fund, considering the required factors. We believe that this approach
strikes an appropriate balance between competing considerations by
allowing tailored choices to be made for each fund but constrained by
the factors that the fund must consider in setting the threshold.
Therefore, we are adopting the threshold requirements as proposed.
Board Approval of Swing Threshold
    We are also requiring the fund's board to approve a fund's swing
threshold as proposed. Several commenters opposed the proposed
requirement for a fund's board to approve the fund's swing threshold,
stating that the determination of swing thresholds is more
appropriately a management function.\155\ One commenter noted that the
determination of a fund's swing threshold would likely be a highly
technical analysis ``that requires intimate familiarity with the fund's
daily operations.'' \156\ Additionally, one commenter questioned
whether the board should be required to approve changes to a fund's
swing threshold(s), arguing that board approval could be detrimental to
a fund's ability to respond quickly to changing market conditions.\157\
One commenter, on the other hand, supported requiring that a fund's
board, including a majority of independent directors, approve the swing
threshold as ``independent perspectives may more fully focus on
shareholder interests.'' \158\ Another commenter suggested that the
proposed swing threshold requirements granted excessive discretion to
fund managers notwithstanding the proposed board approval
requirement.\159\ As discussed in more detail below, several commenters
also supported the idea that a fund's board should be given visibility
into the process by which the swing threshold was determined via
written reports.\160\
---------------------------------------------------------------------------

    \155\ See, e.g., BlackRock Comment (``Mutual fund boards should
not be required to approval all swing thresholds.''); Dechert
Comment Letter (stating that board approval of the swing threshold
``should instead be a management function, subject to board
oversight'').
    \156\ Dechert Comment Letter.
    \157\ Charles Schwab Comment Letter.
    \158\ CFA Institute Comment Letter (``We also support the
requirements that fund boards approve initial swing thresholds and
any material changes to it. . .'').
    \159\ AFR Comment Letter.
    \160\ See infra footnote 276 and accompanying text.
---------------------------------------------------------------------------

    After considering commenters' concerns, we believe that board
approval of a fund's swing threshold (and any changes thereto) is an
important element of board oversight of a fund's swing pricing process.
A fund's swing threshold(s) represents the trigger point at which the
fund's NAV will be adjusted and thus the point at which swing pricing
begins to affect fund shareholders. We believe board review and
approval of this determination will help ensure that the fund's swing
threshold(s)--and the point at which swing pricing begins to affect
shareholders in the fund--is in the best interests of fund
shareholders. While requiring board approval of changes to a fund's
swing threshold may constrain a fund's ability to immediately or
frequently change a fund's swing threshold, we believe that this
requirement acts as an important check on the discretion afforded to
the fund's swing pricing administrator. Moreover, under the final rule,
a fund is permitted to set multiple swing threshold(s), which we
believe may allow a fund to prepare for some changes in market
conditions.
    As described further below, we are also requiring that the board be
provided with a written report from the fund's swing pricing
administrator that describes, among other things, the administrator's
review and assessment of the fund's swing threshold(s), including
information and data supporting this determination.\161\ We believe
that the information provided in this report will help the board in
overseeing this important element of the fund's swing pricing process,
thereby addressing the concern some commenters expressed that the board
may not have the necessary information or expertise to approve the
swing threshold (and changes to the threshold).\162\ At the same time,
we believe that requiring board approval of a fund's swing threshold
(and any changes to the threshold), combined with the board review
requirement, serves to address concerns about granting excessive
discretion to the swing pricing administrator.
---------------------------------------------------------------------------

    \161\ See infra section II.A.3.f.
    \162\ See id.
---------------------------------------------------------------------------

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

proposal solicited comment on whether a fund should be permitted to
apply swing pricing only when the fund's level of net redemptions
exceeds the swing threshold. Commenters requested that the Commission
permit funds the flexibility to adjust their NAV only when net
redemptions (as opposed to both net subscriptions or net redemptions)
exceed the swing threshold,\163\ and permit a fund to set different
swing thresholds for net redemptions versus net subscriptions.\164\
Commenters argued that this additional flexibility was important
because the dilution risks associated with net redemptions may be
significantly different from the risks associated with net
subscriptions, as funds may be able to manage inflows more effectively
over time without as much cost.\165\ For this reason, they argued that
funds may wish to only use swing pricing for net redemptions, and not
subscriptions, or set differing thresholds for subscriptions versus
redemptions.
---------------------------------------------------------------------------

    \163\ See Dechert Comment Letter (``[A] fund should be permitted
to apply swing pricing to net redemptions only, as opposed to
applying it equally to net redemptions and net purchases, which
would be the case under the proposed rule amendments.'') (emphasis
in original).
    \164\ See BlackRock Comment Letter (``[T]he Commission should
clarify that funds are permitted to create an `asymmetric' swing
threshold where the threshold for inflows is different than the
threshold for outflows.'') (internal citation omitted).
    \165\ Unlike the requirement that funds meet redemptions within
7 days, there is no requirement for funds to immediately invest cash
inflows. See ICI Comment Letter I (``[R]eceipt of new cash in a
portfolio may not be as disruptive or problematic as large net
redemptions.''); Dechert Comment Letter (noting that there may be
more significant issues regarding potential dilution for non-
redeeming shareholders in connection with shareholder redemptions).
---------------------------------------------------------------------------

    While we agree with commenters that the impact of subscriptions may
be different from that of redemptions and that funds have other tools
to manage inflows over time,\166\ the final rule continues to require a
fund to adjust its NAV whenever net purchases or net redemptions exceed
the swing threshold. Both purchases and redemptions may cause
shareholder dilution in certain circumstances. Accordingly, we believe
swing pricing will be a useful tool in mitigating shareholder dilution
associated with shareholder purchase activity as well as shareholder
redemption activity.
---------------------------------------------------------------------------

    \166\ We note that a fund is not obligated to accept
subscriptions, and so thus may be able to better manage dilution due
to purchases.
---------------------------------------------------------------------------

Multiple Swing Thresholds
    In response to a comment request in the Proposing Release, a number
of commenters suggested that we should permit a fund to set multiple
escalating swing thresholds (wherein each threshold could be associated
with a different swing factor) instead of only a single threshold.\167\
Commenters argued that permitting multiple thresholds may allow funds
to more effectively mitigate shareholder dilution, because the costs of
managing shareholder activity may increase as redemptions increase, and
would allow swing pricing to more precisely reflect different levels of
costs associated with different levels of shareholder activity.\168\
---------------------------------------------------------------------------

    \167\ See, e.g., ICI Comment Letter I (``[F]unds may wish to
apply more than one threshold to net redemptions (or purchases), and
apply different swing factors depending on which threshold the net
redemption (or purchases) exceeds. This could enhance the precision
of a swing pricing methodology, allowing a fund to make larger
downward adjustments to its NAV when it experiences larger net
outflows.'') (internal citation omitted).
    \168\ See BlackRock Comment Letter (``Funds should also be
permitted to set multiple swing threshold levels for a given fund,
where each threshold could be associated with different swing
factors. Such a sliding swing threshold would allow partial swing
pricing to more precisely reflect different levels of costs
associated with the disposition (purchase) of securities for
different trade sizes.'') (internal citation omitted).
---------------------------------------------------------------------------

    We agree that permitting such multiple thresholds may allow funds
to more precisely target the costs of managing shareholder activity and
better mitigate shareholder dilution effects of such transactions.
Accordingly, the final rule permits (but does not require) a fund to
set multiple escalating swing thresholds, each associated with a
different swing factor.\169\ Whichever threshold is triggered on a
given day would then determine the single swing factor that would be
used to adjust the fund's NAV on that day. If a fund has more than one
threshold, each should be established using the same factors discussed
above, and if it has multiple swing factors, each should be set taking
into account the same considerations discussed in section II.A.2.e.
below.
---------------------------------------------------------------------------

    \169\ As discussed in more detail below, however, a fund's swing
factor(s) may not exceed two percent of NAV per share. See infra
section II.A.3.e.
---------------------------------------------------------------------------

Review Requirement
    The proposed rule would have required a fund's swing pricing
policies and procedures to provide for a periodic review, no less
frequently than annually, of the fund's swing threshold. Beyond
specifying certain factors that a fund would be required to consider in
reviewing its swing threshold, the proposed rule did not include
prescribed review procedures, nor did it specify the changes in a
fund's circumstances over the course of the review period that a fund
must consider as part of its review. One commenter suggested that the
final rule make clear that the required review should be similar in
nature to the review that led to the determination of a fund's swing
threshold in the first place.\170\ Another commenter suggested that the
proposal provided little guidance to fund sponsors and boards in how to
balance conflicting interests of shareholders in setting appropriate
swing thresholds.\171\ As discussed in more detail below, several
commenters also supported the idea that a fund's board should be given
visibility into the process by which the swing threshold was determined
via written reports.\172\
---------------------------------------------------------------------------

    \170\ See Comment Letter of the Federal Regulation of Securities
Committee of the Section of Business Law of the American Bar
Association (Feb. 11, 2016).
    \171\ See Eaton Vance Comment Letter.
    \172\ See infra footnote 276 and accompanying text.
---------------------------------------------------------------------------

    We agree that the review requirement should be more robust, and
instead of requiring a fund to periodically review the fund's swing
threshold, we have adopted in the final rule a requirement that the
fund's board of directors, must review, no less frequently than
annually, a written report prepared by the person(s) responsible for
administering swing pricing for a fund that describes, among other
things: (i) The swing pricing administrator's review of the adequacy of
the fund's swing pricing policies and procedures and the effectiveness
of their implementation, including the impact on mitigating dilution;
and (ii) its review and assessment of the swing threshold(s), swing
factor(s), and swing factor upper limit considering the requirements in
rule 22c-1(a)(3)(i)(B) and (C), including the information and data
supporting these determinations.\173\ We are also requiring, as
proposed, that the fund board approve the fund's swing pricing policies
and procedures, which must specify the process for how the fund's swing
threshold is determined.\174\ Finally, as discussed above, we are
requiring that the fund board approve any changes to the fund's swing
threshold as proposed. We believe that the written report requirement,
which specifies certain information that must be provided to the board,
provides additional guidance regarding the information that may be
useful in assessing the fund's swing threshold.
---------------------------------------------------------------------------

    \173\ Rule 22c-1(a)(3)(ii)(D). See also infra section II.A.3.f.
(discussing the board review requirements).
    \174\ See infra section II.A.3.f.
---------------------------------------------------------------------------

    A fund may consider whether to review and assess its swing
threshold more frequently than annually (e.g., semi-annually or
monthly), and/or

specify any circumstances that would prompt ad hoc review of the fund's
swing threshold in addition to the periodic review required by the rule
(as well as the process for conducting any ad-hoc reviews). We believe
that funds should generally consider evaluating both market-wide and
fund-specific developments affecting each of the rule 22c-1(a)(3)(i)(B)
factors in developing comprehensive procedures for reviewing a fund's
swing threshold.
Swing Threshold Considerations for Multiple Share Classes
    The net purchase or net redemption activity of all share classes of
a fund with multiple share classes is part of the determination of
whether a fund has crossed its swing threshold. If a fund were to only
include the transaction activity of a single share class, and were to
swing one share class and not another, this would have the effect of
having one share class pay transaction expenses incurred in the
management of the fund's portfolio as a whole, expenses that are borne
by all share classes and thus would generally be inconsistent with rule
18f-3.\175\ Accordingly, a fund with multiple share classes may not
selectively swing the NAV of certain share classes but not others.\176\
Like a fund with only one share class, the purchase or redemption
activity of certain shareholders (or a class of shareholders) within a
multi-share-class fund could dilute the value of all shareholders'
interests in the fund.\177\ Further, because the economic activity
causing dilution occurs at the fund level, it would not be appropriate
to employ swing pricing at the share class level to target such
dilution. We also note that because all share classes must utilize the
same swing factor and ETFs cannot utilize swing pricing, funds
structured to include ETFs as a share class would not be able to
utilize swing pricing.\178\
---------------------------------------------------------------------------

    \175\ See rule 18f-3(a)(1)(ii) (stating that allocation of
expenses related to the management of a fund's assets may not differ
among a fund's share classes).
    \176\ One commenter indicated that ``swing pricing can be used
successfully by the conventional share classes of a fund that also
operates an ETF as a share class.'' See Vanguard Comment Letter.
Because of the aforementioned 18f-3 concerns and the inability of
ETFs to utilize swing pricing, we disagree. A swing pricing
adjustment applied to certain share classes of a fund, but not
applied to the ETF share class of that fund, would impermissibly
allocate expenses related to the management of the fund's assets.
    \177\ See ALFI Survey 2015, supra footnote 42, at 4 (``If swing
pricing is applied, all share classes of a fund swing in the same
direction (and typically by the same basis point amount), as
dilution occurs at the fund level rather than at the share class
level.'').
    \178\ See section 18 of the Act.
---------------------------------------------------------------------------

d. Investor Flow Information
    Critically important to the adoption of swing pricing is a fund's
ability to obtain sufficient information about purchase and redemption
activity that took place prior to striking the fund's NAV on a
particular day in order to reasonably estimate whether it has crossed
the swing threshold with high confidence, to determine whether swing
pricing should be in effect that day. If the fund's applicable swing
factor varies depending on the level of its net investor flows,
sufficient investor flow information is also needed to determine the
applicable swing factor that the fund will use to adjust its NAV. A
fund using swing pricing will need to obtain reasonable estimates of
investor flows daily, or the aggregate flows of money being invested in
and redeemed out of the fund, for purposes of reasonably estimating
with high confidence whether the fund's net purchases or net
redemptions have crossed the swing threshold, thus resulting in an NAV
adjustment under its swing pricing policies and procedures.\179\
---------------------------------------------------------------------------

    \179\ We have previously stated that a fund should adopt
compliance policies and procedures that provide for monitoring
shareholder trades or flows of money in and out of the fund for
purposes of detecting market timing activity. See Compliance
Programs of Investment Companies and Investment Advisers, Investment
Company Act Release No. 26299 (Dec. 17, 2003) [68 FR 74714 (Dec. 24,
2003)] (``Rule 38a-1 Adopting Release''), at nn.66-69 and
accompanying text. We also note the requirement that funds have
shareholder information agreements under rule 22c-2 that require
financial intermediaries to provide certain shareholder transaction
data to funds upon their request, which may be helpful in estimating
flows in some respects. See rule 22c-2.
---------------------------------------------------------------------------

    We understand that the deadline by which a fund must strike its NAV
may precede the time that a fund (or its pricing agent) receives final
information concerning daily net investor transaction flows from the
fund's transfer agent. As a result, funds engaging in swing pricing
will likely need to develop processes and procedures to gather
sufficient investor flow information from transfer agents that include
transactions being conducted by intermediaries on behalf of fund
investors.\180\ This information could include actual transaction
orders received by the transfer agent, as well as estimates of investor
flows, which funds can use to reasonably estimate its aggregate daily
net investor flows for swing pricing purposes.\181\
---------------------------------------------------------------------------

    \180\ As indicated in the proposal, a fund may wish to implement
formal or informal policies and procedures regarding the timely
receipt of shareholder flow information, and to establish effective
communication between the persons charged with implementing the
fund's swing pricing policies and procedures, the fund's investment
professionals, personnel charged with the calculating the fund's
daily NAV, and the fund's transfer agent. See Proposing Release,
supra footnote 6, at section III.F.2.a.
    \181\ Under the current system, redemption and subscription
orders from shareholders are typically accepted by funds and their
intermediaries on any given trading day up until 4 p.m. Eastern
time. Intermediaries typically begin processing, aggregating and
submitting transaction orders to fund transfer agents (where
transactions are not NAV dependent) in the late afternoon. Funds
generally publish their NAVs between 6 and 8 p.m. Eastern time
(``ET''). Following the publication and delivery of such NAVs, both
intermediaries and fund transfer agents complete their transaction
processing and conduct their nightly processing cycles, which update
applicable recordkeeping systems for the day's activities. See rule
2a-4 (allowing the adjustment in outstanding fund shares as a result
of purchase and redemption activity to be reflected on T+1).
---------------------------------------------------------------------------

Reasonable Estimates
    Several commenters asked for additional guidance regarding a fund's
use of estimates in determining its net flows in order to determine
whether a fund has crossed its swing threshold.\182\ We acknowledge
that full information about shareholder flows is not likely to be
available to funds by the time such funds need to make the decision as
to whether the swing threshold has been crossed,\183\ but we do not
believe that complete information is necessary to make a reasonable
high confidence estimate.\184\ Instead, a fund may determine its
shareholder flows have crossed the swing threshold based on receipt of
sufficient information about the fund shareholders' daily purchase and
redemption transaction activity to allow the fund to reasonably
estimate, with high confidence, whether it has crossed the swing
threshold. The shareholder flow information used by funds may be
individual, aggregated or netted orders and may include reasonable
estimates where

necessary \185\ (made by funds and their intermediaries) and should
exclude any purchases or redemptions that are made in kind and not in
cash.\186\
---------------------------------------------------------------------------

    \182\ See BlackRock Comment Letter; ICI Comment Letter I (noting
that swing pricing in the U.S. will likely involve the use of
estimates with respect to current day net flows (as well as when
determining factors) and that the Commission should further clarify
that it is comfortable with fund managers and their administrators
using such estimates in a disciplined and documented manner when
employing swing pricing). Similarly, another commenter asked the
Commission to clarify that there is an element of estimation in
evaluating whether a fund has crossed its threshold, inherent in the
proposed reasonable inquiry standard. See SIFMA Comment Letter II.
    \183\ The deadline by which a fund must strike its NAV may
precede the time that a fund receives final information concerning
daily net flows from the fund's transfer agent or principal
underwriter.
    \184\ A fund should not employ swing pricing if the fund is
unable to obtain sufficient information about the fund shareholders'
daily purchase and redemption activity on the relevant date at the
time it calculates the fund's NAV. See supra section II.A.3.c. We
understand that many funds in Europe that use swing pricing may
typically receive as much as 90% of net purchase/redemption data
prior to deciding whether to adjust the fund's NAV by a swing
factor.
    \185\ We understand that most intermediaries submit aggregated
and/or netted transactions orders to funds. Such orders represent
the transactions of underlying investors whose shares are held in
omnibus accounts registered in the name of intermediaries (such as a
broker-dealer, retirement plan record keeper, bank or trust) for the
benefit of such shareholders on transfer agent recordkeeping systems
for each share class in a fund. Intermediaries typically aggregate
their individual customer daily transaction orders and also may net
the total purchase and redemption orders, which are periodically
transmitted for processing to fund transfer agents. See Investment
Company Institute, Navigating Intermediary Relationships, (2009), at
nn.3, 6-7, available at https://www.ici.org/pdf/ppr_09_nav_relationships.pdf.
    \186\ See rule 22c-1(a)(3)(i)(A).
---------------------------------------------------------------------------

    As discussed below, we recognize in some cases, it may not
currently be feasible for certain intermediaries to provide their
actual orders (even in an aggregated or netted format) promptly enough
for the fund to conduct swing pricing. However, we understand that a
fund's reasonably estimated shareholder flows could include estimates
for certain intermediary flows that are based on actual transaction
orders received from investors prior to the fund's cut-off time, which
would subsequently be submitted by intermediaries to the fund's
principal underwriter and/or transfer agent for processing after
receipt of the fund's final NAV. For example, in the European fund
sector, swing pricing is feasible operationally as ``actual'' trade
flows based on estimated prices (typically the prior day's NAV) and
orders occurring on the trade date are available on a timely basis.
Trading platforms collect all of that day's activity and supply it to
the fund's transfer agent. An estimated fund price is then applied to
generate estimated trade values for that trading day. We also note that
where transaction orders are NAV dependent, the application of
estimated fund prices (such as the prior day's NAV) to the current
day's orders to derive estimated shareholder flow information could be
conducted by intermediaries or fund transfer agents.\187\ Additionally,
a fund may require different levels or types of information from each
of its intermediaries depending on a variety of factors.\188\
---------------------------------------------------------------------------

    \187\ See GARP Comment Letter.
    \188\ Such factors might include the size of flows that
ordinarily come through a particular intermediary, the nature of
such orders (i.e., subscriptions, redemptions, exchange
transactions), or certain characteristics or additional information
about the redeeming or purchasing shareholders and intermediaries
conducting transaction processing (e.g., large trade notifications).
A fund may also choose to request flow data only from certain of its
intermediaries if it determines that it can make a high confidence
determination to swing its price with flow information provided by
only a subset of its intermediaries (for example, if there are
intermediaries that typically only conduct a very small volume of
transaction activity with the fund).
---------------------------------------------------------------------------

    Funds should consider utilizing policies and procedures to make the
necessary estimates.\189\ Such policies and procedures could describe
the process by which the fund obtains shareholder flow information
(including flows obtained from intermediaries), as well as the amount
and kind of transaction data that the fund believes necessary to obtain
before making its estimate of total net flows in order to determine
whether the swing threshold has been exceeded, and applying swing
pricing that day.\190\ Funds (and their intermediaries) may also wish
to consider regular back-tests of their daily estimated net flows used
in determining whether a swing threshold has been crossed based on
complete or final data obtained later, and then update their estimation
process over time based on the results of such back-tests. A fund may
wish to consider whether having a process to back-test data, which
would allow a fund to review whether the fund is appropriately
considering and weighing the factors and, over time, may potentially
improve the accuracy of the fund's estimation process. Back-testing
data is a commonly utilized practice in the fund industry (and other
industries) to continuously improve the quality of processes involving
subjective judgments or estimates, and its use has been discussed in
the context of swing pricing in Europe.\191\
---------------------------------------------------------------------------

    \189\ One commenter requested that we ``recognize that certain
components of the swing pricing process will be based on estimates''
and suggested that we ``provide a safe harbor from liability for
differences between estimates and what is observed ex-post if swing
pricing procedures are followed properly.'' BlackRock Comment
Letter. We decline to provide such a safe harbor given the facts and
circumstances nature of this determination.
    \190\ As discussed in section II.A.3.g. below, if a fund,
pursuant to reasonably designed policies and procedures, determined
with reasonable high confidence that it should apply swing pricing
based on estimated information obtained after reasonable inquiry,
the fund would not need to treat the application of swing pricing as
a pricing error if it turned out, after the fact based on final
data, that the swing threshold had not been crossed; similarly, the
fund would not need to treat the failure to apply swing pricing as a
pricing error if it turned out, after the fact based on final data,
that the swing threshold had been crossed.
    \191\ See, e.g., ALFI Swing Pricing Guidelines 2015, supra
footnote 88 (discussing the value of back-testing).
---------------------------------------------------------------------------

    We recognize that funds may take different approaches in
determining whether they have sufficient flow data to make a reasonable
high confidence estimate,\192\ and that the completeness of data (such
as the percentage of actual versus estimated net flow data), as well as
the nature and types of estimates used may vary based on the particular
circumstances of the fund. For example, a fund whose redemption levels
have been very consistent in the past, and that has a large direct
shareholder base that is made up of primarily small retail positions,
may be better positioned to make a high confidence estimate of flows
with less effort, than a fund that is primarily distributed through
intermediaries, who has experienced volatile purchases and redemptions
and has a mix of distribution partners and institutional and retail
shareholders. Because many funds are primarily distributed through
intermediaries, they will need to obtain sufficient information about
shareholder flows (whether actual orders or estimated flows) in a
timely manner to reasonably estimate with high confidence whether a
fund should use swing pricing on a given day.
---------------------------------------------------------------------------

    \192\ See infra footnote 205.
---------------------------------------------------------------------------

Operational Issues
    Many commenters on the swing pricing proposal discussed the
operational difficulties that exist today for funds in obtaining timely
enough information from intermediaries about shareholder flow data to
determine whether or not a swing threshold has been crossed.\193\ These
commenters discussed operational challenges to implementing swing
pricing in the United States as compared to Europe, where many funds
have successfully implemented swing pricing.\194\ Commenters noted that
omnibus account structures and existing processing arrangements with
intermediaries limit the ability of many funds to receive sufficient
flow information prior to the time that the fund's NAV must be
calculated, thus impeding the use of swing pricing as an anti-dilution
tool currently in the U.S.\195\ These commenters also highlighted that
certain intermediaries

(e.g., retirement plan record keepers and insurance companies)
typically require the receipt of actual fund prices (NAVs) to initiate
the processing of fund trades, thus posing difficulties in getting
final actual orders from these distribution channels to funds before
the NAV has been struck.\196\ Some commenters expressed concerns
regarding funds' ability to obtain estimated shareholder flow
information if requested from intermediaries.\197\ Several commenters
also suggested that large fund complexes with more influence over their
distribution partners could be more successful than small complexes in
obtaining such information.\198\ In addition, funds also expressed
concerns that intermediaries may choose not to offer funds that choose
to implement swing pricing, due to the increased processing and
technology burdens that swing pricing would impose on intermediaries, a
consideration that funds will evaluate as they determine whether to
adopt swing pricing. Several commenters stated that, although swing
pricing is used relatively widely in European jurisdictions, certain
differences between U.S. and European fund operations make swing
pricing easier to implement in Europe than in the U.S.\199\
---------------------------------------------------------------------------

    \193\ See, e.g., CRMC Comment Letter; Invesco Comment Letter;
ICI Comment Letter I; GARP Comment Letter.
    \194\ See CRMC Comment Letter; Dechert Comment Letter; ICI
Comment Letter I; IDC Comment Letter.
    \195\ See, e.g., BlackRock Comment Letter; Comment Letter of
Financial Services Roundtable (Jan. 13, 2016) (``FSR Comment
Letter''); J.P. Morgan Comment Letter; SIFMA Comment Letter II.
Commenters also stated that the fund's agent (either the transfer
agent or intermediaries authorized to distribute or transact fund
shares) will take orders from shareholders for execution; typically
until the fund's cut-off time (which is 4 p.m. ET for most U.S.
funds). Thus, a large amount of flow information from intermediaries
is currently provided to some funds after the close of business in
the later evening hours, or the next business day after the investor
transaction occurs (typically early morning on T+1), which is
generally after a fund strikes its NAV. Id.
    \196\ See Eaton Vance Comment Letter; GARP Comment Letter; ICI
Comment Letter I; LPL Comment Letter; Charles Schwab Comment Letter;
Comment Letter of Wells Fargo Funds Management, LLC (Jan. 13, 2016)
(``Wells Fargo Comment Letter''). Commenters also pointed to the
constraints of older (legacy) technology systems used by some
service providers, which limit the ability of these intermediaries
to deliver fund flow information prior to the time a fund strikes
its NAV. See Dechert Comment Letter; Federated Comment Letter; GARP
Comment Letter; SIFMA Comment Letter II. According to these
commenters, these older systems batch process daily transactions
received from fund investors throughout the evening, versus newer
real-time or continuous and automatic systems that process and
submit transactions to fund transfer agents throughout the day.
    \197\ See, e.g., ICI Comment Letter I; Comment Letter of T. Rowe
Price (Jan. 13, 2016) (``T. Rowe Comment Letter'') (expressing
concerns regarding (i) funds' need to rely on estimated flows from
intermediaries, (ii) the costs and burdens to provide sufficient
estimated flows to allow a fund to accurately determine whether a
swing threshold has been exceeded, and (iii) the potential for NAV
errors). These issues are discussed throughout this section. As
discussed below, commenters also encouraged the Commission to
consider what changes to the regulatory framework are necessary to
require intermediaries to provide accurate estimates of shareholder
flows prior to funds striking their NAVs so that swing pricing can
be an effective tool to mitigate potential dilution for
shareholders.
    \198\ See CRMC Comment Letter; Dechert Comment Letter; ICI
Comment Letter I; Comment Letter of Independent Directors Council
(Jan. 13, 2016) (``IDC Comment Letter'').
    \199\ See, e.g., BlackRock Comment Letter; GARP Comment Letter;
Eaton Vance Comment Letter; ICI Comment Letter I. In particular,
commenters maintained that European funds are better able to receive
timely flow information than U.S. funds because there are multiple
or earlier trading cut-off times in Europe and that there is greater
use of currency-based orders in Europe, which contributes to
confidence in the accuracy of fund flows.
---------------------------------------------------------------------------

    Some commenters provided specific ideas about initiatives the
Commission could pursue to mitigate operational challenges and help
facilitate implementation of swing pricing for funds and investors. For
example, they stated that the Commission could require (or encourage)
intermediaries to provide shareholder flow estimates prior to the
deadline by which a fund must strike its NAV.\200\ Some commenters
stated that the Commission also could require (or encourage) funds and
intermediaries to implement earlier cut-off times to buy and sell fund
shares, but many acknowledged the downsides associated with this
option, including limiting investors' ability to transact in funds up
until the close of the U.S. equity markets.\201\ One commenter
representing a group of asset management risk professionals suggested a
detailed roadmap to altering current fund and intermediary processes
that they suggested may represent a feasible approach to implementing
swing pricing in the U.S.\202\ Many commenters suggested that the
Commission should address the operational challenges to swing pricing
before it is implemented in the U.S and suggested delaying the
effective date and/or implementation date of such new rules to allow
the industry to work together to make the necessary changes to their
infrastructure to resolve these concerns.\203\
---------------------------------------------------------------------------

    \200\ See CRMC Comment Letter; GARP Comment Letter; Invesco
Comment Letter; T. Rowe Comment Letter.
    \201\ See GARP Comment Letter; PIMCO Comment Letter; Charles
Schwab Comment Letter; SIFMA Comment Letter II. Some commenters
noted that funds could be put at a competitive disadvantage to other
types of investment products (e.g., hedge funds and collective
trusts) that continue to accept trades throughout the day, and
others stressed the fact that there is a long history in the U.S.
mutual fund market of providing investors with flexibility to submit
redemption and subscription requests until 4 p.m. ET. See, e.g., ICI
Comment Letter I; GARP Comment Letter; Wells Fargo Comment Letter.
    \202\ See GARP Comment Letter. This roadmap involved action by
funds and intermediaries to solve swing pricing operational issues
by: (1) Maintaining the dealing (intermediary and transfer agent)
cut-off time for fund redemptions and subscriptions at 4 p.m. ET, as
is current market practice; (2) requiring funds' NAV publication
time to be shifted from 6 p.m. ET to 8 p.m. ET; (3) requiring
providers of fund flows to provide ``estimated'' trading flows
occurring each day by 6 p.m. ET, which would be used to determine
whether to adjust the fund's NAV per share and calculate the
adjusted NAV. Id.
    \203\ See, e.g., Blackrock Comment Letter; Dodge & Cox Comment
Letter; SIFMA Comment Letter I; Vanguard Comment Letter.
---------------------------------------------------------------------------

    The Commission acknowledges the operational challenges noted by
commenters that will need to be addressed by industry participants.
Because of these concerns, we believe the adoption of swing pricing in
the U.S. as a new (optional) anti-dilution tool will likely require
considerable lead time for many funds that will need to coordinate and
implement the necessary operational changes with intermediaries and
service providers in order to effectively conduct swing pricing for new
or existing funds. Additionally, as noted by commenters, we understand
that certain funds, intermediaries and service providers may incur
substantial costs in doing so.\204\
---------------------------------------------------------------------------

    \204\ See, e.g., ICI Comment Letter I (``Building and
maintaining additional systems would be quite costly, and even
assuming that intermediaries at large would rework their systems to
support swing pricing, they can be expected to seek the substantial
costs of doing so from funds.''); see infra section III discussing
the potential costs and benefits. See also discussion throughout
this section regarding funds' deliberative process in determining
whether the costs and drawbacks of implementing swing pricing,
including managing such operational challenges and any cost sharing
requested by intermediaries, are justified by the anti-dilution and
other benefits that may result as a consequence of implementing
swing pricing.
---------------------------------------------------------------------------

    We recognize that U.S. fund complexes differ widely in terms of
their size, the types of funds they offer, the types of investors they
serve (e.g., retail and/or institutional), and their distribution
models. Thus, we anticipate that there may be certain funds that could
make the necessary adjustments and prepare to implement swing pricing
sooner than other funds, because they have or may be able to more
easily obtain sufficient net flow information. For example, we
understand that certain funds with investors that primarily transact
directly with the fund's principal underwriter or transfer agent, or
that are primarily distributed through affiliates or broker-dealers
(that could potentially provide timely flow data),\205\ and/or do not
have a substantial number of investors transacting in retirement plans
or insurance products could more easily obtain sufficient net flow
information. In addition, larger fund complexes with the ability to
more easily get net flow information from their intermediaries,
including those that have established large trade

notification processes,\206\ may have the leverage to negotiate
operational solutions and the resources to implement swing pricing
sooner for certain funds, which may result in inefficient one-off
solutions rather than coordinated industry-wide operational solutions
that may reduce costs for investors overall.\207\
---------------------------------------------------------------------------

    \205\ We understand through staff outreach, and based on the
time transaction order volumes are received and processed through
the National Securities Clearing Corporation (``NSCC''), that many
broker-dealer firms would have the ability to submit most of their
actual transaction orders within a relatively short timeframe after
the fund's order cut-off time (typically 4 p.m. ET). See Division of
Investment Management, Memorandum re: Meeting with Representatives
of SIFMA (June 13, 2016) available at https://www.sec.gov/comments/s7-16-15/s71615-152.pdf.
    \206\ It is our understanding that today many [larger] fund
complexes require their intermediaries to provide advance
notification of ``large trades'' (e.g., such as for asset allocation
or wrap product rebalancing transactions) several days in advance of
such trades so funds may anticipate and plan for sizable redemptions
and so the shareholder can avoid receiving a redemption in kind. We
further understand that such large trade notification processes
between funds and intermediaries are voluntary or may be specified
in agreements. The industry is seeking to automate and standardized
these communications, which are non-standard (often faxed)
communications. See BNY Mellon Automates Process for Brokers-Dealers
to Notify Mutual Fund Complexes of Upcoming Large Trades, PR
Newswire (Oct. 13, 2015), available at http://www.prnewswire.com/news-releases/bny-mellon-automates-process-for-broker-dealers-to-notify-mutual-fund-complexes-of-upcoming-large-trades-300158615.html. Such large trade notification requirements are
generally disclosed in a fund's statement of additional information
pursuant to Item 23.
    \207\ We understand that such funds likely would negotiate
receipt of actual orders or make arrangements to receive estimated
shareholder flow information from intermediaries (for investor
orders received by intermediaries in accordance with the funds'
applicable end-of-day cut-off times) prior to the striking of the
funds' NAVs.
---------------------------------------------------------------------------

    We understand that in order to implement swing pricing in an
efficient manner, many funds will need time to develop the
infrastructure needed to obtain shareholder flow information for
investors transacting through intermediaries (including banks, broker-
dealers, retirement plan administrators, or insurance companies or
platforms), whose shares are held in omnibus accounts registered in the
name of such intermediaries on fund transfer agent recordkeeping
systems.\208\ We also recognize that because intermediaries allow
customer trades to take place up until the 4 p.m. cut-off time, and
because of the limitations of many current systems,\209\ many fund
transfer agents do not currently have sufficient information to
reasonably estimate net shareholder flow activity for funds without
changes to current processes and systems to facilitate timely receipt
of such information to conduct swing pricing.\210\
---------------------------------------------------------------------------

    \208\ See, e.g., GARP Comment Letter; ICI Comment Letter I;
Charles Schwab Comment Letter; SIFMA Comment Letter II.
    \209\ See, e.g., Dechert Comment Letter; GARP Comment Letter. We
understand that the industry primarily utilizes batch processing to
execute shareholder transaction orders received by intermediaries
with funds or their transfer agents though the NSCC's Wealth
Management Services platform. Such fund orders are typically
transmitted (grouped together and processed) through one of many
NSCC ``batch'' order cycles throughout the day and evening. Batch
processing systems are also used by funds, intermediaries and
service providers for processing and keeping records of shareholder
details, including number of shares, on transfer agency, sub-
transfer agency and intermediary recordkeeping systems.
    \210\ In Europe earlier trade cut-off times have evolved and
fund transaction orders must be received by the fund administrator/
transfer agent by the earlier cut-off time. This factor eases the
burdens of estimating net flows for European funds that swing price.
See ALFI Survey 2015, supra footnote 42, at 7 (``In terms of the
operational process for partial swing, nine promoters stated that
their decision to swing the NAV was based on estimated shareholder
activity. Three promoters were able to rely on final shareholder
activity. An organization's ability to rely on confirmed activity
depended to a large extent on the cut off times of the transfer
agent in relation to the valuation point of the fund.''); see also
e.g., BlackRock Comment Letter; GARP Comment Letter; Eaton Vance
Comment Letter; ICI Comment Letter I.
---------------------------------------------------------------------------

    As noted above, we recognize that because the fund industry is
diverse, it may take longer for certain funds to implement swing
pricing than others. We also acknowledge that funds, intermediaries,
and service providers use complex, integrated systems and technology,
which supports the daily processing of shareholder transactions. We
expect that implementing swing pricing will lead to process and systems
changes to accommodate the additional processing that will be needed to
support the provision of estimated shareholder flows to funds where
necessary, and that such improvements may require additional capital
investments to permit the implementation of swing pricing for funds
that may choose to use it.\211\ Importantly, we believe that an
extended effective date, as discussed below, will allow most funds that
may wish to implement swing pricing to work together with
intermediaries and service providers in implementing efficient, cost
effective, solutions to the operational challenges swing pricing
presents that will assist in reducing overall costs and operational
risks for industry participants, including funds and their investors.
---------------------------------------------------------------------------

    \211\ However, we note that the provision of such data likely
would be facilitated through the industry fund transaction
processing utility (the NSCC), and that once shareholder flow
enhancements are established, any new NSCC capabilities, as well as
those of service providers supporting funds' (and their
intermediaries') swing pricing processes could be used by other
funds that may be interested in implementing swing pricing.
---------------------------------------------------------------------------

Extended Effective Date
    As discussed above, a number of commenters requested that we
provide a delayed effective date of two years for implementation of
swing pricing, to allow the industry to address the necessary changes
to operations and systems and, as a consequence, help alleviate
competitive concerns by allowing all funds time to become familiar with
swing pricing.\212\ These commenters explained that, with a delayed
effective date, all funds would have the opportunity to develop swing
pricing capabilities in an orderly manner, and it would provide time
for efficient operational solutions to be developed to help mitigate
the challenges of implementing swing pricing.
---------------------------------------------------------------------------

    \212\ See, e.g., Invesco Comment Letter; BlackRock Comment
Letter; GARP Comment letter (each suggesting a delayed effective
date of two years); see also SIFMA Comment Letter I; T. Rowe Comment
Letter (each requesting a delayed effective date and noting that
``some fund managers already have extensive experience with swing
pricing, while other fund managers will be approaching swing pricing
for the first time and, hence, be at a disadvantage'').
---------------------------------------------------------------------------

    We acknowledge that, if swing pricing were to be effective
immediately, a limited number of funds might have the ability (e.g.,
based on level of resources and leverage with intermediaries) to
implement swing pricing sooner than others, and that as a result
potential benefits could be provided to long-term investors in such
funds. However, as noted above, most commenters requested a two-year
extended effective date to coordinate the implementation of industry-
wide operational changes to conduct swing pricing, which would provide
time for funds, service providers and the NSCC to develop and implement
standardized processing solutions that could be leveraged more broadly
by the industry. This would be in contrast to certain funds proceeding
immediately with one-off solutions to receive shareholder flow
information directly from intermediaries, which could be a more costly,
less efficient and less secure processing solution over the long-term.
We believe that the benefits to investors that likely would result from
a coordinated industry effort, as suggested by commenters,\213\
including

the mitigation of operational risks associated with non-standardized
processing and the promotion of more reliable and secure transmission
of standardized data in an efficient and cost-effective manner, would
likely outweigh short-term benefits that could be provided to a limited
number of investors if we did not implement an extended effective date.
---------------------------------------------------------------------------

    \213\ See BlackRock Comment Letter; GARP Comment Letter (each
recommending that ``the Commission set the effective date of the
swing pricing provisions to at least two years after the final rule
is adopted'' because it ``will permit an orderly and industry-wide
process to make the necessary changes''); see also Fidelity Comment
Letter (encouraging ``industry-wide solutions'' to operational
challenges associated with swing pricing); Vanguard Comment Letter
(``[C]ertain operational hurdles common across the industry
currently prevent funds from effectively implementing swing pricing
. . . We believe that any potential solution to this problem will
result from increased collaboration and communication between funds,
their service providers, and intermediaries. However, any industry
solution will necessarily take time to develop. Therefore, the
Commission should delay implementation of the swing pricing rule
until such time as intermediaries can demonstrate an ability to
transmit accurate and complete order information to funds in a
reliable, cost-effective, and timely manner. Once the industry is
able to implement swing pricing effectively, we believe that swing
pricing will be a valuable tool funds may use to supplement the
liquidity risk management practices that we propose above.'').
---------------------------------------------------------------------------

    As discussed above and in section II.C. below, we agree with these
commenters and believe it is appropriate to adopt an extended effective
date for swing pricing. We expect that the extended effective date will
allow funds, intermediaries and service providers to work towards
orderly, efficient, industry-wide solutions to the operational
challenges swing pricing presents,\214\ mitigating the costs of such
solutions to funds and their investors as compared to the development
(and possible eventual reconciliation) of numerous, disparate solutions
to swing pricing's operational challenges that might be implemented, if
swing pricing were to be effective immediately, by a small number of
funds potentially seeking to be among the first to engage in swing
pricing. We are persuaded by commenters that two years should provide
sufficient time to develop such solutions in an efficient manner. We
expect that our staff will keep us informed of the industry's progress
by engaging with market participants (e.g., fund complexes,
intermediaries, and service providers) on the implementation of swing
pricing in the U.S.
---------------------------------------------------------------------------

    \214\ See id.
---------------------------------------------------------------------------

Potential Further Commission Action To Facilitate Swing Pricing
    As discussed above, a number of commenters pointed to a variety of
competitive concerns and operational challenges in implementing swing
pricing, and several suggested that the Commission take additional
actions to facilitate its adoption. We recognize the challenges
associated with implementing swing pricing in the U.S., but continue to
believe that swing pricing may provide significant benefits to
investors for funds that choose to use it. As discussed above, some
commenters urged the Commission to adopt rules that would require
intermediaries to provide timely estimates of shareholder flows to
funds that chose to implement swing pricing, or to encourage such
action through non-regulatory means.\215\ However, commenters did not
provide details as to the form such a regulatory requirement would
take, and some noted that any such requirement would likely have to
extend to certain entities not typically subject to regulation by the
Commission.\216\ Any such regulatory requirement would also be limited
by the economic reality that intermediaries are free to choose whether
or not to sell fund shares to their customers, and a requirement that
intermediaries provide shareholder flow data to funds may have the
unintended consequence of leading certain intermediaries to choose to
no longer sell funds that use swing pricing.
---------------------------------------------------------------------------

    \215\ See CRMC Comment Letter (``In order to create a level
playing field for all funds, we instead urge the Commission to adopt
rules requiring intermediaries to provide cash flow information
prior to the deadline by which a fund is required to strike its
NAV.''); see also GARP Comment Letter (``SEC swing pricing
provisions should incorporate additional requirements for financial
intermediaries (as defined in rule 22c-2) . . . to provide, at the
request of a fund, timely estimates of the net purchase or
redemption activity to support the fund's reasonable inquiry.'');
Invesco Comment Letter (``We request that the Commission create a
regulatory obligation that intermediaries provide trade information
to fund sponsors on a time-table that allows all funds to use swing
price. . . . The industry and our intermediaries are unlikely to
make these changes voluntarily.''); T. Rowe Comment Letter (``we
strongly encourage the SEC to consider what changes are necessary to
its regulatory framework to require (or otherwise provide funds with
the ability to influence) intermediaries to provide accurate
estimates of purchase and redemption information prior to funds
striking their NAVs so that swing pricing can be an effective tool
to mitigate potential dilution.'').
    \216\ See, e.g., ICI Comment Letter I. In addition, unless only
newly organized funds chose to implement swing pricing, any such
regulatory requirement would require provisions to deal with
intermediaries that were unable or unwilling to provide such flow
data, which might lead to situations where shareholders owning fund
shares through such intermediaries would either need to switch
intermediaries or redeem their shares (both of which may have
negative consequences for investors) or allow such intermediaries to
continue to keep shareholders in a fund that swing prices, which may
result in funds being unable to implement swing pricing effectively.
---------------------------------------------------------------------------

    Other commenters suggested that the Commission could take action to
require funds and intermediaries to implement earlier cut-off times to
buy and sell fund shares (either through adoption of new rules or other
means).\217\ However many commenters recognized the significant
downsides of such an approach, in that it would limit investors'
ability to trade mutual funds until the markets close (a long-held
expectation of mutual fund investors), and could put mutual funds at a
competitive disadvantage with other investment products.\218\ Still
others took the approach of suggesting that the Commission seek input
from industry or other regulators about what could be done to help
facilitate adoption of swing pricing in the U.S. before taking further
action.\219\ Our staff has previously engaged in significant outreach
to funds, intermediaries, and other regulators as we developed the
swing pricing rule proposal, and we expect that such active dialogue
will continue as swing pricing begins to be implemented.
---------------------------------------------------------------------------

    \217\ See GARP Comment Letter; PIMCO Comment Letter; Charles
Schwab Comment Letter; SIFMA Comment Letter II.
    \218\ See, e.g., ICI Comment Letter I; GARP Comment Letter;
Wells Fargo Comment Letter.
    \219\ See, e.g., Fidelity Comment Letter; Blackrock Comment
Letter; Morningstar Comment Letter.
---------------------------------------------------------------------------

    Considering the diverse and varied recommendations on potential
Commission action that we might take, as well as the potential
limitations and downsides of the approaches that have been suggested to
us, we are not proposing any further regulatory requirements to
facilitate implementation of swing pricing at this time. As discussed
previously, on balance, we believe that it is appropriate to permit
usage of swing pricing as an optional tool subject to a two-year
extended effective date at this time. We believe permitting this
optional tool to be implemented for those funds that choose to do so
may result in benefits for those funds and their investors if they
believe the challenges of implementing swing pricing can be overcome
and are justified by the resulting anti-dilution and other benefits
associated with swing pricing. In addition, permitting the use of swing
pricing encourages funds to begin working with intermediaries to
overcome the operational challenges associated with swing pricing and
may spur the development of efficient solutions that might not
otherwise be created if swing pricing were not allowed.
e. The Swing Factor
    We are adopting a requirement that a fund's swing pricing policies
and procedures provide that, once the fund's level of net purchases or
net redemptions has exceeded a swing threshold, the fund must adjust
its NAV by an amount designated as the ``swing factor'' for that
threshold.\220\ ``Swing factor'' is defined as ``the amount, expressed
as a percentage of the fund's net asset value and determined pursuant
to the fund's swing pricing procedures, by which a fund adjusts its net
asset value per share when the level of net purchases into or net
redemptions from the fund has exceeded the fund's applicable swing
threshold.'' \221\ A fund's swing pricing policies and

procedures are required to specify the process for how the swing factor
will be determined.\222\ In determining the swing factor, the person(s)
responsible for administering swing pricing may take into account only
the near-term costs expected to be incurred by the fund as a result of
net purchases or net redemptions that occur on the day the swing factor
is used, including spread costs, transaction fees and charges arising
from asset purchases or asset sales to satisfy those purchases or
redemptions, and borrowing-related costs associated with satisfying
redemptions.\223\
---------------------------------------------------------------------------

    \220\ Rule 22c-1(a)(3)(i)(A).
    \221\ Rule 22c-1(a)(3)(v)(B).
    \222\ Rule 22c-1(a)(3)(i)(C).
    \223\ Id.
---------------------------------------------------------------------------

    A fund's swing pricing policies and procedures also must include an
upper limit on the swing factor used, which may not exceed two percent
of the fund's NAV per share.\224\ The fund would be required to take
into account certain considerations when determining the swing factor
upper limit.\225\ The swing factor upper limit is subject to new
oversight provisions under the final rule, as further described below.
---------------------------------------------------------------------------

    \224\ Rule 22c-1(a)(3)(i)(C).
    \225\ Id.
---------------------------------------------------------------------------

    The policies and procedures shall also include the determination
that the swing factor(s) used are reasonable in relationship to the
fund's costs in meeting net shareholder subscriptions and
redemptions.\226\ We anticipate that, because these considerations
could vary depending on facts and circumstances, the swing factor that
funds will determine appropriate to use in adjusting its NAV also could
vary.\227\ A fund's policies and procedures for determining the swing
factor should discuss how each of the considerations a fund is required
to take into account under the rule will be used in determining the
swing factor.
---------------------------------------------------------------------------

    \226\ Id.
    \227\ As discussed previously in section II.A.3.c. above, under
the final rule a fund could also have more than one swing threshold,
with varying swing factors associated with each threshold. In
determining multiple swing factors, the fund would take into account
the same factors it would use in establishing a single swing factor,
but evaluate them based on the relevant swing threshold.
---------------------------------------------------------------------------

Setting the Swing Factor
    Under the proposal, when setting its swing factor a fund would have
been required to take into account two specific sets of considerations.
Under the final rule amendments, a fund must take into account only one
set of considerations in determining its swing factor(s), which has
been modified in response to commenters. Under the final rule, the
swing pricing administrator must take into account only the near-term
costs expected to be incurred by the fund as a result of net purchases
or net redemptions that occur on the day the swing factor is used,
including spread costs, transaction fees and charges arising from asset
purchases or asset sales to satisfy those purchases or redemptions, and
borrowing-related costs associated with satisfying redemptions when
determining the fund's swing factor(s).\228\ As discussed below, the
person(s) responsible for administering swing pricing must also
determine that the swing factor used is reasonable in relationship to
these costs. We have eliminated the consideration of market impact
costs or changes in the value of assets purchased or sold as a result
of net purchases or net redemptions. The required considerations are
intended to limit a fund's ability to estimate the costs associated
with purchase and redemption activity that could dilute the value of
non-transacting shareholders' interests in the fund.\229\
---------------------------------------------------------------------------

    \228\ Rule 22c-1(a)(3)(i)(C).
    \229\ The costs that a fund would be required consider in
determining its swing factor overlap significantly with costs that
we understand funds that use swing pricing in other jurisdictions
commonly consider when determining their swing factor. For example,
the Luxembourg Swing Pricing Survey, Reports & Guidelines provides
that the following should be considered when determining the swing
factor: (i) The bid-offer spread of a fund's underlying portfolio
assets; (ii) net broker commissions paid by the fund; (iii) custody
transaction charges; (iv) fiscal charges (e.g., stamp duty and sales
tax); (v) any initial charges or exit fees applied to trades in
underlying investment funds; and (vi) any swing factors or dilution
amounts or spreads applied to underlying investment funds or
derivative instruments. See ALFI Survey 2015, supra footnote 42, at
7, 15-16.
---------------------------------------------------------------------------

i. Required Consideration of Certain Near-Term Costs
    As noted above, as originally proposed, both sets of considerations
were mandatory for setting a swing factor. In the Proposing Release, we
requested comment on each of the considerations that a fund would be
required to take into account in determining the swing factor, and
specifically requested comment on whether any aspect of the proposed
considerations should not be required. In response, some commenters
argued that the proposed considerations for calculating a fund's swing
factor should be guidance only.\230\ On the other hand, one commenter
expressed concern that the proposed rules would grant funds too much
discretion in calculating the swing factor.\231\
---------------------------------------------------------------------------

    \230\ See Dechert Comment Letter (``Generally, we believe that
requiring funds to consider specific factors as part of the swing
threshold and swing factor determinations is too rigid and
prescriptive . . . Instead, we believe a better approach would be to
outline in conceptual guidance the appropriate principles and
factors a fund could consider in making the swing factor
determinations.''); see also ICI Comment Letter I (``[T]he SEC
should permit funds to build their own methodologies, shaped broadly
by SEC guidance within the adopting release.''); Invesco Comment
Letter (stating that, if a cost reflected in one of the proposed
factors cannot be reasonably estimated, a fund should be able to
exclude it from the swing factor calculation).
    \231\ See AFR Comment Letter (``The proposal includes
substantial discretion concerning the threshold for swing pricing
and the actual level of the swing pricing adjustment. We believe
this discretion is excessive. If SEC oversight of swing pricing is
lax, this discretionary process holds the risk of near-arbitrary
redemption fees charged to investors, fees that could become
effectively a form of gating during periods of market stress.''). We
believe that requiring funds to set a swing factor pursuant to
board-approved policies and procedures that are administered by an
investment adviser subject to a fiduciary duty, and requiring that
the policies and procedures provide that the swing factor(s) used
must be reasonable in relationship to these costs, serve as a
counterbalance to allowing funds to set the swing factor, and should
help mitigate the risk that a fund sets a punitive or arbitrary
swing factor that would inappropriately disadvantage redeeming
shareholders.
---------------------------------------------------------------------------

    We continue to believe that mandating funds to take into account
certain near-term costs when setting the swing factor strikes an
appropriate balance between providing funds an appropriate amount of
discretion and requiring that relevant costs be considered when setting
the swing factor. However, in response to commenter concerns, we have
eliminated certain of the proposed considerations and have clarified
that a fund may only take into account those considerations set forth
in the rule.
    The final rule specifies that the determination of a fund's swing
factor must take into account only the near-term costs expected to be
incurred by the fund as a result of net purchases or net redemptions
that occur on the day the swing factor is used (emphasis added). The
phrase ``near-term'' is meant to reflect that investing proceeds from
net purchases or satisfying net redemptions could involve costs that
may not be incurred by the fund for several days. The rule text
specifies that the costs to be considered are those that are expected
to be incurred by the fund as a result of the net purchase or net
redemption activity that occurred on the day the swing factor is used;
this specification is designed to help ensure that the only costs to be
taken into account are those that are directly related to the purchases
or redemptions at issue. Thus, while the term ``near-term costs'' does
not envision a precise number of days, we believe that, in context,
this term would not likely encompass costs that are significantly

removed in time from the purchases or redemptions at issue.
    The near-term costs required to be considered are limited to spread
costs,\232\ transaction fees and charges arising from purchasing or
selling assets,\233\ and borrowing-related costs associated with
satisfying redemptions. We anticipate that the particular transaction
fees and charges that a fund would likely consider, for example, would
include mark-ups and mark-downs, brokerage commissions and custody
fees, as well as other charges, fees, and taxes associated with
portfolio asset purchases or sales (for example, transfer taxes and
repatriation costs for certain foreign securities, or transaction fees
associated with portfolio investments in other investment companies). A
fund also must consider borrowing-related costs associated with
satisfying redemptions, such as the interest charges or other costs
paid if a fund were to draw on a line of credit or engage in interfund
borrowing in order to pay redemptions. These borrowing costs, like the
specific transaction costs associated with purchasing and selling
portfolio assets, could dilute the value of the shares held by non-
transacting shareholders, and also can leverage the fund.\234\ A fund
should consider near-term costs in developing its policies and
procedures for determining a swing factor. The rule as adopted thus
requires funds to incorporate an assessment of multiple sources of
potential dilution when setting the swing factor.
---------------------------------------------------------------------------

    \232\ See Proposing Release, supra footnote 6, at n.416
(defining ``spread costs'' as those ``incurred indirectly when a
fund buys a security from a dealer at the `asked' price (slightly
above current value) or sells a security to a dealer at the `bid'
price (slightly below current value). The difference between the bid
price and the asked price is known as the `spread.' '').
    \233\ ``Transaction fees and charges'' are defined in rule 22c-
1(a)(3) to mean ``brokerage commissions, custody fees, and any other
charges, fees, and taxes associated with portfolio asset purchases
and sales.'' Rule 22c-1(a)(3)(v)(E).
    \234\ See Liquidity Risk Management Programs Adopting Release,
supra footnote 8, at section III.B.2.c for discussion regarding
lines of credit.
---------------------------------------------------------------------------

ii. Elimination of Consideration of Market Impact Costs
    Under the proposal, the costs a fund would have been required to
consider would have included market impact costs \235\ associated with
the fund trading portfolio assets.\236\ Many commenters addressing the
proposed cost considerations indicated that we should not require a
fund to consider market impact costs in determining its swing
factor.\237\ These commenters indicated that estimating market impact
costs can be very difficult and requires an exercise of judgment that
fund managers may not be comfortable undertaking. These commenters also
noted that few funds in other jurisdictions that use swing pricing
include market impact costs in their swing factors and indicated that
estimated market impact costs would reduce swing factor precision.\238\
We understand the difficulties in estimating market impact costs in
other jurisdictions may also apply for some U.S. funds were we to
require consideration of market impact costs when applying swing
pricing here.\239\ In light of concerns that many funds may not be able
to readily estimate market impact costs, as well as concerns that
subjective estimates of market impact costs could grant excessive
discretion in the determination of a swing factor,\240\ we have
eliminated the consideration of market impact costs in setting the
swing factor under the final rule. In making this determination, we
have balanced our concerns regarding potential abusive practices
against the fact that funds using swing pricing potentially may not
capture all the costs that are likely to result from shareholder
transactions on the trade date.
---------------------------------------------------------------------------

    \235\ See Proposing Release, supra footnote 6, at n.415
(defining ``market impact costs'' as those costs ``incurred when the
price of a security changes as a result of the effort to purchase or
sell the security. Stated formally, market impacts are the price
concessions (amounts added to the purchase price or subtracted from
the selling price) that are required to find the opposite side of
the trade and complete the transaction. Market impact cost cannot be
calculated directly. It can be roughly estimated by comparing the
actual price at which a trade was executed to prices that were
present in the market at or near the time of the trade.'').
    \236\ The proposed rule would have required a fund's policies
and procedures for determining the swing factor to take into account
all near-term costs that are expected to be incurred as a result of
net purchases or net redemptions that occur on the day the swing
factor is used to adjust the fund's NAV, including any market impact
costs, spread costs, and transaction fees and charges arising from
asset purchases or asset sales in connection with those purchases or
redemptions, as well as any borrowing-related costs associated with
satisfying those redemptions. See proposed rule 22c-
1(a)(3)(i)(D)(1).
    \237\ See, e.g., ICI Comment Letter I; Invesco Comment Letter;
J.P. Morgan Comment Letter; T. Rowe Comment Letter.
    \238\ Id. See also ALFI Survey 2015, supra footnote 42, at 10
(indicating that 10% of survey respondents consider market impact
costs).
    \239\ We note that some fund complexes may utilize technological
tools, such as best execution systems, that estimate trading cost
information, including market impact, but that not all funds may
have access to these tools and the quality of these estimation
systems may vary.
    \240\ See AFR Comment Letter (questioning the degree of
discretion afforded to funds in setting the swing factor adjustment
under the proposal).
---------------------------------------------------------------------------

iii. Elimination of Consideration of Value of Assets Purchased or Sold
    Under the proposed rule, a fund's policies and procedures for
determining the swing factor would have been required to consider
information about the value of assets purchased or sold by the fund as
a result of the net purchases or net redemptions that occur on the day
the swing factor is used to adjust the fund's NAV, if that information
would not be reflected in the current NAV of the fund computed that
day.\241\ One commenter noted that obtaining this information on a
timely basis may be difficult.\242\ Another commenter objected to
including this consideration, arguing that it is unclear and does not
correspond to common swing pricing practices in Europe.\243\ The
commenter also suggested that taken literally, this consideration
appears to reflect changes in prices attributable to a specific day,
which is in tension with the proposal's treatment of a swing factor
being allowed to be determined on a periodic basis.\244\
---------------------------------------------------------------------------

    \241\ Proposed Rule 22c-1(a)(3)(i)(D)(2).
    \242\ See Invesco Comment Letter.
    \243\ See SIFMA Comment Letter II.
    \244\ See infra footnote 268 and accompanying paragraph.
---------------------------------------------------------------------------

    This consideration was meant to reflect the fact that a fund's NAV
will generally not reflect changes in holdings of the fund's portfolio
assets and changes in the number of the fund's outstanding shares until
the first business day following the fund's receipt of the
shareholder's purchase or redemption requests.\245\ Thus, the price
that a shareholder receives for his or her purchase or sale of fund
shares customarily does not take into account market-related costs that
arise even when the fund trades portfolio assets on the same day in
order to meet shareholder purchases or redemptions. However, we
recognize that requiring inclusion of such information may imply a
level of precision in setting the swing factor tied to changes that
occur each day that would undercut funds being able to set a swing
factor on a periodic basis, with adjustments for more significant
market movements or other more significant cost changes. Accordingly,
we believe requiring consideration of such costs in setting the swing
factor would be inappropriate at this time. In making this
determination, we have balanced these concerns against the fact that
funds using swing pricing potentially may not capture all the costs
that are likely to

result from shareholder transactions on the trade date.
---------------------------------------------------------------------------

    \245\ See Proposing Release, supra footnote 6 at n.412 and
accompanying text.
---------------------------------------------------------------------------

Reasonable in Relation to Costs
    The final rule now includes an explicit requirement that any swing
factor used be reasonable in relation to the costs incurred by the
fund. One commenter objected that as proposed, the swing pricing rule
did not assign an explicit duty to fund sponsors or boards to limit NAV
adjustments to amounts that are reasonable in relation to the estimated
fund costs associated with the capital activity giving rise to the
adjustment.\246\ Another commenter was concerned that the substantial
discretion provided in setting the swing factor could lead to potential
abuse, and if set arbitrarily, could effectively serve as a form of
gating.\247\
---------------------------------------------------------------------------

    \246\ See Eaton Vance Comment Letter.
    \247\ See AFR Comment Letter.
---------------------------------------------------------------------------

    We believe that as required under the proposal, by requiring the
swing factor be set based on the considerations discussed above, funds
would have necessarily been evaluating the reasonableness of the swing
factor and its relationship to costs (and their boards will provide
oversight over this process, including through the approval of swing
pricing policies and procedures).\248\ We agree, however, that this
requirement should be made explicit. Accordingly, we are requiring in
the final rule to require that swing pricing policies and procedures
include a requirement that the relationship between the swing pricing
factor(s) used and the fund costs associated with the capital activity
giving rise to the adjustment be reasonable in relationship to these
costs.\249\ We believe that requiring such an explicit requirement that
a swing factor be reasonably related to the costs incurred by the fund
should serve to address concerns of arbitrariness or potential abuse in
the setting of a swing factor.
---------------------------------------------------------------------------

    \248\ See supra footnote 231 and accompanying paragraph.
    \249\ See rule 22c-1(a)(3)(i)(C).
---------------------------------------------------------------------------

Upper Limit on Swing Factor
    Under the final rule, the fund must establish an upper limit for
the fund's swing factor, which may not exceed two percent of NAV per
share. This swing factor upper limit (and any changes thereto) must be
approved by the fund's board of directors. The proposal did not
prescribe an upper limit or ``cap'' on the swing factor that a fund
would be permitted to use, nor did it mandate that funds' swing
policies and procedures establish such an upper limit. Instead, the
proposed rule would have permitted a fund to adopt an upper limit on
the swing factor as part of its swing pricing policies and procedures,
and the fund's board would have been required to approve any such upper
limit. We requested comment on whether the Commission should require an
upper limit on the swing factor that a fund would be permitted to use
and whether two percent or some other limit would be appropriate.
    Commenter responses in this area were mixed. One commenter agreed
that it was appropriate for the proposed swing pricing rules to permit,
but not require, funds to adopt a swing factor cap.\250\ Another
commenter stated that the Commission had appropriately not prescribed
an upper limit in the proposal.\251\ Other commenters, however,
expressed investor protection-related concerns regarding the proposed
swing pricing rules, indicating that the rules lacked sufficient
transparency regarding swing factors and/or that the rules ignored
economic incentives that would cause funds to employ swing pricing
overly aggressively.\252\ One of these commenters argued that the
discretion provided to funds in setting the swing factor ``could
effectively form a gating during periods of market stress'' and that
``such de facto gating could harm investors.'' \253\
---------------------------------------------------------------------------

    \250\ See HSBC Comment Letter (stating that a disclosed upper
limit may provide useful guidance to investors, but arguing that
``[i]n periods of market stress, spreads and swing factors may widen
and a hardcoded regulatory limit could be detrimental to existing
investors.'').
    \251\ See Invesco Comment Letter.
    \252\ See, e.g., AFR Comment Letter (arguing that the proposed
swing pricing included excessive discretion regarding the level of
the swing pricing adjustment); Eaton Vance Comment Letter (arguing
that ``buyers and sellers would never know, or be able to reasonably
estimate, even the approximate impact of swing pricing on their
transaction prices'' and stating that ``[e]xposing transacting
shareholders to undisclosed and uncapped transaction costs that may
bear little or no relation to the associated fund costs does not
strike us as a fair deal.'') (emphasis omitted).
    \253\ See AFR Comment Letter.
---------------------------------------------------------------------------

    We are persuaded that the final rule must allow enough flexibility
in the determination of a swing factor to keep the factor reasonably
related to transaction costs. At the same time, however, we believe
that it is appropriate to limit the swing factor that may be used to
avoid placing an undue restriction or de facto gate on shareholders'
ability to redeem their shares and to prevent potentially unfair
treatment of shareholders and abusive practices. The Commission has
limited redemption fees under rule 22c-2 to no more than two percent of
the amount redeemed,\254\ and in the context of money market funds, the
Commission has given a money market fund's board the ability to impose
a liquidity fee of no more than two percent.\255\ In those cases, we
sought to balance the fees imposed with shareholders' need to redeem
without incurring disproportionate costs. In the context of swing
pricing, placing an upper limit on the swing factor also provides
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, even though it
may result in a fund not recouping all of the transaction costs the
fund may incur in connection with shareholder capital activity and thus
not mitigating all dilution that may result from such activity.
Additionally, an upper limit on the amount a fund adjusts its NAV could
mitigate volatility and tracking error issues that could arise from the
use of swing pricing.
---------------------------------------------------------------------------

    \254\ See Redemption Fees Adopting Release, supra footnote 24,
at 12 (stating that redemption fees in excess of two percent ``could
harm ordinary shareholders who make an unexpected redemption as a
result of a financial emergency'' and ``would in our judgment impose
an undue restriction on the redeemability of shares required by the
Act.'').
    \255\ See 2014 Money Market Fund Reform Adopting Release, supra
footnote 38, at 95 (``[W]e are limiting the maximum liquidity fee
that may be imposed by a fund to 2%. As with the default fee, we
seek to balance the need for liquidity costs to be allocated to
redemptions with shareholders' need to redeem absent
disproportionate costs. We also believe setting a limit on the level
of a liquidity fee provides notice to investors about the extent to
which a liquidity fee could impact their investment. In addition, as
recognized by at least one commenter, the staff has noted in the
past that fees greater than 2% raise questions regarding whether a
fund's securities remain `redeemable.' '') (internal citation
omitted).
---------------------------------------------------------------------------

    Based on these considerations, we believe it is appropriate for the
Commission to set a maximum amount for the swing factor, as we have
done with redemption fees on funds and liquidity fees on money market
funds, given our desire to balance the fair allocation of fund costs
created by shareholder transaction activity with the redeemable nature
of open-end funds. Nevertheless, we still consider it appropriate to
require funds to establish an upper limit on the swing factor(s) the
fund will use as part of their swing pricing policies and procedures,
within the two percent of NAV per share confines, because for some
funds a swing factor upper limit of less than two percent may be
appropriate given that fund's redemption history and investment
strategy.\256\ Indeed, many funds may consider two percent of NAV per
share to be a form of a ``default'' limit, but where the fund (with the
approval of its board) can find that a lower limit is in the fund's
best interest,

similar to the approach we took regarding money market fund liquidity
fees.\257\ Because the upper limit would affect the swing factor a fund
would use to adjust its NAV when net purchases or net redemptions
exceed the fund's swing threshold, the fund is required to take into
account the swing factor considerations when establishing a swing
factor upper limit (while staying within the two percent maximum
limit).\258\
---------------------------------------------------------------------------

    \256\ See rule 22c-1(a)(3)(i)(C).
    \257\ See rule 2a-7(c)(2)(ii) (if a money market fund's weekly
liquid assets fall below ten percent of its total assets, the fund
must institute a liquidity fee of 1% of value of shares redeemed,
unless the fund's board of directors, including a majority of the
directors who are not interested persons of the fund, determines
that imposing the fee is not in the best interests of the fund or
that a higher (not to exceed 2%) or lower fee level is in the best
interest of the fund).
    \258\ Rule 22c-1(a)(3)(i)(C).
---------------------------------------------------------------------------

    We acknowledge that certain foreign jurisdictions that permit swing
pricing do not place an upper limit on the swing factor that a fund may
set. Instead, funds that use swing pricing within those jurisdictions
may voluntarily limit the level of the swing factor to be applied, with
such limits generally ranging from 1%-3%.\259\ We also acknowledge that
certain funds, particularly funds that invest in asset classes with
higher spreads and other associated transaction costs, may be unable to
recoup all transaction costs or mitigate all potential dilution
associated with shareholders' capital activity if the maximum upper
limit is set at two percent. However, we believe that capping the
maximum swing factor upper limit at two percent will permit funds to
pass on some of the transaction costs to purchasing and redeeming
shareholders without imposing an undue restriction on the redeemability
of shares required by the Act.
---------------------------------------------------------------------------

    \259\ ALFI Survey 2015, supra footnote 42 at 7 (noting, however,
that approximately half of respondents that use swing pricing cap
the level of the swing factor applied on certain asset classes, with
equity, fixed income and multi-asset funds most commonly capped at
two percent).
---------------------------------------------------------------------------

    The final rule requires the fund's board to approve the fund's
swing factor upper limit and any changes thereto.\260\ A number of
commenters objected to the proposed requirement that, if the fund set a
swing factor upper limit, the board must approve the upper limit. These
commenters argued that the fund adviser is best suited for setting any
cap, because it requires in-depth knowledge of the day-to-day
management and administration of the fund--activities performed by the
adviser and other service providers and not the board.\261\ On the
other hand, one commenter stated that the proposal granted excessively
broad discretion to fund managers to design the swing pricing
procedures, and excessive discretion in setting the swing factor. This
commenter feared that excessive discretion could result in unequal
treatment of investors that was not fully justified by differences in
the market impact of their fund transactions.\262\
---------------------------------------------------------------------------

    \260\ See rule 22c-1(a)(3)(ii)(B).
    \261\ See, e.g., BlackRock Comment Letter; CRMC Comment Letter;
Dechert Comment Letter; FSR Comment Letter.
    \262\ See AFR Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we believe board approval of a fund's
swing factor upper limit (and any changes thereto), combined with
required review of a written report from the administrator describing,
among other things, the administrator's review and assessment of the
fund's swing factor upper limit, including information and data
supporting this determination, will serve to limit the degree of
discretion granted to fund management, while providing management with
the flexibility to manage the day-to-day administration of swing
pricing. Obtaining board oversight of the swing factor upper limit will
help ensure that a fund establishes a swing factor upper limit that is
in the best interests of the fund's shareholders. We also believe it is
appropriate for the fund board to approve the fund's specific upper
limit given the important balancing that it effects between the
redeemable nature of the fund's shares against the fair allocation of
fund costs from shareholder transaction activity--a balance between
various shareholder interests that we believe the board is best
situated to judge. Requiring board oversight of the swing factor upper
limit is also consistent with the approach the Commission took in rule
22c-2 under the Act, where the fund board is required to approve any
redemption fee that the fund establishes.\263\ We further believe that
the board review requirement serves to address the concerns of those
commenters that suggested the board may not have the necessary
information or expertise to approve the swing factor upper limit (and
changes to the swing factor upper limit).\264\
---------------------------------------------------------------------------

    \263\ See rule 22c-2(a)(1). See also supra footnotes 24-31 and
accompanying text.
    \264\ See infra section II.A.3.f.
---------------------------------------------------------------------------

    Finally, we are also requiring funds to disclose the swing factor
upper limit on Form N-1A and Form N-CEN. We believe that an adequate
level of transparency about swing pricing is critical for investors to
understand the risks associated with investing in a particular fund,
and that requiring disclosure of a fund's swing factor upper limit will
provide important transparency to fund shareholders regarding the
maximum amount that a shareholder could expect the share price to be
adjusted on account of swing pricing. We also believe that this
transparency could serve as a check on funds that may seek to employ
swing pricing overly aggressively.\265\ Foreign domiciled funds that
voluntarily limit the level of the swing factor to be applied typically
disclose the swing factor upper limit in the fund's offering
documents.\266\
---------------------------------------------------------------------------

    \265\ See Eaton Vance Comment Letter (``The Swing Pricing
Proposal does not appear to recognize that fund sponsors will have
an economic incentive to apply swing pricing aggressively, because
doing so improves the competitiveness of the funds they manage by
increasing reported returns.'').
    \266\ Id.
---------------------------------------------------------------------------

Additional Considerations
    A fund could take a variety of approaches to determining its swing
factor, so long as the fund's process for how the swing factor is
determined includes the considerations set forth in rule 22c-
1(a)(3)(i)(C). For example, a fund may wish to set a ``base'' swing
factor, and adjust it as appropriate if certain aspects required to be
considered in determining the swing factor deviate from a range of pre-
determined norms (for example, if spread costs generally exceed a
certain pre-determined level). Alternatively or additionally, a fund
that uses swing pricing may wish to incorporate into its policies and
procedures a formula or algorithm that includes the required
considerations for determining the swing factor.
    With respect to the process for determining the swing factor, one
commenter opined that the swing factor must be ``quantitative and
automatable,'' \267\ and another similarly suggested that the
Commission should make clear that the swing factor may be determined on
a periodic basis, rather than calculated anew each day that the swing
factor is applied.\268\ We agree that a swing factor could generally be
determined on a periodic basis, as long as developments such as
significant market developments prompt a quicker re-evaluation. We
believe that these aspects of swing factor determination should be
addressed by funds when designing their policies and procedures
relating to swing pricing, and are reflected in the final rule.
---------------------------------------------------------------------------

    \267\ See Invesco Comment Letter.
    \268\ See SIFMA Comment Letter II.

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

f. Governance, Oversight and Other Considerations
    Although the final rule requires a fund that uses swing pricing to
obtain approval of its swing pricing policies and procedures from the
fund's board, including a majority of independent directors, in a
change from the proposal, the final rule does not require the board to
approve material changes to the policies and procedures. The rule
provides that a fund's board-approved swing pricing policies and
procedures must specify the process for how the fund's swing
threshold(s), swing factor(s), and swing factor upper limit are
determined. In addition, the final rule requires that the fund board
approve the fund's swing threshold(s) and the upper limit on the swing
factor(s) used by the fund, as well as any changes thereto. The rule
requires that a fund's board designate the fund's investment adviser,
officer or officers responsible for administering the fund's swing
pricing policies and procedures.\269\ Similar to the proposal, the
final rule provides administration of the swing pricing policies and
procedures must be reasonably segregated from portfolio management of
the fund and may not include portfolio managers (although portfolio
managers may provide data or other input used by those responsible for
administering the policies and procedures). Finally, the fund board
must also review a periodic written report prepared by the fund's swing
pricing administrator that includes certain required information and
the fund must meet certain recordkeeping requirements related to its
swing pricing policies and procedures, as described below.
---------------------------------------------------------------------------

    \269\ Rule 22c-1(a)(3)(ii)(C).
---------------------------------------------------------------------------

Board Role
    As described above, consistent with the proposal, a fund's board of
directors must approve two core elements of a fund's swing pricing
program--the swing threshold(s) and the swing factor upper limit. The
swing threshold establishes the point at which swing pricing begins to
affect fund shareholders, and thus involves an important balancing of
various shareholder interests. Similarly, the swing factor upper limit
reflects a balancing of the redeemable nature of the fund's shares
against the fair allocation of fund costs from shareholder transaction
activity. In both cases, the board has an important role in balancing
shareholder interests. This is consistent with the board's role in
other contexts under the Act. For example, a fund's board has
significant responsibility regarding valuation- and pricing-related
matters.\270\
---------------------------------------------------------------------------

    \270\ See, e.g., section 2(a)(41)(B) of the Act and rule 2a-4
thereunder (when market quotations are not readily available for a
fund's portfolio securities, the Investment Company Act requires the
fund's board of directors to determine, in good faith, the fair
value of the securities); rule 2a-7(c)(1)(i) and rule 2a-
7(g)(1)(i)(A)-(C) (a stable NAV money market fund that qualifies as
a retail or government money market fund may use the amortized cost
method of valuation to compute the current share price provided,
among other things, the board of directors believes that the
amortized cost method of valuation fairly reflects the market-based
NAV and does not believe that such valuation may result in material
dilution or other unfair results to investors or existing
shareholders). See also rule 18f-3(d) (requiring the board,
including a majority of independent directors, to find that a fund's
multi-class plan is in the best interests of each share class
individually and the fund as a whole, and providing that before any
vote on a fund's multi-class plan, the directors are required to
request and evaluate such information as may be reasonably necessary
to evaluate the plan).
---------------------------------------------------------------------------

    In addition, we believe that ongoing oversight of a fund's swing
pricing program, which necessarily involves addressing a diverse range
of issues, some technical, requires a calibrated balance between the
role of the board and the role of management. Accordingly, under the
final rule, a fund's board of directors must approve the fund's initial
swing pricing policies and procedures, as proposed. However, in a
change from the proposal, instead of the board approving any material
changes to the swing pricing policies and procedures and instead of the
fund performing a periodic review of the fund's swing threshold,\271\
the board will provide its ongoing oversight of the fund's swing
pricing by reviewing, no less frequently than annually, a written
report prepared by the person(s) responsible for administering the
fund's swing pricing policies and procedures. This written report must
describe: (i) The swing pricing administrator's review of the adequacy
of the fund's swing pricing policies and procedures and the
effectiveness of their implementation, including the impact on
mitigating dilution; (ii) material changes to the policies and
procedures since the date of the last report; and (iii) 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 a review and assessment of
information and data supporting these determinations.\272\
---------------------------------------------------------------------------

    \271\ See supra section II.A.3.c.
    \272\ See rule 22c-1(a)(3)(ii).
---------------------------------------------------------------------------

    In the proposal, we asked comment on the extent to which the board
oversight requirements we proposed would ensure that a fund establishes
policies and procedures that are in the interest of all fund
shareholders.\273\ A number of commenters believed that appropriate
board oversight of swing pricing is key to ensuring proper
administration of swing pricing in the interest of fund
shareholders,\274\ and many generally supported the proposed
requirement for a fund's board to approve its swing pricing policies
and procedures.\275\ Several commenters suggested, in particular, that
regular reports on the administration of swing pricing would help the
board in its oversight role, and facilitate the appropriate use of
swing pricing.\276\ Another commenter suggested that the board should
periodically review whether adjustments should be made to swing pricing
policies and procedures.\277\
---------------------------------------------------------------------------

    \273\ See Proposing Release, supra footnote 6, at text following
n.522.
    \274\ See, e.g., Blackrock Comment letter; CRMC Comment Letter.
    \275\ See CRMC Comment Letter; CFA Comment Letter; HSBC Comment
Letter; IDC Comment Letter; J.P. Morgan Comment Letter; MFDF Comment
Letter; Charles Schwab Comment Letter.
    \276\ See, e.g., Blackrock Comment letter (``The Swing Pricing
Committee should report to the mutual fund board at regular
scheduled intervals . . .''); CRMC comment letter (``[W]e believe
that fund boards should be given visibility to such determinations
[of the swing threshold and swing factor limit] through written
reports . . .'').
    \277\ See Charles Schwab Comment Letter.
---------------------------------------------------------------------------

    However, a number of commenters objected to the particular methods
we proposed for ongoing board oversight of swing pricing, including the
proposed requirement that the board specifically approve the fund's
swing threshold and any swing factor cap that that the fund
adopts.\278\ These commenters argued that the fund adviser, rather than
the board, is best suited for setting these parameters, because it
requires in-depth knowledge of the day-to-day management and
administration of the fund--activities performed by the adviser and
other service providers and not the board. Commenters also argued that
fund boards should not be required to approve material changes to a
fund's policies and procedures, as obtaining approval from fund boards
may unnecessarily constrain management, considering the infrequency of
board meetings and the significant changes in markets that may occur
between them.\279\ On the other hand, one commenter stated that the
proposal

granted excessively broad discretion to fund managers to design the
swing pricing procedures, and excessive discretion in setting the swing
pricing threshold and factor, which this commenter feared could result
in unequal treatment of investors not fully justified by differences in
the market impact of their fund transactions.\280\
---------------------------------------------------------------------------

    \278\ See, e.g., BlackRock Comment Letter; CRMC Comment Letter;
Dechert Comment Letter; FSR Comment Letter.
    \279\ See Liquidity Risk Management Programs Adopting Release,
supra footnote 8, at section III.H.2 for a more detailed discussion
regarding comments received regarding board approval of material
changes to fund policies and procedures.
    \280\ See AFR Comment Letter.
---------------------------------------------------------------------------

    As discussed above, after considering comments, we believe
requiring the board to approve a fund's swing threshold(s) and swing
factor upper limit (and any changes thereto) is an important, targeted
means to help ensure that a fund's swing pricing policies and
procedures are in the best interests of fund shareholders. In addition,
with respect to oversight beyond these discrete elements, we believe
that board approval of swing pricing policies and procedures combined
with required review of a report laying out information and analyses
supporting how the important components of swing pricing are
determined--the swing factor(s), swing threshold(s), and swing factor
upper limit--appropriately balances the concerns of some commenters
that the board should not be involved in the day-to-day administration
of swing pricing with the concerns of other commenters that the rule
should prevent excessive discretion granted to fund management and
inappropriate treatment of fund shareholders. Although we consider the
adviser better suited to administering the fund's swing pricing
policies and procedures, we believe that requiring board approval of
the policies and procedures and requiring board review of the
administrator's report that includes certain required information are
integral to an effective ongoing assessment of swing pricing. We also
believe these requirements will help ensure that a fund establishes and
implements swing pricing policies and procedures that are in the best
interests of the fund's shareholders. As noted above, a fund's board
has significant responsibility regarding valuation- and pricing-related
matters,\281\ and it is required to approve valuation and compliance-
related policies and procedures.\282\ Additionally, in the past we have
stated that a fund's compliance policies and procedures, which must be
approved by the fund's board (including a majority of independent
directors), should include procedures for the pricing of portfolio
securities and fund shares.\283\ In particular, we note that rule 38a-1
requires that a board receive a written report on the operation of the
policies and procedures that the fund has adopted that are reasonably
designed to prevent violation of the federal securities laws, which
would include rule 22c-1.
---------------------------------------------------------------------------

    \281\ See supra footnote 270.
    \282\ See, e.g., Accounting for Investment Securities by
Registered Investment Companies, Accounting Series Release No. 118
(Dec. 23, 1970) (a board, consistent with its responsibility to
determine the fair value of each issue of restricted securities in
good faith, determines the method of valuing each issue of
restricted securities in the company's portfolio, and the actual
valuation calculations may be made by persons acting pursuant to the
board's direction; the board must continuously review the
appropriateness of the method used in valuing each issue of security
in the company's portfolio); and Rule 38a-1 Adopting Release, supra
footnote 179, at text accompanying n.46 (stating that rule 38a-1
requires fund directors to approve written compliance policies and
procedures that require each fund to ``provide a methodology or
methodologies by which the fund determines the fair value of the
portfolio security'').
    \283\ See Rule 38a-1 Adopting Release, supra footnote 179, at
nn.39-47 and accompanying text.
---------------------------------------------------------------------------

    The report the board must review contains several important
elements. These elements are designed to provide the board with the
types of information that the board would consider relevant and likely
request if required to approve material changes to the fund's swing
pricing policies and procedures. As noted above, in light of comments,
we are replacing the proposed requirement that the board approve all
material changes to the swing pricing policies and procedures and the
proposed requirement of a fund review of the swing threshold with
required board review of the swing pricing administrator's report.
First, the report must describe the swing pricing administrator's
review of the adequacy of the fund's swing pricing policies and
procedures and the effectiveness of their implementation, including the
impact on mitigating dilution. This will help the board satisfy its
fiduciary role that the fund pricing process is operating in the best
interest of fund shareholders. It also is similar to the requirements
of rule 38a-1 \284\ and thus should be a familiar process for funds and
their boards. Second, the report must describe any material changes to
the fund's swing pricing policies and procedures since the last report.
Because the board is not required to approve these changes before they
take effect, it is important that they nevertheless be informed of
these changes to provide effective oversight of swing pricing. Finally,
the final rule provides that a fund's swing pricing policies and
procedures must specify the process used by the fund to determine the
fund's swing threshold(s), swing factor(s), and swing factor upper
limit, and that the swing pricing administrator's report must describe
the administrator's review and assessment of the fund's swing
threshold(s), swing factor(s), and swing factor upper limit considering
the requirements of the rule, including a review and assessment of
information and data supporting these determinations. The swing
threshold(s), swing factor(s), and swing factor upper limit are the key
features of swing pricing practices and ultimately drive the prices at
which fund shareholders will transact. Accordingly, providing boards
with information on how these essential parameters are determined, and
a review and assessment of how well these processes are leading to the
right parameters, is important in enabling boards to satisfy their
oversight role. In particular, this information may assist the board in
its consideration of any recommended changes to the fund's swing
threshold(s) or swing factor upper limit. These elements of the
report--and the related board oversight--are also intended to address
commenter concerns that the proposed swing pricing framework granted
fund manager's excessive discretion in setting the swing threshold and
swing factor, particularly given conflicting interests that fund
personnel may have.\285\ The board has traditionally provided oversight
when there are potential conflicts at the fund.
---------------------------------------------------------------------------

    \284\ See rule 38a-1(a)(3) and rule 38a-1(a)(4)(iii) (requiring
that the fund's chief compliance officer provide a report to the
fund's board, at least annually, covering certain specified matters
relating to the fund's compliance program and requiring an annual
review of the adequacy of the fund's compliance policies and
procedures and the effectiveness of their implementation).
    \285\ Eaton Vance Comment Letter (``While the proposed rule
specifies the factors that must be considered in establishing a
fund's swing threshold and swing factor, it provides little guidance
to fund sponsors and fund boards on how to balance the conflicting
interests of continuing shareholders (benefiting from low swing
thresholds and high swing factors) versus transacting shareholders
(benefiting from high swing thresholds and low swing factors) in
setting appropriate swing thresholds and applying reasonable swing
factor adjustments each day that the swing threshold is
exceeded.''); AFR Comment Letter (stating that ``[t]he proposal
includes substantial discretion concerning the threshold for swing
pricing and the actual level of the swing pricing adjustment. We
believe this discretion is excessive.'').
---------------------------------------------------------------------------

    We note that this report must include an assessment of the
information and data supporting the fund's swing threshold(s), swing
factor(s), and swing factor upper limit. We believe that the inclusion
of this information in the board report should help provide the board
sufficient information about the inputs used in swing pricing to
provide proper oversight of the fund's swing pricing processes and
further address the concerns of commenters noted

above. The information and data supporting these determinations may
take a variety of forms, such as reviews or back-tests of shareholder
flows and transaction costs in relation to the swing threshold(s),
swing factor(s), and swing factor upper limit used by the fund. Back-
testing of swing thresholds and factors, for example, is used in swing
pricing practices in Europe,\286\ and we expect it may enhance the
accuracy and effectiveness of swing pricing as a tool to mitigate
potential shareholder dilution.
---------------------------------------------------------------------------

    \286\ See JP Morgan Comment Letter (discussing back-testing of
cash flow projections it performed in confirming the accuracy of its
swing pricing determinations); ICI Comment Letter (noting that the
ALFI guidelines require regular back-testing of a fund's swing
threshold and swing factor).
---------------------------------------------------------------------------

    Overall, we believe that the board approval and oversight
requirements in the final rule will help a fund establish and implement
swing pricing policies and procedures that are in the best interests of
the fund and its shareholders. Because fund directors have an
obligation to act in the best interests of the fund,\287\ approving
policies and procedures that are designed to disadvantage shareholders
would not be consistent with their fiduciary duties. In fulfilling
these duties, while the board bears ultimate responsibility for meeting
its obligations under its fiduciary duty and our rules, the board may
choose, where consistent with the prudent discharge of its fiduciary
duties, to make its determinations while relying on reports it receives
under this rule and such other information and data as it determines
appropriate from the person(s) administering the swing pricing
program.\288\
---------------------------------------------------------------------------

    \287\ See, e.g., Interpretive Matters Concerning Independent
Directors of Investment Companies, Investment Company Act Release
No. 24083 (Oct. 14, 1999) [64 FR 59877 (Nov. 3, 1999)] (discussing
staff's views of directors' duties of care and loyalty).
    \288\ See also Letter of Michael Didiuk, Division of Investment
Management, Securities and Exchange Commission, to Dorothy Berry,
Chair, Independent Directors Council, and Jameson Baxter, Chair,
Mutual Fund Directors Forum (Nov. 2, 2010), available at https://www.sec.gov/divisions/investment/noaction/2010/idc-mfdf110210.pdf.
---------------------------------------------------------------------------

Designation of Administrator
    As under the proposal, the board will be required to designate the
fund's adviser, officer, or officers responsible for the administration
of the fund's swing pricing policies and procedures. As discussed
above, multiple commenters supported the proposal's approach that the
fund's board should not be required to administer the fund's swing
pricing policies and procedures,\289\ and instead should designate a
swing pricing administrator.\290\ One commenter, however, suggested
that the fund's adviser, not the board, should be responsible for
designating the person responsible for administering the fund's swing
pricing policies and procedures.\291\ We believe that it is appropriate
and consistent with the board's historical role and its
responsibilities under other of our rules for the board to be
responsible for designating the administrator. We believe that having
the board approve the administrator should help enhance board oversight
of swing pricing and allow for boards to better understand who is
responsible for administering it. Accordingly, we are retaining this
requirement in the final rule.
---------------------------------------------------------------------------

    \289\ See Dechert Comment Letter; IDC Comment Letter; MFDF
Comment Letter.
    \290\ See CFA Comment Letter; HSBC Comment Letter.
    \291\ See IDC Comment Letter.
---------------------------------------------------------------------------

    We note that it is currently common industry practice for foreign
domiciled funds that use swing pricing to appoint a committee to
administer the fund's swing pricing operations.\292\ A fund's board may
wish to consider requiring the fund's swing pricing policies and
procedures to be administered by a committee, and to specify the
officers or functional areas that comprise the committee (taking into
account any possible conflicts for the fund and the adviser related to
swing pricing). The persons or committee tasked with swing pricing
oversight may wish to meet periodically to determine the swing
factor(s) the fund would use in a variety of circumstances, taking into
account the considerations discussed above in section II.A.3.e. A fund
may wish to consider delineating the frequency with which these persons
would meet in its policies and procedures; for example, a fund's
policies and procedures might specify that these persons shall meet
periodically, such as monthly or quarterly, and more frequently if
market conditions require.
---------------------------------------------------------------------------

    \292\ See, e.g., BlackRock Fund Structures Paper, supra footnote
46; J.P. Morgan Asset Management Swing Pricing Paper, supra footnote
60; and Franklin Templeton Investments, Swing pricing: Investor
protection against fund dilution (last visited Apr. 15, 2015),
available at http://www.franklintempletongem.com/downloadsServlet?docid=hm2t1yb7.
---------------------------------------------------------------------------

Segregation From Portfolio Management Function
    As proposed, the swing pricing rule would have required that the
determination of the swing factor must be reasonably segregated from
the portfolio management function of the fund. The final rule as
adopted, is similar to the proposed requirement; however, it has been
modified to provide that administration of a fund's swing pricing
policies and procedures must be reasonably segregated from portfolio
management of the fund and ``may not include portfolio managers.''
\293\ We noted in the Proposing Release that portfolio managers may
have conflicts of interest with respect to setting the swing factor,
and therefore did not believe that they should be involved in setting
the swing factor. We believe that requiring segregation of functions
(and clarifying in the rule text that portfolio managers may not be
involved) with respect to the administration of swing pricing
generally, and not just with respect to setting the factor, will
provide better clarity of roles and reduce the possibility of conflicts
of interest in the administration of swing pricing.
---------------------------------------------------------------------------

    \293\ We recognize that smaller fund complexes may have
different personnel choices available when determining who would be
responsible for administering their funds' swing pricing policies
and procedures. See infra section III.
---------------------------------------------------------------------------

    We believe that, because of the potential conflict of interest that
a portfolio manager who may be compensated based on fund performance
may have if they are involved in setting the swing factor (which if not
set properly, may have the effect of increasing fund performance
inappropriately rather than recouping the transaction costs associated
with purchasing and redeeming shareholders' capital activity),
portfolio managers should not be a part of the swing pricing
administration.\294\ For example, a fund's portfolio manager could have
an incentive to determine a swing factor that is as low as possible,
because the portfolio manager could be reluctant for the fund's short-
term performance to deviate from the fund's benchmark or lag its peers;
or set a swing factor that is too high to enhance the fund's
performance relative to its benchmark or peers.\295\
---------------------------------------------------------------------------

    \294\ We recognize that this approach differs from that taken in
the administration of rule 22e-4 (as it did in the proposal) and
believe this difference is justified by the higher potential for
conflicts of interest in regards to portfolio managers and swing
pricing as compared to liquidity risk management generally. See
Liquidity Risk Management Programs Adopting Release, supra footnote
8 at section III.H.1.
    \295\ See supra section II.A.2.g (discussing performance
reporting); see also Evergreen Order, supra footnote 128 (Commission
found that a fund's portfolio management team withheld relevant
negative information about certain fund holdings from a valuation
committee, resulting in the fund substantially overstating its NAV
for over one year).
---------------------------------------------------------------------------

    Several commenters expressed support for the determination of the
swing factor being reasonably segregated

from a fund's portfolio management function, which as described in the
Proposing Release, would exclude portfolio managers from administration
of swing pricing factor.\296\ Accordingly, we are adopting the
requirements summarized above. We recognize that it would be
appropriate for a committee tasked with the administration of a fund's
swing pricing policies and procedures, including the determination of
the swing factor(s) the fund would use in a variety of circumstances,
to obtain appropriate inputs from the fund's portfolio manager, which
could be used by that committee in determining the swing factor.
However, portfolio managers could not be members of the committee, nor
could they decide how their inputs would be employed in the swing
factor determination.
---------------------------------------------------------------------------

    \296\ See CRMC Comment Letter; CFA Comment Letter; HSBC Comment
Letter.
---------------------------------------------------------------------------

Fund Merger Considerations
    We stated in the Proposing Release that, when funds merge, and at
least one of the merging funds uses swing pricing, there are a number
of considerations relating to swing pricing that the funds generally
should consider when determining the terms of the merger.\297\
Commenters did not address these views, which we reiterate here. The
boards of merging funds should consider whether a swing factor should
be used to adjust the value of the absorbed fund's assets, if the
absorbing fund uses swing pricing and it is applied on the day of the
merger.\298\ Although the manager of the absorbing fund may need to
sell certain of the assets of the absorbed fund following the merger
(e.g., for consistency with the absorbing fund's investment strategy,
or to comply with certain regulatory requirements), we do not believe
that the NAV of either the absorbing fund or the absorbed fund should
be adjusted to counter any dilution resulting from these sales, because
costs associated with these sales would result from the merger and
would not be caused by shareholders' purchase or redemption activity.
In light of potential complications arising when funds using swing