allocation of these costs. Swing pricing is
optional, so funds can decide whether a more fair allocation of costs
justifies

the operational costs associated with implementing swing pricing. The
same commenter also suggested that depending on the ratio of purchases
to redemptions for a given net fund flow, swing pricing does not allow
non-transacting shareholders to capture all of the proceeds recovered
from transacting shareholders when the NAV is swung, and shows using
its own historical fund flows that this reduction can be significant
(ranging as high as 91% when a swing threshold of zero was used). We
acknowledge that swing pricing may not allow all of the costs assessed
to transacting shareholders to be returned to the fund, though any
reallocation of costs from transacting to non-transacting shareholders
reduces dilution. Because swing pricing is optional, funds can
determine whether this type of benefit reduction is likely given their
historical fund flow patterns and whether the net reduction in
shareholder dilution is expected to justify the costs of implementing
swing pricing.
---------------------------------------------------------------------------

    \427\ Eaton Vance Comment Letter.
---------------------------------------------------------------------------

b. Costs
    Generally, implementing swing pricing may increase a fund's return
volatility and could increase the tracking error relative to a fund's
benchmark. However, the impact of swing pricing on volatility and
tracking error should decrease as a function of the time over which
returns and tracking errors are measured: For example, the impact of
swing pricing on daily return volatility and tracking error will likely
be much greater than the impact on monthly volatility and tracking
error. Enabling funds to have multiple swing thresholds and factors, as
well as limiting swing factors to be at most 2% of the funds NAV, also
potentially lessens swing pricing's impact on volatility and tracking
error.
    In addition, swing pricing exposes transacting investors to
additional uncertainty about the price at which their fund shares will
ultimately be purchased or redeemed relative to the economic baseline.
For example, under existing regulations, investors who submit purchase
or redemption orders on a given date face uncertainty about the price
they will transact at until the NAV is next struck. Under the adopted
rule, investors face an additional source of uncertainty surrounding
the eventual price they will transact at because this price will also
depend on net fund flows on the trade date and any resultant NAV
adjustment via swing pricing protocols. They may end up transacting at
a better (e.g., if they are subscribing on a day the NAV is adjusted
downwards) or worse (e.g., if they are redeeming on a day the NAV is
adjusted downwards) price, but they are facing an additional source of
uncertainty relative to current practices. This uncertainty is limited
in that investors will know the fund's swing factor upper limit.
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 and will not be required to disclose
under the rule.
    If a fund's swing threshold(s) and factor(s) are accurately
calibrated to reflect the costs incurred as a result of significant net
subscriptions and redemptions, the increased execution price risk faced
by investors who transact in a fund should be offset by a decrease in
the dilution that non-transacting investors would otherwise face if the
fund's NAV was never adjusted. The rule's limitation on a swing
factor's maximum size may reduce the extent to which funds that face
higher trading costs are able to reflect those costs in their swing
factor(s), but it also reduces the execution risk faced by investors
who transact in these funds. We acknowledge commenter concerns that
estimating the trading costs associated with various redemption levels
is not trivial, and swing pricing programs are unlikely to anticipate
trading costs perfectly, so a given fund's swing factor may overstate
or understate the expected transaction costs associated with a given
transaction.\428\ For example, the rule requires a fund to apply a
swing factor when its net flows cross a certain threshold, but the
actual costs to be incurred will vary with other factors such as the
fund's portfolio on the date the NAV is swung, the trades they decide
to execute to meet a given redemption, or any macroeconomic factors
that affect bid-ask spreads. If a swing factor underestimates or is
unable to capture the true trading costs for a fund, non-transacting
shareholders of the fund will still benefit from swing pricing, but to
a lesser extent. If a fund overestimates its swing factor, non-
transacting shareholders will be enriched by its swing pricing program
(and the fund's NAV will reflect it), but this increase in wealth will
be at the expense of transacting shareholders, who are paying more than
the true cost of their transactions. To the extent that a fund cannot
perfectly estimate the swing factors appropriate for it, the fund may
have an incentive to overestimate these factors because it will
increase observed fund performance. Given the limited swing pricing
disclosures a fund must make, it may also be difficult for investors to
determine if the swing factor has charged them in excess of true
trading costs, and may make it difficult for investors to disentangle
true fund performance from swing pricing effects.
---------------------------------------------------------------------------

    \428\ Eaton Vance Comment Letter.
---------------------------------------------------------------------------

    Several of the provisions of the final rule could mitigate any
incentive a fund has to overestimate its swing factor: (i) Requiring
board approval of a fund's swing pricing policies and procedures, which
must specify the processes used to determine the swing threshold(s),
swing factor(s), and swing factor upper limit; (ii) requiring board
approval of the swing threshold(s) and swing factor upper limit, as
well as any changes to these quantities; (iii) adding an express
requirement that swing factors be reasonably related to the near-term
costs resulting from subscriptions and redemptions and limiting the
near-term costs that may be considered in determining the swing
factor(s); (iv) requiring the establishment of an upper limit on the
swing factor(s) used, which may not exceed two percent of NAV per
share; (v) requiring that the investment adviser, officer, or officers
responsible for administrating a fund's swing pricing policies and
procedures must be reasonably segregated from portfolio management of
the fund, and may not include portfolio managers; and (vi) requiring
the board to periodically review a written report prepared by the swing
pricing administrator that describes: (a) Its 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;
(b) any material changes to the fund's swing pricing policies and
procedures since the date of the last report; and (c) its 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.
    Each fund that chooses to adopt swing pricing policies and
procedures pursuant to rule 22c-1(a)(3) will incur one-time costs to
develop and implement the policies and procedures, as well as ongoing
costs relating to administration of the policies and procedures, as
will intermediaries and third party service providers. To the extent
that fund advisers, intermediaries, and other service providers are
able to pass their costs along to funds, we believe it is likely that
these costs will also be passed on,

at least in part, to fund investors.\429\ As discussed above, while
U.S. registered funds do not currently use swing pricing to mitigate
potential dilution, certain foreign funds affiliated with U.S. fund
families currently do use swing pricing.\430\ In the proposal, we
stated that U.S. registered funds in fund complexes that also include
foreign-domiciled funds that use swing pricing may incur relatively
lower costs to implement swing pricing policies and procedures pursuant
to the rule. However, several commenters pointed out that fundamental
differences exist between fund operations in the U.S. and Europe,
including the more timely arrival of flow information in Europe due to
earlier trading cut-off times, a higher portion of direct-sold funds in
Europe, and the more prevalent use of currency-based orders in Europe
(which removes the need for flow estimation cycles).\431\ We
acknowledge that these differences mean that it is less likely funds
will be able to leverage preexisting systems from other jurisdictions,
though they may still be able to leverage their general expertise with
swing pricing in other countries in developing appropriate policies and
procedures. They are still likely to face the same operational hurdles
as other funds in obtaining timely fund flow information in the U.S.
---------------------------------------------------------------------------

    \429\ Commenters suggested this as well, see BlackRock Comment
Letter; GARP Comment Letter; Charles Schwab Comment Letter.
    \430\ See supra section II.A.1.
    \431\ See, e.g., ICI Comment Letter I; T. Rowe Comment Letter;
IDC Comment Letter; PIMCO Comment Letter; GARP Comment Letter;
Blackrock Comment Letter; Invesco Comment Letter.
---------------------------------------------------------------------------

    Commenters also expressed concern that the analysis of costs did
not consider the substantial costs and technology and operational
hurdles that must be resolved for intermediaries to provide the net
flow information necessary to perform swing pricing.\432\ We agree that
there may be significant costs for many fund complexes and
intermediaries to implement swing pricing and have revised our
estimates of the implementation costs discussed below to incorporate
commenter suggestions. At the same time, commenters also suggested ways
that funds, intermediaries, and other third parties could coordinate to
make the implementation of swing pricing feasible, and stated that they
believed the long-term benefits of swing pricing outweighed the one-
time costs of enabling swing pricing in the U.S.\433\
---------------------------------------------------------------------------

    \432\ Dechert Comment Letter; Eaton Vance Comment Letter; ICI
Comment Letter I; IDC Comment Letter; Invesco Comment Letter; J.P.
Morgan Comment Letter; Charles Schwab Comment Letter; T. Rowe
Comment Letter.
    \433\ See, e.g., GARP Comment Letter.
---------------------------------------------------------------------------

    The final rule's swing pricing provisions are being adopted with a
two-year extended effective date, which, as discussed above, several
commenters requested. With respect to costs, the extended effective
date may result in more efficient industry-wide approaches to providing
funds with timely flow estimates in determining whether and by how much
their NAVs will be adjusted on a given date. For example, if funds and
intermediaries are able to coordinate with each other to develop
standards and timing conventions for how data is transmitted to enable
the timely estimation of flows instead of developing ad-hoc individual
processes, the aggregate costs of implementing swing pricing are likely
to be lower on a per fund basis. However, to the extent individual
funds or intermediaries do not participate on a coordinated approach,
progress on a more efficient collective solution to swing pricing's
operational challenges may be hindered and the extended effective date
may simply postpone the adoption of swing pricing relative to an
immediate effective date. On the other hand, if swing pricing were made
effective immediately and a significant portion of funds wanted to
adopt it, market pressures could spur industry-wide solutions and
innovations that reduce implementation costs and make swing pricing
operationally feasible for a broader group of funds.
    The costs of implementing swing pricing policies and procedures
could vary depending on the level of liquidity risk facing the fund, as
well as the sources of the fund's liquidity risk. To determine a fund's
swing threshold, rule 22c-1(a)(3) would require a fund to consider
certain of the factors required to be considered as part of the
liquidity risk assessment required under rule 22e-4.\434\ Therefore,
the costs associated with developing policies and procedures for
determining the swing threshold could also vary according to similar
factors that could cause differences in the costs to funds associated
with rule 22e-4.\435\
---------------------------------------------------------------------------

    \434\ See rule 22c-1(a)(3)(i)(B). Specifically, the requirement
for a fund to consider: (i) The size, frequency, and volatility of
historical net purchases and net redemptions of fund shares during
normal and stressed periods, (ii) the fund's investment strategy and
the liquidity of the fund's portfolio investments, and (iii) the
fund's holdings of cash and cash equivalents, and borrowing
arrangements and other funding sources overlap with certain of the
proposed liquidity risk assessment factors. See rule 22e-
4(b)(iii)(A), (B), and (D). See also Liquidity Risk Management
Programs Adopting Release, supra footnote 8, at section III.B.
    \435\ See Liquidity Risk Management Programs Adopting Release,
supra footnote 8, at section IV.C.1.c.
---------------------------------------------------------------------------

    As noted above, commenters suggested the proposal underestimated
the activities required for a fund, in conjunction with its
intermediaries, to implement swing pricing. We acknowledge that the
adoption of swing pricing could cause significant costs to be incurred
by intermediaries (which are discussed below) and by funds in terms of
the systems and processes they need to develop to receive timely flow
data from intermediaries. A fund that adopts swing pricing will incur
costs associated with the following activities: (i) Developing swing
pricing policies and procedures that include all of the elements
required under the rule,\436\ as well as policies and procedures
relating to the recordkeeping requirements associated with swing
pricing; \437\ (ii) planning, coding, testing, and installing any
system modifications for receiving, estimating, aggregating and
transmitting sufficient shareholder flow information for the fund's
transfer agent and pricing agent, in order to determine if the fund's
NAV should be adjusted pursuant to the fund's swing pricing policies
and procedures; (iii) integrating and implementing the fund's swing
pricing policies and procedures, as well as policies and procedures
relating to the financial reporting and recordkeeping requirements
associated with swing pricing; (iv) developing any relevant compliance,
control and testing procedures; (v) establishing procedures for the
periodic review and back-testing of swing threshold(s), swing
factor(s), swing factor upper limit, and flow estimates; (vi) preparing
training materials and administering training sessions for staff in
affected areas; (vii) board approval of the fund's swing pricing
policies and procedures, which specify the processes used to determine
the swing threshold(s), swing factor(s), and swing factor upper limit;
(viii) board approval of the fund's swing threshold(s) and swing factor
upper limit, and any changes to the swing threshold(s) and swing factor
upper limit; and (ix) board periodic review of the written report
prepared by the swing pricing administrator.
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    \436\ Rule 22c-1(a)(3)(i).
    \437\ Rule 22c-1(a)(3)(iii); rule 31a-2(a)(2).
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    The proposal estimated the one-time costs of implementing a swing
pricing program as being in the range of $1.3 million to $2.25 million
per fund complex by assuming costs were similar to those associated
with the fees and

gates provision of the Commission's 2014 money market reform rule. The
only alternative estimate of swing pricing implementation costs came
from a commenter who stated that its experience complying with the
money market reform rule suggested those estimates were severely
understated, and that it believed that implementing a swing pricing
program would be four to five times more costly than the proposal's
estimate.\438\ We extrapolate from this commenter's estimate to obtain
estimates for all fund complexes, producing estimated one-time costs
ranging from $2.4 million to $48.5 million per fund complex to
implement swing pricing, with an average cost per fund complex of $3.4
million.\439\ These costs estimates should be considered an upper bound
for two reasons: (1) They assume a fund complex implements swing
pricing for all of its funds; (2) they assume a fund develops all
systems and processes associated with swing pricing in-house, but if
third-party solutions become available funds may be able to reduce some
of their swing pricing implementation costs.
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    \438\ Charles Schwab Comment Letter.
    \439\ The commenter, Charles Schwab Investment Management, has
52 funds. A multiple of 4-5 times the proposals estimate produces a
range of $5.2 million to $11.25 million, and we assume the
commenter's costs are in the middle of that range at $8 million.
Assuming a fixed cost of 30%, and that costs beyond that scale with
the number of funds, we arrive at an estimated one-time costs for
each fund complex, and calculate the minimum, maximum, and average
across those fund complexes.
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    In the proposal, we estimated that the ongoing costs of adopting a
swing policy would range from 5% to 15% of the one-time costs. We
recognize that, relative to our discussion of costs in the proposal,
funds will have to maintain substantial systems and procedures to
estimate fund flows, and believe it's reasonable to increase this range
from 5% to 32.5%.\440\ Again using the fund-by-fund cost approach above
based on a commenter's estimate of the one-time costs, we estimate that
ongoing costs to fund complexes would range from $120,000 to $15.8
million, with the average fund having costs in the range of $170,000 to
$1.1 million. The low end of the range might be achieved by small
complexes that are direct-sold, whereas the high end of the range could
correspond to very large fund complexes that primarily distribute their
funds through a wide variety of intermediaries and use swing pricing
for many of their funds. These estimated costs are attributable to the
following activities, as applicable to each of the funds within the
complex that adopts swing pricing policies and procedures: (i) Costs
associated with monitoring whether the fund's net purchases or net
redemptions cross the swing threshold (which could include costs
associated with obtaining shareholder flows from its transfer agent,
including sufficient information on flows from the funds
intermediaries, in order to reasonably estimate its daily net flows)
(implicated by rule 22c-1(a)(3)(i)(A)); (ii) adjusting the fund's NAV
when the fund's net purchases or net redemptions cross the swing
thresholds, including costs associated with determining the swing
factors that would be used to adjust the fund's NAV when the fund's
swing thresholds are exceeded (rule 22c-1(a)(3)(i)(A), rule 22c-
1(a)(3)(i)(C)); (iii) periodic 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, as well as
periodic review of fund's swing threshold(s), swing factor(s) and swing
factor upper limit, and related board reporting requirements (rule 22c-
1(a)(3)(ii)(D)); (iv) systems maintenance; (v) compliance costs and the
back-testing of flow estimation procedures; (vi) additional staff
training; and (vii) recordkeeping (rule 22c-1(a)(3)(iii), amendments to
rule 31a-2(a)(2)).\441\ Funds would also incur costs if they began
distributing their fund through new intermediaries, as they would need
to integrate that intermediary into the systems used to determine if
fund flows have exceeded a swing threshold. We note that for purposes
of our PRA analysis, we estimate that, relative to the proposal, half
as many fund complexes (84 fund complexes) will implement swing
pricing.\442\ Based on this estimate and our estimate of the average
per fund complex cost above, we estimate that the aggregate cost to
implement swing pricing will be $286 million.\443\
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    \440\ See Invesco Comment Letter. The commenter estimated that
the asset classification requirement of proposed rule 22e-4 would
involve one-time costs of $2 million and ongoing costs of $650,000.
This ongoing cost estimate represents 32.5% of the one-time cost
estimate associated with that proposed requirement. See also
Investment Company Liquidity Risk Management Programs, supra
footnote 8, at n. 1097 and surrounding discussion. We assume swing
pricing programs will, at the high end, involve on-going costs that
are the same proportion of one-time costs (32.5%).
    \441\ We anticipate that, depending on the personnel (and/or
third-party service providers) involved in the activities associated
with administering a fund's swing pricing policies and procedures,
certain of the estimated ongoing costs associated with these
activities could be borne by the fund, and others could be borne by
the adviser.
    \442\ See infra footnote 489 and surrounding discussion
regarding the revision to the number of funds expected to implement
swing pricing in the PRA analysis.
    \443\ See supra footnote 439 and surrounding discussion
regarding cost estimates on a per fund complex basis. The aggregate
cost is estimated as 84 fund complexes x $3.4 million = $286
million.
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    While the proposal incorporated the costs to intermediaries and
other third-party service providers into its estimates at the fund
complex level, we recognize, based on the operational issues raised by
commenters, that these parties will incur significant separate costs to
make swing pricing feasible. Specifically, new processes and procedures
will need to be established across a wide variety of intermediaries and
service providers to gather and transmit sufficient flow information
prior to the striking of the fund's NAV. Costs will be incurred by fund
transfer agents, pricing agents, intermediaries and service providers
to facilitate the movement of flow data to funds earlier in the
evening. This will include new estimated flow data that will need to be
generated by retirement plans and third-party administrators as
intermediaries that will likely be sent via new files and processing
cycles through the NSCC. Further changes to transaction processing and
nightly processing may occur if the delivery of fund NAVs is pushed to
later in the evening to accommodate swing pricing. Compressing
processing times could increase risk and costs if there is less time
for intermediaries to confirm transactions with funds and update
shareholder records on a timely basis.
    Commenters did not provide estimates for the costs that swing
pricing will cause intermediaries to incur, which are likely to vary
widely depending on the specific role each intermediary plays in the
process of providing funds with the flow information swing pricing
policies are dependent upon. For example, a small retirement plan that
only needs to transmit data in a more timely fashion as a result of
swing pricing might incur one-time costs in the tens of thousands of
dollars to upgrade its systems, while a central fund transaction
processing utility such as the NSCC might incur costs similar in
magnitude to the largest fund complexes (in the tens of millions of
dollars) to build systems that reliably process flow data for a broad
range of their participants. Intermediaries such as broker-dealers and
retirement plan administrators that use the services of the utility may
incur costs in the middle of this range (in the hundreds of thousands
to the millions of dollars) to enable the processing of flow data from
any smaller intermediaries or clients they service in addition to any
share of

NSCC costs they pay.\444\ Similarly, we would expect ongoing costs for
a given entity to be a percentage of the entity's one-time costs, in
the range of 10% to 25%.\445\ To the extent intermediaries are able to
pass on these costs to funds, it is likely that investors will
ultimately pay some share of the expenses intermediaries incur in the
form of higher operating expenses or management fees. Given these
additional costs, each fund will need to determine whether the higher
operational costs of swing pricing--including both external costs
passed on from intermediaries and internal costs associated with their
own systems, policies, and procedures--are justified by swing pricing's
anti-dilutive benefits.
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    \444\ The low end of this estimate, which is more likely to
apply to broker-dealers than retirement plan administrators, is of
the same order of magnitude as the costs to intermediaries
associated with processing and reporting transactions in other SEC
rulemakings. See, e.g. Regulation SBSR--Reporting and Dissemination
of Security-Based Swap Information, Exchange Act Release No. 74245
(Feb. 11, 2015) [80 FR 14739 (Mar. 19, 2015)] (estimating the one-
time costs for trade execution platforms and registered clearing
agencies to develop transaction processing systems and report
transaction-level information to swap data repositories).
    \445\ There could also be additional costs incurred by more
ancillary parties. For example, data providers that disseminate or
third parties that analyze fund NAV may have to update their
operations.
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    Commenters also emphasized that those costs went beyond needing to
create systems, policies, and procedures. They suggested that total
costs include potential damage to investors, investment advisers, and
service providers that would occur if operational requirements are not
able to be effectively implemented because of current practices in the
U.S. fund market.\446\ We recognize that if funds use inaccurate
estimates of daily flows because actual values are not available before
funds must strike their NAV, then a fund may swing its price
unnecessarily or fail to swing its price when necessary. Under the
final rule, a fund is required to ``reasonably estimate whether it has
crossed the swing threshold with high confidence,'' which should reduce
the probability that a fund swings its NAV based on inaccurate flow
information and, in cases where this does happen, does not require the
fund to consider it a NAV error as long as the flow estimates used were
of ``high confidence.''
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    \446\ Dechert Comment Letter; Federated Comment Letter; ICI
Comment Letter I; IDC Comment Letter; J.P. Morgan Comment Letter.
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    Relative to the proposal, the final rule also changes the role of a
fund's board in its oversight of any swing pricing program. Under the
final rule, the board is required to approve the swing pricing policies
and procedures, which must specify the process for determining swing
threshold(s), swing factor(s) and their upper limits, but is not
required to approve all material changes to the fund's swing pricing
policies and procedures. The fund board is also required to approve a
fund's swing factor upper limit and its swing threshold(s). In order to
facilitate these obligations, the final rule also requires the board to
periodically review a written report prepared by the swing pricing
administrator that includes certain required information. The revised
cost estimates above use a commenter's cost estimates of adopting swing
pricing under the proposal, which we assume included the board's
obligations to approve swing threshold(s), any swing factor upper
limit, swing pricing policies and procedures, and any material changes
to those policies and procedures. The final rule's inclusion of a
requirement that the fund's board periodically review a written report
from the swing pricing administrator will impose certain additional
costs: (i) The costs incurred by the administrator in performing the
analysis underlying the written report, including a review of the
reasonableness of the swing threshold(s), swing factor(s), and upper
limit; (ii) the cost of preparing the report itself; and (iii) the cost
of the board's time to review the written report. While these
activities are more explicitly required by the final rule, some of
their associated costs, such as those associated with any analysis and
document preparation as part of the proposal's periodic review
requirements, as well as any time associated with board review of
material changes, would have been incurred under the proposal. In
addition, the final rule does not require board approval of all
material changes to a fund's swing pricing policies and procedures,
reducing costs relative to the proposal. On balance, we therefore
believe that the revised costs estimates of the proposal above, which
incorporate commenter feedback, are still reasonable estimates of the
final rule's costs.
c. Effects on Efficiency, Competition, and Capital Formation
    Rule 22c-1(a)(3) permits a fund, under certain circumstances, to
adjust its NAV to effectively pass on the estimated costs stemming from
shareholder purchase or redemption activity to the shareholders
associated with that activity. Adjusting a fund's NAV in this way could
reduce dilution to non-transacting shareholders arising from trading
costs. We therefore believe that the rule could increase the efficiency
of cost allocation among shareholders of funds that adopt swing pricing
policies and procedures, provided that a fund's swing thresholds and
swing factors are appropriately calculated.
    If investors believe swing pricing to be valuable, funds that
decide to implement swing pricing will be at a competitive advantage.
Fund complexes currently using swing pricing in other jurisdictions may
be at a slight advantage due to their familiarity with swing pricing
procedures, but, as noted above, they will still face the same
operational hurdles as other funds in obtaining timely fund flow
information in the U.S. Similarly, funds that are predominantly sold
directly or primarily through an affiliated broker-dealer may not be as
impacted by these operational difficulties, and may be able to
implement swing pricing more quickly. In addition, some funds may
decide to forgo using swing pricing due to concerns that some
intermediaries will not offer their funds due to the increased
operational burden swing pricing places on those intermediaries.
    The extended effective date reduces these competitive effects and
provides funds not currently using swing pricing in other jurisdictions
and funds that are not sold directly sufficient time to develop and
implement their own swing pricing programs in conjunction with any
broad industry efforts to provide fund flow data on a timely basis.
Alternatively, if the rule's swing pricing provisions became effective
immediately, while some funds would have an initial competitive
advantage, if a significant portion of funds wanted to adopt swing
pricing, market pressures could spur innovations that made swing
pricing feasible for a broader groups of funds. We are unable to assess
the relative likelihoods of these two potential outcomes.
    Commenters also suggested that smaller fund complexes are less
likely to have the resources necessary to implement swing pricing, may
have less leverage in obtaining flow information from their
distribution partners, and that if investors prefer funds that use
swing pricing, smaller fund complexes would be at a competitive
disadvantage.\447\ We acknowledge that small funds (as well as other
types of funds such as those that are not primarily sold directly or
through an affiliated broker-dealer) may be at an

initial disadvantage, and note that the delayed extended effective date
should provide some fund complexes sufficient time and resources to
overcome their initial competitive disadvantage before any fund can
actually use swing pricing. For example, the extended effective date
could provide third parties with time to develop tools to help smaller
fund complexes perform swing pricing. However, it is possible that some
fund complexes will not be able to effectively implement swing pricing,
and to the extent investors prefer funds that use swing pricing, those
fund complexes will be at a competitive disadvantage.
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    \447\ Dechert Comment Letter; ICI Comment Letter I; IDC Comment
Letter; Charles Schwab Comment Letter; T. Rowe Comment Letter.
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    We anticipate that rule 22c-1(a)(3) could indirectly foster capital
formation by bolstering investor confidence. Investors may be more
inclined to invest in funds if they understand that funds will be able
to use swing pricing to prevent the purchase or redemption activity of
certain investors from diluting the interests of other investors
(particularly long-term investors, who represent the majority of fund
shareholders). To the extent that swing pricing increases investment
returns to investors, particularly long-term investors, this could
incentivize investment in funds that use swing pricing. If rule 22c-
1(a)(3) enhances investor confidence in funds, investors are more
likely to invest in funds, so to the extent that investors are not
already invested in the capital markets (e.g., via direct ownership of
stocks or bonds), the rule could make additional assets available for
investment in the capital markets.
    To the extent that investors care about short-term volatility, they