may activate alerts in monitoring systems that follow fund performance,
which could in turn trigger purchases or redemptions in automated fund
advisory services whose algorithms are driven by fund performance.
However, we believe that the use of partial swing pricing, described
below, would significantly reduce the performance volatility
potentially associated with swing pricing. In addition, swing pricing
should have a minimal effect on longer-term performance volatility and
longer-term tracking error. Taking these considerations into account,
we do not believe that volatility would generally be a significant
deterrent to funds using swing pricing. We do request comment below on
the potential effects of swing pricing on funds' performance volatility
and any potential market distortions that could result if some funds
adopt swing pricing but other, similarly situated funds do not.
---------------------------------------------------------------------------

    \446\ But see supra notes 440-441 and accompanying text (noting
that swing pricing has been found to benefit fund performance over
the long term).
---------------------------------------------------------------------------

    Proposed rule 22c-1(a)(3) envisions partial swing pricing (that is,
a NAV adjustment would not be permitted unless net purchases or net
redemptions exceed a threshold set by the fund and approved by the
fund's board) and not full swing pricing (that is, a NAV adjustment any
time the fund experiences net purchases or net redemptions). Some
foreign funds employ full swing pricing,\447\ and there are certain
advantages to full swing pricing (e.g., a fund using full swing pricing
would not be required to determine an appropriate swing
threshold).\448\ However, we believe partial swing pricing would
generally cause lower NAV volatility than full swing pricing. The use
of partial swing pricing also recognizes that net purchases and net
redemptions below a certain threshold might not require a fund to trade
portfolio assets,\449\ and therefore a NAV adjustment, and any
associated NAV volatility, might not be appropriate if purchases and
redemptions would not result in costs associated with asset purchases
and sales.
---------------------------------------------------------------------------

    \447\ But see Luxembourg Swing Pricing Survey, Reports &
Guidelines, supra note 413, at 6 (of the respondents surveyed by
ALFI, the majority employed a partial swing approach, with only a
select few choosing the full swing method).
    \448\ See Luxembourg Swing Pricing Survey, Reports & Guidelines,
supra note 413, at 17.
    \449\ For example, a fund may not need to sell portfolio assets
to pay redemptions below a certain threshold if it maintains a
certain percentage of its net assets in cash or cash equivalents.
---------------------------------------------------------------------------

    We recognize that there are other trade-offs that a fund would have
to consider in determining to implement swing pricing. For example,
application of a swing factor would affect all purchasing and redeeming
shareholders equally, regardless of whether the size of an individual
shareholder's purchases or redemptions alone would create material
trading costs for the fund. This could cause certain shareholders to
experience benefits or costs, relative to the other shareholders in the
fund, that otherwise would not exist. For example, an investor who
purchases fund shares on a day when a fund adjusts its NAV downward
would pay less to enter the fund than if the fund had not adjusted is
NAV on that day. And, while a small investor's redemption requests
would not likely create significant liquidity costs for the fund on its
own, if this investor were to redeem on the same day that the fund's
net redemptions cross the swing threshold, his or her redemption
proceeds would be reduced by the NAV adjustment. These concerns,
however, are partially mitigated by the fact that shareholders could be
assured that the same threshold level of net purchase and net
redemption activity (as approved by the fund's board) would
consistently trigger the use of swing pricing, unless the fund's board
and a majority of the fund's independent directors were to approve a
change in the fund's swing threshold.\450\ Furthermore, we believe that
investors who purchase shares on a day that a fund adjusts its NAV
downward would not create dilution for non-redeeming shareholders (even
though the purchasing shareholders may be receiving a lower price than
would be the case if the NAV was not adjusted downward). Under these
circumstances, shareholders' purchase activity would provide liquidity
to the fund, which could reduce the fund's liquidity costs and thereby
could decrease the swing factor. This could potentially help redeeming
shareholders to receive a more favorable redemption price than they
otherwise would have if there had been less purchase activity on that
day, but would not affect the interests of non-redeeming investors.
---------------------------------------------------------------------------

    \450\ See infra section III.F.1.f.
---------------------------------------------------------------------------

    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. As discussed in section III.G
below, proposed disclosure and reporting requirements regarding swing
pricing would assist shareholders in understanding whether a particular
fund has implemented swing pricing policies and procedures and has used
swing pricing. We are not, however, proposing to require a fund to
publicly disclose its swing threshold, because of concerns that certain
shareholders may attempt to time their transactions based on this
information,\451\ as well as

concerns that disclosure could be confusing or potentially misleading
insofar as it could give an inaccurate view of funds' relative risks
and benefits. For example, a shareholder might assume that Fund X with
a swing threshold of 5% is inherently more risky and thus a ``worse''
investment than Fund Y with a swing threshold of 7% because a lower
level of net flows would cause Fund X to adjust its NAV than Fund Y.
But the relative performance and risks of both funds could depend on
additional considerations, even excluding differences in the various
market, credit, liquidity, and other risks associated with the funds'
portfolio assets. These considerations could include the swing factors
the funds would use to adjust their NAV and the frequency with which
each fund would encounter net purchases or net redemptions that cross
the fund's swing threshold. Although funds would not be required to
disclose their swing threshold, the use of partial swing pricing as
opposed to full swing pricing could give shareholders comfort that,
under circumstances in which the fund is experiencing relatively low
purchases or redemptions, the fund's NAV will likely not be adjusted.
---------------------------------------------------------------------------

    \451\ See Luxembourg Swing Pricing Survey, Reports & Guidelines,
supra note 413, at 8 (of the respondents surveyed by ALFI, the
majority of those that used swing pricing ``were reluctant to
disclose the level of [swing] threshold they apply . . . [and some]
commented that the act of disclosing these details was contradictory
to the principle of investor protection and therefore avoided
disclosing the threshold.'' ALFI noted that ``[o]n balance it
appears that the majority of promoters prefer not to disclose
thresholds to ensure clients do not actively manage trades below the
trigger level of the partial swing.'').
---------------------------------------------------------------------------

Request for Comment
    We seek comment on the general swing pricing process as
contemplated by proposed rule 22c-1(a)(3). We seek specific comment on
the process a fund would use to determine and review its swing
threshold and to calculate the swing factor it would use to adjust its
NAV, and on the proposed approval and oversight requirements associated
with swing pricing policies and procedures, below.
     Do commenters agree that swing pricing could be a useful
tool for U.S. registered funds in mitigating potential dilution of fund
shareholders? Do commenters believe that dilution arising from costs
associated with certain purchases or redemptions of fund shares is a
significant problem that funds currently face, have historically faced
under certain market conditions, or might be expected to face in the
future?
     Do commenters agree that the proposed rule should require
a fund that adopts swing pricing policies and procedures to adjust the
fund's NAV when the fund's level of net purchases or redemptions
exceeds the fund's swing threshold? Or should the proposed rule instead
only require a fund that adopts swing pricing policies and procedures
to adjust the fund's NAV when the fund's level of net redemptions
exceeds the swing threshold? Alternatively, should the proposed rule
permit a fund to choose whether to adopt swing pricing policies and
procedures that would: (i) Require the fund to adjust its NAV when the
fund's level of net purchases or redemptions exceeds the fund's swing
threshold; or (ii) require the fund to adjust its NAV only when the
fund's level of net redemptions exceeds the fund's swing threshold? Are
there greater concerns about the potential for dilution associated with
net redemptions than those associated with net purchases?
     Should a fund be permitted to use full swing pricing, as
opposed to the partial swing pricing contemplated by the proposed rule?
Why or why not?
     Under the proposed rule, when net purchases or net
redemptions of a fund that has adopted swing pricing policies and
procedures exceed the fund's swing threshold, the price that all
purchasing or redeeming shareholders would receive for fund shares
would be adjusted pursuant to the fund's swing pricing policies and
procedures. Should a fund instead be permitted to exempt certain
shareholders (for example, purchasing shareholders on days when the
fund's share price is adjusted downward, or small shareholders whose
purchase or redemption activity would not likely create significant
liquidity costs for the fund) from receiving an adjusted share price on
a day when the fund's net purchases or redemptions exceed the swing
threshold? Why or why not?
     Would the use of purchase fees, redemption fees and/or
liquidity fees (either separately or in combination) be a more or less
effective means of mitigating potential dilution than swing pricing?
Why or why not? Would the use of purchase fees, redemption fees and/or
liquidity fees (either separately or in combination) entail burdens and
costs that are higher or lower than the burdens and costs associated
with swing pricing? What types of operational challenges would arise
with swing pricing as opposed to purchase fees, redemption fees, and
liquidity fees? Are purchase fees, redemption fees, and liquidity fees
feasible for those funds whose shares are primarily held through third-
party intermediaries?
     Would the use of dual pricing be a more or less effective
means of mitigating potential dilution than swing pricing? What types
of operational challenges would arise with swing pricing vs. dual
pricing?
     Would allowing funds to require certain investors to
accept in-kind redemptions in certain circumstances be a more or less
effective means of mitigation potential dilution than swing pricing in
those circumstances?
     Do commenters agree that the swing pricing framework
contemplated by proposed rule 22c-1(a)(3) responds as effectively as
possible to the potential concerns associated with swing pricing?
Specifically, we request comment on the extent to which the swing
pricing requirements incorporated into the proposed rule would reduce
volatility and respond to transparency-related concerns. Would any
performance volatility that could result from swing pricing result in
market distortions if some funds adopt swing pricing but other,
similarly situated funds do not? Do commenters believe that the use of
partial swing pricing, as opposed to full swing pricing, would mitigate
concerns that the swing pricing would increase a fund's volatility? Do
these proposed requirements also effectively respond to transparency-
related concerns associated with swing pricing, and would the proposed
disclosure requirements regarding swing pricing also respond to
transparency concerns? Would any alternative or additional swing
pricing requirements more effectively respond to potential concerns
about volatility or transparency (or any other concerns) associated
with swing pricing?
     As proposed, rule 22c-1(a)(3) would permit, but not
require, a fund to adopt swing pricing policies and procedures. What
process do commenters anticipate that a fund may use to weigh the
potential advantages and disadvantages of swing pricing in relation to
the fund's particular circumstances and risks? Should each fund's board
be required to determine whether swing pricing is appropriate for each
fund? Should all funds, or a particular subset of funds (e.g., funds
whose three-day liquid asset minimums are below a certain level, or
whose less liquid assets are above a certain level) be required to use
swing pricing? Do commenters expect funds would decide that swing
pricing would be an effective anti-dilution tool, in spite of potential
concerns about volatility or transparency (or any other potential
concerns)?
     Proposed rule 22c-1(a)(3) would permit the person(s)
responsible for administering a fund's swing pricing policies and
procedures to make the

determination of whether the fund's level of net purchases or
redemptions has exceeded the fund's swing threshold ``on the basis of
information obtained after reasonable inquiry.'' Do commenters agree
that this would be appropriate? Why or why not? Is the phrase
``information obtained after reasonable inquiry'' clear? If not, how
could this term be clarified within the context of the proposed rule?
     As proposed, rule 22c-1(a)(3) would require a fund to
exclude any purchases or redemptions that are made in kind and not in
cash when determining whether the fund's level of net purchases or net
redemptions has exceeded the fund's swing threshold. Is this exclusion
appropriate? Why or why not?
b. Scope of Proposed Rule
    Proposed rule 22c-1(a)(3) would apply to all registered open-end
management investment companies, with the exception of money market
funds and ETFs.\452\ While rule 22c-1(a) generally applies to all
registered investment companies issuing redeemable securities,\453\ we
believe that only open-end mutual funds (and, as discussed below, not
UITs or ETFs) are generally susceptible to the risk that shareholder
redemption activity could dilute the value of outstanding shares held
by existing shareholders. And as discussed below, we believe money
market funds, while potentially susceptible to this risk, already have
extensive tools at their disposal to mitigate potential shareholder
dilution.
---------------------------------------------------------------------------

    \452\ As discussed above, for purposes of the proposed
amendments to rule 22c-1, ``exchange-traded fund'' includes an ETMF.
    \453\ Rule 2a-7 provides exemptions from rule 22c-1 for money
market funds, to permit certain money market funds to use the
amortized cost method and/or the penny-rounding method to calculate
its NAV, and to permit a money market fund to impose liquidity fees
and temporarily suspend redemptions. See rule 2a-7(c)(1)(i); rule
2a-7(c)(2).
---------------------------------------------------------------------------

    All investment companies that fall within the scope of proposed
rule 22e-4, with the exception of ETFs, would be permitted to use swing
pricing under proposed rule 22c-1(a)(3), and a fund may decide to adopt
swing pricing policies and procedures as part of the liquidity risk
management program it would be required to implement under proposed
rule 22e-4. Under proposed rule 22c-1(a)(3), swing pricing would be
voluntary for funds, and some fund complexes may decide to use swing
pricing for certain funds within the complex but not others, or
establish different swing thresholds for different funds within the
complex.\454\ As discussed above, funds would be required to exclude
any purchases and redemptions that are made in kind, and not in cash,
in determining whether the fund's level of net purchases or net
redemptions has exceeded the fund's swing threshold.\455\ This could
functionally limit the ability of a fund that often permits in-kind
purchases and in-kind redemptions to use swing pricing, or discourage
such a fund from adopting swing pricing policies and procedures,
because the fund's level of net purchases or net redemptions as
calculated pursuant to proposed rule 22c-1(a)(3) may never (or rarely)
reach the fund's swing threshold as determined pursuant to the proposed
rule.
---------------------------------------------------------------------------

    \454\ Outside the U.S., it is a common industry practice for
funds within a fund complex each to have an individual swing
threshold, or for some funds within a complex to use swing pricing
while others do not. See, e.g., BlackRock Swing Pricing Paper, supra
note 412; J.P. Morgan Asset Management, Swing pricing: The J.P.
Morgan Asset Management Approach in the Luxembourg Domiciled SICAVs,
JPMorgan Funds and JPMorgan Investment Funds Insight (June 2014),
available at http://www.jpmorganassetmanagement.de/DE/dms/Swing%20Pricing%20%5bMKR%5d%20%5bIP_EN%5d.pdf (``J.P. Morgan Asset
Management Swing Pricing Paper'').
    \455\ See supra note 439 and accompanying paragraph.
---------------------------------------------------------------------------

    We are not proposing to include closed-end investment companies,
UITs, ETFs or money market funds within the scope of proposed rule 22c-
1(a)(3). Closed-end investment companies do not issue redeemable
securities and therefore would not incur costs associated with
shareholder purchase and redemption activity that would necessitate
swing pricing. Similarly, where a UIT sponsor maintains a secondary
market in units of a UIT series, we believe that the series is unlikely
to ever need to use swing pricing. In addition, since UITs do not
frequently trade their underlying securities, but instead maintain a
relatively fixed portfolio, investor flows do not generally affect the
portfolio, and thus purchases and sales of UIT shares would not likely
produce dilutive effects to existing shareholders.\456\
---------------------------------------------------------------------------

    \456\ See, e.g., supra notes 136 and 141 and accompanying text.
---------------------------------------------------------------------------

    Although we believe that ETFs could experience liquidity risk and
thus have included them within the scope of proposed rule 22e-4,\457\
we are proposing not to include ETFs within the scope of proposed rule
22c-1(a)(3) because we believe--as described more fully below--that
ETFs' purchase and redemption practices do not generally entail the
risk of dilution as a result of authorized participants' purchase and
redemption activity, and that swing pricing could impede the effective
functioning of an ETF's arbitrage mechanism. Unlike mutual funds, which
typically internalize the costs associated with purchases and
redemptions of shares, ETFs typically externalize these costs by
charging a fixed and/or variable fee to authorized participants who
purchase creation units from, and sell creation units to, an ETF. The
fixed and/or variable fees are imposed to offset both transfer and
other transaction costs that may be incurred by the ETF (or its service
providers), as well as brokerage, tax-related, foreign exchange,
execution, market impact and other costs and expenses related to the
execution of trades resulting from such transaction. The amount of
these fixed and variable fees typically depends on whether the
authorized participant effects transactions in kind versus in cash and
is related to the costs and expenses associated with transaction
effected in kind versus in cash. When an authorized participant redeems
ETF shares by selling a creation unit to the ETF, for example, the fees
imposed by the ETF defray the costs of the liquidity that the redeeming
authorized participant receives, which in turn mitigates the risk that
dilution of non-redeeming authorized participants would result when an
ETF redeems its shares.
---------------------------------------------------------------------------

    \457\ See supra section III.A.2.
---------------------------------------------------------------------------

    In addition to our belief that ETFs' purchase and redemption
practices would generally not entail the risk of dilution for existing
shareholders, we are also not including ETFs within the scope of the
proposed rule because we believe that swing pricing could impede the
effective functioning of an ETF's arbitrage mechanism.\458\ As
discussed above, the effective functioning of the arbitrage mechanism
is necessary in order for an ETF's shares to trade at a price that is
at or close to the NAV of the ETF.\459\ If an ETF were to adopt swing
pricing policies and procedures, as conceptualized under the proposed
rule, an authorized participant would not know whether the ETF's NAV
would be adjusted by a swing factor on any given day and therefore may
not be able to assess whether an arbitrage opportunity exists.\460\ The
Commission

has historically considered the effective functioning of the arbitrage
mechanism to be central to the principle that all shareholders be
treated equitably when buying and selling their fund shares.\461\
Therefore, we believe that the implementation of swing pricing by an
ETF could raise concerns about the equitable treatment of shareholders,
to the extent that swing pricing could impede the effective functioning
of the arbitrage mechanism.
---------------------------------------------------------------------------

    \458\ As discussed previously, ETMF market makers would not
engage in the same arbitrage as ETF market makers because all
trading prices of ETMF shares are linked to NAV. See supra note 32
and accompanying text. ETMFs would charge transaction fees that
mitigate the risk of dilution, and therefore we do not propose to
include ETMFs within the scope of proposed rule 22c-1(a)(3).
    \459\ See, e.g., supra note 14 and accompanying text.
    \460\ See supra note 451 and accompanying paragraph (noting that
a fund would not be required to disclose its swing threshold under
the proposed rule).
    \461\ See, e.g., Spruce ETF Trust, et al., Investment Company
Act Release No. 31301 (Oct. 21, 2014) [79 FR 63964 (Oct. 27, 2014)]
(notice of application for exemptive relief) (to the extent that
investors would have to exit at a price substantially below the NAV
of the ETF, this would be ``contrary to the foundational principle
underlying section 22(d) and rule 22c-1 under the Act that all
shareholders be treated equitably when buying and selling their fund
shares''); Precidian ETFs Trust, et al., Investment Company Act
Release No. 31300 (Oct. 21, 2014) [79 FR 63971 (Oct. 27, 2014)]
(notice of application for exemptive relief) (``A close tie between
market price and NAV per share of the ETF is the foundation for why
the prices at which retail investors buy and sell ETF shares are
similar to the prices at which Authorized Participants are able to
buy and redeem shares directly from the ETF at NAV. This close tie
between prices paid by retail investors and Authorized Participants
is important because section 22(d) and rule 22c-1 under the Act are
designed to require that all fund shareholders be treated equitably
when buying and selling their fund shares.'').
---------------------------------------------------------------------------

    We are also not proposing to include money market funds within the
scope of proposed rule 22c-1(a)(3). Money market funds are subject to
extensive requirements concerning the liquidity of their portfolio
assets. Also, a money market fund (other than a government fund) is
permitted to impose a liquidity fee on redemptions if its weekly liquid
assets fall below a certain threshold, and these fees serve a similar
purpose as the NAV adjustments contemplated by swing pricing.\462\ That
is, money market fund liquidity fees allocate at least some of the
costs of providing liquidity to redeeming rather than existing
shareholders,\463\ and also generate additional liquidity to meet
redemption requests.\464\ We therefore believe that money market funds
already have liquidity risk management tools at their disposal that
could accomplish comparable goals to the swing pricing that would be
permitted under proposed rule 22c-1(a)(3).
---------------------------------------------------------------------------

    \462\ See rule 2a-7(c)(2); see also 2014 Money Market Fund
Reform Adopting Release, supra note 85, at section III.A.
    \463\ See, e.g., 2014 Money Market Fund Reform Adopting Release,
supra note 85, at n.139 and accompanying text.
    \464\ See id. at n.120.
---------------------------------------------------------------------------

    We also believe that the liquidity fee regime permitted under rule
2a-7 is a more appropriate tool for money market funds to manage the
allocation of liquidity costs than swing pricing. First, while funds
would be able to adopt swing pricing policies and procedures at their
discretion, rule 2a-7 requires a money market fund under certain
circumstances to impose a 1% liquidity fee on each shareholder's
redemption, unless the fund's board of directors (including a majority
of its independent directors) determines that such fee is not in the
best interests of the fund, or determines that a lower or higher fee
(not to exceed 2%) is in the best interests of the fund.\465\ Money
market funds also have unique minimum liquid asset requirements, and we
believe the use of liquidity fees is appropriately tied to those
requirements. Finally, we anticipate that open-end funds that adopt
swing pricing policies and procedures would be required under such
procedures to adjust their NAV on a relatively regular basis (whenever
the fund's net purchases or net redemptions exceed the fund's swing
threshold). In contrast, money market fund investors (particularly,
investors in stable-NAV money market funds) are particularly sensitive
to price volatility,\466\ and we anticipate liquidity fees will be used
only in times of stress when money market funds' internal liquidity has
been partially depleted. We note that some foreign jurisdictions have a
similar conception of liquidity fees as a distinct tool separate from
swing pricing. For example, in Europe, UCITS may use swing pricing and
apply ``dilution levies.'' \467\ While many UCITS use swing pricing as
a matter of normal course, dilution levies may be considered a
liquidity risk management tool that is used in connection with stressed
conditions.\468\
---------------------------------------------------------------------------

    \465\ See supra note 462.
    \466\ For example, retail and government money market funds are
permitted to maintain a stable NAV, reflecting in part our
understanding that investors in these products have a low tolerance
for NAV volatility. See 2014 Money Market Fund Reform Adopting
Release, supra note 85, at section III.B.3.c. Investors in floating
NAV money market funds also could be sensitive to principal
volatility, as we recognized in adopting requirements that all money
market funds disclose their daily net asset value (rounded to the
fourth decimal place) on their Web sites, and as we discussed in the
economic analysis of the 2014 Money Market Fund Reform Adopting
Release. See id. at section III.E.9 and section III.K.
    \467\ See, e.g., BlackRock Fund Structures Paper, supra note 30,
at 6; see also supra note 422 and accompanying and following text
(discussing redemption fees that are currently permitted under rule
22c-2 and noting that, while redemption fees could mitigate dilution
arising from redemption activity, implementing a fee requires
coordination with the fund's service providers, which could entail
operational complexity).
    \468\ See BlackRock Fund Structures Paper, supra note 30, at 6.
---------------------------------------------------------------------------

Request for Comment
    We seek comment on the scope of proposed rule 22c-1(a)(3).
     Do commenters agree that the proposed rule should apply to
all registered open-end management investment companies except money
market funds and open-end ETFs?
     Do commenters agree that the risk of investor dilution is
low for closed-end investment companies and UITs, and thus closed-end
investment companies and UITs should not be included within the scope
of proposed rule 22c-1(a)(3)?
     Do commenters agree that the risk of investor dilution is
low for ETFs, whether ETFs purchase and redeem in cash or in kind? Why
or why not? Do commenters agree that swing pricing could adversely
affect the effective functioning of an ETF's arbitrage mechanism? Why
or why not? Regardless of these considerations, should ETFs be
permitted to use swing pricing, and do commenters anticipate that ETFs
would use swing pricing if the scope of proposed rule 22c-1(a)(3) were
expanded to include ETFs?
     If the scope of the proposed rule were expanded to include
ETFs, are there any swing pricing operational considerations specific
to ETFs that we should address? For example, if an ETF were to adopt
swing pricing, how should we address any shareholder fairness
implications that could result if certain authorized participants were
to transact in cash and others were to transact in kind on a day when
the fund swings its NAV? Should ETFs be permitted to use swing pricing
in addition to imposing transaction fees on authorized participants, or
as an alternative to such fees? Should we address implications of the
proposed rule on exemptive relief that has been granted to existing
ETFs? Should we also consider the implications of the proposed rule on
an ETF that operates as a share class of a fund that also offers mutual
fund share classes, or on an ETF that operates as a feeder fund
investing in a master fund alongside mutual fund feeder funds?
     We seek comment on how the utilization of swing pricing by
an ETF could affect the capital markets, in particular, market-making
in the ETF. If the scope of the rule were expanded to include ETFs,
would market makers and other market participants that contribute to
ETF market-making be less willing to do so if it were unclear when an
ETF that has adopted swing pricing policies and procedures would adjust
its NAV, and to what extent swing pricing would affect the ETF's end-
of-day NAV?

     The proposed definition of ``exchange-traded fund'' in
rule 22c-1 would include ETMFs. While no ETMF has been launched yet, if
an ETMF were to begin operations pursuant to applicable exemptive
relief, it would arrange for an independent third party to disseminate
the intraday indicative value of the ETMF's shares, which an investor
would use to estimate the number of shares to buy or sell based on the
dollar amount in which the investor wants to transact.\469\ To what
extent would a NAV adjustment effected by swing pricing make an
investor's estimate less accurate, given that such adjustment would not
be reflected in the intraday indicative value of the ETMF's shares
disseminated during the trading day?
---------------------------------------------------------------------------

    \469\ See ETMF Notice, supra note 15.
---------------------------------------------------------------------------

     Do commenters agree that money market funds already have
liquidity risk management tools at their disposal that could accomplish
comparable goals to swing pricing, and that the liquidity fee regime
permitted under rule 2a-7 is a more appropriate tool for money market
funds to manage the allocation of liquidity costs than swing pricing?
Would there be any reason to extend the scope of proposed rule 22c-
1(a)(3) to floating NAV money market funds?
c. Determining the Fund's Swing Threshold
    Under proposed rule 22c-1(a)(3), a fund's swing pricing policies
and procedures must provide that the fund is required to adjust its NAV
once the level of net purchases or net redemptions from the fund has
exceeded a set, specified percentage of the fund's net asset value
known as the ``swing threshold.'' \470\ A fund would be required to
adopt policies and procedures for determining its swing threshold,\471\
and as discussed below, the swing threshold and any changes thereto
must be approved by the fund's board of directors.\472\ In specifying
its swing threshold, a fund would be required to consider:
---------------------------------------------------------------------------

    \470\ Proposed rule 22c-1(a)(3)(i)(A). Under the proposed rule,
``swing threshold'' would be defined as ``the amount of net
purchases into or net redemptions from a fund, expressed as a
percentage of the fund's net asset value, that triggers the
initiation of swing pricing.'' Proposed rule 22c-1(a)(3)(v)(D). We
request comment on this definition at the end of this section
III.F.1.c.
    \471\ Proposed rule 22c-1(a)(3)(i)(B).
    \472\ See infra section III.F.1.f.
---------------------------------------------------------------------------

    [cir] The size, frequency, and volatility of historical net
purchases or net redemptions of fund shares during normal and stressed
periods;
    [cir] The fund's investment strategy and the liquidity of the
fund's portfolio assets;
    [cir] The fund's holdings of cash and cash equivalents, as well as
borrowing arrangements and other funding sources; and
    [cir] The costs associated with transactions in the markets in
which the fund invests.\473\
---------------------------------------------------------------------------

    \473\ Proposed rule 22c-1(a)(3)(i)(B).
     These factors overlap significantly with factors that we
understand are commonly considered by funds that use swing pricing
in other jurisdictions, in order to determine a fund's swing
threshold. For example, the Luxembourg Swing Pricing Survey, Reports
& Guidelines provides that factors influencing the determination of
the swing threshold ordinarily include: (i) Fund size; (ii) type and
liquidity of securities in which the fund invests; (iii) costs (and
hence, the dilution impact) associated with the markets in which the
fund invests; and (iv) investment manager's investment policy and
the extent to which the fund can retain cash (or near cash) as
opposed to always being fully invested). See Luxembourg Swing
Pricing Survey, Reports & Guidelines, supra note 413, at 14.
---------------------------------------------------------------------------

    In order to effectively mitigate possible dilution arising in
connection with shareholder purchase and redemption activity, a fund's
swing threshold should generally reflect the estimated point at which
net purchases or net redemptions would trigger the fund's investment
adviser to trade portfolio assets in the near term, to a degree or of a
type that may generate material liquidity or transaction costs for the
fund. As discussed below, we believe that a consideration of the
factors set forth above would permit a fund to estimate this point. The
liquidity or transaction costs associated with purchase or redemption
activity can dilute the value of existing shareholders' interests in
the fund, and the purpose of swing pricing is to lessen this potential
dilution. Trading assets to meet purchase or redemption requests is not
in and of itself an indication that a fund will incur material
liquidity or transaction costs. For example, trading smaller levels of
very liquid assets would likely not produce significant costs to the
fund. However, trading portfolio assets to a significant degree, or
trading relatively less liquid assets within a short time frame in
order to invest proceeds from purchases or satisfy redemption requests,
could generate material costs to the fund that could dilute the value
of fund shares held by existing investors.
    We believe that evaluating the factors that proposed rule 22c-
1(a)(3) would require a fund to consider in specifying its swing
threshold would assist a fund in determining what level of net
purchases or net redemptions would generally lead to a trade of
portfolio assets that would result in material costs to the fund.
Assessing the size, frequency, and volatility of historical net
purchases and net redemptions of fund shares would permit a fund to
determine its typical levels of net purchases and net redemptions and
the levels the fund could expect to encounter during periods of unusual
market stress, as well as the frequency with which the fund could
expect to see periods of unusually high purchases or redemptions. We
believe that comparing the fund's historical flow patterns with the
fund's investment strategy, the liquidity of the fund's portfolio
holdings, the fund's holdings of cash and cash equivalents and
borrowing arrangements and other funding sources, and the costs
associated with transactions in the markets in which the fund invests
would allow a fund to predict what levels of purchases and redemptions
would result in material costs under a variety of scenarios.
    The first three factors that proposed rule 22c-1(a)(3)(i)(B) would
require a fund to consider in specifying the fund's swing threshold
correspond with certain of the factors a fund would be required to
consider in assessing its liquidity risk.\474\ This is because
evaluating a fund's liquidity risk, or the risk that the fund could not
meet expected and reasonably foreseeable requests to redeem its shares
without materially affecting the fund's NAV,\475\ is a similar exercise
to determining the fund's swing threshold (which, as discussed above,
should generally reflect the estimated point at which net purchases or
net redemptions would trigger the fund's investment manager to trade
portfolio assets in the near term, to a degree or of a type that may
generate material liquidity or transaction costs for the fund). For
this reason, we believe that the issues a fund would consider in
assessing the extent to which the (i) size, frequency, and volatility
of historical purchases and redemptions of fund shares during normal
and stressed periods, (ii) the fund's investment strategy and portfolio
liquidity, and (iii) the fund's holdings of cash and cash equivalents,
borrowing arrangements and other funding sources would affect the
fund's liquidity risk also are relevant when a fund determines its
swing

threshold. These issues are discussed in detail above.\476\
---------------------------------------------------------------------------

    \474\ See proposed rule 22e-4(b)(2)(iii)(A)(1), proposed rule
22e-4(b)(2)(iii)(B), proposed rule 22e-4(b)(2)(iii)(D) (requiring a
fund to consider, in assessing its liquidity risk, the ``size,
frequency, and volatility of historical purchases and redemptions of
fund shares during normal and stressed periods,'' the fund's
``investment strategy and liquidity of portfolio assets,'' and the
fund's ``holdings of cash and cash equivalents, as well as borrowing
arrangements and other funding sources,'' respectively).
    \475\ See proposed rule 22e-4(a)(7).
    \476\ See supra sections III.C.1.a, III.C.1.b, and III.C.1.d.
---------------------------------------------------------------------------

    In assessing the fourth factor, the costs associated with
transactions in the markets in which the fund invests, a fund may wish
to consider, as applicable, market impact costs \477\ and spread costs
\478\ that the fund typically incurs when it trades its portfolio
assets (or assets with comparable characteristics if data concerning a
particular portfolio asset is not available to the fund). A fund also
may wish to consider, as applicable, the transaction fees and charges
that the fund typically is required to pay when it trades portfolio
assets.\479\ These could include brokerage commissions and custody
fees, as well as other charges, fees, and taxes associated with
portfolio asset purchases or sales (for example, transfer taxes and
repatriation costs for certain foreign securities, or transaction fees
associated with portfolio investments in other investment companies).
---------------------------------------------------------------------------

    \477\ See supra note 415.
    \478\ See supra note 416.
    \479\ A fund would be required to take transaction fees and
charges into account when determining the swing factor that would be
used to adjust the fund's NAV when the level of net purchases or net
redemptions from the fund has exceeded the fund's swing threshold.
Proposed rule 22c-1(a)(3)(i)(D)(1). See infra note 493 for a
discussion of the proposed definition of ``transaction fees and
charges.''
---------------------------------------------------------------------------

    We understand that because proposed rule 22c-1(a)(3) does not
specify a minimum ``floor'' for a fund's swing threshold, a fund could
set a swing threshold representing a very low level of net purchases or
net redemptions. This could result in the fund effectively practicing
full swing pricing (that is, adjusting the fund's NAV whenever there is
any level of net purchases or net redemptions) instead of partial swing
pricing. However, we do not anticipate that a fund would generally wish
to set a very low swing threshold, because we believe that a fund would
not want to incur the increased NAV volatility associated with full (or
nearly full) swing pricing. We also are not currently proposing a swing
threshold floor because we believe that different levels of net
purchases and net redemptions would create a risk of dilution for funds
with different strategies, shareholder bases, and other liquidity-
related characteristics, and thus it would be difficult to determine a
swing threshold floor that would be appropriate across the scope of
funds that would be permitted to use swing pricing.\480\
---------------------------------------------------------------------------

    \480\ We note that, in Europe, there are no across-the-board
swing threshold floors applicable to UCITS that use swing pricing.
---------------------------------------------------------------------------

    We recognize that requiring a fund to adopt a swing threshold could
create the potential for shareholder gaming behavior because a fund's
shareholders could attempt to time their purchases and redemptions
based on the likelihood that a fund would or would not adjust its NAV.
However, we do not think that potential gaming is a significant
concern, because it would be difficult for shareholders to determine
when the fund's net purchases or net redemptions cross the swing
threshold. As discussed above, a fund would not be required to publicly
disclose its swing threshold.\481\ Also, funds are not required to
disclose their daily net flows and do not usually do so.\482\ For a
shareholder to effectively ``game'' the swing pricing, it would have to
know the daily flows on the day that shareholder was purchasing or
redeeming and those flows would have to not materially change after the
shareholder placed its order, all of which may be unlikely.
Accordingly, even if a fund were to reveal its swing threshold, it may
be difficult for shareholders to determine when the fund's net
purchases or net redemptions exceed the swing threshold. We note that,
to the extent a fund does decide to disclose its swing threshold, we
believe it would not be appropriate for a fund to disclose it
selectively to certain investors (e.g., to only disclose the fund's
swing threshold to institutional investors), as we believe this could
assist certain groups of shareholders in strategically timing purchases
and redemptions of fund shares, potentially disadvantaging shareholders
who do not know the fund's swing threshold.\483\
---------------------------------------------------------------------------

    \481\ See supra paragraph accompanying note 451.
    \482\ However, as proposed earlier this year, a fund would be
required to disclose flow information on proposed Form N-PORT
monthly, and information contained on reports for the last month of
each fiscal quarter would be made public. See infra note 561.
    \483\ Like selective disclosure of fund portfolio holdings, we
believe that selective disclosure of a fund's swing threshold could
facilitate fraud and have adverse ramifications for a fund's
investors if certain investors are given the opportunity to use this
information to their advantage to the detriment of other investors.
See, e.g., Disclosure Regarding Market Timing and Selective
Disclosure of Portfolio Holdings, Investment Company Act Release No.
26418 (Apr. 16, 2004) [69 FR 22300 (Apr. 23, 2004)] (discussing harm
that could result from selective disclosure of fund portfolio
holdings and adopting amendments to Form N-1A that would--among
other things--require funds to disclose their policies and
procedures with respect to the disclosure of their portfolio
securities and any ongoing arrangements to make available
information about their portfolio securities).
---------------------------------------------------------------------------

Request for Comment
    We request comment on the definition of ``swing threshold'' set
forth in proposed rule 22c-1(a)(3) and the process a fund would use to
determine its swing threshold.
     Is the definition of ``swing threshold,'' as set forth in
proposed rule 22c-1(a)(3) appropriate and clear? If not, how could this
definition be clarified or made more effective within the context of
the proposed rule?
     Should a fund be permitted to adopt two swing thresholds--
one for net redemptions and one for net purchases? Would this be more
operationally difficult than adopting one swing threshold that would be
used for net redemptions as well as net purchases, and if so, why?
     Should any of the proposed factors not be required to be
considered by a fund in determining and reviewing its swing threshold?
Should any be modified? Are there any additional factors, besides the
proposed factors, that a fund should be required to consider? Should we
set a minimum floor for a fund's swing threshold (e.g., one percent, or
some other percentage, of the fund's net asset value) to prevent a fund
from setting a very low swing threshold? If so, what should it be and
why?
     Do commenters agree that the swing threshold requirements
under proposed rule 22c-1(a)(3) would not raise significant concerns
regarding the potential for shareholder gaming behavior, because it
would be difficult for shareholders to determine when the fund's net
purchases or net redemptions cross the swing threshold? If commenters
believe that the swing pricing framework contemplated by proposed rule
22c-1(a)(3) would raise significant concerns regarding the potential
for shareholder gaming behavior, how could these concerns best be
alleviated?
d. Periodic Review of a Fund's Swing Threshold
    Proposed rule 22c-1(a)(3) would require a fund's swing pricing
policies and procedures to include policies and procedures providing
for the periodic review, no less frequently than annually, of the
fund's swing threshold.\484\ In conducting such review, a fund would be
required to consider the factors included in proposed rule 22c-
1(a)(3)(i)(B).\485\ Any change to the fund's swing threshold, including
those deemed appropriate as a result of this review would be deemed to
be a material change to the fund's swing pricing policies and
procedures that must be approved by the fund's

board.\486\ Beyond specifying certain factors that a fund would be
required to consider in reviewing its swing threshold, proposed rule
22c-1(a)(3) does not include prescribed review procedures, nor does it
specify the required risk review period or incorporate specific
developments that a fund should consider as part of its review. A fund
may wish to adopt procedures specifying that the swing threshold will
be reviewed more frequently than annually (i.e., semi-annually or
monthly), and/or specifying any circumstances that would prompt ad-hoc
review of the fund's swing threshold in addition to the periodic review
required by the proposed rule (as well as the process for conducting
any ad-hoc reviews). Like a fund's liquidity risk review procedures, we
believe that funds should generally consider procedures for evaluating
market-wide, and fund-specific developments affecting each of the
proposed rule 22c-1(a)(3)(i)(B) factors in developing comprehensive
procedures for reviewing a fund's swing threshold.\487\
---------------------------------------------------------------------------

    \484\ Proposed rule 22c-1(a)(3)(i)(C).
    \485\ Id.
    \486\ Proposed rule 22c-1(a)(3)(ii)(A) (``The fund's board of
directors, including a majority of directors who are not interested
persons of the fund, shall approve . . . any material change to the
[fund's swing pricing] policies and procedures (including any change
to the fund's swing threshold).'').
    \487\ See supra section III.C.2.a.
---------------------------------------------------------------------------

Request for Comment
    We request comment on the process a fund would use to review its
swing threshold.
     Are there certain procedures that we should require, and/
or on which we should provide guidance, regarding a fund's periodic
review of its swing threshold? Should we expand our guidance on the
market-wide, and fund-specific developments that a fund's swing
threshold review procedures should cover?
     Do commenters agree that a fund that adopts swing pricing
policies and procedures should be required to review its swing
threshold at least annually? Do commenters anticipate that a fund that
adopts swing pricing procedures would voluntarily choose to review its
swing threshold any more frequently than annually? Alternatively,
should a fund be required to review its swing threshold any more or
less frequently than annually?
e. Calculating the Swing Factor the Fund Will Use To Adjust Its NAV
    Under proposed rule 22c-1(a)(3), a fund's swing pricing policies
and procedures would be required to provide that the fund must adjust
its NAV by an amount designated as the ``swing factor'' each time the
fund's net purchases or net redemptions have exceeded the fund's swing
threshold.\488\ A fund's swing pricing policies and procedures would be
required to specify how the swing factor to be used to adjust the
fund's NAV will be determined.\489\ As discussed in more detail below,
the swing factor would be the amount, expressed as a percentage of the
fund's net asset value, that takes into account any 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 to adjust
the fund's NAV.\490\ It also must take into account information about
the value of assets purchased or sold by the fund to satisfy 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 on that day).\491\
---------------------------------------------------------------------------

    \488\ Proposed rule 22c-1(a)(3)(i)(A). Under the proposed rule,
``swing factor'' would be 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 when the level of net purchases into or net redemptions
from the fund has exceeded the fund's swing threshold.'' Proposed
rule 22c-1(a)(3)(v)(B). We request comment on this definition at the
end of this section III.F.1.e.
    \489\ Proposed rule 22c-1(a)(3)(i)(D).
    \490\ Id.
    \491\ Id.
---------------------------------------------------------------------------

    We anticipate that, because these considerations could vary
depending on the facts and circumstances, the swing factor that a fund
would determine appropriate to use in adjusting its NAV also could
vary. We therefore believe that procedures for determining the swing
factor generally should detail how each of the factors a fund would be
required to consider under the proposed rule would assist the fund in
calculating the swing factor. Below we provide examples of methods that
a fund may wish to consider employing in calculating the swing factor.
    We are proposing rule 22c-1(a)(3) to provide funds with a tool to
mitigate the potentially dilutive effects of shareholder purchase and
redemption activity, and the factors a fund would be required to
consider in determining its swing factor are meant to enhance a fund's
ability to estimate the costs associated with purchase and redemption
activity that could dilute the value of the existing shareholders'
interests in the fund. These costs include both market-related costs
(that is, market impact costs and spread costs \492\) and transaction
fees and charges associated with the fund trading portfolio
assets.\493\ The proposed swing factor determination requirement
incorporates an assessment of multiple sources of potential dilution,
in order to cause a fund to take all relevant considerations into
account when making this determination.
---------------------------------------------------------------------------

    \492\ See supra notes 415-416.
    \493\ ``Transaction fees and charges'' would be defined in
proposed 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.'' Proposed rule 22c-
1(a)(3)(v)(E). We request comment on the proposed definition of this
term at the end of this section III.F.1.e.
---------------------------------------------------------------------------

    Specifically, proposed rule 22c-1(a)(3)(i)(D)(1) would require a
fund's policies and procedures for determining the swing factor to take
into account any 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.\494\ While a fund may be able to
determine some of these costs with precision (e.g., transaction fees
and charges, and borrowing-related costs), we understand that other
costs may only be able to be estimated by the fund, and the swing
factor therefore would represent an estimate of the combined near-term
costs associated with purchase or redemption activity. A fund may wish
to consider certain of the factors it would evaluate for purposes of
classifying the liquidity of its portfolio positions \495\ in order to
assess the costs associated with purchasing or selling portfolio
assets. For example, a fund could use a portfolio asset's average daily
trading volume \496\ in determining the portion of a particular
portfolio holding that it could sell each day without market impact.
Likewise, a fund

could refer to bid-ask spreads for a particular asset \497\ to estimate
the purchase price that the fund would pay for that asset. Indications
of decreasing liquidity (for example, widening bid-ask spreads) would
likely indicate increased market-related costs associated with certain
portfolio assets. We anticipate that the particular transaction fees
and charges that a fund would likely consider would include brokerage
commissions and custody fees, as well as other charges, fees, and taxes
associated with portfolio asset purchases or sales (for example,
transfer taxes and repatriation costs for certain foreign securities,
or transaction fees associated with portfolio investments in other
investment companies). If a fund were to draw on a line of credit, or
otherwise borrow money, in order to pay redemptions, this borrowing
activity could result in costs to the fund that, like the costs
associated with purchasing and selling portfolio assets, could dilute
the value of the shares held by existing shareholders.\498\ We are
therefore proposing to require that a fund consider these costs, along
with the costs associated with investing the proceeds from net
purchases or assets sales to satisfy net redemptions, in determining
the swing factor.
---------------------------------------------------------------------------

    \494\ The proposed 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 Luxembourg Swing
Pricing Survey, Reports & Guidelines, supra note 413, at 7, 15-16.
    \495\ See supra section III.B.2.
    \496\ See proposed rule 22e-4(b)(2)(ii)(B).
    \497\ See proposed rule 22e-4(b)(2)(ii)(D).
    \498\ See supra section III.C.5.a.
---------------------------------------------------------------------------

    The proposed rule specifies that the determination of a fund's
swing factor must take into account 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 to adjust the fund's NAV
(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. For example, a fund could use cash to satisfy redemptions, which
may result in minimal costs to the fund, but rebalancing the fund's
portfolio to rebuild cash balances in the next several days could cause
the fund to incur costs that would be borne by the existing
shareholders. 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 to adjust the fund's NAV; this specification
is designed to help ensure that the 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.
    Under proposed rule 22c-1(a)(3)(i)(D)(2), a fund's policies and
procedures for determining the swing factor would be 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. This factor is 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.\499\ 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 when the fund trades portfolio assets in order to meet
shareholder purchases or redemptions. But these costs could dilute the
value of fund shares held by existing shareholders and thus should be
considered in determining the fund's swing factor.
---------------------------------------------------------------------------

    \499\ See supra note 412 and accompanying text.
---------------------------------------------------------------------------

    A fund could take a variety of approaches to determining its swing
factor, in light of the fact that the relevant factors to be used in
determining the swing factor could vary, as well as the likelihood that
the persons administering the fund's swing pricing policies and
procedures may (to the extent that net purchases or net redemptions
cannot be ascertained or reasonably estimated until close to the time
that the fund must strike its NAV) have limited time to determine the
swing factor each day the fund's net purchases or net redemptions
exceed the swing threshold. 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,
we request comment below on the extent to which a fund that uses swing
pricing may wish to incorporate into its policies and procedures a
formula or algorithm that includes the factors required to be
considered for determining the swing factor. We also understand that it
may be difficult to determine certain costs (particularly, certain
market impact costs and spread costs) with precision, while other
factors that a fund would be required to consider in determining its
swing factor may be able to be ascertained more exactly (for example,
transaction fees and charges, borrowing-related costs, and the value of
assets purchased or sold by the fund 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). For this reason, in establishing policies and
procedures for determining the swing factor, a fund may wish to
incorporate the use of reasonable estimates in these policies and
procedures, to the extent the fund determines necessary or
appropriate.\500\
---------------------------------------------------------------------------

    \500\ We understand that funds that use swing pricing in other
jurisdictions may use reasonable estimates, such as those discussed
in this paragraph, when determining their swing factor. See, e.g.,
Luxembourg Swing Pricing Survey, Reports & Guidelines, supra note
413, at 15.
---------------------------------------------------------------------------

    We are not proposing to require an upper limit on the swing factor
that a fund would be permitted to use, on account of the difficulty of
establishing an appropriate across-the-board limit that would permit
funds with different investment strategies, under all market
conditions, to determine a swing factor that reflects the costs
associated with the potential shareholder purchase or redemption
activity. These costs could vary widely across funds and under
different market conditions, and we do not wish to limit the extent to
which swing pricing could mitigate the dilution of existing
shareholders. We believe that the lack of an upper limit on a fund's
swing factor would not result in inappropriately high NAV adjustments,
because the swing factor would be required to be determined with
reference to the factors discussed above, and the policies and
procedures for determining the swing factor would be required to be
approved by the fund's board, which has an obligation to act in the
interests of the fund.\501\
---------------------------------------------------------------------------

    \501\ See infra section III.F.1.f and note 517.
---------------------------------------------------------------------------

    We do recognize that if we were to require an upper limit on the
amount that a fund would be permitted to adjust its NAV, this could
mitigate volatility, tracking error, and transparency concerns that
could arise from the use of swing pricing.\502\ A required swing factor
limit would act as an upper bound on the extent to which a fund would
be able to adjust its NAV and the NAV volatility resulting from this
adjustment. Also, capping the swing factor that a fund would be
permitted to use would provide transparency

regarding the maximum amount that a shareholder could expect the share
price that he or she receives upon purchase or redemption to be
adjusted on account of swing pricing. However, as discussed above, we
believe that the use of partial swing pricing could significantly
reduce the performance volatility potentially associated with swing
pricing,\503\ and that proposed disclosure and reporting requirements
regarding swing pricing will enhance transparency surrounding the use
of swing pricing.\504\
---------------------------------------------------------------------------

    \502\ See supra section III.F.1.a.
    \503\ See supra notes 447-449 and accompanying text.
    \504\ See supra paragraph accompanying note 451.
---------------------------------------------------------------------------

    Although we are not proposing to require an upper limit on the
swing factor that a fund would be permitted to use, a fund would be
permitted to adopt an upper limit on the swing factor it would apply,
as part of the fund's swing pricing policies and procedures.\505\ We
understand that certain foreign domiciled funds that use swing pricing
voluntarily limit the level of the swing factor to be applied, with
such limits generally ranging from 1%-3%.\506\ These funds usually
disclose the swing factor upper limit in the fund's offering
documents.\507\ To the extent that a fund chooses to adopt a swing
factor upper limit as part of its swing pricing policies and
procedures, this limit would be required to be approved by the fund's
board (as part of the fund's swing pricing policies and procedures,
which are subject to board approval).\508\ Likewise, a change to a
fund's swing factor upper limit would be deemed to be a material change
to the fund's swing pricing policies and procedures that would require
board approval.\509\ As fund directors have an obligation to act in the
interests of the fund,\510\ we expect that a fund board approving a
swing factor upper limit would generally determine that capping the
swing factor would not unduly limit the extent to which swing pricing
could mitigate the potentially dilutive effects of shareholder purchase
and redemption activity. Also, 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 determination of
the upper limit must take into account the same factors the fund would
be required to consider in determining the swing factor.\511\
---------------------------------------------------------------------------

    \505\ See proposed rule 22c-1(a)(3)(i)(D).
    \506\ Luxembourg Swing Pricing Survey, Reports & Guidelines,
supra note 413, at 7.
    \507\ Id.
    \508\ See infra section III.F.1.f.
    \509\ See id.; proposed rule 22c-1(a)(3)(ii)(A).
    \510\ See infra note 517 and accompanying text.
    \511\ Proposed rule 22c-1(a)(3)(i)(D).
---------------------------------------------------------------------------

    We request comment below on whether to require an upper limit on
the swing factor that a fund would be permitted to use, and if so, the
appropriate level of such limit. We also request comment on whether a
fund should be permitted to adopt an upper limit on the swing factor it
would apply, as part of the fund's swing pricing policies and
procedures.
Request for Comment
    We request comment on the definition of ``swing factor'' set forth
in proposed rule 22c-1(a)(3) and the process a fund would use to
calculate the swing factor that the fund would use to adjust its NAV.
     Is the definition of ``swing factor,'' as set forth in
proposed rule 22c-1(a)(3) appropriate and clear? If not, how could this
definition be clarified or made more effective within the context of
the proposed rule?
     We request comment on each of the considerations that a
fund would be required to take into account in determining the swing
factor, pursuant to proposed rule 22c-1(a)(3)(i)(D). Would these
considerations reflect the estimated or actual costs associated with
purchasing or selling portfolio assets in order to meet purchases or
redemptions of fund shares? Should any aspect of proposed rule 22c-
1(a)(3)(i)(D) not be required to be considered by a fund in calculating
the swing factor? Should any of the considerations be modified, and is
the definition of ``transaction fees and charges,'' as set forth in the
proposed rule, appropriate and clear? Instead of codifying certain
considerations that a fund must take into account in determining the
swing factor, should we instead provide guidance on factors a fund may
wish to consider in calculating the swing factor? Instead of using a
swing factor to adjust a fund's NAV, is there an alternate means by
which a fund should be permitted to adjust its NAV to mitigate
potential dilution stemming from purchase or redemption activity (e.g.,
pricing its assets on the basis of bid prices, as opposed to pricing
using the mean of bid and asked prices)?
     We request comment on the approaches commenters believe a
fund may take to determine its swing factor. For example, do commenters
anticipate that a fund would set a ``base'' swing factor, and adjust it
as appropriate if certain elements required to be considered in the
swing factor deviate from a range of pre-determined norms? Do
commenters believe that it would be feasible and likely that a fund may
wish to use a formula or algorithm approach for determining the swing
factor? What other approaches to determining the swing factor do
commenters anticipate that a fund would be likely to take?
     Do commenters agree that the Commission should not require
an upper limit on the swing factor that a fund would be permitted to
use? Why or why not? If not, what upper limit would be appropriate
(e.g., 2%, or some other limit), and why? Should we specify different
limits for different types of funds or investment strategies?
     Do commenters agree that a fund should be permitted to
adopt an upper limit on the swing factor it would apply, as part of the
fund's swing pricing policies and procedures? Why or why not? To the
extent that a fund does adopt an upper limit on the swing factor it
would apply, should the fund be required to disclose this upper limit
to shareholders? Should each fund that adopts swing pricing policies
and procedures be required, not only permitted, to adopt an upper limit
on the swing factor it would apply?
f. Approval and Oversight of Swing Pricing Policies and Procedures
    Proposed rule 22c-1(a)(3)(ii)(A) would require a fund that has
determined to engage in the use of swing pricing to obtain initial
approval of its swing pricing policies and procedures (including the
fund's swing threshold and any swing factor upper limit specified under
the fund's swing pricing policies and procedures) from the fund's
board, including a majority of independent directors. The proposed rule
also would require a fund's board, including a majority of independent
directors, to approve any material change to the fund's swing pricing
policies and procedures (including any change to the fund's swing
threshold, a change to any swing factor upper limit, or any decision to
suspend or terminate the fund's swing pricing policies and
procedures).\512\ However, a fund's board would not be required to
manage the administration of the fund's swing pricing policies and
procedures. The proposed rule instead provides that a fund's board is
required to designate the fund's investment adviser or officers
responsible for administering the fund's swing pricing policies and
procedures and determining the swing factor that would be used to
adjust the fund's NAV when the fund's swing threshold is breached.\513\
This proposed designation requirement tasks administration for the
fund's swing pricing policies and procedures to persons who we believe
would be in a better position to evaluate

fund flows on a real-time basis than the fund's board.
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    \512\ Proposed rule 22c-1(a)(3)(ii)(A).
    \513\ Proposed rule 22c-1(a)(3)(ii)(B).
---------------------------------------------------------------------------

    The proposed oversight requirements for a fund's board and its
independent directors reflect the historical role that a fund's board
and independent directors have held with respect to issues involving
valuation. A fund's board historically has held significant
responsibility regarding valuation- and pricing-related matters,\514\
as well as in approving valuation and compliance-related policies and
procedures.\515\ 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.\516\
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    \514\ See, e.g., section 2(a)(41)(B) of the Investment Company
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).
    \515\ See, e.g., ASR 118, supra note 423 (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); Rule
38a-1 Adopting Release, supra note 90, 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'').
    \516\ See Rule 38a-1 Adopting Release, supra note 90, at nn.39-
47 and accompanying text.
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    We believe that the proposed board and independent director
approval requirements would help ensure that a fund establishes and
implements swing pricing policies and procedures that are in the best
interests of all the fund's shareholders. Because fund directors have
an obligation to act in the interests of the fund,\517\ a board
approving swing pricing policies and procedures might do so under the
premise that such policies and procedures would not unduly disadvantage
any particular group of shareholders, and that any disadvantages that
could affect certain shareholders would generally be outweighed by the
benefits to the fund as a whole. Furthermore, the proposed approval
requirements would serve to assure shareholders that the same level of
net purchase or net redemption activity would consistently trigger the
use of swing pricing, unless the fund's board and a majority of the
fund's independent directors were to approve a change in the fund's
swing threshold.
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    \517\ See, e.g., Role of Independent Directors of Investment
Companies, Investment Company Act Release No. 24082 (Oct. 14, 1999)
[64 FR 59826 (Nov. 3, 1999)] (discussing directors' duties of care
and loyalty).
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    We believe that shareholders' interests would be best served by
requiring the majority of a fund's independent directors, along with
the fund's board, to approve the fund's swing pricing policies and
procedures. As we have stated before, a fund's independent directors
serve to guard investors' interests.\518\ The decision to implement
swing pricing, and determining the terms of swing pricing policies and
procedures to be adopted by a fund, could occasionally produce
conflicts for the fund and its adviser, and we believe that the
proposed independent director approval requirement would help ensure
that a fund's use of swing pricing would operate to the benefit of the
fund's shareholders (even if this may not be in the best interest of
the fund's adviser). For example, a fund's adviser could be reluctant
to implement swing pricing to the extent it may make the fund's
performance stray too far from, or appear more volatile than, the
fund's benchmark, which could impact the ability of the fund to attract
new investments. Approval of swing pricing policies and procedures by a
majority of a fund's independent directors could make certain that the
fund would use swing pricing in circumstances in which the board has
determined swing pricing would serve shareholders' best interests, even
if these interests may conflict with the adviser's.
---------------------------------------------------------------------------

    \518\ See id.
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    While a fund's board would be required to approve the fund's swing
pricing policies and procedures, the board would be required to
designate the fund's adviser or officers responsible for the
administration of these policies and procedures, including
responsibility for determining a swing factor that would be used to
adjust the fund's NAV when the fund's swing threshold is breached.\519\
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.\520\ 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 factors and
considerations discussed above in section III.F.1.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, or more frequently if market conditions
require.\521\ Because a fund may decide to adopt swing pricing policies
and procedures as part of its liquidity risk management program, the
fund's board may wish to provide that the persons (or functional areas)
in charge of implementing these policies and procedures overlap with
the persons (or functional areas) in charge of administering the
liquidity risk management program.
---------------------------------------------------------------------------

    \519\ Proposed rule 22c-1(a)(3)(ii)(B).
    \520\ See, e.g., BlackRock Swing Pricing Paper, supra note 412;
J.P. Morgan Asset Management Swing Pricing Paper, supra note 454;
Franklin Templeton Investments, Swing pricing: Investor protection
against fund dilution, last visited Apr. 15, 2015, available at
http://www.franklintempleton.co.uk/downloadsServlet?docid=hjs17mth
(``Franklin Templeton Investments Swing Pricing Paper'').
    \521\ See, e.g., BlackRock Swing Pricing Paper, supra note 412
(swing pricing committee meets at least monthly); J.P. Morgan Asset
Management Swing Pricing Paper, supra note 454 (swing pricing
committee meets at least quarterly); Franklin Templeton Investments
Swing Pricing Paper, supra note 520 (swing pricing committee meets
at least quarterly).
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    Proposed rule 22c-1(a)(3) would require the determination of the
swing factor to be reasonably segregated from the portfolio management
function of the fund. For example, if a committee were tasked with
determining the swing factor(s) the fund would use in a variety of
circumstances, we believe it would be appropriate for the fund's
portfolio manager to provide inputs to be used by that committee in
determining the swing factor, but not to decide how those inputs would
be employed in the swing factor determination. We believe that, in
determining the swing factor, independence from portfolio management is
important because the incentives of portfolio managers may not always
be consistent with determining a swing factor that most effectively
prevents dilution of existing

shareholders' interests in the fund. 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 appear relatively poor compared to
other funds and the fund's benchmark.\522\
---------------------------------------------------------------------------

    \522\ See supra note 446 and accompanying text; infra section
III.F.2.b.
---------------------------------------------------------------------------

    A fund's board would not be required to approve each swing factor
that would be used to adjust the fund's NAV when the fund's swing
threshold is breached, although the board would be required to approve
the policies and procedures for determining the swing threshold. This
approval framework--along with the proposed segregation of the swing
factor determination from the portfolio management function--is meant
to strike a balance between ensuring appropriate board oversight over
the policies and procedures for determining the swing factor, and
independence with respect to the swing factor determination process,
while recognizing that it may not be practicable for a fund's directors
to be directly involved in the process of determining each swing
factor. Because the persons administering the fund's swing pricing
policies and procedures may have limited time to determine each swing
factor to the extent that net purchases or net redemptions cannot be
ascertained or reasonably estimated until close to the time that the
fund must strike its NAV, we do not believe that it would generally be
operationally feasible for a fund's board to approve each swing factor.
Also, we do not believe that requiring a fund's board to approve each
swing factor would be consistent with boards' historical oversight
role.
Request for Comment
    We seek comment on the proposed approval and oversight requirements
associated with a fund's swing pricing policies and procedures.
     Do commenters agree that a fund's board, including a
majority of the fund's independent directors, should be required to
approve the fund's swing pricing policies and procedures (including the
fund's swing threshold, and any swing factor upper limit specified
under the fund's swing pricing policies and procedures), and any
material changes thereto? Would these approval requirements ensure that
a fund establishes and implements swing pricing policies and procedures
that are in the interests of all of the fund's shareholders? Do
commenters agree that the proposed independent director approval
requirement would ensure that a fund's use of swing pricing benefits
the fund's shareholders? Should the board be provided the option to not
use swing pricing in a particular situation when swing pricing would
have been warranted pursuant to a fund's swing pricing policies and
procedures?
     Do commenters agree that it would be appropriate to
require a fund's board to designate the fund's adviser or officers
responsible for the administration of swing pricing policies and
procedures, including responsibility for determining a swing factor
that would be used to adjust the fund's NAV when the fund's swing
threshold is breached? Do commenters agree that the determination of
the swing factor should be reasonably segregated from the portfolio
management of the fund? Would this pose any difficulty for particular
types of entities, for example funds managed by small advisers? Is
there a better way to prevent conflicts between the portfolio manager's
incentives and the process of determining a swing factor that most
effectively prevents dilution of existing shareholders' interests in
the fund? What officers (or functional areas) of a fund do commenters
anticipate a fund's board would select to administer the fund's swing
pricing policies and procedures, and do commenters anticipate that
these persons (or functional areas) would overlap with the
administrators of a fund's liquidity risk management program?
     Do commenters agree that a fund's board should not be
required to approve each swing factor that would be used to adjust the
fund's NAV when the fund's swing threshold is breached, although the
board would be required to approve the policies and procedures for
determining the swing threshold? Why or why not?
     Should the Commission provide guidance as to the
circumstances in which a possible misapplication of a firm's swing
pricing policy could result in a material NAV error? For example,
should the Commission explain whether an error would occur when the
fund makes estimates under its swing pricing policy that is applied
correctly, but the information, such as final shareholder flows,
subsequently changes to a material degree? Should funds be required to
have specific policies and procedures to address possible NAV errors?
g. Recordkeeping Requirements
    Proposed rule 22c-1(a)(3) would require a fund to maintain a
written copy of swing pricing policies and procedures adopted by the
fund that are in effect, or at any time within the past six years were
in effect, in an easily accessible place.\523\ Additionally, we are
proposing to expand current rule 31a-2(a)(2), which requires a fund to
keep records evidencing and supporting each computation of the fund's
NAV,\524\ to reflect the NAV adjustments based on a fund's swing
pricing policies and procedures. Specifically, a fund that adopts swing
pricing policies and procedures would be required to preserve records
evidencing and supporting each computation of an adjustment to the
fund's NAV based on the fund's swing pricing policies and
procedures.\525\ For each NAV adjustment, such records should generally
include, at a minimum, the fund's unswung NAV, the level of net
purchases or net redemptions that the fund encountered (or estimated)
that triggered the application of swing pricing, the swing factor that
was used to adjust the fund's NAV, and relevant data supporting the
calculation of the swing factor. The records required under the
proposed amendments to rule 31a-2(a)(2) would be required to be
preserved for at least six years from the date that the NAV adjustment
occurred, the first two years in an easily accessible place.\526\ The
proposed six-year period for a fund to maintain a copy of its swing
pricing policies and procedures in proposed rule 22c-1(a)(3)
corresponds with the six-year recordkeeping period currently
incorporated in rule 31a-2(a)(2). We believe that consistency in these
retention periods is appropriate in order to permit a fund or
Commission staff to review historical instances of NAV adjustments
effected pursuant to the fund's swing pricing policies and procedures
in light of the policies and procedures that were actually in place at
the time the NAV adjustments occurred.
---------------------------------------------------------------------------

    \523\ Proposed rule 22c-1(a)(3)(iii).
    \524\ See rule 31a-2(a)(2) (every registered investment company
shall . . . ``[p]reserve for a period not less than six years from
the end of the fiscal year in which any transactions occurred, the
first two years in an easily accessible place . . . all schedules
evidencing and supporting each computation of net asset value of the
investment company shares'').
    \525\ See proposed amendment to rule 31a-2(a)(2).
    \526\ See id.
---------------------------------------------------------------------------

    These proposed recordkeeping requirements would help our
examination staff to ascertain whether a fund that has adopted swing
pricing policies and procedures has done so in compliance with the
requirements of proposed rule 22c-1(a)(3). They also would help our
staff to determine whether a fund is taking into account

the factors required to be considered under proposed rule 22c-
1(a)(3)(i)(D) in calculating the swing factor.
Request for Comment
    We seek comment on the proposed recordkeeping requirements
associated with a fund's swing pricing policies and procedures.
     Do commenters agree that the proposed recordkeeping
requirements are appropriate? Are there any additional records
associated with a fund's swing pricing policies and procedures that a
fund should be required to keep? Should rule 31a-2(a)(2) be amended to
specifically require a fund to keep records evidencing the fund's
consideration of each of the factors required to be considered in
determining each swing factor used to adjust the fund's NAV? Do
commenters agree that the six-year record retention period in proposed
rule 22c-1(a)(3) and the proposed amendments to rule 31a-2(a)(2) is
appropriate?
2. Guidance on Operational Considerations Relating To Swing Pricing
a. Operational Processes Associated With Swing Pricing
    Swing pricing requires the net cash flows for a fund to be known,
or estimated using information obtained after reasonable inquiry,\527\
before determining whether to adjust the fund's NAV on any particular
day (and, if the fund's swing factor varies depending on its net flows,
to determine the swing factor that the fund will use to adjust its
NAV). A fund using swing pricing would need to monitor shareholder
trades or flows of money in and out of the fund for purposes of
determining whether the fund's net purchases or net redemptions would
give rise to an NAV adjustment under its swing pricing policies and
procedures.\528\ Because 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, a fund may
wish to arrange for interim feeds of flows from its transfer agent or
distributor in order to reasonably estimate its daily net flows for
swing pricing purposes. A fund also may wish to implement formal or
informal policies to encourage effective communication channels between
the persons charged with implementing the fund's swing pricing policies
and procedures, the fund's investment professionals, and personnel
charged with day-to-day pricing responsibility (to the extent different
persons comprise each of these groups).
---------------------------------------------------------------------------

    \527\ See proposed rule 22c-1(a)(3)(i)(A) (permitting the
person(s) responsible for administering the fund's swing pricing
policies and procedures to use ``information obtained after
reasonable inquiry'' in determining whether the fund's level of net
purchases or net redemptions has exceeded the fund's swing
threshold).
    \528\ 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 Rule 38a-1
Adopting Release, supra note 90, at nn.66-69 and accompanying text.
---------------------------------------------------------------------------

    In addition, there are unique operational considerations applicable
to funds with multiple share classes. A fund with multiple share
classes that uses swing pricing should consider the net purchase or net
redemption activity of all share classes in determining whether its
swing threshold has been breached.\529\ 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 the existing shareholders' (or class of shareholders')
interests in the fund.
---------------------------------------------------------------------------

    \529\ See Luxembourg Swing Pricing Survey, Reports & Guidelines,
supra note 413, at 21 (discussing swing pricing considerations
relevant to funds with multiple share classes).
---------------------------------------------------------------------------

b. Performance Reporting and Calculation of NAV-Based Performance Fees
    For purposes of calculating the financial highlights and
performance data to be included in a fund's prospectus and shareholder
reports,\530\ a fund using swing pricing should consider its NAV at the
beginning and end of a reporting period, as well as its ``ending
redeemable value'' on a particular day, to be its NAV as adjusted
pursuant to its swing pricing policies and procedures (as applicable).
Because a fund using swing pricing to adjust its NAV would, under
certain circumstances, use the adjusted NAV as the price that
shareholders receive for the purchase or redemption of shares, the
adjusted NAV is the ``net asset value calculated on the last business
day before the first day of each [performance] period'' and the ``price
calculated on the last business day of each [performance] period,'' as
referenced in the instructions to Item 13 (``Financial Highlights
Information'') of Form N-1A. For the same reason, the adjusted NAV is
the ``ending redeemable value'' of the fund's shares, as referenced in
Item 26 (``Calculation of Performance Data'') of Form N-1A. Likewise,
because rule 482 under the Securities Act references Form N-1A with
respect to performance data,\531\ a fund using swing pricing also
should use its adjusted NAV when calculating the standardized
performance data to be included in the fund's advertising materials.
---------------------------------------------------------------------------

    \530\ See Items 13, 26 of Form N-1A.
    \531\ Rule 482(d), 17 CFR 230.482.
---------------------------------------------------------------------------

    If a fund using swing pricing pays NAV-based performance fees to
its adviser,\532\ the fund's NAV for purposes of calculating
performance fees should be the NAV as adjusted pursuant to its swing
pricing policies and procedures (as applicable). As discussed above, a
fund's NAV used for performance reporting purposes would be the NAV as
adjusted pursuant to swing pricing policies and procedures. We believe
that the reported NAV and the NAV used for calculating performance fees
(to the extent used) should be consistent in order to promote
transparency regarding any performance fees paid to the fund's adviser,
and to reflect the fact that the fund's performance likely has been
affected by the transaction costs associated with shareholders'
purchases and redemptions.
---------------------------------------------------------------------------

    \532\ Section 205(a)(1) of the Investment Advisers Act generally
restricts an investment adviser from entering into, extending,
renewing, or performing an investment advisory contract that
provides for compensation to the adviser based on a share of capital
gains on, or capital appreciation of, the funds of a client.
    However, there are certain exemptions to this general
restriction. See section 205(b)(2) of the Investment Advisers Act
(providing that the section 205(a)(1) restriction does not apply to
an investment adviser charging performance fees to a registered
investment company if the fee is structured to comply with four
requirements: (i) The fee is based on the investment company's NAV;
(ii) the NAV is averaged over a ``specified period''; (iii) the fee
increases or decreases proportionately with the investment company's
``investment performance'' over the specified period; and (iv) the
investment company's investment performance relates to the
``investment record'' of an ``appropriate index'' of securities
prices or another measure of investment performance as specified by
the Commission by rule, regulation, or order); see also rule 205-3
under the Investment Advisers Act 17 CFR 275.205-3 (providing an
exemption to the section 205(a)(1) restriction and permitting an
investment adviser to charge performance fees if the adviser's
client is a ``qualified client'' as defined in rule 205-3(d)(1)
(generally, a client having at least $1 million under management
with the adviser immediately after entering into an advisory
contract with the adviser, or a client the adviser reasonably
believed had a net worth of more than $2 million at the time the
contract was entered into)).
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c. Fund Merger Considerations
    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.\533\

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.\534\ 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 \535\), 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 pricing merge, the boards of merging funds should consider
whether to temporarily suspend a fund's swing pricing policies and
procedures ahead of the merger.\536\ Under proposed rule 22c-1(a)(3),
such suspension would be considered a material change to the fund's
swing pricing policies and procedures and thus could be accomplished
only by vote of the fund's board, including a majority of the fund's
independent directors.\537\ In any event, the swing threshold of the
absorbing fund should be reviewed following a merger. Likewise, the
persons in charge of administering the absorbing fund's swing pricing
policies and procedures should consider the effects of the merger when
considering what swing factor would be appropriate to use if the fund's
swing threshold is breached following the merger.
---------------------------------------------------------------------------

    \533\ See Luxembourg Swing Pricing Survey, Reports & Guidelines,
supra note 413, at 18-19 (discussing swing pricing considerations
relevant to fund mergers).
    \534\ Directors overseeing fund mergers must take into account
rule 17a-8 under the Investment Company Act (which sets forth
requirements for mergers of affiliated investment companies), if
applicable, as well as any relevant state law requirements. Rule
17a-8 requires a board, including a majority of the independent
directors, to consider the relevant facts and circumstances with
respect to a merger of affiliated funds and determine that the
merger is in the best interests of each of the merging funds and
that the interests of the shareholders of both the fund being
acquired and the acquiring fund are not being diluted. We expect
swing pricing considerations could be relevant to this
determination.
     See Luxembourg Swing Pricing Survey, Reports & Guidelines,
supra note 413, at 18-19 (discussing issues associated with the use
of swing pricing to adjust the value of the absorbed fund's assets).
    \535\ See, e.g., supra paragraph accompanying notes 296-298.
    \536\ See supra note 534.
    \537\ See proposed rule 22c-1(a)(3)(ii)(A).
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d. Request for Comment
    We seek comment on the Commission's guidance discussed above
regarding certain operational and accounting considerations relating to
swing pricing. Do commenters generally agree with the Commission's
guidance in this section III.F.2?
    Along with this general request for comment on the Commission's
guidance, we request specific comment on a number of individual
guidance items.
     To what extent is it currently typical for a fund to
receive interim feeds of flows from its transfer agent or distributor,
and do these interim feeds generally permit a fund to reasonably
estimate its net flows at the end of a business day? To what extent do
financial intermediaries or other third parties provide interim feeds
of flows?
     Should the Commission amend the proposed rule or provide
guidance regarding pricing errors in the context of swing pricing? How
do commenters anticipate that a fund using swing pricing may wish to
update its pricing policies to provide clarity as to the application of
swing pricing to the fund's policies concerning pricing errors? What
policies do commenters anticipate that a fund's pricing policies could
incorporate with respect to circumstances in which the fund's NAV was
swung (or not swung) based on an estimate of net purchases or net
redemptions that was later determined to be incorrect, but was based on
information obtained after reasonable inquiry pursuant to proposed rule
22c-1(a)(3)(i)(A)?
     Do commenters agree that it is appropriate to require that
a fund calculate performance fees based on the fund's NAV as adjusted
pursuant to the fund's swing pricing policies and procedures (as
applicable)? Why or why not? We specifically request comment on whether
calculating a performance fee based on a fund's adjusted NAV could be
viewed as inappropriately increasing or decreasing the fee (e.g.,
depending on whether the NAV was adjusted at the beginning or end of a
measurement period).
     Besides the issues discussed in this section, what
specific operational challenges do funds anticipate associated with
swing pricing? Do commenters anticipate there would be circumstances in
which a fund's structure (e.g., a fund with multiple share classes, as
discussed in section III.F.2.a) would cause swing pricing to be
particularly complex to implement?
     With respect to a fund with multiple share classes that
uses swing pricing, do commenters agree that the fund should consider
the net purchase or net redemption activity of all share classes in
determining whether its swing threshold has been breached? Or should a
fund instead be permitted to consider the net purchase or redemption
activity of each share class separately (which potentially could lead
to NAV adjustments for certain share classes and not others, or
different NAV adjustments for each share class, on the same day)? If
so, should we amend rule 18f-3 to expressly allow this? What
operational or other difficulties could result from permitting a fund
with multiple share classes that uses swing pricing to consider the net
purchase or redemption activity of each share class separately, and to
potentially make different NAV adjustments for each share class on the
same day?
     Besides the issues discussed in this section, are there
any other operational issues associated with swing pricing about which
we should provide guidance?
3. Master-Feeder Funds
    With respect to master-feeder funds, we believe the use of swing
pricing would generally be appropriate only with respect to the level
(or levels) of the fund structure that actually transact in underlying
portfolio assets as a result of net purchase or redemption
activity.\538\ For example, if shareholders of a feeder fund were to
redeem feeder fund shares, the feeder fund would redeem from the master
fund (and not sell portfolio assets) in order to pay redeeming
shareholders. Likewise, if investors were to purchase shares of a
feeder fund, the feeder fund would invest in the master fund with cash
received from the feeder fund purchasing shareholders, and the master
fund would invest this cash in portfolio assets. Thus, a feeder fund
would not be permitted to use swing pricing under the proposed
rule.\539\ The master fund, on the other hand, would potentially need
to purchase portfolio assets in order to invest purchasing
shareholders' cash (as transferred through the feeder fund), or sell
portfolio assets in order to pay redemption proceeds in exchange for
feeder fund shares. Thus, to the extent that net purchases into or
redemptions from the master fund (by one or more feeder funds, or any
other investors in the master fund) exceed the fund's swing threshold,
the swing factor should thus be applied to the master fund's NAV.\540\
In this example, because

the feeder fund invests in the master fund, the master fund's adjusted
NAV would indirectly affect the NAV of the feeder fund.
---------------------------------------------------------------------------

    \538\ See Luxembourg Swing Pricing Survey, Reports & Guidelines,
supra note 413, at 21-22 (discussing swing pricing considerations
relevant to master-feeder fund structures).
    \539\ See proposed rule 22c-1(a)(3)(iv).
    \540\ Proposed rule 22c-1(a)(3) clarifies that, although feeder
funds would not be permitted to use swing pricing, master funds
would be permitted to do so. See proposed rule 22c-1(a)(3)(iv).
---------------------------------------------------------------------------

Request for Comment
    We seek comment on the application of swing pricing to master-
feeder funds. Do commenters generally agree that feeder funds should
not be permitted to use swing pricing? Why or why not?
4. Financial Statement Disclosure Regarding Swing Pricing
    The application of swing pricing would impact a fund's financial
statements and disclosures in a number of areas, including a fund's
statement of assets and liabilities, statement of changes in net
assets, financial highlights and the notes to the financial statements.
Currently, funds are required by Regulation S-X rule 6-04.19 \541\ to
state the NAV on the statement of assets and liabilities. Similar to
``ending redeemable value'' discussed in performance reporting in
section III.F.2.b above, for purposes of reporting the NAV in a fund's
statement of assets and liabilities, a fund using swing pricing should
consider its ``purchase price'' or ``redemption price'' on a particular
day to be its NAV as adjusted pursuant to its swing pricing policies
and procedures. We believe that disclosure of this price is important,
as it allows investors to understand the value they would receive had
they purchased or redeemed shares on the financial reporting period end
date. Different from redemption fees, which may be charged to specific
shareholders based on the length of time that the shareholder has owned
shares of the fund, all shareholders in a fund would receive the NAV as
adjusted pursuant to its swing pricing policies and procedures. As all
shareholders would receive the NAV as adjusted pursuant to the fund's
swing pricing policies and procedures, we are proposing to amend
Regulation S-X rule 6-04.19 to require funds to disclose the NAV as
adjusted pursuant to its swing pricing policies and procedures (if
applicable).\542\
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    \541\ See 17 CFR 210.6-04.19.
    \542\ See proposed amendments to 210.6-04.19. We also propose
amending Regulation S-X rule 6-02 to add a definition of swing
pricing. Swing pricing would be defined as having the meaning given
in proposed rule 22c-1(a)(3)(v)(C). See proposed 210.6-02(g).
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    Swing pricing also would impact disclosures of capital share
transactions included in a fund's statement of changes in net assets. A
fund using swing pricing to adjust its NAV would make payments for
shares redeemed and receive payments for shares purchased net of the
swing pricing adjustment. For example, if a fund had an unadjusted NAV
of $10.00 on a given day and the adjusted NAV pursuant to the fund's
swing pricing policies and procedures was $9.90, shareholders would
transact at $9.90 multiplied by the number of shares purchased or
redeemed. The $0.10 difference between the adjusted and unadjusted NAV
would be retained by the fund to offset transaction and liquidity
costs. This $0.10 difference per share should be accounted for as a
capital transaction and not included as income to the fund, because it
is designed to reflect the near-term transactional and liquidity costs
incurred as a result of satisfying shareholder transactions. Funds are
required by Regulation S-X rule 6-09.4(b) to disclose the number of
shares and dollar amounts received for shares sold and paid for shares
redeemed.\543\ In this example, Regulation S-X would require the dollar
amount disclosed to be based on the $9.90 per share that was actually
used for shareholder transactions.
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    \543\ See 17 CFR 210.6-09.4(b).
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    Consistent with presentation of the impact of swing pricing on the
statement of changes in net assets and performance reporting described
in section III.F.2.b, a fund should include the impact of swing pricing
in its financial highlights.\544\ The per share impact of amounts
retained by the fund due to swing pricing should be included in the
fund's disclosures of per share operating performance.\545\
Accordingly, we are proposing to amend Item 13 of Form N-1A to
specifically require the per share impact of amounts related to swing
pricing to be disclosed below the total distributions line in a fund's
financial highlights. In order to properly reconcile with the adjusted
NAV reported on the statement of assets and liabilities, we also are
proposing to clarify that ``Net Asset Value, Beginning of Period'' and
``Net Asset Value, End of Period'' are each the NAV as adjusted
pursuant to the fund's swing pricing policies and procedures, if
applicable.
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    \544\ See Item 13 of Form N-1A.
    \545\ ASC 946-205-50-7 requires specific per share information
to be presented in the financial highlights for registered
investment companies, including disclosure of the per share amount
of purchase premiums, redemption fees, or other capital items.
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    Similarly, a fund's calculation of total return should use the NAV
as adjusted pursuant to a fund's swing pricing policies and procedures
as the redemption price calculated on the last business day of the
period. We are proposing to amend Instructions 3(a) and 3(d) to Item 13
of Form N-1A to explicitly require funds to assume the NAV calculated
on the last business day before the first day of each period and the
price calculated on the last business day of each period shown should
each be adjusted for the impact of swing pricing, if applicable. We
believe that it is important for investors to understand the impact of
swing pricing on the return that they would have received for the
period presented in the fund's financial statements. We also are
proposing to amend instructions to Item 26 regarding calculation of
performance data to clarify that ``ending redeemable value'' should
assume a value adjusted pursuant to swing pricing policies and
procedures.
    Finally, we are proposing to require funds that adopted swing
pricing policies and procedures to state in a note to their financial
statements the general methods used in determining whether the fund's
net asset value per share will swing, whether the fund's net asset
value per share has swung during the year, and a general description of
the effects of swing pricing on the fund's financial statements.\546\
We believe this information would be useful in further understanding
the impact of swing pricing on a fund.
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    \546\ See proposed amendments to rule 6-03(n) of Regulation S-X.
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Request for Comment
    We seek comment on the financial statement disclosure
considerations relating to swing pricing. Do commenters generally agree
with the Commission's guidance discussed above regarding financial
statement disclosure, as well as the proposed amendments to Regulation
S-X?
    Along with this general request for comment, we request specific
comment on a number of individual issues discussed above.
     Should the Commission allow a fund to disclose the total
return calculation on an unadjusted NAV basis as a supplement to the
total return calculation in the financial highlights table, and/or in a
fund's advertising materials?
     Should the dollar amount of purchases and redemptions
disclosed in a fund's financial statements be presented based on
unadjusted NAV, with the dollar amount retained by the fund because of
swing pricing separately disclosed? Alternatively, should the dollar
amount of purchases and redemptions be presented as the actual value
received by the fund or paid to shareholders, which would include the
impact of swing pricing? Why or why not?

     Should funds be required to disclose only the NAV as
adjusted pursuant to a fund's swing pricing policies and procedures on
the statement of assets and liabilities? Alternatively, should funds be
required to disclose both unadjusted NAV and the NAV as adjusted
pursuant to a fund's swing pricing policies and procedures on the
statement of assets and liabilities?
     Should we require additional disclosures in notes to fund
financial statements regarding swing pricing? If so, what additional
information should be disclosed? Do commenters believe that any of the
proposed disclosures should be modified? Are any of the proposed
disclosures unnecessary? Why or why not?
     Do commenters have any accounting or auditing concerns in
connection with swing pricing? If so, please describe specific
concerns.

G. Disclosure and Reporting Requirements Regarding Liquidity Risk and
Liquidity Risk Management

    Investors receiving relevant information about the operations of a
fund and the principal risks associated with an investment in a
particular fund are important in facilitating investor choice regarding
the appropriate investments for their risk tolerances. Investors in
open-end funds generally expect funds to pay redemption proceeds
promptly following their redemption requests based, in part, on
representations made by funds in their disclosure documents.
Accordingly, information about how redemptions will be made and when
investors will receive payment is significant to investors. Currently,
funds are not expressly required to disclose how they manage the
liquidity of their assets, and therefore limited information is
available regarding whether the liquidity of a fund's portfolio
securities corresponds with its liquidity needs related to redemption
obligations. In addition to the proposed amendments to Form N-1A and
Regulation S-X discussed above regarding financial reporting related to
swing pricing, we are proposing amendments to Form N-1A, Regulation S-
X, proposed Form N-PORT and proposed Form N-CEN to improve the ability
of investors, the Commission staff, and other potential users to
analyze and better understand a fund's redemption practices, its
management of liquidity risks, and how liquidity risk management can
affect shareholder redemptions. We are also proposing amendments to
Form N-1A regarding disclosure of swing pricing.
1. Proposed Amendments to Form N-1A
a. Redemption of Fund Shares
    Form N-1A is used by funds to register under the Investment Company
Act and to register offerings of their securities under the Securities
Act. In particular, Form N-1A requires funds to describe their
procedures for redeeming fund shares, including restrictions on
redemptions and any redemption charges.\547\ Disclosure regarding other
important redemption information, such as the timing of payment of
redemption proceeds to fund shareholders, varies across funds as today
there are no specific requirements for this disclosure under the form.
Some funds disclose that they will redeem shares within a specific
number of days after receiving a redemption request, other funds
disclose that they will honor such requests within seven days (as
required by section 22(e) of the Act), and others provide no specific
time periods. Some funds disclose differences in the timing of payment
of redemption proceeds based on the distribution channel through which
the fund shares are redeemed, while others do not.
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    \547\ See Item 11(c) of Form N-1A.
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    We believe that requiring consistency in disclosures and increasing
the level of information provided among funds regarding the timing of
payment after shareholder redemption of fund shares would give
investors fuller information about their investments. Improvements are
needed to enhance the ability of investors to evaluate and compare
redemption policies across funds and to understand when a fund will
actually pay redemption proceeds. Accordingly, we are proposing
amendments to Item 11 of Form N-1A that would require a fund to
disclose the number of days in which the fund will pay redemption
proceeds to redeeming shareholders.\548\ If the number of days in which
the fund will pay redemption proceeds differs by distribution channel,
the fund also would be required to disclose the number of days for each
distribution channel.\549\
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    \548\ See proposed Item 11(c)(7) of Form N-1A.
    \549\ Id.
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    We also are proposing amendments to Item 11 of Form N-1A that would
require a fund to disclose the methods that the fund uses to meet
redemption requests.\550\ Under this requirement funds would have to
disclose whether they use the methods regularly to meet redemptions or
only in stressed market conditions. Methods to meet redemption requests
may include, for example, sales of portfolio assets, holdings of cash
or cash equivalents, lines of credit, interfund lending, and ability to
make in-kind redemptions. To address transaction costs associated with
shareholder activity, funds also may use redemption fees.\551\
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    \550\ See proposed Item 11(c)(8) of Form N-1A.
    \551\ Funds also may use swing pricing to address transaction
costs associated with shareholder purchases or redemptions. We have
proposed amendments to Form N-1A regarding disclosure of swing
pricing. See proposed Item 6(d) of Form N-1A.
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    Currently, Item 11(c)(3) of Form N-1A requires funds to disclose
whether they reserve the right to redeem their shares in kind instead
of in cash.\552\ We propose to incorporate this disclosure requirement
into proposed Item 11(c)(8) discussed above. We understand that the use
of in-kind redemptions (outside of the ETF context) historically has
been rare and that many funds reserve the right to redeem in kind only
as a tool to manage liquidity risk under emergency circumstances or to
manage the redemption activity of a fund's large institutional
investors.\553\ We also are aware that there are often logistical
issues associated with redemptions in kind and that these issues can
limit the availability of in-kind redemptions as a practical
matter.\554\ A fund should consider whether adding relevant detail to
its disclosure regarding in-kind redemptions, or revising its
disclosure if the fund would be practically limited in its ability to
redeem its shares in kind, would provide more accurate information to
investors.
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    \552\ See Item 11(c)(3) of Form N-1A.
    \553\ See supra section III.C.5.c.
    \554\ Id.
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    We are also proposing to amend Item 28 of Form N-1A to require a
fund to file as an exhibit to its registration statement any agreements
related to lines of credit for the benefit of the fund.\555\ As
previously mentioned, we understand based on staff outreach that it is
relatively common for funds to establish lines of credit to manage
liquidity risk and meet shareholder redemptions, typically during
periods of significantly limited market liquidity.\556\ We believe that
requiring funds to include such agreements as exhibits to registration
statements will increase Commission, investor, and market participant
knowledge concerning the arrangements funds have made in order to
strengthen their ability to meet shareholder redemption requests and
manage liquidity risk and the terms of those arrangements. We also
propose to include an instruction related to credit agreements noting
that the specific fees paid in connection with the credit

agreements need not be disclosed in the exhibit filed with the
Commission to preserve the confidentiality of this information.
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    \555\ See proposed Item 28(h) of Form N-1A.
    \556\ See supra section III.C.5.a.
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    Overall, we believe that requiring funds to provide additional
disclosure concerning the methods they use and the funding sources they
have to fulfill their redemption obligations and whether those methods
are used on a regular basis or only in stressed market conditions would
improve shareholder and market participant knowledge regarding fund
redemption procedures and liquidity risk management. In particular,
increased knowledge of how and when a fund's redemption procedures may
affect whether, for example, a shareholder would receive cash or
securities in kind or pay a redemption fee would be helpful for
investors to better understand the impact of a fund's redemption
procedures on shareholders.
b. Swing Pricing
    Form N-1A currently requires a fund to describe its procedures for
pricing fund shares, including an explanation that the price of fund
shares is based on the fund's NAV and the method used to value fund
shares.\557\ If the fund is an ETF, an explanation that the price of
fund shares is based on market price is required.\558\ As discussed
above, under proposed rule 22c-1(a)(3), a fund (with the exception of a
money market fund or ETF) would be permitted, under certain
circumstances, to use swing pricing to adjust its current NAV as an
additional tool to lessen dilution of the value of outstanding
redeemable securities through shareholder purchase and redemption
activity.\559\
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    \557\ See Item 11(a)(1) of Form N-1A.
    \558\ Id.
    \559\ See supra section III.F.
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    We are proposing to amend Item 6 of Form N-1A to account for this
pricing procedure. Specifically, the proposed amendment would require a
fund that uses swing pricing to explain the circumstances under which
swing pricing would be required to be used as well as the effects of
using swing pricing.\560\ For a fund that invests in other funds (e.g.,
fund-of-funds, master-feeder funds), the fund would be required to
include a statement that its NAV is calculated based on the NAVs of the
funds in which the fund invests, and that the prospectuses for those
funds explain the circumstances under which those funds will use swing
pricing and the effects of using swing pricing. We believe that these
proposed disclosures would improve public understanding regarding a
fund's use of swing pricing as well as the potential advantages and