
[Federal Register Volume 81, Number 223 (Friday, November 18, 2016)]
[Rules and Regulations]
[Pages 82084-82139]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25347]



[[Page 82083]]

Vol. 81

Friday,

No. 223

November 18, 2016

Part III





Securities and Exchange Commission





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17 CFR Parts 210, 270, and 274





Investment Company Swing Pricing; Final Rule

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

[[Page 82084]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 270, and 274

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


Investment Company Swing Pricing

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

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

FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, John Foley, Andrea 
Ottomanelli Magovern, Naseem Nixon, Amanda Hollander Wagner, Senior 
Counsels; Thoreau Bartmann, Melissa Gainor, Senior Special Counsels; or 
Kathleen Joaquin, Senior Financial Analyst, Investment Company 
Rulemaking Office, at (202) 551-6792; Ryan Moore, Assistant Chief 
Accountant, or Matt Giordano, Chief Accountant, Office of the Chief 
Accountant, at (202) 551-6918, Division of Investment Management, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-8549.

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

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

I. Introduction

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

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[[Page 82085]]

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

A. Swing Pricing

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

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

[[Page 82087]]

exceptions or waivers must be disclosed to fund investors.\31\
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    \27\ See id., at section II. (``[Rule 22c-2] permits each board 
to take steps it concludes are necessary to protect its investors, 
and provides the board flexibility to tailor the redemption fee to 
meet the needs of the fund.''); and Mutual Fund Redemption Fees, 
Investment Company Act Release No. 27504 (Sept. 27, 2006) [71 FR 
58257 (Oct. 3, 2001)], at section II.C (``[T]he terms of redemption 
fee policies are a matter for fund boards to determine.'').
    \28\ Rule 22c-2.
    \29\ While rule 22c-2 provides a minimum seven day ``time 
period'' during which a redemption fee, if imposed, must apply, 
(i.e. a fee may not apply only to shares redeemed in three days or 
less after purchase, but must capture shares redeemed within at 
least a seven-day period after purchase), it does not impose a 
maximum duration of such a time period, and thus redemption fees may 
be imposed on shares redeemed within a month, three months, or even 
longer periods, depending on the duration deemed appropriate by the 
fund board. See rule 22c-2(a)(1)(i).
    \30\ Redemption fees imposed for an indefinite time period after 
purchase but only on redemptions exceeding a certain size--like 
redemption fees imposed on all shares redeemed within a certain time 
period--might potentially implicate the senior security concerns of 
section 18(f)(1), but we note that in adopting rule 22c-2 we 
explicitly provided exemptive relief from section 18(f)(1) for 
redemption fees imposed under rule 22c-2. See Redemption Fees 
Adopting Release, supra footnote 24, at n.30 (``By adopting the 
rule, we are providing an exemption from . . . the Act's prohibition 
against the issuance of a senior security.'').
    \31\ See id., at n.32 (``The details of the redemption fee, the 
circumstances under which it would (and would not) be imposed, and 
the specific exceptions to imposition of the fee are currently 
disclosed to fund investors when they decide to invest in a fund, 
and may include exceptions for particular transactions.''). See also 
Item 11(c) of Form N-1A.
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    While we believe redemption fees may be an effective anti-dilution 
tool, we acknowledge that these fees are viewed as unpopular with 
investors and intermediaries \32\ and entail their own operational 
complexities.\33\ As a result, redemption fees have not become 
prevalent as a means of addressing dilution due to shareholder 
transaction activity, and thus are used by a limited number of 
funds.\34\
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    \32\ See Eaton Vance Comment Letter (``Even investors who 
understand that transaction fees accrue to the benefit of the fund 
(and thus, indirectly, to fund shareholders) often react negatively 
when confronted with having to pay them.'').
    \33\ For example, we recognize the compliance burdens and 
operational challenges certain types of redemption fees place on 
intermediaries, who would be required to track various fund policies 
for such fees by share class that may include varying fee rates, 
applicability and waiver policies. Such data also would require 
daily updating as it is sourced by systems that support both front-
end (customer facing) and back-end transaction processing to ensure 
fees are accurately assessed. See Proposing Release, supra footnote 
6 at text accompanying n.724 (acknowledging potential operational 
complexity that could accompany the use of redemption fees). We 
acknowledge that these operational challenges may be particularly 
acute in circumstances where a fund's policies assess redemption 
fees only in circumstances where the fund is experiencing heavy 
redemptions or particular market stresses or where a fund assesses 
redemption fees that may vary in size each time they are applied.
    \34\ See Eaton Vance Comment Letter (``Given a choice, most 
investors appear to prefer funds that do not charge transactions 
fees over funds that do. This creates a competitive disadvantage for 
funds that impose transaction fees, accounting for their limited 
use.'').
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    Funds may also attempt to address potential shareholder dilution by 
reserving the right to redeem in kind instead of with cash.\35\ In-kind 
redemptions may reduce transaction costs by reducing the need for cash 
transactions, but they raise challenges of their own.\36\ There are 
often logistical and operational issues associated with paying in-kind 
redemptions, and this limits the availability of in-kind redemptions 
under many circumstances.\37\ For instance, in-kind redemptions could 
entail operational difficulties that result in manual processes, which 
would be imposed on both the fund and on investors receiving portfolio 
securities.\38\ Moreover, some shareholders are generally unable or 
unwilling to receive in-kind redemptions.\39\
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    \35\ See, e.g., Adoption of (1) Rule 18f-1 Under the Investment 
Company Act of 1940 to Permit Registered Open-End Investment 
Companies Which Have the Right to Redeem In Kind to Elect to Make 
Only Cash Redemptions and (2) Form N-18F-1, Investment Company Act 
Release No. 6561 (June 14, 1971) [36 FR 11919 (June 23, 1971)] 
(``Rule 18f-1 and Form N-18F-1 Adopting Release'') (stating that the 
definition of ``redeemable security'' in section 2(a)(32) of the 
Investment Company Act ``has traditionally been interpreted as 
giving the issuer the option of redeeming its securities in cash or 
in kind.'').
    \36\ Mutual funds that reserve the right to redeem their shares 
in kind may use such redemptions to manage liquidity risk under 
exceptional circumstances. See Karen Damato, `Redemptions in Kind' 
Become Effective for Tax Management, Wall Street Journal (Mar. 10, 
1999), available at http://www.wsj.com/articles/SB921028092685519084 
(`` `Redemptions in kind' are typically viewed by fund managers as 
an emergency measure, a step they could take to meet massive 
redemptions in the midst of a market meltdown.''). Funds may also 
use in-kind redemptions for other reasons. For example, funds may 
wish to redeem certain investors (particularly, large, institutional 
investors) in kind, because in-kind redemptions could have a lower 
tax impact on the fund than selling portfolio securities in order to 
pay redemptions in cash. This, in turn, could benefit the remaining 
shareholders in the fund. See, e.g., id. See also Liquidity Risk 
Management Programs Adopting Release, supra footnote 8, at section 
III.F.
    \37\ See, e.g., Comment Letter of Invesco on the Notice Seeking 
Comment on Asset Management Products and Activities, Docket No. 
FSOC-2014-0001 (Mar. 25, 2015), at 11 (noting that while ``Invesco 
has on occasion exercised rights to redeem in kind, in practice such 
rights are exercised infrequently'').
    \38\ See Money Market Fund Reform; Amendments to Form PF, 
Investment Company Act Release No. 31166 (July 23, 2014) [79 FR 
47736 (Aug. 14, 2014)] (``2014 Money Market Fund Reform Adopting 
Release''), at section II.L.1.f (discussing ``complex valuation and 
operational issues'' associated with in-kind redemptions). See also 
Money Market Fund Reform; Amendments to Form PF, Investment Company 
Act Release No. 30551 (June 5, 2013) [78 FR 36834, (June 19, 2013)] 
(``2013 Money Market Fund Reform Proposing Release''), at n.473 and 
accompanying text.
    \39\ See Comment Letter of BlackRock Inc. (Jan. 13, 2016) 
(``BlackRock Comment Letter'') (``[R]edemptions in-kind are not 
practical for retail investors, as retail investors may lack the 
proper custodial accounts to hold a particular security and they may 
be less likely to have the necessary expertise and/or the 
operational ability to trade the securities that could be held in a 
fund. For example, a retail investor may not have a custodial 
account set up to hold a security that is traded in another country, 
nor the sophistication to be able to trade such a security.''). See 
also Comment Letter of Invesco Ltd. (Jan. 13, 2016) (``Invesco 
Comment Letter'') (``The primary problem with using redemptions in-
kind to meet large redemptions is the willingness and ability of the 
redeeming entity to receive securities instead of cash.''); Peter 
Fortune, Mutual Funds, Part I: Reshaping the American Financial 
System, New England Econ. Rev. (July/Aug. 1997), at 47, available at 
http://www.bostonfed.org/economic/neer/neer1997/neer497d.htm. (``A 
fund redeeming in kind does so at the risk of its reputation and 
future business . . .''). In the context of money market funds, we 
requested comment on whether we should require redemptions in kind 
for redemptions in excess of a certain size threshold, to ease 
liquidity strains on the fund and reduce the risks and unfairness 
posed by significant sudden redemptions. See Money Market Fund 
Reform; Proposed Rule, Investment Company Act Release No. 28807 
(June 30, 2009) [74 FR 32688 (July 8, 2009)] (``2009 Money Market 
Fund Reform Proposing Release''), at section III.B. Commenters 
generally opposed this type of reform for a variety of reasons, all 
of which likely would apply equally to funds other than money market 
funds. For example, most commenters stated that in-kind redemptions 
would be technically unworkable due to complex valuation and 
operational issues that would be imposed on both the fund and on 
investors receiving the in-kind distribution. See 2013 Money Market 
Fund Reform Proposing Release, supra footnote 38, at section 
III.B.9.c.
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    Funds may still mitigate shareholder dilution using redemption fees 
and redemptions in kind, but each has downsides (as described above) 
and they are not broadly utilized by funds. Therefore, for the reasons 
discussed throughout this section, we believe that providing funds the 
option to use swing pricing as another anti-dilution tool is likely to 
benefit investors and may complement or be an alternative to the tools 
currently available to funds.
    Finding efficient and cost-effective ways to protect fund 
shareholders from the dilutive impacts of trading activity and related 
costs is challenging, and many tools have been used in different 
jurisdictions to address these issues.\40\ As discussed in detail in 
the Proposing Release, one particularly successful tool, which has been 
applied in the Luxembourg fund industry for over 15 years, is swing 
pricing.\41\ Swing pricing is regarded abroad as an efficient mechanism 
to protect non-transacting shareholders from dilution, as well as an 
additional tool to help funds manage liquidity risks.\42\ Asset 
managers have

[[Page 82088]]

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

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

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

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

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

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

[[Page 82089]]

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

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

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

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

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

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

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

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

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

[[Page 82090]]

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

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

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

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

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

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

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

[[Page 82091]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 82092]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 82093]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 82094]]

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

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

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

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

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

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

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

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

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

[[Page 82095]]

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

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

    For a shareholder to effectively game swing pricing, the 
shareholder would have to know the fund's swing threshold and net flow 
information on the day that the shareholder was purchasing or redeeming 
and that flow information would have to not materially change after the 
shareholder placed its order. Accordingly, without disclosure of this 
information, it will be difficult for shareholders to determine when 
the fund's net purchases or net redemptions exceed the swing threshold. 
After weighing these considerations, we are not requiring a fund to 
disclose its swing threshold or swing factor under the final rule, and 
we believe that a fund generally should not disclose its swing 
threshold unless it has determined that it is in the best interests of 
the fund to do so. In making this assessment, the fund should consider 
the nature of the fund's shareholders and whether disclosure of the 
swing threshold would result in significant shareholder harm. We note 
that, to the extent a fund does decide to disclose its swing threshold, 
we believe it would not be appropriate for a fund to disclose it 
selectively to certain investors (e.g., to only disclose the fund's 
swing threshold to institutional investors), as we believe this could 
assist certain groups of shareholders in strategically timing purchases 
and redemptions of fund shares, potentially disadvantaging shareholders 
who do not know the fund's swing threshold.\128\
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    \128\ The Commission has brought enforcement actions against 
fund managers for selective disclosure. See In the Matter of 
Evergreen Investment Management Company, LLC and Evergreen 
Investment Services, Inc., Investment Company Act Release No. 28759 
(June 8, 2009) (settled order) (``Evergreen Order''); In the Matter 
of Alliance Capital Management, L.P., Investment Company Act Release 
No. 26312 (Dec. 18, 2003) (settled order).
---------------------------------------------------------------------------

    With respect to market timing concerns, we note that a fund's 
market timing policies and procedures should address and seek to 
resolve such issues for a fund that uses swing pricing. We note that 
funds have a variety of tools to prevent any such market timing should 
it occur, such as redemption fees, purchase blocks, and roundtrip 
restrictions, which we believe should mitigate this risk. In addition, 
investors will not be able to purposefully take advantage of swing 
pricing to obtain a better price without knowledge of contemporaneous 
intraday flows and a fund's swing thresholds, neither of which funds 
are required to publicly disclose under the rule.
c. Swing Threshold
    Under the final rule, as under the proposed rule, a fund's swing 
pricing policies and procedures must provide that the fund is required 
to adjust its NAV once the level of net purchases or net redemptions 
from the fund has exceeded a set, specified percentage of the fund's 
net asset value known as the ``swing threshold.'' \129\ A fund must 
adopt policies and procedures that specify the process for how the 
fund's swing threshold is determined,\130\ and the policies and 
procedures must be approved by the fund's board of directors.\131\ In 
addition, the fund board will review a periodic report that describes, 
among other things, a review and assessment of the fund's swing 
threshold.\132\ Finally, the fund board will be required to approve the 
fund's swing threshold and any changes thereto.\133\
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    \129\ Rule 22c-1(a)(3)(i)(A). Under the rule, ``swing 
threshold'' is defined as ``the amount of net purchases into or net 
redemptions from a fund, expressed as a percentage of the fund's net 
asset value, that triggers the initiation of swing pricing.'' Rule 
22c-1(a)(3)(v)(D).
    \130\ Rule 22c-1(a)(3)(i)(B).
    \131\ Rule 22c-1(a)(3)(ii)(A).
    \132\ Rule 22c-1(a)(3)(ii)(D).
    \133\ Rule 22c-1(a)(3)(ii)(B).
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    In determining whether the fund's level of net purchases or net 
redemptions has exceeded the swing threshold, the person(s) responsible 
for administering the fund's swing pricing policies and procedures will 
be permitted to make this determination based on receipt of sufficient 
information about the fund shareholders' daily purchase and redemption 
activity to allow the fund to reasonably estimate whether it has 
crossed the swing threshold with high confidence.\134\ This shareholder 
flow information may be individual, aggregated, or netted orders, may 
include reasonable estimates where necessary, and shall exclude any 
purchases or redemptions that are made in kind and not in cash.\135\ 
The fund's policies and procedures should describe how such 
determinations will be made.\136\ We are adopting a requirement that, 
in specifying the process for how the swing threshold is determined, a 
fund consider:
---------------------------------------------------------------------------

    \134\ Rule 22c-1(a)(3)(i)(A).
    \135\ Id. As noted in the Proposing Release, when a fund 
investor purchases or redeems shares of a fund in kind as opposed to 
in cash, this does not necessarily cause the fund to trade any of 
its portfolio assets. The risk of dilution as a result of 
shareholder purchase and redemption activity, therefore, is lower 
with respect to in-kind purchases and in-kind redemptions, and thus 
swing pricing would not be permitted unless a fund's net purchases 
or net redemptions that are made in cash (and not in kind) exceed 
the fund's swing threshold. See Proposing Release, supra footnote 6, 
at n.439 and accompanying paragraph.
    \136\ See infra footnote 179.
---------------------------------------------------------------------------

     The size, frequency, and volatility of historical net 
purchases or net redemptions of fund shares during normal and stressed 
periods;
     The fund's investment strategy and the liquidity of the 
fund's portfolio investments;
     The fund's holdings of cash and cash equivalents, as well 
as borrowing arrangements and other funding sources; and
     The costs associated with transactions in the markets in 
which the fund invests.\137\
---------------------------------------------------------------------------

    \137\ Rule 22c-1(a)(3)(i)(B).
     These factors overlap significantly with factors that we 
understand are commonly considered by funds that use swing pricing 
in other jurisdictions, in order to determine a fund's swing 
threshold. For example, the Luxembourg Swing Pricing Survey, Reports 
& Guidelines provides that factors influencing the determination of 
the swing threshold ordinarily include: (i) Fund size; (ii) type and 
liquidity of securities in which the fund invests; (iii) costs (and 
hence, the dilution impact) associated with the markets in which the 
fund invests; and (iv) investment manager's investment policy and 
the extent to which the fund can retain cash (or near cash) as 
opposed to always being fully invested). See ALFI Survey 2015, supra 
footnote 42, at 14.
---------------------------------------------------------------------------

    We requested comment on the process a fund would use to determine 
its swing threshold, including the factors that a fund would be 
required to consider, and also requested comment on whether there were 
certain procedures that we should require a fund to use when reviewing 
its swing threshold. Commenters on the proposed rule expressed a 
variety of views regarding the factors a fund must consider in 
specifying the fund's swing threshold. Some commenters indicated that 
the Commission should be less prescriptive in establishing the factors, 
arguing that not all of the factors are equally applicable to all 
funds, that requiring funds to consider all these factors may lead 
funds to create overly mechanistic checklists, and that a principles-
based approach would better allow funds to

[[Page 82096]]

tailor their swing pricing processes to their unique 
circumstances.\138\ Other commenters indicated that the rule's factors 
as proposed grant ``excessive'' discretion concerning the threshold for 
swing pricing,\139\ and expressed concern that ``fund shareholders will 
frequently bear swing pricing transaction costs that have little or no 
relation to the actual impact of their transaction on the fund and its 
continuing shareholders.'' \140\ One commenter stated that the factors 
are in line with the commenter's expectations.\141\
---------------------------------------------------------------------------

    \138\ See ICI Comment Letter I; J.P. Morgan Comment Letter; 
Charles Schwab Comment Letter.
    \139\ See AFR Comment Letter.
    \140\ See Eaton Vance Comment Letter.
    \141\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    We recognize the potential dangers of being overly prescriptive in 
this area, but believe that the factors reflect common areas that a 
fund would consider in establishing its swing pricing process and are 
consistent with factors that are considered by funds that use swing 
pricing in other jurisdictions.\142\ In addition, we note that the rule 
does not preclude a fund from considering other factors that the fund 
believes may be relevant.\143\ Similarly, we recognize the potential 
dangers of providing complete discretion in this area, but note that 
further constraining funds' decision-making processes in setting the 
swing threshold may unduly restrict the ability of each fund to select 
an appropriate threshold that best suits the particular needs of the 
fund. Both extremes present a risk that transacting shareholders will 
bear swing pricing costs via the swing factor that are divorced from 
the fund's transaction costs. After considering commenters' concerns, 
therefore, we are adopting the factors related to setting a fund's 
swing threshold as proposed.
---------------------------------------------------------------------------

    \142\ See supra footnote 137.
    \143\ In contrast, we have given more limited discretion to 
funds when setting a fund's swing factor(s), but are not requiring 
board approval of the fund's swing factors. See rule 22(c)-
1(a)(3)(i)(C) (providing that the person(s) responsible for 
administering swing pricing may take into account only the near-term 
costs expected to be incurred by the fund as a result of net 
purchases or net redemptions that occur on the day the swing 
factor(s) is used). Together, these modifications are designed to 
enhance the fair treatment of shareholders in the use of swing 
pricing and to prevent abusive practices, while also providing funds 
with the ability to tailor a fund's use of swing pricing after 
consideration of the swing threshold factors. See also AFR Comment 
Letter (expressing concern regarding the degree of discretion 
afforded to funds in setting both the swing threshold and swing 
factor).
---------------------------------------------------------------------------

    We continue to believe that evaluating all four factors will assist 
a fund in determining what level of net purchases or net redemptions 
would generally lead to the trading of portfolio assets that would 
result in material costs to the fund, and thus they are relevant to 
setting a fund's swing threshold.\144\ Two of the factors a fund is 
required to consider in specifying the fund's swing threshold, relating 
to a fund's investment strategy and cash holdings, are similar 
(investment strategy factor) or the same (cash holdings factor) as two 
of the factors a fund is required to consider in assessing its 
liquidity risk under rule 22e-4.\145\ Overlap between the factors is 
not surprising, because evaluating a fund's liquidity risk may be 
relevant to determining the fund's swing threshold (i.e., determining 
the appropriate circumstances under which the fund should employ swing 
pricing to combat shareholder dilution).\146\ Such overlap may also 
lead to efficiencies in both analyses, as funds become more familiar 
with the interaction between the factors, the risk of dilution, and 
efforts to combat dilution. A third factor (the size, frequency, and 
volatility of historical net purchases or net redemptions of fund 
shares during normal and stressed periods) is a consideration in 
determining how frequently a fund may expect a specified swing 
threshold to be exceeded.\147\ The fourth factor, the costs associated 
with transactions in the markets in which the fund invests, is a 
consideration in determining whether costs of responding to shareholder 
transaction activity are significant enough at a specified threshold 
level that the fund should utilize swing pricing to address their 
dilutive impact.\148\
---------------------------------------------------------------------------

    \144\ Assessing the size, frequency, and volatility of 
historical net purchases and net redemptions of fund shares will 
permit a fund to determine its typical levels of net purchases and 
net redemptions and the levels the fund could expect to encounter 
during periods of unusual market stress, as well as the frequency 
with which the fund could expect to see periods of unusually high 
purchases or redemptions. We continue to believe that comparing the 
fund's historical flow patterns with the fund's investment strategy, 
the liquidity of the fund's portfolio holdings, the fund's holdings 
of cash and cash equivalents and borrowing arrangements and other 
funding sources, and the costs associated with transactions in the 
markets in which the fund invests will allow a fund to predict what 
levels of purchases and redemptions would result in material costs 
under a variety of scenarios.
    \145\ See rule 22e-4(b)(2)(ii)(A) (requiring a fund to consider, 
in assessing its liquidity risk, the fund's ``investment strategy 
and liquidity of portfolio investments during both normal and 
reasonably foreseeable stressed conditions (including whether the 
investment strategy is appropriate for an open-end fund, the extent 
to which the strategy involves a relatively concentrated portfolio 
or large positions in particular issuers, and the use of borrowings 
for investment purposes and derivatives)''; and rule 22e-
4(b)(2)(ii)(C) (requiring a fund to consider, in assessing its 
liquidity risk, the fund's ``holdings of cash and cash equivalents, 
as well as borrowing arrangements and other funding sources''). See 
also Liquidity Risk Management Programs Adopting Release, supra 
footnote 8.
    \146\ See rule 22e-4(a)(11) (defining liquidity risk). We note 
that, in the Proposing Release, three of the factors a fund would 
have been required to consider in specifying the fund's swing 
threshold aligned with factors a fund is required to consider in 
assessing its liquidity risk. The change from three to two 
overlapping factors is due to a change in the liquidity risk 
assessment factors. See Liquidity Risk Management Programs Adopting 
Release, supra footnote 8, at section III.B.2.
    \147\ This factor is similar to a factor for assessing liquidity 
risk, however, it has been tailored to be a more precise 
consideration for setting the swing threshold. See id.
    \148\ As discussed in the Proposing Release, a fund may wish to 
consider, as applicable, market impact costs and spread costs that 
the fund typically incurs when it trades its portfolio assets (or 
assets with comparable characteristics if data concerning a 
particular portfolio asset is not available to the fund). A fund 
also may wish to consider, as applicable, the transaction fees and 
charges that the fund typically is required to pay when it trades 
portfolio assets. These could include brokerage commissions and 
custody fees, as well as other charges, fees, and taxes associated 
with portfolio asset purchases or sales (for example, transfer taxes 
and repatriation costs for certain foreign securities, or 
transaction fees associated with portfolio investments in other 
investment companies).
---------------------------------------------------------------------------

    In order to effectively mitigate possible dilution arising in 
connection with shareholder purchase and redemption activity, a fund's 
swing threshold should generally reflect the estimated point at which 
net purchases or net redemptions would trigger the fund's investment 
adviser to trade portfolio assets in the near term, to a degree or of a 
type that may generate material liquidity or transaction costs for the 
fund. We believe that a consideration of the factors set forth above 
will promote a fund estimating this threshold point.\149\
---------------------------------------------------------------------------

    \149\ In circumstances where fund purchases and redemptions are 
fairly balanced, we believe that it is unlikely that the purchases 
or redemptions would trigger the fund's investment adviser to trade 
portfolio assets in the near term, to a degree or of a type that may 
generate material liquidity or transaction costs for the fund.
---------------------------------------------------------------------------

Full Swing Pricing vs. Swing Pricing Above a Threshold
    Like the proposal, the final rule does not impose a minimum 
``floor'' for a fund's swing threshold. We believe that different 
levels of net purchases and net redemptions would create different 
risks of dilution for funds with different strategies, shareholder 
bases, and other liquidity-related characteristics, and thus we do not 
believe that it would be appropriate to determine a single swing 
threshold floor to apply to all funds that elect to use swing 
pricing.\150\ Rather, we believe it is appropriate to constrain the 
swing threshold through the factors that a fund must consider in 
setting the

[[Page 82097]]

swing threshold, which are designed to prevent a fund from setting a 
swing threshold that is inappropriate and does not reflect the size and 
nature of the liquidity costs likely to be incurred by the fund. We 
believe that the consideration of the swing threshold factors would 
lead a fund to set a threshold at a level that would trigger the fund's 
investment adviser to trade portfolio assets in the near term to a 
degree or of a type that may generate material liquidity or transaction 
costs for the fund. We further believe that, after considering the 
swing threshold factors, a fund would be unable to set the swing 
threshold at zero.
---------------------------------------------------------------------------

    \150\ We note that, in Europe, there are no across-the-board 
swing threshold floors applicable to UCITS that use swing pricing.
---------------------------------------------------------------------------

    Commenters generally supported the approach taken under the 
proposal of not setting a minimum threshold for swing pricing. Some 
commenters indicated that the Commission should permit full swing 
pricing because a fund may find it more appropriate for its particular 
circumstances \151\ and would mitigate any potential first-mover 
advantage inadvertently caused by swing pricing.\152\ One commenter 
also suggested that full swing pricing is more transparent and easier 
to understand than partial swing pricing.\153\ On the other hand, some 
commenters stated that the Commission should permit only partial swing 
pricing, arguing that the tracking error and volatility associated with 
full swing pricing would outweigh its benefits.\154\
---------------------------------------------------------------------------

    \151\ See Dechert Comment Letter. Full swing pricing is the 
process of adjusting the fund's NAV whenever there is any level of 
net purchases or net redemptions, instead of swing pricing above a 
threshold (i.e., partial swing pricing).
    \152\ See Federated Comment Letter.
    \153\ See HSBC Comment Letter (noting advantages of full swing 
pricing but also acknowledging benefits of partial swing pricing, 
such as ``a lower impact on net asset value volatility, tracking 
error and fund performance.'').
    \154\ See AFR Comment Letter (``We understand that full swing 
pricing--allowing NAV adjustments anytime there are net purchases or 
redemptions--may increase volatility, tracking errors, and investor 
misperceptions about funds' performance that could lead to market 
distortions. Instead, we support the proposed partial swing pricing 
that would allow NAV adjustments only when net purchases or 
redemptions exceed an established threshold. We agree that this 
approach will result in lower volatility than full swing pricing, 
while still reducing dilution on assets. To that end, we do not 
support an option allowing funds to choose to use full swing 
pricing.''). See also MFS Comment Letter.
---------------------------------------------------------------------------

    On balance, we continue to believe that setting a minimum threshold 
for all funds would not be appropriate, and that funds should be 
provided the flexibility to implement swing pricing at a threshold 
level that best fits their particular circumstances based on the 
required factors and the guidance set forth herein. We expect that as 
part of the process of determining whether the benefits of implementing 
swing pricing are justified given the costs, funds will evaluate the 
appropriate threshold level and select a level that is suitable for the 
fund, considering the required factors. We believe that this approach 
strikes an appropriate balance between competing considerations by 
allowing tailored choices to be made for each fund but constrained by 
the factors that the fund must consider in setting the threshold. 
Therefore, we are adopting the threshold requirements as proposed.
Board Approval of Swing Threshold
    We are also requiring the fund's board to approve a fund's swing 
threshold as proposed. Several commenters opposed the proposed 
requirement for a fund's board to approve the fund's swing threshold, 
stating that the determination of swing thresholds is more 
appropriately a management function.\155\ One commenter noted that the 
determination of a fund's swing threshold would likely be a highly 
technical analysis ``that requires intimate familiarity with the fund's 
daily operations.'' \156\ Additionally, one commenter questioned 
whether the board should be required to approve changes to a fund's 
swing threshold(s), arguing that board approval could be detrimental to 
a fund's ability to respond quickly to changing market conditions.\157\ 
One commenter, on the other hand, supported requiring that a fund's 
board, including a majority of independent directors, approve the swing 
threshold as ``independent perspectives may more fully focus on 
shareholder interests.'' \158\ Another commenter suggested that the 
proposed swing threshold requirements granted excessive discretion to 
fund managers notwithstanding the proposed board approval 
requirement.\159\ As discussed in more detail below, several commenters 
also supported the idea that a fund's board should be given visibility 
into the process by which the swing threshold was determined via 
written reports.\160\
---------------------------------------------------------------------------

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

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

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

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

[[Page 82098]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 82099]]

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

    \175\ See rule 18f-3(a)(1)(ii) (stating that allocation of 
expenses related to the management of a fund's assets may not differ 
among a fund's share classes).
    \176\ One commenter indicated that ``swing pricing can be used 
successfully by the conventional share classes of a fund that also 
operates an ETF as a share class.'' See Vanguard Comment Letter. 
Because of the aforementioned 18f-3 concerns and the inability of 
ETFs to utilize swing pricing, we disagree. A swing pricing 
adjustment applied to certain share classes of a fund, but not 
applied to the ETF share class of that fund, would impermissibly 
allocate expenses related to the management of the fund's assets.
    \177\ See ALFI Survey 2015, supra footnote 42, at 4 (``If swing 
pricing is applied, all share classes of a fund swing in the same 
direction (and typically by the same basis point amount), as 
dilution occurs at the fund level rather than at the share class 
level.'').
    \178\ See section 18 of the Act.
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d. Investor Flow Information
    Critically important to the adoption of swing pricing is a fund's 
ability to obtain sufficient information about purchase and redemption 
activity that took place prior to striking the fund's NAV on a 
particular day in order to reasonably estimate whether it has crossed 
the swing threshold with high confidence, to determine whether swing 
pricing should be in effect that day. If the fund's applicable swing 
factor varies depending on the level of its net investor flows, 
sufficient investor flow information is also needed to determine the 
applicable swing factor that the fund will use to adjust its NAV. A 
fund using swing pricing will need to obtain reasonable estimates of 
investor flows daily, or the aggregate flows of money being invested in 
and redeemed out of the fund, for purposes of reasonably estimating 
with high confidence whether the fund's net purchases or net 
redemptions have crossed the swing threshold, thus resulting in an NAV 
adjustment under its swing pricing policies and procedures.\179\
---------------------------------------------------------------------------

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

    We understand that the deadline by which a fund must strike its NAV 
may precede the time that a fund (or its pricing agent) receives final 
information concerning daily net investor transaction flows from the 
fund's transfer agent. As a result, funds engaging in swing pricing 
will likely need to develop processes and procedures to gather 
sufficient investor flow information from transfer agents that include 
transactions being conducted by intermediaries on behalf of fund 
investors.\180\ This information could include actual transaction 
orders received by the transfer agent, as well as estimates of investor 
flows, which funds can use to reasonably estimate its aggregate daily 
net investor flows for swing pricing purposes.\181\
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    \180\ As indicated in the proposal, a fund may wish to implement 
formal or informal policies and procedures regarding the timely 
receipt of shareholder flow information, and to establish effective 
communication between the persons charged with implementing the 
fund's swing pricing policies and procedures, the fund's investment 
professionals, personnel charged with the calculating the fund's 
daily NAV, and the fund's transfer agent. See Proposing Release, 
supra footnote 6, at section III.F.2.a.
    \181\ Under the current system, redemption and subscription 
orders from shareholders are typically accepted by funds and their 
intermediaries on any given trading day up until 4 p.m. Eastern 
time. Intermediaries typically begin processing, aggregating and 
submitting transaction orders to fund transfer agents (where 
transactions are not NAV dependent) in the late afternoon. Funds 
generally publish their NAVs between 6 and 8 p.m. Eastern time 
(``ET''). Following the publication and delivery of such NAVs, both 
intermediaries and fund transfer agents complete their transaction 
processing and conduct their nightly processing cycles, which update 
applicable recordkeeping systems for the day's activities. See rule 
2a-4 (allowing the adjustment in outstanding fund shares as a result 
of purchase and redemption activity to be reflected on T+1).
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Reasonable Estimates
    Several commenters asked for additional guidance regarding a fund's 
use of estimates in determining its net flows in order to determine 
whether a fund has crossed its swing threshold.\182\ We acknowledge 
that full information about shareholder flows is not likely to be 
available to funds by the time such funds need to make the decision as 
to whether the swing threshold has been crossed,\183\ but we do not 
believe that complete information is necessary to make a reasonable 
high confidence estimate.\184\ Instead, a fund may determine its 
shareholder flows have crossed the swing threshold based on receipt of 
sufficient information about the fund shareholders' daily purchase and 
redemption transaction activity to allow the fund to reasonably 
estimate, with high confidence, whether it has crossed the swing 
threshold. The shareholder flow information used by funds may be 
individual, aggregated or netted orders and may include reasonable 
estimates where

[[Page 82100]]

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

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

    As discussed below, we recognize in some cases, it may not 
currently be feasible for certain intermediaries to provide their 
actual orders (even in an aggregated or netted format) promptly enough 
for the fund to conduct swing pricing. However, we understand that a 
fund's reasonably estimated shareholder flows could include estimates 
for certain intermediary flows that are based on actual transaction 
orders received from investors prior to the fund's cut-off time, which 
would subsequently be submitted by intermediaries to the fund's 
principal underwriter and/or transfer agent for processing after 
receipt of the fund's final NAV. For example, in the European fund 
sector, swing pricing is feasible operationally as ``actual'' trade 
flows based on estimated prices (typically the prior day's NAV) and 
orders occurring on the trade date are available on a timely basis. 
Trading platforms collect all of that day's activity and supply it to 
the fund's transfer agent. An estimated fund price is then applied to 
generate estimated trade values for that trading day. We also note that 
where transaction orders are NAV dependent, the application of 
estimated fund prices (such as the prior day's NAV) to the current 
day's orders to derive estimated shareholder flow information could be 
conducted by intermediaries or fund transfer agents.\187\ Additionally, 
a fund may require different levels or types of information from each 
of its intermediaries depending on a variety of factors.\188\
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    \187\ See GARP Comment Letter.
    \188\ Such factors might include the size of flows that 
ordinarily come through a particular intermediary, the nature of 
such orders (i.e., subscriptions, redemptions, exchange 
transactions), or certain characteristics or additional information 
about the redeeming or purchasing shareholders and intermediaries 
conducting transaction processing (e.g., large trade notifications). 
A fund may also choose to request flow data only from certain of its 
intermediaries if it determines that it can make a high confidence 
determination to swing its price with flow information provided by 
only a subset of its intermediaries (for example, if there are 
intermediaries that typically only conduct a very small volume of 
transaction activity with the fund).
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 82101]]

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

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

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

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

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

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

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

[[Page 82102]]

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

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

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

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

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

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

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

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

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

[[Page 82103]]

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

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

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

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

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

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

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

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

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

[[Page 82104]]

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

    \220\ Rule 22c-1(a)(3)(i)(A).
    \221\ Rule 22c-1(a)(3)(v)(B).
    \222\ Rule 22c-1(a)(3)(i)(C).
    \223\ Id.
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    A fund's swing pricing policies and procedures also must include an 
upper limit on the swing factor used, which may not exceed two percent 
of the fund's NAV per share.\224\ The fund would be required to take 
into account certain considerations when determining the swing factor 
upper limit.\225\ The swing factor upper limit is subject to new 
oversight provisions under the final rule, as further described below.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

[[Page 82105]]

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

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

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

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

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

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

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

[[Page 82106]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 82107]]

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

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

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

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

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

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

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

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

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

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

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

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

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[[Page 82108]]

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

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

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

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

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

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

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

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

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

[[Page 82109]]

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

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

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

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

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

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

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

[[Page 82110]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 82111]]

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

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

Fund Merger Considerations
    We stated in the Proposing Release that, when funds merge, and at 
least one of the merging funds uses swing pricing, there are a number 
of considerations relating to swing pricing that the funds generally 
should consider when determining the terms of the merger.\297\ 
Commenters did not address these views, which we reiterate here. The 
boards of merging funds should consider whether a swing factor should 
be used to adjust the value of the absorbed fund's assets, if the 
absorbing fund uses swing pricing and it is applied on the day of the 
merger.\298\ Although the manager of the absorbing fund may need to 
sell certain of the assets of the absorbed fund following the merger 
(e.g., for consistency with the absorbing fund's investment strategy, 
or to comply with certain regulatory requirements), we do not believe 
that the NAV of either the absorbing fund or the absorbed fund should 
be adjusted to counter any dilution resulting from these sales, because 
costs associated with these sales would result from the merger and 
would not be caused by shareholders' purchase or redemption activity. 
In light of potential complications arising when funds using swing 
pricing merge, the boards of merging funds may want to consider whether 
to temporarily suspend a fund's swing pricing policies and procedures 
ahead of the merger.\299\ Similarly, the swing threshold of the 
absorbing fund generally should be reviewed following a merger, and the 
persons in charge of administering the absorbing fund's swing pricing 
policies and procedures should consider the effects of the merger when 
considering what swing factor would be appropriate to use if the fund's 
swing threshold is exceeded following the merger.\300\
---------------------------------------------------------------------------

    \297\ See Proposing Release, supra footnote 6, at n.533 and 
accompanying text.
    \298\ Directors overseeing fund mergers must take into account 
rule 17a-8 under the Act (which sets forth requirements for mergers 
of affiliated investment companies), if applicable, as well as any 
relevant state law requirements. Rule 17a-8 requires a board, 
including a majority of the independent directors, to consider the 
relevant facts and circumstances with respect to a merger of 
affiliated funds and determine that the merger is in the best 
interests of each of the merging funds and that the interests of the 
shareholders of both the fund being acquired and the acquiring fund 
are not being diluted. The board may want to consider the swing 
pricing policies and procedures of the merging funds including any 
appropriate modifications.
    See ALFI Swing Pricing Guidelines 2015, supra footnote 88, at 
19-20 (discussing issues associated with the use of swing pricing to 
adjust the value of the absorbed fund's assets).
    \299\ See Proposing Release, supra footnote 6, at n.536 and 
accompanying text.
    \300\ See id., at text following n.536.
---------------------------------------------------------------------------

Recordkeeping Requirements
    Like under the proposal, the final rule requires a fund to maintain 
the swing pricing policies and procedures adopted by the fund that are 
in effect, or at any time within the past six years were in effect, in 
an easily accessible place.\301\ Additionally, as proposed, we are 
expanding current rule 31a-2(a)(2), which requires a fund to keep 
records evidencing and supporting each computation of the fund's 
NAV,\302\ to reflect the NAV adjustments based on a fund's swing 
pricing policies and procedures. Specifically, a fund that adopts swing 
pricing policies and procedures will be required to preserve records 
evidencing and supporting each computation of an adjustment to the 
fund's NAV based on the fund's swing pricing policies and 
procedures.\303\ For each NAV adjustment, such records should generally 
include, at a minimum, the fund's unswung NAV, the level of net 
purchases or net redemptions that the fund encountered (and estimated) 
that triggered the application of swing pricing, the swing factor that 
was used to adjust the fund's NAV, relevant data supporting the 
calculation of the swing factor, and any back-testing data used by the 
fund in assessing the swing factor (and its relationship to near term 
costs expected to be incurred by the fund as a result of net purchases 
or net redemptions that occur on the day the swing factor(s) is used). 
The records required under the amendments to rule 31a-2(a)(2) are 
required to be preserved for at least six years from the date that the 
NAV adjustment occurred, the first two years in an easily accessible 
place.\304\ The six-year period for a fund to maintain a copy of its 
swing pricing policies and procedures in rule 22c-1(a)(3) corresponds 
to the six-year recordkeeping period currently incorporated in rule 
31a-2(a)(2). We believe that consistency in these retention periods is 
appropriate in order to permit a fund or Commission staff to review 
historical instances of NAV adjustments effected pursuant to the fund's 
swing pricing policies and procedures in light of the policies and 
procedures that were in place at the time the NAV adjustments occurred. 
Commenters generally found these proposed requirements appropriate, and 
we are adopting them as proposed.\305\
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    \301\ Rule 22c-1(a)(3)(iii).
    \302\ See rule 31a-2(a)(2) (every registered investment company 
shall . . .``[p]reserve for a period not less than six years from 
the end of the fiscal year in which any transactions occurred, the 
first two years in an easily accessible place . . . all schedules 
evidencing and supporting each computation of net asset value of the 
investment company shares'').
    \303\ See amendment to rule 31a-2(a)(2).
    \304\ See id.
    \305\ See, e.g., HSBC Comment Letter (``[HSBC] AMG believes the 
recordkeeping requirements are sufficient.''). But see Voya Comment 
Letter (listing recordkeeping requirements as one of many aspects of 
the proposed rule that would make swing pricing too administratively 
burdensome to implement in a manner outweighed by swing pricing's 
benefits). We note that the rule amendments we adopt today permit, 
but do not require, a fund to implement swing pricing and allow a 
fund to weigh recordkeeping and other costs to administer swing 
pricing against swing pricing benefits as the fund deems 
appropriate.
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    In addition, and based on the same rationale as that of the other 
aforementioned swing pricing-related recordkeeping requirements, the 
final rule requires a fund to maintain all written periodic reports 
provided to the board under rule 22c-1(a)(3)(ii)(D) relating to swing 
pricing for six years, the first two years in an easily accessible 
place.\306\
---------------------------------------------------------------------------

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

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

[[Page 82112]]

will have on other aspects of financial statement reporting,\308\ which 
we address below.
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    \307\ See ICI Comment Letter I.
    \308\ See Comment Letter of Ernst & Young LLP (Jan. 14, 2016) 
(``EY Comment Letter''); Comment Letter of KPMG LLP (Jan. 26, 2016) 
(``KPMG Comment Letter''); Comment Letter of PricewaterhouseCoopers 
LLP (Jan. 13, 2016) (``PwC Comment Letter'').
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Statement of Assets and Liabilities
    Today we are clarifying, after consideration of the comments 
received, that for funds that utilize swing pricing the statement of 
assets and liabilities would continue to be presented as currently 
required by Regulation S-X rule 6-04.19 \309\ and U.S. Generally 
Accepted Accounting Principles or ``GAAP.'' Under Regulation S-X and 
GAAP, funds are required to state on the statement of assets and 
liabilities their NAV per share, which is defined as ``the amount of 
net assets attributable to each share of capital stock outstanding at 
the close of the period,'' \310\ and which we refer herein to as the 
``GAAP'' NAV. We proposed to amend rule 6-04.19 to require presentation 
of the NAV per share as adjusted pursuant to its swing pricing policies 
and procedures (if applicable), the ``Swung NAV,'' on the statement of 
assets and liabilities.\311\ However, commenters questioned how the 
effects of swing pricing are captured within the financial reporting 
process and interact with the normal trade date reporting adjustments 
that go into a GAAP NAV.\312\ Commenters also pointed out that a user 
of the financial statements would not be able to divide the net assets 
of the fund (or class) by the shares outstanding to arrive at the Swung 
NAV per share and that there was no proposed reconciliation of these 
amounts.\313\ Generally, commenters suggested consideration of whether 
the GAAP NAV per share should be presented in addition to or in lieu of 
the Swung NAV, as proposed,\314\ and asked for further clarification on 
how swing pricing would impact the financial highlights, including the 
total return calculations.\315\
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    \309\ See 17 CFR 210.6-04, paragraph 19.
    \310\ See FASB ASC 946-10-20 for definition of NAV per share.
    \311\ See proposed amendments to section 210.6-04 of Regulation 
S-X; see also, Proposing Release, supra footnote 6, at section 
III.F.1.g.
    \312\ See KPMG Comment Letter; EY Comment Letter; PwC Comment 
Letter. See also EY Comment Letter; PwC Comment Letter (on whether 
the NAV should be adjusted for trade date activity). Rule 2a-4 of 
the Act permits registered investment companies to record security 
transactions as of one day after the trade date for purposes of 
determining net asset value. However, FASB ASC 946-320-25-1 notes 
that for financial reporting purposes, security transactions should 
be recorded on trade date. Consistent with current practice, trade 
date adjustments for portfolio transactions or capital share 
transactions occurring on the balance sheet date (otherwise known as 
``as of'' adjustments) are included in the GAAP NAV per share.
    \313\ See KPMG Comment Letter.
    \314\ See Proposing Release, supra footnote 6, at section 
III.F.1.g.
    \315\ See EY Comment Letter; KPMG Comment Letter.
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    One commenter also noted that, under the proposal, there would be a 
difference between the Swung NAV per share disclosed in accordance with 
proposed rule 6-04.19 and the GAAP NAV per share.\316\ For a fund that 
chooses to implement swing pricing, the GAAP NAV would include both the 
effects of swing pricing throughout the period, if applicable, as well 
as any trade date financial reporting adjustments for portfolio 
transactions (including any related income, expense, gain and loss) and 
capital share transactions occurring on the balance sheet date. The 
Swung NAV would be the NAV that investors transacted at on the last day 
of the financial reporting period and would not include the GAAP trade 
date adjustments.\317\ For funds that adopt swing pricing, if the NAV 
is swung on the last day of the reporting period it could be higher or 
lower than the GAAP NAV presented in the financial statements, 
depending on the direction of the swing. For example, as one commenter 
noted, if a fund on the last day of the financial reporting period 
(when considering subscriptions or redemptions that day) in calculating 
its daily NAV made a determination to adjust or swing the NAV according 
to its swing pricing policies and procedures, and applied the swing 
pricing factor to its unswung NAV of $10.00, which resulted in a Swung 
NAV of $9.90 (as a result of large redemptions), shareholder redemption 
(and subscription) transactions would be processed at the Swung NAV of 
$9.90 on the last day of the reporting period.\318\ Assuming that the 
effect of processing transactions at $9.90 increases the fund's NAV to 
$10.01, and there were no other financial reporting trade date 
adjustments, the GAAP NAV would be $10.01.
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    \316\ See KPMG Comment Letter.
    \317\ We also note that today, without the use of swing pricing, 
there could be differences between the GAAP NAV and the 
transactional NAV calculated and used by funds to process investor 
orders, due to the fact that GAAP NAV is calculated as of T+0 for 
financial statement purposes (i.e., includes trade date adjustments 
for portfolio investments and capital share activity as noted above) 
and fund complexes generally calculate NAV and transact on a T+1 
basis in accordance with rule 2a-4. Thus, some of the adjustments 
between the GAAP NAV and the transactional NAV that currently exist 
are due to, among other things, the financial reporting adjustments 
for trade date (T+0) activity.
    \318\ See KPMG Comment Letter.
---------------------------------------------------------------------------

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

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

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

[[Page 82113]]

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

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

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

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

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

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

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

[[Page 82114]]

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

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

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

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

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

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

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

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

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

[[Page 82115]]

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

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

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

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

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

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

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

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

B. Disclosure and Reporting Requirements Regarding Swing Pricing

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

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

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

[[Page 82116]]

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

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

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

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

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

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

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

    As we proposed, we have determined not to require funds to disclose 
their swing pricing threshold or swing factor in their prospectus 
disclosures on Form N-1A. Some commenters supported this determination 
and, for example, expressed concerns that public disclosures of a 
fund's swing pricing threshold or swing factor could result in unfair 
trading practices, thereby creating a new type of material non-public 
information (i.e., the trading intent of other shareholders).\367\ One 
commenter recommended that the Commission prohibit funds from 
selectively disclosing swing thresholds to certain investors to prevent 
potential gaming where, for example, larger shareholders may attempt to 
take advantage of pricing adjustments when a swing threshold is 
crossed.\368\ We share commenters' concerns regarding unfair trading, 
gaming, and other negative fund and market impacts that could occur if 
swing pricing thresholds were shared with the public and recommend that 
a fund consider these concerns (and determine that disclosure of a 
fund's swing threshold is in the best interests of the fund) before 
disclosing this information in its prospectus or elsewhere. Indeed, 
funds and advisers to funds generally should take into consideration 
the potential for gaming into account and any other potential 
consequences before making any such disclosure.\369\ As noted above, we 
are requiring a fund to disclose the swing factor upper limit to 
provide shareholders with additional transparency regarding a fund's 
use of swing pricing and the potential impact of that usage.
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    \367\ See Federated Comment Letter.
    \368\ See CFA Comment Letter.
    \369\ See, e.g., In re Alliance Capital Management, L.P., 
Investment Advisers Act Release No. 2205A (Jan. 15, 2004) (settled 
action) (finding a mutual fund adviser willfully violated section 
204A of the Advisers Act by failing to establish, maintain, and 
enforce written policies and procedures reasonably designed to 
prevent the misuse of material, nonpublic information by releasing 
material, nonpublic information about the portfolio holdings of 
certain mutual funds to select market timers in those funds and 
thereby defrauding mutual fund investors).
---------------------------------------------------------------------------

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

[[Page 82117]]

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

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

C. Effective and Compliance Dates

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

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

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

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

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

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

III. Economic Analysis

A. Introduction and Primary Goals of Regulation

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

[[Page 82118]]

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

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

    Swing pricing regulations also are meant to address the significant 
growth in the assets managed by funds with strategies that focus on 
holding relatively less liquid investments (such as fixed income funds, 
including emerging market debt funds, open-end funds with alternative 
strategies, and emerging market equity funds), which could incur 
significant trading costs and hence could give rise to increased 
dilution effects from redeeming and subscribing shareholders in those 
funds.\385\ Furthermore, there has also been considerable growth in 
assets managed by funds that exhibit characteristics, for example high 
investor flow volatility, that also could give rise to increased 
dilution effects.\386\ Collectively, these industry trends emphasize 
the importance of allowing funds to choose to use swing pricing.
---------------------------------------------------------------------------

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

B. Economic Baseline

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

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

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

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

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

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

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

[[Page 82119]]

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

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

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

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

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

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

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

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

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

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

[[Page 82120]]

reporting, and recordkeeping requirements regarding swing pricing and 
reasonable alternatives to rule 22c-1(a)(3).
1. Requirements of Rule 22c-1(a)(3)
    Under rule 22c-1(a)(3), a fund (with the exception of a money 
market fund or ETF) would be permitted to establish and implement swing 
pricing policies and procedures that would, under certain 
circumstances, require the fund to use swing pricing to adjust its 
current NAV as an additional tool to lessen potential dilution of the 
value of outstanding redeemable securities caused by shareholder 
purchase or redemption activity. In order to use swing pricing under 
the rule, a fund would be required to establish and implement swing 
pricing policies and procedures.\411\ These policies and procedures 
must: (i) Provide that the fund will adjust its NAV by amounts 
designated as the ``swing factor(s)'' once the level of net purchases 
or net redemptions from the fund has exceeded specified strictly 
positive percentage(s) of the fund's net asset value known as the 
``swing threshold(s)''; \412\ (ii) specify the process for how the 
fund's swing threshold(s) are determined, considering certain specified 
factors; \413\ and (iii) specify the process for how the swing 
factor(s) are determined, which must include the establishment of an 
upper limit on the swing factor(s) used, taking into account certain 
considerations and not exceeding a maximum of two percent of the fund's 
NAV per share.\414\
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    \411\ Proposed rule 22c-1(a)(3)(i).
    \412\ Rule 22c-1(a)(3)(i)(A).
    \413\ Rule 22c-1(a)(3)(i)(B).
    \414\ Rule 22c-1(a)(3)(i)(C).
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    A fund's board, including a majority of the fund's independent 
directors, will be required to approve the fund's swing pricing 
policies and procedures, which policies and procedures must specify the 
process for setting swing thresholds, swing factor(s), and swing factor 
upper limits.\415\ In addition, the board must approve the fund's swing 
threshold(s) and swing factor upper limit (including any changes 
thereto).\416\ The board also will be required to designate the fund's 
investment adviser or officers responsible for administration of the 
fund's swing pricing policies and procedures.\417\ Additionally, the 
board will be required to review, no less frequently than annually, a 
written report prepared by the swing pricing administrator that 
describes: (i) Its review of the adequacy of the fund's swing pricing 
policies and procedures and the effectiveness of their implementation, 
including the impact on mitigating dilution; (ii) any material changes 
to the fund's swing pricing policies and procedures since the date of 
the last report; and (iii) its review and assessment of the fund's 
swing threshold(s), swing factor(s), and swing factor upper limit 
considering the requirements of the rule, including the information and 
data supporting these determinations.\418\
---------------------------------------------------------------------------

    \415\ Rule 22c-1(a)(3)(ii)(A).
    \416\ Rule 22c-1(a)(3)(ii)(B).
    \417\ Rule 22c-1(a)(3)(ii)(C).
    \418\ Rule 22c-1(a)(3)(ii)(D).
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    A fund that adopts swing pricing policies and procedures will be 
required to keep certain records, including its swing pricing policies 
and procedures and a written copy of the periodic report provided to 
the board,\419\ as well as records of support for each computation of 
an adjustment to the fund's NAV based on the fund's swing pricing 
policies and procedures.\420\ A fund that engages in swing pricing will 
be required to make certain disclosures, including disclosure of the 
fund's swing factor upper limit, on Form N-1A and Form N-CEN.\421\ A 
fund that uses swing pricing will also be required to reflect its use 
of swing pricing in its financial statements and on Form N-1A.\422\
---------------------------------------------------------------------------

    \419\ Rule 22c-1(a)(3)(iii).
    \420\ Amendment to rule 31a-2(a)(2).
    \421\ See Item 4(b)(2)(ii), Item 4(b)(2)(iv)(E), and Item 6(d) 
of Form N-1A; Item C.21 of Form N-CEN.
    \422\ See Item 13 of Form N-1A and amendments to Regulation S-X.
---------------------------------------------------------------------------

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

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

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

[[Page 82121]]

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

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

[[Page 82122]]

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

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

b. Costs
    Generally, implementing swing pricing may increase a fund's return 
volatility and could increase the tracking error relative to a fund's 
benchmark. However, the impact of swing pricing on volatility and 
tracking error should decrease as a function of the time over which 
returns and tracking errors are measured: For example, the impact of 
swing pricing on daily return volatility and tracking error will likely 
be much greater than the impact on monthly volatility and tracking 
error. Enabling funds to have multiple swing thresholds and factors, as 
well as limiting swing factors to be at most 2% of the funds NAV, also 
potentially lessens swing pricing's impact on volatility and tracking 
error.
    In addition, swing pricing exposes transacting investors to 
additional uncertainty about the price at which their fund shares will 
ultimately be purchased or redeemed relative to the economic baseline. 
For example, under existing regulations, investors who submit purchase 
or redemption orders on a given date face uncertainty about the price 
they will transact at until the NAV is next struck. Under the adopted 
rule, investors face an additional source of uncertainty surrounding 
the eventual price they will transact at because this price will also 
depend on net fund flows on the trade date and any resultant NAV 
adjustment via swing pricing protocols. They may end up transacting at 
a better (e.g., if they are subscribing on a day the NAV is adjusted 
downwards) or worse (e.g., if they are redeeming on a day the NAV is 
adjusted downwards) price, but they are facing an additional source of 
uncertainty relative to current practices. This uncertainty is limited 
in that investors will know the fund's swing factor upper limit. 
Investors will not be able to purposefully take advantage of swing 
pricing to obtain a better price without knowledge of contemporaneous 
intraday flows and a fund's swing thresholds, neither of which funds 
are required to publicly disclose and will not be required to disclose 
under the rule.
    If a fund's swing threshold(s) and factor(s) are accurately 
calibrated to reflect the costs incurred as a result of significant net 
subscriptions and redemptions, the increased execution price risk faced 
by investors who transact in a fund should be offset by a decrease in 
the dilution that non-transacting investors would otherwise face if the 
fund's NAV was never adjusted. The rule's limitation on a swing 
factor's maximum size may reduce the extent to which funds that face 
higher trading costs are able to reflect those costs in their swing 
factor(s), but it also reduces the execution risk faced by investors 
who transact in these funds. We acknowledge commenter concerns that 
estimating the trading costs associated with various redemption levels 
is not trivial, and swing pricing programs are unlikely to anticipate 
trading costs perfectly, so a given fund's swing factor may overstate 
or understate the expected transaction costs associated with a given 
transaction.\428\ For example, the rule requires a fund to apply a 
swing factor when its net flows cross a certain threshold, but the 
actual costs to be incurred will vary with other factors such as the 
fund's portfolio on the date the NAV is swung, the trades they decide 
to execute to meet a given redemption, or any macroeconomic factors 
that affect bid-ask spreads. If a swing factor underestimates or is 
unable to capture the true trading costs for a fund, non-transacting 
shareholders of the fund will still benefit from swing pricing, but to 
a lesser extent. If a fund overestimates its swing factor, non-
transacting shareholders will be enriched by its swing pricing program 
(and the fund's NAV will reflect it), but this increase in wealth will 
be at the expense of transacting shareholders, who are paying more than 
the true cost of their transactions. To the extent that a fund cannot 
perfectly estimate the swing factors appropriate for it, the fund may 
have an incentive to overestimate these factors because it will 
increase observed fund performance. Given the limited swing pricing 
disclosures a fund must make, it may also be difficult for investors to 
determine if the swing factor has charged them in excess of true 
trading costs, and may make it difficult for investors to disentangle 
true fund performance from swing pricing effects.
---------------------------------------------------------------------------

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

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

[[Page 82123]]

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

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

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

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

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

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

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

    \436\ Rule 22c-1(a)(3)(i).
    \437\ Rule 22c-1(a)(3)(iii); rule 31a-2(a)(2).
---------------------------------------------------------------------------

    The proposal estimated the one-time costs of implementing a swing 
pricing program as being in the range of $1.3 million to $2.25 million 
per fund complex by assuming costs were similar to those associated 
with the fees and

[[Page 82124]]

gates provision of the Commission's 2014 money market reform rule. The 
only alternative estimate of swing pricing implementation costs came 
from a commenter who stated that its experience complying with the 
money market reform rule suggested those estimates were severely 
understated, and that it believed that implementing a swing pricing 
program would be four to five times more costly than the proposal's 
estimate.\438\ We extrapolate from this commenter's estimate to obtain 
estimates for all fund complexes, producing estimated one-time costs 
ranging from $2.4 million to $48.5 million per fund complex to 
implement swing pricing, with an average cost per fund complex of $3.4 
million.\439\ These costs estimates should be considered an upper bound 
for two reasons: (1) They assume a fund complex implements swing 
pricing for all of its funds; (2) they assume a fund develops all 
systems and processes associated with swing pricing in-house, but if 
third-party solutions become available funds may be able to reduce some 
of their swing pricing implementation costs.
---------------------------------------------------------------------------

    \438\ Charles Schwab Comment Letter.
    \439\ The commenter, Charles Schwab Investment Management, has 
52 funds. A multiple of 4-5 times the proposals estimate produces a 
range of $5.2 million to $11.25 million, and we assume the 
commenter's costs are in the middle of that range at $8 million. 
Assuming a fixed cost of 30%, and that costs beyond that scale with 
the number of funds, we arrive at an estimated one-time costs for 
each fund complex, and calculate the minimum, maximum, and average 
across those fund complexes.
---------------------------------------------------------------------------

    In the proposal, we estimated that the ongoing costs of adopting a 
swing policy would range from 5% to 15% of the one-time costs. We 
recognize that, relative to our discussion of costs in the proposal, 
funds will have to maintain substantial systems and procedures to 
estimate fund flows, and believe it's reasonable to increase this range 
from 5% to 32.5%.\440\ Again using the fund-by-fund cost approach above 
based on a commenter's estimate of the one-time costs, we estimate that 
ongoing costs to fund complexes would range from $120,000 to $15.8 
million, with the average fund having costs in the range of $170,000 to 
$1.1 million. The low end of the range might be achieved by small 
complexes that are direct-sold, whereas the high end of the range could 
correspond to very large fund complexes that primarily distribute their 
funds through a wide variety of intermediaries and use swing pricing 
for many of their funds. These estimated costs are attributable to the 
following activities, as applicable to each of the funds within the 
complex that adopts swing pricing policies and procedures: (i) Costs 
associated with monitoring whether the fund's net purchases or net 
redemptions cross the swing threshold (which could include costs 
associated with obtaining shareholder flows from its transfer agent, 
including sufficient information on flows from the funds 
intermediaries, in order to reasonably estimate its daily net flows) 
(implicated by rule 22c-1(a)(3)(i)(A)); (ii) adjusting the fund's NAV 
when the fund's net purchases or net redemptions cross the swing 
thresholds, including costs associated with determining the swing 
factors that would be used to adjust the fund's NAV when the fund's 
swing thresholds are exceeded (rule 22c-1(a)(3)(i)(A), rule 22c-
1(a)(3)(i)(C)); (iii) periodic review of the adequacy of the fund's 
swing pricing policies and procedures and the effectiveness of their 
implementation, including the impact on mitigating dilution, as well as 
periodic review of fund's swing threshold(s), swing factor(s) and swing 
factor upper limit, and related board reporting requirements (rule 22c-
1(a)(3)(ii)(D)); (iv) systems maintenance; (v) compliance costs and the 
back-testing of flow estimation procedures; (vi) additional staff 
training; and (vii) recordkeeping (rule 22c-1(a)(3)(iii), amendments to 
rule 31a-2(a)(2)).\441\ Funds would also incur costs if they began 
distributing their fund through new intermediaries, as they would need 
to integrate that intermediary into the systems used to determine if 
fund flows have exceeded a swing threshold. We note that for purposes 
of our PRA analysis, we estimate that, relative to the proposal, half 
as many fund complexes (84 fund complexes) will implement swing 
pricing.\442\ Based on this estimate and our estimate of the average 
per fund complex cost above, we estimate that the aggregate cost to 
implement swing pricing will be $286 million.\443\
---------------------------------------------------------------------------

    \440\ See Invesco Comment Letter. The commenter estimated that 
the asset classification requirement of proposed rule 22e-4 would 
involve one-time costs of $2 million and ongoing costs of $650,000. 
This ongoing cost estimate represents 32.5% of the one-time cost 
estimate associated with that proposed requirement. See also 
Investment Company Liquidity Risk Management Programs, supra 
footnote 8, at n. 1097 and surrounding discussion. We assume swing 
pricing programs will, at the high end, involve on-going costs that 
are the same proportion of one-time costs (32.5%).
    \441\ We anticipate that, depending on the personnel (and/or 
third-party service providers) involved in the activities associated 
with administering a fund's swing pricing policies and procedures, 
certain of the estimated ongoing costs associated with these 
activities could be borne by the fund, and others could be borne by 
the adviser.
    \442\ See infra footnote 489 and surrounding discussion 
regarding the revision to the number of funds expected to implement 
swing pricing in the PRA analysis.
    \443\ See supra footnote 439 and surrounding discussion 
regarding cost estimates on a per fund complex basis. The aggregate 
cost is estimated as 84 fund complexes x $3.4 million = $286 
million.
---------------------------------------------------------------------------

    While the proposal incorporated the costs to intermediaries and 
other third-party service providers into its estimates at the fund 
complex level, we recognize, based on the operational issues raised by 
commenters, that these parties will incur significant separate costs to 
make swing pricing feasible. Specifically, new processes and procedures 
will need to be established across a wide variety of intermediaries and 
service providers to gather and transmit sufficient flow information 
prior to the striking of the fund's NAV. Costs will be incurred by fund 
transfer agents, pricing agents, intermediaries and service providers 
to facilitate the movement of flow data to funds earlier in the 
evening. This will include new estimated flow data that will need to be 
generated by retirement plans and third-party administrators as 
intermediaries that will likely be sent via new files and processing 
cycles through the NSCC. Further changes to transaction processing and 
nightly processing may occur if the delivery of fund NAVs is pushed to 
later in the evening to accommodate swing pricing. Compressing 
processing times could increase risk and costs if there is less time 
for intermediaries to confirm transactions with funds and update 
shareholder records on a timely basis.
    Commenters did not provide estimates for the costs that swing 
pricing will cause intermediaries to incur, which are likely to vary 
widely depending on the specific role each intermediary plays in the 
process of providing funds with the flow information swing pricing 
policies are dependent upon. For example, a small retirement plan that 
only needs to transmit data in a more timely fashion as a result of 
swing pricing might incur one-time costs in the tens of thousands of 
dollars to upgrade its systems, while a central fund transaction 
processing utility such as the NSCC might incur costs similar in 
magnitude to the largest fund complexes (in the tens of millions of 
dollars) to build systems that reliably process flow data for a broad 
range of their participants. Intermediaries such as broker-dealers and 
retirement plan administrators that use the services of the utility may 
incur costs in the middle of this range (in the hundreds of thousands 
to the millions of dollars) to enable the processing of flow data from 
any smaller intermediaries or clients they service in addition to any 
share of

[[Page 82125]]

NSCC costs they pay.\444\ Similarly, we would expect ongoing costs for 
a given entity to be a percentage of the entity's one-time costs, in 
the range of 10% to 25%.\445\ To the extent intermediaries are able to 
pass on these costs to funds, it is likely that investors will 
ultimately pay some share of the expenses intermediaries incur in the 
form of higher operating expenses or management fees. Given these 
additional costs, each fund will need to determine whether the higher 
operational costs of swing pricing--including both external costs 
passed on from intermediaries and internal costs associated with their 
own systems, policies, and procedures--are justified by swing pricing's 
anti-dilutive benefits.
---------------------------------------------------------------------------

    \444\ The low end of this estimate, which is more likely to 
apply to broker-dealers than retirement plan administrators, is of 
the same order of magnitude as the costs to intermediaries 
associated with processing and reporting transactions in other SEC 
rulemakings. See, e.g. Regulation SBSR--Reporting and Dissemination 
of Security-Based Swap Information, Exchange Act Release No. 74245 
(Feb. 11, 2015) [80 FR 14739 (Mar. 19, 2015)] (estimating the one-
time costs for trade execution platforms and registered clearing 
agencies to develop transaction processing systems and report 
transaction-level information to swap data repositories).
    \445\ There could also be additional costs incurred by more 
ancillary parties. For example, data providers that disseminate or 
third parties that analyze fund NAV may have to update their 
operations.
---------------------------------------------------------------------------

    Commenters also emphasized that those costs went beyond needing to 
create systems, policies, and procedures. They suggested that total 
costs include potential damage to investors, investment advisers, and 
service providers that would occur if operational requirements are not 
able to be effectively implemented because of current practices in the 
U.S. fund market.\446\ We recognize that if funds use inaccurate 
estimates of daily flows because actual values are not available before 
funds must strike their NAV, then a fund may swing its price 
unnecessarily or fail to swing its price when necessary. Under the 
final rule, a fund is required to ``reasonably estimate whether it has 
crossed the swing threshold with high confidence,'' which should reduce 
the probability that a fund swings its NAV based on inaccurate flow 
information and, in cases where this does happen, does not require the 
fund to consider it a NAV error as long as the flow estimates used were 
of ``high confidence.''
---------------------------------------------------------------------------

    \446\ Dechert Comment Letter; Federated Comment Letter; ICI 
Comment Letter I; IDC Comment Letter; J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

    Relative to the proposal, the final rule also changes the role of a 
fund's board in its oversight of any swing pricing program. Under the 
final rule, the board is required to approve the swing pricing policies 
and procedures, which must specify the process for determining swing 
threshold(s), swing factor(s) and their upper limits, but is not 
required to approve all material changes to the fund's swing pricing 
policies and procedures. The fund board is also required to approve a 
fund's swing factor upper limit and its swing threshold(s). In order to 
facilitate these obligations, the final rule also requires the board to 
periodically review a written report prepared by the swing pricing 
administrator that includes certain required information. The revised 
cost estimates above use a commenter's cost estimates of adopting swing 
pricing under the proposal, which we assume included the board's 
obligations to approve swing threshold(s), any swing factor upper 
limit, swing pricing policies and procedures, and any material changes 
to those policies and procedures. The final rule's inclusion of a 
requirement that the fund's board periodically review a written report 
from the swing pricing administrator will impose certain additional 
costs: (i) The costs incurred by the administrator in performing the 
analysis underlying the written report, including a review of the 
reasonableness of the swing threshold(s), swing factor(s), and upper 
limit; (ii) the cost of preparing the report itself; and (iii) the cost 
of the board's time to review the written report. While these 
activities are more explicitly required by the final rule, some of 
their associated costs, such as those associated with any analysis and 
document preparation as part of the proposal's periodic review 
requirements, as well as any time associated with board review of 
material changes, would have been incurred under the proposal. In 
addition, the final rule does not require board approval of all 
material changes to a fund's swing pricing policies and procedures, 
reducing costs relative to the proposal. On balance, we therefore 
believe that the revised costs estimates of the proposal above, which 
incorporate commenter feedback, are still reasonable estimates of the 
final rule's costs.
c. Effects on Efficiency, Competition, and Capital Formation
    Rule 22c-1(a)(3) permits a fund, under certain circumstances, to 
adjust its NAV to effectively pass on the estimated costs stemming from 
shareholder purchase or redemption activity to the shareholders 
associated with that activity. Adjusting a fund's NAV in this way could 
reduce dilution to non-transacting shareholders arising from trading 
costs. We therefore believe that the rule could increase the efficiency 
of cost allocation among shareholders of funds that adopt swing pricing 
policies and procedures, provided that a fund's swing thresholds and 
swing factors are appropriately calculated.
    If investors believe swing pricing to be valuable, funds that 
decide to implement swing pricing will be at a competitive advantage. 
Fund complexes currently using swing pricing in other jurisdictions may 
be at a slight advantage due to their familiarity with swing pricing 
procedures, but, as noted above, they will still face the same 
operational hurdles as other funds in obtaining timely fund flow 
information in the U.S. Similarly, funds that are predominantly sold 
directly or primarily through an affiliated broker-dealer may not be as 
impacted by these operational difficulties, and may be able to 
implement swing pricing more quickly. In addition, some funds may 
decide to forgo using swing pricing due to concerns that some 
intermediaries will not offer their funds due to the increased 
operational burden swing pricing places on those intermediaries.
    The extended effective date reduces these competitive effects and 
provides funds not currently using swing pricing in other jurisdictions 
and funds that are not sold directly sufficient time to develop and 
implement their own swing pricing programs in conjunction with any 
broad industry efforts to provide fund flow data on a timely basis. 
Alternatively, if the rule's swing pricing provisions became effective 
immediately, while some funds would have an initial competitive 
advantage, if a significant portion of funds wanted to adopt swing 
pricing, market pressures could spur innovations that made swing 
pricing feasible for a broader groups of funds. We are unable to assess 
the relative likelihoods of these two potential outcomes.
    Commenters also suggested that smaller fund complexes are less 
likely to have the resources necessary to implement swing pricing, may 
have less leverage in obtaining flow information from their 
distribution partners, and that if investors prefer funds that use 
swing pricing, smaller fund complexes would be at a competitive 
disadvantage.\447\ We acknowledge that small funds (as well as other 
types of funds such as those that are not primarily sold directly or 
through an affiliated broker-dealer) may be at an

[[Page 82126]]

initial disadvantage, and note that the delayed extended effective date 
should provide some fund complexes sufficient time and resources to 
overcome their initial competitive disadvantage before any fund can 
actually use swing pricing. For example, the extended effective date 
could provide third parties with time to develop tools to help smaller 
fund complexes perform swing pricing. However, it is possible that some 
fund complexes will not be able to effectively implement swing pricing, 
and to the extent investors prefer funds that use swing pricing, those 
fund complexes will be at a competitive disadvantage.
---------------------------------------------------------------------------

    \447\ Dechert Comment Letter; ICI Comment Letter I; IDC Comment 
Letter; Charles Schwab Comment Letter; T. Rowe Comment Letter.
---------------------------------------------------------------------------

    We anticipate that rule 22c-1(a)(3) could indirectly foster capital 
formation by bolstering investor confidence. Investors may be more 
inclined to invest in funds if they understand that funds will be able 
to use swing pricing to prevent the purchase or redemption activity of 
certain investors from diluting the interests of other investors 
(particularly long-term investors, who represent the majority of fund 
shareholders). To the extent that swing pricing increases investment 
returns to investors, particularly long-term investors, this could 
incentivize investment in funds that use swing pricing. If rule 22c-
1(a)(3) enhances investor confidence in funds, investors are more 
likely to invest in funds, so to the extent that investors are not 
already invested in the capital markets (e.g., via direct ownership of 
stocks or bonds), the rule could make additional assets available for 
investment in the capital markets.
    To the extent that investors care about short-term volatility, they 
may be discouraged from investing in funds that use swing pricing 
because it will generally increase daily volatility and benchmark 
tracking error on those days when the NAV is swung. However, if a 
fund's swing thresholds and factors are properly calibrated, long-term 
tracking error relative to the fund's benchmark should improve. 
Additionally, as discussed above, investors might be slightly less 
inclined to transact in funds that use swing pricing because of the 
additional uncertainty it introduces surrounding the NAV at which their 
shares will ultimately be purchased or redeemed, as this NAV now 
depends on that day's net fund flows in addition to variations in the 
prices of the fund's portfolio positions. Investors also may be less 
inclined to invest in funds that use swing pricing if they are not 
confident that the fund's swing factors and thresholds appropriately 
reflect costs associated with transacting in the fund; specifically, a 
fund that uses a swing pricing program which overstates trading costs 
will effectively impose the equivalent of hidden purchase and 
redemption fees on transacting investors, which will increase the 
fund's NAV and benefit non-transacting shareholders at their expense. 
Investors will not be able to directly evaluate whether a fund's swing 
pricing policy is reasonably linked to its costs, and will only be able 
to determine how much of a fund's performance is attributable to swing 
pricing if funds voluntarily choose to publicly disclose both their 
swung and unswung NAVs on a daily basis. However, the additional 
restrictions in the final rule that are designed to reduce the ability 
of funds to overestimate swing factors to increase observed fund 
performance, should reduce such concerns and have a positive effect on 
capital formation. Because we do not have the information necessary to 
determine how investors will perceive swing pricing, or how they will 
evaluate the relative benefits or detriments of investing in funds that 
use swing pricing, we are unable to draw conclusions about the precise 
effects of rule 22c-1(a)(3) on capital formation. Moreover, the 
requirement for funds that use swing pricing to disclose the swing 
factor upper limit will provide transparency to investors 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.
    The final rule enables funds to use multiple swing thresholds, and 
allows for different swing factors corresponding to each threshold, 
subject to a swing factor upper limit that may not exceed two percent 
of NAV per share, which increases a fund's ability to tailor swing 
pricing to the specific trading costs it anticipates incurring when 
facing significant net fund flows. To the extent that funds accurately 
reflect these costs in their swing pricing programs, and that the 
expense of operating a swing pricing program does not significantly 
increase fund expenses, this should improve the efficiency of trading 
cost allocation between transacting and non-transacting investors. The 
final rule's increased flexibility could, at the margin, lead to an 
increase in the use of swing pricing by funds that would not have 
otherwise employed it under the proposed rule's provisions; to the 
extent that investors perceive swing pricing as being a desirable 
feature of certain funds, and the extent to which they have assets that 
are not already invested in the capital markets, this could enhance 
capital formation relative to the proposed rule.
2. Disclosure and Reporting Requirements Regarding Swing Pricing
a. Disclosure and Reporting Requirements
    We are adopting amendments to Form N-1A and Regulation S-X as well 
as adopting a new item to Form N-CEN to enhance fund disclosure and 
reporting regarding swing pricing. Specifically, amendments to Form N-
1A will require a fund to explain the fund's use of swing pricing, 
including an explanation of what swing pricing is, the circumstances 
under which it will use swing pricing, and the effects of using swing 
pricing.\448\ A fund that uses swing pricing will also be required to 
disclose the swing factor upper limit,\449\ and include a general 
description of the effects of swing pricing on a fund's annual and 
average total returns for the applicable periods.\450\ The GAAP NAV 
reported on the balance sheet of a fund's financial statements will 
include the effects of swing pricing throughout the reporting period, 
but it will not explicitly reveal instances where the fund NAV was 
adjusted or the magnitudes of those adjustments.\451\ A new item on 
Form N-CEN will require a fund to report whether the fund engages in 
swing pricing and, if so, the fund's swing factor upper limit.\452\
---------------------------------------------------------------------------

    \448\ Item 6(d) of Form N-1A.
    \449\ Id.
    \450\ Item 4(b)(2)(ii) and Item 4(b)(2)(iv)(E) of Form N-1A.
    \451\ Form N-1A as amended requires a fund to disclose both its 
GAAP NAV as well as its Swung NAV (if it swings at period end) in 
the financial highlights section of the fund's financial statements 
and the financial highlights information in the fund's registration 
statement. See Item 13(a) of Form N-1A. The financial highlights 
section, which details per share operating performance (by share 
class), rolls forward the GAAP NAV per share from beginning to end 
of period. The roll forward will require disclosure of the per share 
cumulative impact of amounts related to swing pricing (during the 
period) as a separate line item below the total distributions line 
in the roll forward. Funds also are required to disclose whether the 
fund's net asset value per share has swung during the period in the 
notes to the financial statements. Investors will not be able to 
fully disentangle the effects of swing pricing on fund performance 
from these figures, but Commission staff will have access to 
complete records of daily NAV adjustments and could look at the 
effects of swing pricing as part of the examination process. As 
noted above, the Commission is not prohibiting funds from disclosing 
an unadjusted NAV outside of the financial statements in other 
performance information, which may be useful information in 
understanding the impact of swing pricing on a fund.
    \452\ Item C.21 of Form N-CEN.
---------------------------------------------------------------------------

    The final form amendments differ from the proposal in several ways 
that may have potential economic consequences. Specifically, funds that 
use swing pricing will be required to disclose the swing factor upper 
limit on

[[Page 82127]]

Form N-1A and Form N-CEN, and will be required to include a general 
description of the effects of swing pricing on a fund's annual and 
average total returns for the applicable periods on Form N-1A. Any 
significant economic effects of these changes are discussed below.
b. Benefits
    The disclosure and reporting requirements will increase 
shareholders' understanding of particular funds' swing pricing 
policies, which should assist investors in making investment choices 
that better match their risk tolerances. For example, disclosure of the 
swing factor upper limit will inform investors as to the maximum amount 
of costs they could be charged if they were to redeem or subscribe on a 
day where the fund is swinging its NAV in response to redemptions or 
subscriptions, respectively. Similarly, disclosures about the effects 
of swing pricing on a fund's annual and average total returns should 
help investors understand the extent to which fund performance may have 
been impacted by the fund's use of swing pricing. However, as discussed 
above, while we are not requiring disclosure in the financial 
statements of the fund's total return based on the Swung NAV, we are 
not prohibiting funds from disclosing this information along with the 
total return based on the unswung NAV outside of the financial 
statements.\453\ Finally, the presumption against disclosure of the 
swing factor or threshold should help protect against harm to investors 
that could potentially result from gaming of the fund's swing pricing, 
although as discussed above, the likelihood of gaming is mitigated by 
the lack of public availability of real-time flow data.
---------------------------------------------------------------------------

    \453\ See infra section II.A.iii.g.
---------------------------------------------------------------------------

    Because we cannot predict the extent to which the requirements will 
enhance investors' awareness of funds' swing pricing and its impact on 
investors, we are unable to quantify the potential benefits discussed 
in this section.
c. Costs
    Funds will incur costs to comply with the disclosure and reporting 
requirements regarding swing pricing. Commenters' responses to the 
estimates of these costs are discussed in the PRA discussion below, and 
we have updated all estimates in this section to reflect changes in the 
PRA.\454\
---------------------------------------------------------------------------

    \454\ See infra section IV.
---------------------------------------------------------------------------

    We estimate that the one-time costs to comply with the amendments 
to Form N-1A for funds that choose to employ swing pricing will be 
approximately $648 per fund (plus printing costs).\455\ Based on this 
estimate we further estimate that the total one-time costs for funds 
that chose to employ swing pricing will be approximately $307,152 for 
all funds.\456\ We estimate that each of these funds will incur an 
ongoing cost associated with compliance with the amendments to Form N-
1A of approximately $324 each year to review and update the disclosure 
regarding swing pricing.\457\ Based on these estimates we further 
estimate that the total ongoing annual costs for funds that chose to 
employ swing pricing will be approximately $153,576 for all funds.\458\ 
In addition, we expect that there will be minor costs associated with 
the related amendments to Regulation S-X, which are discussed above.
---------------------------------------------------------------------------

    \455\ This estimate is based on the following calculation: 2 
hours (2 hour to update registration statement to include swing 
pricing-related disclosure statements) x $324 (blended rate for a 
compliance attorney ($340) and a senior programmer ($308)) = $648. 
This figure incorporates the costs we estimated for each fund to 
update its registration statement to include the required disclosure 
about the fund's use of swing pricing, including an explanation of 
what swing pricing is, an explanation of the circumstances under 
which it will use swing pricing, the effects of using swing pricing; 
the fund's swing factor upper limit; and disclosures about the 
effects of swing pricing on a fund's annual and average total 
returns. The costs associated with these activities are all 
paperwork-related costs and are discussed in more detail infra at 
section IV.E.
    \456\ This estimate is based on the following calculation: 948 
hours x $324 (blended rate for a compliance attorney ($340) and a 
senior programmer ($308)) = $307,152. The costs associated with 
these activities are all paperwork-related costs and are discussed 
in more detail infra at section IV.E.
    \457\ This estimate is based on the following calculations: 1 
hours x $324 (blended hourly rate for a compliance attorney ($340) 
and a senior programmer ($308)) = $324. The costs associated with 
these activities are all paperwork-related costs and are discussed 
in more detail infra at section IV.E.
    \458\ This estimate is based on the following calculation: 474 
hours x $324 (blended hourly rate for a compliance attorney ($340) 
and a senior programmer ($308)) = $153,576. The costs associated 
with these activities are all paperwork-related costs and are 
discussed in more detail infra at section IV.E.
---------------------------------------------------------------------------

    We estimate compliance with the new item of Form N-CEN related to 
swing pricing will involve an annual hourly burden which is discussed 
in the PRA discussion below.\459\ We estimate that 10,633 funds will be 
required to file responses on Form N-CEN.\460\ We estimate that 9,039 
funds will be required to file responses to Item C.21 of Form N-CEN 
regarding swing pricing.\461\ We estimate an average annual hourly 
burden associated with providing additional responses to Form N-CEN as 
a result of the additional reporting requirement will be approximately 
.5 hours per fund, for a total average annual burden of 4,519.5 
hours.\462\ We do not estimate any change to the external costs 
associated with the proposed Form N-CEN
---------------------------------------------------------------------------

    \459\ See infra section IV.
    \460\ See 2016 ICI Fact Book, supra footnote 388, at 22, 176, 
183.
    \461\ See supra footnote 388.
    \462\ This estimate is based on the following calculation: 9,039 
funds x .5 hour = 4,519.5 hours.
---------------------------------------------------------------------------

d. Effects on Efficiency, Competition, and Capital Formation
    We believe the disclosure and reporting requirements on Form N-1A 
and Form N-CEN could increase informational efficiency by providing 
additional information about a fund's use of swing pricing. To the 
extent that investors better understand a fund's swing pricing, 
including the upper limit of the swing factor, they can trade off the 
benefit from dilution protection with the increase in return 
volatility, as discussed above, when deciding on investing in a fund 
that choses to use swing pricing. To the extent that investors invest 
in funds that adopt swing pricing because of these disclosure and 
reporting requirements, the new disclosure and reporting requirements 
will also increase capital formation. However, we do not believe that 
this effect will be significant because such investors are more likely 
already investing in other funds and hence any reallocation will be a 
``zero-sum game.''
    Increased investor awareness of funds' swing pricing policies, 
including swing factor upper limits, improve the investors' ability to 
compare funds that elect to use swing pricing with each other as well 
as with funds that do not elect to implement swing pricing. Such a 
comparison could improve competition among funds, which could benefit 
investors. While this competition could unintentionally increase 
incentives for funds to overestimate the swing factors to improve and 
compete on performance, the additional safeguards required by the final 
rule should prevent such a negative impact.

D. Reasonable Alternatives

    The following discussion addresses significant alternatives to the 
final swing pricing regulations. More detailed alternatives to the 
individual elements of the swing pricing regulations are discussed in 
detail above.\463\
---------------------------------------------------------------------------

    \463\ See supra sections II.A and II.B.
---------------------------------------------------------------------------

    Instead of permitting, but not requiring, funds to adopt swing 
pricing policies and procedures under rule 22c-1(a)(3), the Commission 
could have

[[Page 82128]]

adopted a rule that would require all funds, or funds with certain 
strategies, to adopt swing pricing policies and procedures. This 
alternative approach would have the benefit of establishing a uniform 
regulatory framework to prevent potential shareholder dilution, and 
might lower the per fund cost of implementing swing pricing due to 
economies of scale. But because funds differ notably in terms of their 
particular circumstances and risks, as well as with respect to the 
tools funds use to manage risks relating to liquidity and shareholder 
purchases and redemptions, we decided to adopt a rule that would permit 
swing pricing as a voluntary tool for funds. The adopted approach will 
allow funds to weigh the advantages of swing pricing (e.g., improved 
allocation of trading costs) against potential disadvantages (e.g., the 
potential for swing pricing to increase the volatility of a fund's NAV 
in the short term and its operational costs). Some commenters advocated 
for the Commission to require all funds to adopt swing pricing policies 
and procedures,\464\ but most commenters supported the permissive (not 
mandatory) approach.\465\
---------------------------------------------------------------------------

    \464\ Barnard Comment Letter; Invesco Comment Letter.
    \465\ See CFA Comment Letter; Dechert Comment Letter; ICI 
Comment Letter I; IDC Comment Letter; J.P. Morgan Comment Letter; 
Morningstar Comment Letter.
---------------------------------------------------------------------------

    While rule 22c-1(a)(3) enables partial swing pricing (that is, a 
NAV adjustment would not be permitted unless net purchases or 
redemptions exceed a positive threshold set by the fund), the 
Commission instead could have adopted a rule that would permit full 
swing pricing (that is, a NAV adjustment would occur any time the fund 
experiences net purchases or net redemptions, or equivalently allowed 
zero percent thresholds). Full swing pricing would result in any 
estimated costs associated with purchases or redemptions being passed 
along to the shareholders whose actions created those costs, whereas 
the partial swing pricing contemplated by the rule will only allocate 
costs related to purchase and redemption activity to purchasing or 
redeeming shareholders when net purchases or net redemptions exceed the 
fund's positive swing threshold. Most commenters supported permitting 
only ``partial'' swing pricing,\466\ but some commenters did suggest 
that funds should have the option to use full swing pricing.\467\ 
Nevertheless, we believe that the partial swing pricing policy choice 
is, on balance, preferable to the full swing pricing option. We expect 
that partial swing pricing, as opposed to full swing pricing, will 
reduce any performance volatility potentially associated with swing 
pricing and could reduce operational costs associated with swinging a 
fund's NAV (e.g., record keeping requirements) when fund flows are not 
significant enough to cause significant shareholder dilution. Also, the 
use of partial swing pricing recognizes that purchases or redemptions 
below a certain threshold are less likely to require a fund to trade 
portfolio assets, and therefore a NAV adjustment might be less 
appropriate if purchases or redemptions might not result in costs 
associated with asset purchases or sales (in which case, a NAV 
adjustment could unfairly penalize purchasing or redeeming 
shareholders).
---------------------------------------------------------------------------

    \466\ Many commenters implicitly agreed with only permitting 
partial swing pricing, but some explicitly agreed with only 
permitting partial swing pricing. CFA Comment Letter; SIFMA Comment 
Letter II.
    \467\ See Dechert Comment Letter; Federated Comment Letter; HSBC 
Comment Letter; MFS Comment Letter.
---------------------------------------------------------------------------

    We considered permitting funds to use swing pricing only to adjust 
their NAV downward in the event that net redemptions exceeded a 
particular threshold, as there may be more significant issues regarding 
potential dilution for non-transacting shareholders in connection with 
shareholder redemptions, because funds are obligated to satisfy 
redemption requests pursuant to section 22(e) of the Act. In this 
regard, we note that unlike redemptions, funds may reserve the right to 
decline purchase requests. For example, a fund may decline purchase 
requests from shareholders who engaged in frequent trading, and it also 
may decline large purchase requests that would negatively impact the 
fund. However, the final rule contemplates that funds will use swing 
pricing to adjust their NAV upward or downward because we believe that 
swing pricing could be a useful tool in mitigating dilution associated 
with shareholder purchase activity as well as shareholder redemption 
activity.
    We considered exempting investors with small investments in a fund 
from the NAV adjustments permitted under rule 22c-1(a)(3). However, we 
believe that the costs of exempting those investors from the NAV 
adjustment could be significant, particularly the operational costs 
that could result from the relatively complex process of applying the 
NAV adjustment only to some investors and not to others. Exempting 
small investors from the NAV adjustment also may not be beneficial to a 
fund because such exemption could lead to large investors engaging in 
gaming behavior--that is, structuring their investments in funds using 
multiple small accounts--in order to use the exemption. This could 
contravene the purpose of the exemption and be costly for funds to 
detect. In addition, while small investors' trading activity might not 
incur significant costs individually, their aggregate trading in the 
fund could incur costs, just as it would if they were trading directly 
in, for example, the stock market, and it would not be fair to impose 
those collectively generated costs on non-transacting shareholders.
    Some commenters suggested that redemption fees may have a better 
combination of potential cost and benefits compared to swing 
pricing.\468\ Redemption fees are already permissible under existing 
rules, subject to certain conditions, so swing pricing is an 
alternative tool funds can use to mitigate dilution.\469\ To the extent 
they are permissible under existing rules, purchase fees allow funds to 
recoup the costs associated with fund subscriptions in the same way 
redemption fees recoup costs associated with fund redemptions. Both 
swing pricing and purchase and redemption fees can pass on trading-
related costs to transacting shareholders, but they accomplish this in 
different ways. The specific implementation of a redemption fee can 
vary--funds can impose a constant fee that applies to all redemptions 
or can apply it more selectively to transactions of a given size in 
order to reduce dilution of the fund's outstanding shares. In theory, 
purchase fees can be applied in a similar manner.
---------------------------------------------------------------------------

    \468\ ICI Comment Letter I; PIMCO Comment Letter.
    \469\ As discussed above, funds are currently permitted under 
rule 22c-2 to impose redemption fees under certain circumstances. 
See also Redemption Fees Adopting Release, supra footnote 24.
---------------------------------------------------------------------------

    The key characteristic of a redemption or purchase fee, relative to 
swing pricing, is that it is imposed on a given investor's transaction 
independent of other investors' transactions in a fund, which means, 
for example, that investors may pay a fee even when their transactions 
do not result in significant net flows or any corresponding dilution 
for the fund's non-transacting investors. On the other hand, swing 
pricing allows funds to condition when they recover costs from 
transacting investors on the net flows to their fund on a given trading 
date, which could allow funds to more fairly allocate the actual costs 
created by investor flows and prevent shareholder dilution. As with 
redemption and purchase fees, it is still possible that investors pay a 
cost via the swing factor that ends up being larger

[[Page 82129]]

than the costs they impose on the fund--for example, if the discount at 
which assets are sold to cover redemptions turn out to be smaller than 
what was anticipated on the redemption date--but if funds are able to 
properly calibrate their swing factors, investors should end up paying 
the ex-ante expected cost associated with a given level of fund flows. 
The extent to which swing pricing is able to recover the expected costs 
associated with a given transaction is limited by the maximum swing 
factor size of 2% of a fund's NAV, but redemption fees are subject to 
the same limitation. Purchase fees and redemption fees, relative to 
swing pricing, have the benefit of being simple for investors to 
understand, they do not produce the same short-term volatility and 
tracking error concerns as swing pricing, and they provide more 
transparency to potential investors regarding the expected performance 
impact of anti-dilutive measures on a fund's NAV (the proceeds from 
both redemption fees and swing pricing eventually make their way into 
the NAV).
    If purchase or redemption fees are made contingent on the size of a 
transaction, a fund may be able to tailor these fees to transactions 
that are more likely to impose costs on non-transacting investors. For 
example, a large redemption may make it more likely that a fund 
experiences significant net redemptions on a given day. Targeting 
purchase and redemption fees in this manner could allow a fund to 
achieve some of the benefits of swing pricing without its potentially 
redistributive effects.\470\ For example, if a fund experiences gross 
subscriptions of 10 shares and gross redemptions of 20 shares on a 
given day, and recovers trading costs from redeeming investors via 
swing pricing, roughly half of those proceeds will be returned to non-
transacting shareholders in the fund (the other half goes to 
subscribers), and some dilution will still occur. To the extent that 
fund flows on that day are driven by large redemptions, a targeted 
redemption fee may allow a fund to assess estimated costs to redeeming 
investors while returning all proceeds to the fund.
---------------------------------------------------------------------------

    \470\ See supra footnote 427 and related discussion on 
distributional issues with swing pricing.
---------------------------------------------------------------------------

    In terms of direct costs, redemption fees may require more 
coordination with a fund's service providers because these fees need to 
be imposed on an investor-by-investor basis--which may be particularly 
difficult with respect to omnibus accounts. While there are funds that 
currently utilize redemption fees and have built systems to support 
them, these redemption fees are generally constant fees that are not 
tailored to the costs of a given redemption. Swing pricing, on the 
other hand, will require some funds and intermediaries to create new 
systems and operational procedures (discussed above), but once those 
are in place swing pricing will be incorporated in the process by which 
a fund strikes its NAV, and will not require any additional investor-
specific infrastructure to assess trading costs to them.
    Finally, a closely related alternative to swing pricing that the 
Commission could have adopted would be to permit funds to employ dual 
pricing, which has been used in certain European funds.\471\ Instead of 
swinging the NAV in one direction based on net flows and establishing a 
single price at which investors transact, dual pricing would allow the 
fund to set a ``spread'' around the fund's true NAV: A bid price at 
which the fund redeems shares and an offer price at which the fund 
issues new shares. This spread could be set in a manner similar to the 
rule's swing factor (e.g., based on a threshold of net flows), or on an 
ad-hoc basis based on the fund's portfolio and any relevant market 
conditions on the trade date. Dual pricing is an alternative that 
shares many costs and benefits with the rule's swing pricing component. 
The major benefit of dual pricing relative to the rule is that it does 
not allow one type of fund investor to benefit at the expense of 
another. For example, under swing pricing, if the NAV is adjusted 
downwards when a fund experiences net redemptions, any subscribing 
investors are able to purchase the fund at a discount at the expense of 
some of the redeeming investors, and this reduces the proceeds that are 
recovered by non-transacting shareholders in the fund. Under the same 
scenario with dual pricing, subscribers do not receive a discount (if 
anything, they may pay a premium which benefits non-transacting 
shareholders), and all of the proceeds from redeeming investors are 
returned to the fund. The primary cost of dual pricing relative to the 
rule is that it may impose additional requirements and risks on fund 
intermediaries, service providers, and other third parties as they now 
need to handle two NAVs on each trade date. Furthermore, to the extent 
that dual pricing is implemented using a constant spread around a 
fund's NAV, it may not be able to reflect the costs associated with 
fund redemptions or subscriptions on a given day as well as swing 
pricing.
---------------------------------------------------------------------------

    \471\ See BlackRock Fund Structures Paper, supra footnote 46 for 
a high level comparison of some of the differences between dual 
pricing and swing pricing.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act Analysis

A. Introduction

    The amendments to rule 22c-1 contain ``collections of information'' 
within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\472\ In addition, the amendments to rule 31a-2, Regulation 
S-X and Form N-1A will impact the collections of information burden 
under those rules and form.\473\ The new reporting requirements on Form 
N-CEN will impact the collections of information burden associated with 
the form described in the Investment Company Reporting Modernization 
Adopting Release.\474\
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    \472\ 44 U.S.C. 3501 through 3521.
    \473\ The paperwork burden from Regulation S-X is imposed by the 
rules and forms that relate to Regulation S-X and, thus, is 
reflected in the analysis of those rules and forms. To avoid a PRA 
inventory reflecting duplicative burdens and for administrative 
convenience, we have previously assigned a one-hour burden to 
Regulation S-X.
    \474\ See Investment Company Reporting Modernization Adopting 
Release, supra footnote 11, at section IV.A.
---------------------------------------------------------------------------

    The titles for the existing collections of information are: ``Rule 
31a-2 Records to be preserved by registered investment companies, 
certain majority-owned subsidiaries thereof, and other persons having 
transactions with registered investment companies'' (OMB Control No. 
3235-0179); and ``Form N-1A under the Securities Act of 1933 and under 
the Investment Company Act of 1940, Registration Statement of Open-End 
Management Investment Companies'' (OMB Control No. 3235-0307). In the 
Investment Company Reporting Modernization Adopting Release, we 
submitted new collections of information for Form N-CEN.\475\ The title 
for the new collections of information is: ``Form N-CEN Under the 
Investment Company Act, Annual Report for Registered Investment 
Companies.''
---------------------------------------------------------------------------

    \475\ See id.
---------------------------------------------------------------------------

    We are submitting new collections of information for the amendments 
to rule 22c-1 under the Investment Company Act of 1940. The title for 
the new collections of information will be: ``Rule 22c-1 Under the 
Investment Company Act of 1940, Pricing of redeemable securities for 
distribution, redemption and repurchase.'' The Commission is submitting 
these collections of information to the OMB for review in accordance 
with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may not conduct or 
sponsor, and a person is not

[[Page 82130]]

required to respond to, a collection of information unless it displays 
a currently valid control number.
    The Commission is adopting amendments to rule 22c-1, rule 31a-2, 
Regulation S-X, and Form N-1A. The Commission also is adopting a new 
item to Form N-CEN. The amendments are designed to prevent potential 
dilution of interests of fund shareholders in light of shareholder 
purchase and redemption activity and enhance disclosure and Commission 
oversight of funds' use of swing pricing. We discuss below the 
collection of information burdens associated with these reforms. In the 
Proposing Release, the Commission solicited comment on the collection 
of information requirements and the accuracy of the Commission's 
statements in the Proposing Release.

B. Rule 22c-1

    We are adopting, largely as proposed, amendments to rule 22c-1 that 
will enable a fund (with the exception of a money market fund or ETF) 
to choose to use ``swing pricing'' as a tool to mitigate shareholder 
dilution.\476\ This will be a new collection of information under the 
PRA. We believe that rule 22c-1 will promote investor protection by 
providing funds with an additional tool to mitigate the potentially 
dilutive effects of shareholder purchase or redemption activity and 
provide a set of operational standards that will allow funds to gain 
comfort using swing pricing as a new means of mitigating potential 
dilution.\477\
---------------------------------------------------------------------------

    \476\ See supra section II.A. See also rule 22c-1(a)(3).
    \477\ See supra section II.A.
---------------------------------------------------------------------------

    In order to use swing pricing under rule 22c-1, as amended, a fund 
is required to establish and implement swing pricing policies and 
procedures that meet certain requirements.\478\ The policies and 
procedures must specify the process for how the fund's swing 
threshold(s) and swing factor(s) are determined, which must include the 
establishment of an upper limit on the swing factor(s) used (which may 
not exceed two percent of NAV per share).\479\ The amendments require a 
fund's board of directors to approve the fund's swing pricing policies 
and procedures, as well as the fund's swing threshold and swing factor 
upper limit (and any changes to the swing threshold or swing factor 
upper limit).\480\ The fund's board is also required to review, no less 
frequently than annually, a written report prepared by the persons 
responsible for administering swing pricing that describes: (i) Its 
review of the adequacy of the fund's swing pricing policies and 
procedures and the effectiveness of their implementation, including the 
impact on mitigating dilution; (ii) any material changes to the fund's 
swing pricing policies and procedures since the date of the last 
report; and (iii) its review and assessment of the fund's swing 
threshold(s), swing factor(s), and swing factor upper limit considering 
the requirements of the rule, including the information and data 
supporting these determinations.\481\ A fund is required to maintain 
the fund's swing pricing policies and procedures and a written copy of 
the periodic report provided to the board.\482\ The requirements that 
funds adopt policies and procedures, obtain board approval and periodic 
review, provide a written report to the board, and retain certain 
records related to swing pricing are collections of information under 
the PRA. The respondents to amended rule 22c-1 will be open-end 
management investment companies (other than money market funds or ETFs) 
that engage in swing pricing. Compliance with rule 22c-1(a)(3) will be 
mandatory for any fund that chooses to use swing pricing to adjust its 
NAV in reliance on the amendments. The information required under rule 
22c-1 regarding swing pricing when provided to the Commission in 
connection with staff examinations and investigations and oversight 
programs will be kept confidential subject to the provisions of 
applicable law.
---------------------------------------------------------------------------

    \478\ See rule 22c-1(a)(3)(i).
    \479\ See rule 22c-1(a)(3)(i)(B) and (C).
    \480\ See rule 22c-1(a)(3)(ii)(A) and (B).
    \481\ See rule 22c-1(a)(3)(ii)(D).
    \482\ See rule 22c-1(a)(3)(iii).
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that 167 fund complexes 
include funds that would adopt swing pricing policies and procedures 
pursuant to the rule.\483\ For purposes of the PRA analysis, we 
estimated that each fund complex would incur a one-time average burden 
of 24 hours to document swing pricing policies and procedures. Under 
the proposal, rule 22c-1 would have required fund boards initially to 
approve the swing pricing policies and procedures (including the swing 
threshold) and any material changes to them, and we estimated a one-
time burden of five hours per fund complex associated with the fund 
board's review and approval of swing pricing policies and procedures. 
Amortized over a 3-year period, we estimated that this would be an 
annual burden per fund complex of about 10 hours. Accordingly, we 
estimated that the total burden associated with the preparation and 
approval of swing pricing policies and procedures by those fund 
complexes that we believed would use swing pricing would be 4,843 
hours.\484\ We also estimated that it would cost a fund complex $21,710 
to document, review and initially approve these policies and 
procedures, for a total cost of $3,625,570.\485\
---------------------------------------------------------------------------

    \483\ See Proposing Release, supra footnote 6, at n. 766 and 
accompanying text.
    \484\ This estimate was based on the following calculation: (24 
+ 5) hours x 167 fund complexes = 4,843 hours.
    \485\ These estimates were based on the following calculations: 
12 hours x $198 (hourly rate for a senior accountant) = $2,376; 12 
hours x $455.5 (blended hourly rate for assistant general counsel 
($426) and chief compliance officer ($485)) = $5,466; 3 hours x 
$4,400 (hourly rate for a board of 8 directors) = $13,200; 2 hours 
(for a fund attorney's time to prepare materials for the board's 
determinations) x $334 (hourly rate for a compliance attorney) = 
$668; ($2,376 + $5,466 + $13,200 + $668) = $21,710; $21,710 x 167 
fund complexes = $3,625,570. The hourly wages used were from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013, 
modified to account for an 1800-hour work-year and multiplied by 
5.35 to account for bonuses, firm size, employee benefits, and 
overhead. See also infra footnote 492 (discussing basis for 
estimated hourly rate for a board of directors).
---------------------------------------------------------------------------

    As discussed above, many commenters expressed general concerns 
about the operational and technology costs associated with swing 
pricing and recommended that the Commission consider the substantial 
costs and technology challenges that need to be overcome to implement 
swing pricing.\486\ One commenter expressed the belief that the 
Commission significantly underestimated the costs associated with 
developing and implementing the systems and procedures necessary to 
comply with rule 22c-1 swing pricing requirements and stated that its 
implementation costs for swing pricing would likely be four or five 
times more costly than the Commission's estimates in the proposal.\487\ 
We appreciate the information provided by the commenter and, in 
consideration of their comment, have extrapolated from this commenter's 
estimate increased cost estimates for the amendments to rule 22c-1 
adopted today.\488\
---------------------------------------------------------------------------

    \486\ See supra section II.A.2. See also e.g., Dechert Comment 
Letter; Eaton Vance Comment Letter; ICI Comment Letter I; IDC 
Comment Letter; Invesco Comment Letter; J.P. Morgan Comment Letter; 
Charles Schwab Comment Letter; T. Rowe Comment Letter.
    \487\ See Charles Schwab Comment Letter (stating that the 
Commission based its estimated costs to establish and implement 
swing pricing policies and procedures in part on the costs 
associated with implementing the fees and gates provisions of the 
2014 money market fund reform rule and that, in the commenter's 
experience, the implementation costs for the money market fund 
reform rule were severely understated).
    \488\ See supra section III.C.1.b.

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

[[Page 82131]]

    The Commission has modified the estimated increase in burden hours 
associated with a fund documenting its swing pricing policies and 
procedures in consideration of commenters' concerns that such burdens 
were underestimated as well as modifications made to the proposal and 
updates to data figures that were utilized in the Proposing Release. We 
estimate that 84 fund complexes, rather than 167 fund complexes (half 
as many fund complexes as estimated in the proposal), include funds 
that will adopt swing pricing policies and procedures pursuant to the 
rule.\489\ While one commenter suggested that the burden to comply with 
the amendments to rule 22c-1 would be four or five times more costly 
than in the proposal, we believe that with respect to the PRA analysis, 
the estimated burdens for documenting swing pricing procedures will not 
be as high as the commenter's estimate of the costs associated with the 
entire implementation of swing pricing policies and procedures. Based 
on our review of the adopted requirements, we estimate that each fund 
complex will incur a one-time average burden of 48 hours, rather than 
24 hours, to document swing pricing policies and procedures. We further 
estimate that each fund complex will spend 2 hours, on average, 
preparing the required written report to the board. Since a fund board 
will approve the fund's swing pricing policies and procedures, swing 
threshold, and swing factor upper limit as well as review, no less 
frequently than annually, a written report that includes certain 
required information, we estimate a one-time burden of 7 hours, rather 
than 5 hours per fund complex associated with the fund board's review 
and approval of swing pricing policies and procedures.
---------------------------------------------------------------------------

    \489\ See supra section III.C.1.b. As we discussed in section 
III.C.1.b, commenters noted a variety of challenges associated with 
the immediate implementation of swing pricing. Accordingly, we have 
revised our estimated number of fund complexes that will implement 
swing pricing within the three-year period discussed below. 
Additionally, the two-year extended effective date means that no 
fund may implement swing pricing until the third year, which will 
likely further reduce the number of funds for purposes of this 
estimate.
---------------------------------------------------------------------------

    Amortized over a 3-year period, we estimate that this will be an 
annual burden per fund complex of about 19 hours, rather than 10 
hours.\490\ Accordingly, we estimate that the total burden associated 
with the preparation and approval of swing pricing policies and 
procedures by those fund complexes that we believe will use swing 
pricing will be 4,788 hours, rather than 4,843 hours.\491\ We also 
estimate that it will cost a fund complex $35,496, rather than $21,710, 
to document, review and initially approve these policies and 
procedures, for a total cost of $2,981,664, rather than 
$3,625,570.\492\
---------------------------------------------------------------------------

    \490\ This estimate is based on the following calculations: 48 
hours + 2 hours + 7 hours / 3 = 19 hours.
    \491\ This estimate is based on the following calculation: (48 + 
2 + 7) hours x 84 fund complexes = 4,788 hours.
    \492\ These estimates are based on the following calculations: 
24 hours x $201 (hourly rate for a senior accountant) = $4,824; 24 
hours x $463 (blended hourly rate for assistant general counsel 
($433) and chief compliance officer ($493)) = $11,112; 4 hours x 
$4,465 (hourly rate for a board of 8 directors) = $17,860; 5 hours 
(for a fund attorney's time to prepare materials for the board's 
determinations) x $340 (hourly rate for a compliance attorney) = 
$1,700; ($4,824 + $11,112 + $17,860 + $1,700) = $35,496; $35,496 x 
84 fund complexes = $2,981,664. The hourly wages used are from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013, modified by Commission staff to account for an 1800-
hour work-year and inflation, and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead. The staff 
previously estimated in 2009 that the average cost of board of 
director time was $4,000 per hour for the board as a whole, based on 
information received from funds and their counsel. Adjusting for 
inflation, the staff estimates that the current average cost of 
board of director time is approximately $4,465.
---------------------------------------------------------------------------

    We are adopting, as proposed, amendments to rule 22c-1 to require a 
fund that uses swing pricing to maintain the fund's swing policies and 
procedures that are in effect, or at any time within the past six years 
were in effect, in an easily accessible place.\493\ In a modification 
to the proposal, we also are requiring a fund to retain a written copy 
of the periodic report provided to the board prepared by the swing 
pricing administrator that describes, among other things, the swing 
pricing administrator's review of the adequacy of the fund's swing 
pricing policies and procedures and the effectiveness of their 
implementation, including the impact on mitigating dilution and any 
back-testing performed.\494\ The retention of these records is 
necessary to allow the staff during examinations of funds to determine 
whether a fund is in compliance with its swing pricing policies and 
procedures and with rule 22c-1, as amended.
---------------------------------------------------------------------------

    \493\ See rule 22c-1(a)(3)(iii).
    \494\ See id.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that the burden would be 
three hours per fund complex to retain the proposed swing pricing 
records, with 1.5 hours spent by a general clerk and 1.5 hours spent by 
a senior computer operator. We estimated a time cost per fund complex 
of $216.\495\ We estimated that the total for recordkeeping related to 
swing pricing would be 501 hours, at an aggregate cost of $36,072 for 
all fund complexes that we believe include funds that would adopt swing 
pricing policies and procedures.\496\ Amortized over a three-year 
period, we believed that the hour burdens and time costs associated 
with the proposed amendments to rule 22c-1, including the burden 
associated with the requirements that funds adopt policies and 
procedures, obtain board approval and retain certain records related to 
swing pricing, would result in an average aggregate annual burden of 
2,115 hours and average aggregate time costs of $1,244,595.\497\ We 
estimated that there were no external costs associated with this 
collection of information.
---------------------------------------------------------------------------

    \495\ This estimate was based on the following calculations: 1.5 
hours x $57 (hourly rate for a general clerk) = $85.5; 1.5 hours x 
$87 (hourly rate for a senior computer operator) = $130.5. $85.5 + 
$130.5 = $216.
    \496\ These estimates were based on the following calculations: 
3 hours x 167 fund complexes = 501 hours. 167 fund complexes x $216 
= $36,072.
    \497\ These estimates were based on the following calculations: 
4,843 hours (year 1) + (3 x 501 hours) (years 1, 2 and 3) / 3 = 
2,115 hours; $3,625,570 (year 1) + (3 x $36,072) (years 1, 2 and 3) 
/ 3 = $1,244,595.
---------------------------------------------------------------------------

    We did not receive any comments on the estimated hour and cost 
burdens for this record retention requirement. The Commission has 
modified the estimated increase in annual burden hours and total time 
costs that will result from the amendments based on the modification to 
the proposal to require funds to retain a written copy of the annual 
report provided to the board from the swing pricing administrator. We 
have also modified the estimated increase in annual burden hours and 
total time costs in light of updated data concerning funds and fund 
personnel salaries. We estimate that the burden will be four hours, 
rather than three hours, per fund complex to retain these records, with 
2 hours, rather than 1.5 hours, spent by a general clerk and 2 hours, 
rather than 1.5 hours, spent by a senior computer operator. Based on 
updates to the industry data figures that were utilized in the 
Proposing Release, we estimate a time cost per fund complex of $292, 
rather than $216.\498\ We estimate that the total for recordkeeping 
related to swing pricing will be 336 hours, rather than 501 hours, at 
an aggregate cost of $24,528, rather than $36,072, for all fund 
complexes that we believe include

[[Page 82132]]

funds that would adopt swing pricing policies and procedures.\499\
---------------------------------------------------------------------------

    \498\ This estimate is based on the following calculations: 2 
hours x $58 (hourly rate for a general clerk) = $116; 2 hours x $88 
(hourly rate for a senior computer operator) = $176. $116 + $176 = 
$292.
    \499\ These estimates are based on the following calculations: 4 
hours x 84 fund complexes = 336 hours. 84 fund complexes x $292 = 
$24,528.
---------------------------------------------------------------------------

    Amortized over a three-year period, we believe that the hour 
burdens and time costs associated with the amendments to rule 22c-1, 
including the burden associated with the requirements that funds adopt 
policies and procedures, obtain board approval, and periodic review of 
an annual written report from the swing pricing administrator, and 
retain certain records and written reports related to swing pricing, 
will result in an average aggregate annual burden of 1,932 hours, 
rather than 2,115 hours, and average aggregate time costs of 
$1,018,416, rather than $1,244,595.\500\ We continue to estimate that 
there are no external costs associated with this collection of 
information.
---------------------------------------------------------------------------

    \500\ These estimates are based on the following calculations: 
(4,788 hours (year 1) + (3 x 336 hours) (years 1, 2 and 3)) / 3 = 
1,932 hours; ($2,981,664 (year 1) + (3 x $24,528) (years 1, 2 and 
3)) / 3 = $1,018,416.
---------------------------------------------------------------------------

C. Rule 31a-2

    Section 31(a)(1) of the Investment Company Act requires registered 
investment companies and certain of their majority-owned subsidiaries 
to maintain and preserve records as prescribed by Commission rules. 
Rule 31a-1 under the Act specifies the books and records that must be 
maintained. Rule 31a-2 under the Act specifies the time periods that 
entities must retain certain books and records, including those 
required to be maintained under rule 31a-1. The retention of records, 
as required by rule 31a-2, is necessary to ensure access by Commission 
staff to material business and financial information about funds and 
certain related entities. This information is used by the staff to 
evaluate fund compliance with the Investment Company Act and 
regulations thereunder. The Commission currently estimates that the 
annual burden associated with rule 31a-2 is 220 hours per fund, with 
110 hours spent by a general clerk at a rate of $52 per hour and 110 
hours spent by a senior computer operator at a rate of $81 per 
hour.\501\ The current estimate of the total annual burden for all 
funds to comply with rule 31a-2 is approximately 766,480 hours at an 
estimated cost of $50,970,920.\502\
---------------------------------------------------------------------------

    \501\ The estimated salary rates were derived from SIFMA's 
Office Salaries in the Securities Industry 2011, modified to account 
for an 1800-hour work-year and multiplied by 2.93 to account for 
bonuses, firm size, employee benefits, and overhead.
    \502\ These estimates were based on the following calculations: 
220 hours x 3,484 funds (the estimated number of funds the last time 
the rule's information collections were submitted for PRA renewal in 
2012) = 766,480 total hours; 776,480 hours / 2 = 383,240 hours; 
383,240 x $52/hour for a clerk = $19,928,480; 383,240 x $81 rate per 
hour for a computer operator = $31,042,440; $19,928,480 + 
$31,042,440 = $50,970,920 total cost.
---------------------------------------------------------------------------

    We are adopting amendments to rule 31a-2 to require a fund that 
chooses to use swing pricing to create and maintain a record of support 
for each computation of an adjustment to the NAV of the fund's shares 
based on the fund's swing policies and procedures.\503\ This collection 
of information requirement is mandatory for any fund that chooses to 
use swing pricing to adjust its NAV in reliance on the adopted 
amendments to rule 22c-1. To the extent that the Commission receives 
confidential information in connection with staff examinations and 
investigations and oversight programs pursuant to this collection of 
information, such information will be kept confidential, subject to the 
provisions of applicable law.
---------------------------------------------------------------------------

    \503\ Proposed amendment to rule 31a-2(a)(2).
---------------------------------------------------------------------------

    In the proposal, we estimated that approximately 947 funds would 
use swing pricing and that each fund that uses swing pricing generally 
would incur an additional burden of 1 hour per year in order to comply 
with the proposed amendments to rule 31a-2.\504\ Accordingly, we 
estimated that the total average annual hour burden associated with the 
proposed amendments to rule 31a-2 would have been an additional 947 
hours at a cost of $68,169.\505\
---------------------------------------------------------------------------

    \504\ See Proposing Release, supra footnote 6, at section V.D.
    \505\ These estimates were based on the following calculations: 
1 hour x 947 funds = 947 total hours; 474 hours x $57 rate per hour 
for a general clerk = $27,018; 473 hours x $87 rate per hour for a 
senior computer operator = $41,151; $27,018 + $41,151 = $68,169 
total cost.
---------------------------------------------------------------------------

    Based on updates to industry data figures that were utilized in the 
Proposing Release and the reduction in our estimate of the number of 
funds in fund complexes that will choose to use swing pricing, for 
purposes of the PRA analysis, we estimate that approximately 474 funds 
(half as many funds as proposed) will use swing pricing.\506\ In light 
of the concerns expressed by commenters that the Commission 
underestimated the operational costs associated with swing pricing 
discussed above,\507\ we estimate that each fund that uses swing 
pricing generally will incur an additional burden of 3 hours, rather 
than 1 hour per year in order to comply with the amendments to rule 
31a-2. Accordingly, we estimate that the total average annual hour 
burden associated with the amendments to rule 31a-2 will be an 
additional 1,422 hours, rather than 947 hours, at a cost of $103,806, 
rather than $68,169.\508\
---------------------------------------------------------------------------

    \506\ See also, supra footnote 489 and accompanying text.
    \507\ See, e.g., Dechert Comment Letter; Eaton Vance Comment 
Letter; J.P. Morgan Comment Letter; T. Rowe Comment Letter.
    \508\ These estimates are based on the following calculations: 3 
hour x 474 funds = 1,422 total hours; 711 hours x $58 rate per hour 
for a general clerk = $41,238; 711 hours x $88 rate per hour for a 
senior computer operator = $62,568; $41,238 + $62,568 = $103,806 
total cost.
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    The Commission currently estimates that the average external cost 
of preserving books and records required by rule 31a-2 is approximately 
$70,000 per fund at a total cost of approximately $243,880,000 per 
year,\509\ but that funds would already spend approximately half this 
amount to preserve these same books and records, as they are also 
necessary to prepare financial statements, meet various state reporting 
requirements, and prepare their annual federal and state income tax 
returns. Therefore, the Commission estimated that the total annual cost 
burden for all funds as a result of compliance with rule 31a-2 is 
approximately $121,940,000.\510\ In the proposal, we estimated that the 
annual external cost burden of compliance with the information 
collection requirements of rule 31a-2 would increase by $300 per fund 
that engages in swing pricing, for an increase in the total annual cost 
burden of $284,100.\511\ We are modifying this figure in response to 
commenters' general concerns that the Commission as underestimated the 
operational costs associated with swing pricing and the reduction in 
the number of funds we estimate will use swing pricing, as discussed 
above. We estimate that the annual external cost burden of compliance 
with the information collection requirements of rule 31a-2 would 
increase by $600 per fund, rather than $300 per fund that engages in 
swing pricing, for an increase in the total annual cost burden of 
$284,400, rather than $284,100.\512\
---------------------------------------------------------------------------

    \509\ This estimate is based on the following calculation: 3,484 
funds (the estimated number of funds the last time the rule's 
information collections were submitted for PRA renewal in 2012) x 
$70,000 = $243,880,000.
    \510\ See Submission of OMB Review; and Comment Request, 
Extension: Rule 31a-2, OMB Control No. 3235-0179, Securities and 
Exchange Commission, 77 FR 66885 (Nov. 7, 2012).
    \511\ This estimate was based on the following calculation: 947 
funds x $300 = $284,100.
    \512\ This estimate is based on the following calculation: 474 
funds x $600 = $284,400.
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D. Form N-CEN

    On May 20, 2015, we proposed to amend rule 30a-1 to require all 
funds to file reports with certain census-type

[[Page 82133]]

information on proposed Form N-CEN with the Commission on an annual 
basis. Proposed Form N-CEN would have been a collection of information 
under the PRA, and was designed to facilitate the Commission's 
oversight of funds and its ability to monitor trends and risks. The 
collection of information under Form N-CEN would be mandatory for all 
funds, and responses would not be kept confidential.
    In the Investment Company Reporting Modernization Proposing 
Release, we estimated that the average annual hour burden per response 
for proposed Form N-CEN for the first year would be 32.37 hours and 
12.37 hours in subsequent years.\513\ Amortizing the burden over three 
years, we estimated that the average annual hour burden per fund per 
year would be 19.04 and the total average annual hour burden would be 
59,900 hours.\514\ We also estimated that all applicable funds would 
incur, in the aggregate, external annual costs of $1,748,637, which 
would include the costs of registering and maintaining LEIs for 
funds.\515\
---------------------------------------------------------------------------

    \513\ Investment Company Reporting Modernization Proposing 
Release, supra footnote 11, at n.762 and accompanying text.
    \514\ Id. at n.765 and accompanying text.
    \515\ In the Investment Company Reporting Modernization Adopting 
Release, we continue to estimate that the average annual hour burden 
per response for Form N-CEN for the first year will be 32.37 hours 
and 12.37 hours in subsequent years. Amortizing the burden over 
three years, we continue to estimate that the average annual burden 
per fund year will be 19.04 hours but that the total aggregate 
annual hour burden will be 59,272 hours, rather than 59,900 in light 
of updates to the industry data figures that were utilized in the 
Investment Company Reporting Modernization Proposing Release. See 
Investment Company Reporting Modernization Adopting Release, supra 
footnote 11, at section IV.B.1.
---------------------------------------------------------------------------

    We are adopting, substantially as proposed, a new reporting item on 
Form N-CEN to require funds to report information regarding swing 
pricing.\516\ Specifically, the new item on Form N-CEN will require 
funds (other than money market funds and ETFs) to report whether they 
used swing pricing during the reporting period and, if so, the fund's 
swing factor upper limit.\517\
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    \516\ In the Proposing Release, we also proposed to add to Form 
N-CEN a requirement for funds to report information concerning lines 
of credit, interfund lending, and interfund borrowing. We are 
adopting those reporting requirements and discuss related PRA 
burdens and costs in the Liquidity Risk Management Programs Adopting 
Release. See supra footnote 8, at section V.G.
    \517\ See Item C.21 of Form N-CEN.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that 8,734 funds would be 
required to file responses on Form N-CEN. We estimated that the average 
annual hour burden per additional response to Form N-CEN as a result of 
the proposed new reporting requirements would be 0.5 hour per fund per 
year for a total average annual hour burden of 4,367 hours.\518\ We did 
not estimate any change to the external costs associated with proposed 
Form N-CEN.
---------------------------------------------------------------------------

    \518\ This estimate was based on the following calculation: 
8,734 funds x 0.5 hours = 4,367 hours.
---------------------------------------------------------------------------

    We did not receive any comments on these estimated hour and cost 
burdens. The Commission has modified the estimated increase in annual 
burden hours and total time costs based on the modification to the 
proposal to address separately in this Release the requirement to 
report whether a fund used swing pricing during the reporting period 
and require funds report the swing factor upper limit if swing pricing 
was used during the reporting period. The estimated increase in annual 
burden hours and total time costs also has been modified in light of 
updated data concerning funds and fund personnel salaries. We estimate 
that 9,039 funds will be required to file responses to Item C.21 of 
Form N-CEN regarding swing pricing.\519\ For these funds, we estimate 
that the average annual hour burden per additional response to Form N-
CEN as a result of the adopted swing pricing-related additions to Form 
N-CEN will be 0.5 hour per fund per year for a total average annual 
hour burden of 4,519.5 hours.\520\ We do not estimate any change to the 
external costs associated with proposed Form N-CEN.
---------------------------------------------------------------------------

    \519\ See supra footnote 388.
    \520\ This estimate is based on the following calculation: 9,039 
funds x .5 hour = 4,519.5 hours.
---------------------------------------------------------------------------

E. Form N-1A

    Form N-1A is the registration form used by open-end investment 
companies. The respondents to the amendments to Form N-1A adopted today 
are open-end management investment companies registered or registering 
with the Commission. Compliance with the disclosure requirements of 
Form N-1A is mandatory, and the responses to the disclosure 
requirements are not confidential. We currently estimate for Form N-1A 
a total hour burden of 1,579,974 hours, and the total annual external 
cost burden is $124,820,197.\521\
---------------------------------------------------------------------------

    \521\ These estimates are based on the last time the rule's 
information collections were submitted for PRA renewal in 2014.
---------------------------------------------------------------------------

    We are adopting amendments to Form N-1A that require funds that use 
swing pricing to disclose that they use swing pricing, and, if 
applicable, an explanation of what swing pricing is, the circumstances 
under which swing pricing is used, and the effects of using swing 
pricing.\522\ Funds that use swing pricing will also be required to 
disclose the swing factor upper limit.\523\ We also are adopting 
amendments to Form N-1A that require funds to include, if applicable, a 
footnote that describes the effects of swing pricing on the fund's 
annual total return bar chart and average annual total returns table, 
and additional disclosures in the prospectus financial highlights with 
respect to the per share impact of amounts related to swing pricing in 
the NAV per-share roll-forward, as well as the Swung NAV per 
share.524 525
---------------------------------------------------------------------------

    \522\ See Item 6(d) of Form N-1A.
    \523\ See id.
    \524\ See supra section II.B. See also Item 4(b)(2)(ii); Item 
4(b)(2)(iv)(E); Item 13(a); and Instructions 2(d) and (e) of Item 
13(a).
    \525\ See supra section II.B. In the Proposing Release, we also 
proposed to amend Form N-1A to require funds to disclose additional 
information concerning the procedures for redeeming a fund's shares. 
We are adopting those disclosure requirements and discuss related 
PRA burdens and costs in the Liquidity Risk Management Programs 
Adopting Release. See supra footnote 8, at section V.H.
---------------------------------------------------------------------------

    We believe that requiring funds to provide this additional 
disclosure regarding swing pricing will provide Commission staff, 
investors, and market participants with improved information about the 
conditions under which swing pricing procedures will be used to 
mitigate the effects of dilution as a result of shareholder purchase or 
redemption activity.
    Form N-1A generally imposes two types of reporting burdens on 
investment companies: (i) The burden of preparing and filing the 
initial registration statement; and (ii) the burden of preparing and 
filing post-effective amendments to a previously effective registration 
statement (including post-effective amendments filed pursuant to rule 
485(a) or 485(b) under the Securities Act, as applicable). In the 
Proposing Release, we estimated that each fund would incur a one-time 
burden of an additional 2 hours,\526\ at a time cost of an additional 
$637,\527\ to draft and finalize the required disclosure and amend its 
registration statement in response to the proposed Form N-1A disclosure 
requirements. In aggregate, we estimated that funds would incur a one-
time burden of an

[[Page 82134]]

additional 17,468 hours,\528\ at a time cost of an additional 
$5,563,558,\529\ to comply with the Form N-1A disclosure requirements 
originally proposed. We estimated that amortizing the one-time burden 
over a three-year period would result in an average annual burden of an 
additional 5,823 hours at a time cost of an additional $1,854,519.\530\
---------------------------------------------------------------------------

    \526\ This estimate was based on the following calculation: 1 
hour to update registration statement to include swing pricing-
related disclosure statements + 1 hour to update registration 
statement disclosure about redemption procedures = 2 hours.
    \527\ This estimate was based on the following calculation: 2 
hours x $318.5 (blended rate for a compliance attorney ($334) and a 
senior programmer ($303)) = $637.
    \528\ This estimate was based on the following calculations: 2 
hours x 8,734 funds = 17,468 hours.
    \529\ This estimate was based on the following calculation: 
17,468 hours x $318.50 (blended rate for a compliance attorney 
($334) and a senior programmer ($303)) = $5,563,558.
    \530\ This estimate was based on the following calculation: 
17,468 hours / 3 = 5,823 average annual burden hours; $5,563,558 
burden costs / 3 = $1,854,519 average annual burden cost.
---------------------------------------------------------------------------

    In the Proposing Release, we also estimated that each fund would 
incur an ongoing burden of an additional 0.25 hours, at a time cost of 
an additional $80,\531\ each year to review and update the proposed 
disclosure in response to Item 11 and Item 28 of Form N-1A regarding 
the pricing and redemption of fund shares and the inclusion of credit 
agreements as exhibits, respectively. In aggregate, we estimated that 
funds would incur an annual burden of an additional 2,184 hours,\532\ 
at a time cost of an additional $695,604,\533\ to comply with the 
proposed Form N-1A disclosure requirements.
---------------------------------------------------------------------------

    \531\ This estimate was based on the following calculations: 
0.25 hours x $318.50 (blended hourly rate for a compliance attorney 
($334) and a senior programmer ($303)) = $79.63.
    \532\ This estimate was based on the following calculation: 0.25 
hours x 8,734 funds = 2,183.5 hours.
    \533\ This estimate was based on the following calculation: 
2,184 hours x $318.50 (blended hourly rate for a compliance attorney 
($334) and a senior programmer ($303)) = $695,604.
---------------------------------------------------------------------------

    In the Proposing Release, we further estimated that amortizing 
these one-time and ongoing hour and cost burdens over three years would 
result in an average annual increased burden of approximately 0.50 
hours per fund,\534\ at a time cost of $265.42 per fund.\535\
---------------------------------------------------------------------------

    \534\ This estimate was based on the following calculation: 1 
burden hour (year 1) + 0.25 burden hour (year 2) + 0.25 burden hour 
(year 3) / 3 = 0.50 hours.
    \535\ This estimate was based on the following calculation: $637 
(year 1 monetized burden hours) + $79.63 (year 2 monetized burden 
hours) + $79.63 (year 3 monetized burden hours) / 3 = $265.42.
---------------------------------------------------------------------------

    In total, we estimated in the Proposing Release that funds would 
incur an average annual increased burden of approximately 8,007 
hours,\536\ at a time cost of approximately $2,550,123,\537\ to comply 
with the proposed Form N-1A disclosure requirements. We did not 
estimate any change to the external costs associated with the proposed 
amendments to Form N-1A.
---------------------------------------------------------------------------

    \536\ This estimate was based on the following calculation: 
5,823 hours + 2,184 hours = 8,007 hours.
    \537\ This estimate was based on the following calculation: 
$1,854,519 + $695,604 = $2,550,123.
---------------------------------------------------------------------------

    One commenter stated that the cost estimates under the proposal 
were overly optimistic, including as an example our estimated $637 cost 
per fund to implement the proposed Form N-1A disclosure 
requirements.\538\ As discussed above, the amendments to Form N-1A, 
discussed in this Release, concern disclosure requirements related to 
swing pricing only. We recognize that certain disclosure requirements 
related to swing pricing have been modified from the proposal and that 
these disclosure requirements were not contemplated in the burden hours 
and costs we estimated in the Proposing Release. For example, we are 
adopting a requirement that a fund include in its financial highlights 
presentation in Form N-1A two NAV calculations (i.e., the Net Asset 
Value adjusted for GAAP and the Net Asset Value adjusted pursuant to 
Swing Pricing, End of Period) rather than a single Swung NAV as 
proposed.\539\ We are also adopting a requirement that funds include a 
general description of the effects of swing pricing on the fund's 
annual total returns bar chart and average annual total returns table 
if swing pricing policies and procedures were applied during any of the 
periods represented.\540\ We are also requiring funds that use swing 
pricing to disclose the swing factor upper limit.\541\ In addition, we 
recognize that one commenter suggested that we had understated the cost 
estimates associated with amendments to Form N-1A although they did not 
provide alternative quantitative estimates.\542\
---------------------------------------------------------------------------

    \538\ See FSR Comment Letter (noting that changes to a fund's 
disclosure typically involve a number of stakeholders and several 
rounds of drafting and review, such that costs associated with even 
modest changes to fund disclosure can have a serious cost 
component). With the exception of this comment, we did not receive 
comments on the estimated hour and costs burdens associated with the 
disclosure amendments to Form N-1A under the proposal.
    \539\ See Item 13 of Form N-1A. See also supra section II.B.
    \540\ See Item 4(b)(2)(ii) and Item 4(b)(2)(iv)(E) of Form N-1A.
    \541\ See Item 6(d) of Form N-1A.
    \542\ See FSR Comment Letter.
---------------------------------------------------------------------------

    The Commission has modified the estimated increase in annual burden 
hours and total time costs that will result from the amendments to Form 
N-1A based on the modifications to the proposal discussed in this 
Release. Furthermore, we have considered the concern expressed by one 
commenter that the burdens and costs estimated in the proposal were 
overly optimistic. We also have estimated an increase in the aggregate 
annual burden hours that will result from the amendments to Form N-1A 
in light of updated data regarding the number of funds subject to the 
disclosure requirements.
    In the Proposing Release, we estimated that approximately 947 funds 
would use swing pricing.\543\ Based on updates to industry data figures 
that were utilized in the Proposing Release and the reduction in our 
estimate of the number of funds in fund complexes that will choose to 
use swing pricing, for purposes of the PRA analysis, we estimate that 
approximately 474 funds (half as many funds as proposed) will use swing 
pricing.\544\ We estimate that each fund will incur a one-time burden 
of an additional 2 hours, rather than 1 hour, to draft and finalize the 
required swing pricing-related disclosures and amend its registration 
statement accordingly,\545\ but at a time cost of an additional $648, 
rather than $637,\546\ based on updated data concerning funds and fund 
personnel salaries. In aggregate, we estimate that funds will incur a 
one-time burden of an additional 948 hours,\547\ rather than 17,468 
hours, at a time cost of an additional $307,152,\548\ rather than 
$5,563,558, to comply with the Form N-1A disclosure requirements as 
adopted. We estimate that amortizing the one-time burden over a three-
year period will result in an average annual burden of an additional 
316 hours, rather than 5,823 hours at a time cost of an additional 
$102,384, rather than $1,854,519.\549\
---------------------------------------------------------------------------

    \543\ See Proposing Release, supra footnote 6, at section V.D.
    \544\ See supra footnote 489.
    \545\ This estimate is based on the following calculation: 2 
hours to update registration statement to include swing pricing-
related disclosure statements.
    \546\ This estimate is based on the following calculation: 2 
hours x $324 (blended rate for a compliance attorney ($340) and a 
senior programmer ($308)) = $648.
    \547\ This estimate was based on the following calculations: 2 
hours x 474 funds) = 948 hours.
    \548\ This estimate is based on the following calculation: 948 
hours x $324 (blended rate for a compliance attorney ($340) and a 
senior programmer ($308)) = $307,152.
    \549\ This estimate is based on the following calculation: 948 
hours / 3 = 316 average annual burden hours; $307,152 burden costs / 
3 = $102,384 average annual burden cost.
---------------------------------------------------------------------------

    In addition, we estimate that each fund will incur an ongoing 
burden of an additional one hour, but at a time cost of an additional 
$324,\550\ each year to review and update disclosures required in 
response to the amendments to Form N-1A related to swing pricing. In

[[Page 82135]]

aggregate, we estimate that funds will incur an annual burden of an 
additional 474 hours,\551\ at a time cost of an additional 
$153,576,\552\ to comply with the Form N-1A disclosure requirements 
related to swing pricing adopted today.
---------------------------------------------------------------------------

    \550\ This estimate is based on the following calculations: 1 
hour x $324 (blended hourly rate for a compliance attorney ($340) 
and a senior programmer ($308)) = $324.
    \551\ This estimate is based on the following calculation: 1 
hour x 474 funds = 474 hours.
    \552\ This estimate is based on the following calculation: 474 
hours x $324 (blended hourly rate for a compliance attorney ($340) 
and a senior programmer ($308)) = $153,576.
---------------------------------------------------------------------------

    Furthermore, we estimate that amortizing these one-time and ongoing 
hour and cost burdens over three years will result in an average annual 
increased burden of approximately 1.33 hours per fund,\553\ but at a 
time cost of $432 per fund.\554\
---------------------------------------------------------------------------

    \553\ This estimate is based on the following calculation: 2 
burden hours (year 1) + 1 burden hour (year 2) + 1 burden hour (year 
3) / 3 = 1.33 hours.
    \554\ This estimate is based on the following calculation: $648 
(year 1 monetized burden hours) + $324 (year 2 monetized burden 
hours) + $324 (year 3 monetized burden hours) / 3 = $432.
---------------------------------------------------------------------------

    In total, we estimate that funds will incur an average annual 
increased burden of approximately 790 hours,\555\ at a time cost of 
approximately $255,960,\556\ to comply with the Form N-1A disclosure 
requirements related to swing pricing adopted today. We do not estimate 
any change to the external costs associated with these amendments to 
Form N-1A.
---------------------------------------------------------------------------

    \555\ This estimate is based on the following calculation: 316 
hours + 474 hours = 790 hours.
    \556\ This estimate is based on the following calculation: 
$102,384 + $153,576= $255,960.
---------------------------------------------------------------------------

V. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Analysis has been prepared in 
accordance with section 3 of the Regulatory Flexibility Act 
(``RFA'').\557\ It relates to amendments to rule 22c-1, rule 31a-2, 
Form N-1A, and Form N-CEN. We prepared an Initial Regulatory 
Flexibility Analysis (``IRFA'') in conjunction with the Proposing 
Release in September 2015.\558\ The Proposing Release included, and 
solicited comment, on the IRFA.
---------------------------------------------------------------------------

    \557\ 5 U.S.C. 604.
    \558\ See Proposing Release, supra footnote 6, at section VI.
---------------------------------------------------------------------------

A. Need for the Rule

    Under current pricing methods, shareholder purchase and redemption 
activity could dilute the value of non-transacting shareholders' 
interests in some funds. The Commission is adopting amendments to rule 
22c-1 to permit a fund to use ``swing pricing,'' the process of 
adjusting a fund's NAV to effectively pass on to purchasing and 
redeeming shareholders more of the costs stemming from their trading 
activity. We believe that rule 22c-1 will promote investor protection 
by providing funds with an additional tool to mitigate the potentially 
dilutive effects of shareholder purchase or redemption activity and 
provide a set of operational standards that will allow funds to gain 
comfort using swing pricing as a new means of mitigating potential 
dilution. Swing pricing may also provide funds with an additional tool 
to manage liquidity risks. In addition, the Commission is adopting 
related recordkeeping and disclosure requirements to enhance disclosure 
and Commission oversight of funds' use of swing pricing. Each of these 
objectives is discussed in detail in section III above.

B. Significant Issues Raised by Public Comment

    In the Proposing Release, we requested comment on the IRFA, 
requesting in particular comment on the number of small entities that 
would be subject to the proposed swing pricing rules and whether the 
proposed swing pricing rules would have any effects that have not been 
discussed. We requested that commenters describe the nature of any 
effects on small entities subject to the proposed swing pricing rules 
and provide empirical data to support the nature and extent of such 
effects. We also requested comment on the estimated compliance burdens 
of the proposed swing pricing rules and how they would affect small 
entities. We received a number of comments related to the impact of our 
proposal on small entities, with some commenters expressing concern 
that certain large fund complexes with more influence over their 
distribution partners (or with more resources/internal processes in 
place to support swing pricing) would be more successful than small 
fund complexes in obtaining intraday flow information and implementing 
swing pricing.\559\ We believe this effect on small fund complexes may 
be mitigated if fund service providers implement the operational 
changes necessary to support swing pricing for all funds that they 
service. Based on staff outreach, we understand that fund service 
providers are more likely to implement operational changes in this 
manner than they are to implement operational changes selectively for 
certain funds. We also note that funds will be permitted, but will not 
be required, to implement swing pricing.
---------------------------------------------------------------------------

    \559\ See CRMC Comment Letter; Dechert Comment Letter; ICI 
Comment Letter I; IDC Comment Letter.
---------------------------------------------------------------------------

C. Small Entities Subject to the Rule

    An investment company is a small entity if, together with other 
investment companies in the same group of related investment companies, 
it has net assets of $50 million or less as of the end of its most 
recent fiscal year.\560\ Commission staff estimates that, as of 
December 31, 2015, there were 78 small open-end investment companies 
(within 76 fund complexes) that would be considered small entities; 
this number includes open-end ETFs.
---------------------------------------------------------------------------

    \560\ See rule 0-10(a) under the Act.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

1. Swing Pricing
    Amendments to rule 22c-1 permit, but do not require, all registered 
open-end funds (except money market funds and ETFs), including small 
entities, to use swing pricing, provided that it adopts policies and 
procedures that include certain elements and are approved by the fund's 
board.\561\ A fund's swing pricing policies and procedures must provide 
that the fund is required to adjust its NAV per share by an amount 
known as the ``swing factor'' once the level of net purchases or net 
redemptions has exceeded a set, specified percentage of the fund's NAV 
known as the ``swing threshold.'' \562\ A fund is required to consider 
certain factors in determining its swing threshold,\563\ and to take 
into account certain considerations in determining the swing 
factor.\564\ In addition, a fund is required to establish an upper 
limit on the swing factor(s) used, which may not exceed two percent of 
NAV per share. The fund's board is required to approve the fund's swing 
pricing policies and procedures, as well as the fund's swing factor 
upper limit and swing threshold(s) and any changes to the upper limit 
or threshold(s). The fund's board is also required to periodically 
review a written report prepared by the persons responsible for 
administering swing pricing that includes certain required 
information.\565\ A fund that adopts swing pricing policies and 
procedures also would be subject to certain recordkeeping requirements 
under proposed amendments to each of rule 22c-1 and rule 31a-2. We 
estimate that the annual external cost burden of

[[Page 82136]]

compliance with these recordkeeping requirements would increase by $600 
per fund that engages in swing pricing.\566\ Because the amendments 
permit, but do not require a fund to adopt swing pricing policies and 
procedures, there is no compliance date associated with this rule. We 
are providing a two-year effective date for the new swing pricing 
amendments, however, to provide time for funds, their intermediaries 
and service providers to make any operational changes necessary to 
implement swing pricing.\567\ By providing a uniform extended effective 
date, all eligible funds will have time to develop swing pricing 
capabilities (should they choose to do so) and competitive advantages 
among funds may be mitigated.
---------------------------------------------------------------------------

    \561\ See supra section II.A.
    \562\ A fund may have multiple, escalating swing factors, with 
each factor associated with a different swing threshold, subject to 
the two percent upper limit. See supra section II.A.3.c.
    \563\ Id.
    \564\ See supra section II.A.3.e.
    \565\ See supra section II.A.3.f.
    \566\ See supra footnote 512 and accompanying text.
    \567\ See supra section II.A.1.
---------------------------------------------------------------------------

    As discussed above, we estimate that, on average, a fund complex 
would incur one-time costs ranging from $2.4 million to $48.5 million, 
depending on the fund complex's particular circumstances, to adopt 
swing pricing policies and procedures and comply with related record 
retention requirements, as well as ongoing annual costs ranging from 
$120,000 to $15.8 million per year associated with the new swing 
pricing (and related recordkeeping) regulations.\568\ We estimate that 
12 small fund complexes, rather than 24 small fund complexes (half as 
many small fund complexes as estimated in the proposal), include funds 
that will adopt swing pricing policies and procedures pursuant to the 
rule.\569\ We further estimate that these small fund complexes would 
incur one-time and ongoing costs on the low end of the estimated range 
as compared to the high end of the estimated range (one-time costs of 
approximately $2.4 million and ongoing costs of approximately $120,000 
per year for each small fund complex).
---------------------------------------------------------------------------

    \568\ See supra footnote 439 and accompanying paragraph.
    \569\ See supra footnote 489 and accompanying text.
---------------------------------------------------------------------------

2. Disclosure and Reporting Requirements Regarding Swing Pricing
    The swing pricing rules include amendments to Form N-1A and 
additions to Form N-CEN that are intended to enhance fund disclosure 
and reporting regarding a fund's use of swing pricing. In particular, 
the amendments to Form N-1A require funds that use swing pricing to 
disclose that they use swing pricing, and, if applicable, an 
explanation of what swing pricing is, the circumstances under which 
swing pricing is used, the effects of using swing pricing, and the 
upper limit the fund has set on the swing factor.\570\ The amendments 
to Form N-1A also require funds to disclose on their balance sheet the 
NAV as adjusted pursuant to swing pricing policies and procedures.\571\ 
The amendments to Regulation S-X requires a fund to disclose both its 
GAAP NAV per share and the Swung NAV per share as adjusted pursuant to 
the fund's swing pricing policies and procedures (if applicable). The 
new item in Form N-CEN requires disclosure regarding whether a fund 
engaged in swing pricing during the reporting period and, if so, the 
fund's swing factor upper limit. We estimate that 78 funds are small 
entities that would be required to comply with the proposed disclosure 
and reporting requirements.\572\
---------------------------------------------------------------------------

    \570\ See supra section II.B.
    \571\ Id.
    \572\ Commission staff estimate as of December 31, 2015.
---------------------------------------------------------------------------

    As discussed above, we estimate that each fund, including funds 
that are small entities, will incur a one-time burden of an additional 
2 hours,\573\ at a time cost of an additional $648 (plus printing 
costs), to comply with the amendments to Form N-1A.\574\ We also 
estimate that each fund, including small entities, will incur an 
ongoing burden of an additional 1 hour, at a time cost of approximately 
an additional $324 each year associated with compliance with the 
amendments to Form N-1A.\575\ We do not estimate any change to the 
external costs associated with the amendments to Form N-1A.
---------------------------------------------------------------------------

    \573\ See supra footnote 526 and accompanying text.
    \574\ See supra footnote 527 and accompanying text.
    \575\ See supra footnote 531 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, we also estimate that the average annual hour 
burden per additional response to Form N-CEN as a result of the adopted 
swing pricing additions to Form N-CEN will be 0.5 hour per fund per 
year.\576\ We do not estimate any change to the external costs 
associated with Form N-CEN.\577\
---------------------------------------------------------------------------

    \576\ See supra footnote 520 and accompanying paragraph.
    \577\ Id.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant impact on small entities. Alternatives 
in this category would include: (i) Establishing different compliance 
or reporting standards that take into account the resources available 
to small entities; (ii) clarifying, consolidating, or simplifying the 
compliance requirements under the rules and amendments for small 
entities; (iii) using performance rather than design standards; and 
(iv) exempting small entities from coverage of the rules and 
amendments, or any part of the rules and amendments.
    The Commission does not presently believe that the swing pricing 
rules would require the establishment of special compliance 
requirements or timetables for small entities. The swing pricing rules 
are specifically designed to reduce any unnecessary burdens on all 
funds (including small funds). To establish special compliance 
requirements or timetables for small entities may in fact disadvantage 
small entities by encouraging larger market participants to focus 
primarily on the needs of larger entities when making the operational 
changes envisioned by the swing pricing rules, and possibly ignoring 
the needs of smaller funds.
    With respect to further clarifying, consolidating, or simplifying 
the compliance requirements of the swing pricing rules, using 
performance rather than design standards, and exempting small entities 
from coverage of the swing pricing rules or any part of the swing 
pricing rules, we believe additional such changes would be 
impracticable. Small entities are as vulnerable to the risk of dilution 
of the interests of fund shareholders as larger funds. We believe that 
the swing pricing rules are necessary to help mitigate these risks. 
Exempting small funds from coverage under the swing pricing rules or 
any part of the swing pricing rules could compromise the effectiveness 
of the swing pricing rules or any part of the swing pricing rules.

VI. Statutory Authority and Text of Amendments

    The Commission is adopting amendments to rule 22c-1 under the 
authority set forth in sections 22(c) and 38(a) of the Investment 
Company Act [15 U.S.C. 80a-22(c) and 80a-37(a)]. The Commission is 
adopting amendments to rule 31a-2 under the authority set forth in 
section 31(a) of the Investment Company Act [15 U.S.C. 80a-31(a)]. The 
Commission is adopting amendments to Form N-1A, Regulation S-X, and 
proposed Form N-CEN under the authority set forth in the Securities 
Act, particularly section 19 thereof [15 U.S.C. 77a et seq.], the Trust 
Indenture Act, particularly, section 19 thereof [15 U.S.C. 77aaa et 
seq.], the Exchange Act, particularly sections 10, 13, 15, and 23, and 
35A thereof [15 U.S.C. 78a et seq.],

[[Page 82137]]

and the Investment Company Act, particularly, sections 8, 30, and 38 
thereof [15 U.S.C. 80a et seq.].

Text of Rules and Forms

List of Subjects

17 CFR Part 210

    Accounting, Investment companies, Reporting and recordkeeping 
requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is amended as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

0
1. The authority citation for part 210 continues to read as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n, 
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, unless otherwise 
noted.


0
2. Amend Sec.  210.6-02 by adding paragraph (e) to read as follows:


Sec.  210.6-02  Definition of certain terms.

* * * * *
    (e) Swing pricing. The term swing pricing shall have the meaning 
given in Sec.  270.22c-1(a)(3)(v)(C) of this chapter.

0
3. Section 210.6-03, as revised elsewhere in this issue of the Federal 
Register, is further amended by adding paragraph (m) to read as 
follows:


Sec.  210.6-03  Special rules of general application to registered 
investment companies and business development companies.

* * * * *
    (m) Swing pricing. For a registered investment company that has 
adopted swing pricing policies and procedures, state in a note to the 
company's financial statements:
    (1) The general methods used in determining whether the company's 
net asset value per share will swing;
    (2) Whether the company's net asset value per share has swung 
during the year; and
    (3) A general description of the effects of swing pricing.

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
4. The authority citation for part 270 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *

0
5. Amend Sec.  270.22c-1 by adding paragraph (a)(3) to read as follows:


Sec.  270.22c-1  Pricing of redeemable securities for distribution, 
redemption and repurchase.

    (a) * * *
    (3) Notwithstanding this paragraph (a), a registered open-end 
management investment company (but not a registered open-end management 
investment company that is regulated as a money market fund under Sec.  
270.2a-7 or an exchange-traded fund as defined in paragraph 
(a)(3)(v)(A) of this section) (a ``fund'') may use swing pricing to 
adjust its current net asset value per share to mitigate dilution of 
the value of its outstanding redeemable securities as a result of 
shareholder purchase or redemption activity, provided that it has 
established and implemented swing pricing policies and procedures in 
compliance with the paragraphs (a)(3)(i) through (v) of this section.
    (i) The fund's swing pricing policies and procedures must:
    (A) Provide that the fund must adjust its net asset value per share 
by a single swing factor or multiple factors that may vary based on the 
swing threshold(s) crossed once the level of net purchases into or net 
redemptions from such fund has exceeded the applicable swing threshold 
for the fund. In determining whether the fund's level of net purchases 
or net redemptions has exceeded the applicable swing threshold(s), the 
person(s) responsible for administering swing pricing shall be 
permitted to make such determination based on receipt of sufficient 
information about the fund investors' daily purchase and redemption 
activity (``investor flow'') to allow the fund to reasonably estimate 
whether it has crossed the swing threshold(s) with high confidence, and 
shall exclude any purchases or redemptions that are made in kind and 
not in cash. This investor flow information may consist of individual, 
aggregated, or netted orders, and may include reasonable estimates 
where necessary.
    (B) Specify the process for how the fund's swing threshold(s) shall 
be determined, considering:
    (1) The size, frequency, and volatility of historical net purchases 
or net redemptions of fund shares during normal and stressed periods;
    (2) The fund's investment strategy and the liquidity of the fund's 
portfolio investments;
    (3) The fund's holdings of cash and cash equivalents, and borrowing 
arrangements and other funding sources; and
    (4) The costs associated with transactions in the markets in which 
the fund invests.
    (C) Specify the process for how the swing factor(s) shall be 
determined, which must include: The establishment of an upper limit on 
the swing factor(s) used, which may not exceed two percent of net asset 
value per share; and the determination that the factor(s) used are 
reasonable in relationship to the costs discussed in this paragraph. In 
determining the swing factor(s) and the upper limit, the person(s) 
responsible for administering swing pricing may take into account only 
the near-term costs expected to be incurred by the fund as a result of 
net purchases or net redemptions that occur on the day the swing 
factor(s) is used, including spread costs, transaction fees and charges 
arising from asset purchases or asset sales resulting from those 
purchases or redemptions, and borrowing-related costs associated with 
satisfying redemptions.
    (ii) The fund's board of directors, including a majority of 
directors who are not interested persons of the fund must:
    (A) Approve the fund's swing pricing policies and procedures;
    (B) Approve the fund's swing threshold(s) and the upper limit on 
the swing factor(s) used, and any changes to the swing threshold(s) or 
the upper limit on the swing factor(s) used;
    (C) Designate the fund's investment adviser, officer, or officers 
responsible for administering the swing pricing policies and procedures 
(``person(s) responsible for administering swing pricing''). The 
administration of swing pricing must be reasonably segregated from 
portfolio management of the fund and may not include portfolio 
managers; and
    (D) Review, no less frequently than annually, a written report 
prepared by the person(s) responsible for administering swing pricing 
that describes:
    (1) Its review of the adequacy of the fund's swing pricing policies 
and procedures and the effectiveness of their implementation, including 
the impact on mitigating dilution;

[[Page 82138]]

    (2) Any material changes to the fund's swing pricing policies and 
procedures since the date of the last report; and
    (3) Its review and assessment of the fund's swing threshold(s), 
swing factor(s), and swing factor upper limit considering the 
requirements of paragraphs (a)(3)(i)(B) and (C) of this section, 
including the information and data supporting the determination of the 
swing threshold(s), swing factor(s), and swing factor upper limit.
    (iii) The fund shall maintain the policies and procedures adopted 
by the fund under this paragraph (a)(3) that are in effect, or at any 
time within the past six years were in effect, in an easily accessible 
place, and shall maintain a written copy of the report provided to the 
board under paragraph (a)(3)(ii)(C) of this section for six years, the 
first two in an easily accessible place.
    (iv) Any fund (a ``feeder fund'') that invests, pursuant to section 
12(d)(1)(E) of the Act (15 U.S.C. 80a-12(d)(1)(E)), in another fund (a 
``master fund'') may not use swing pricing to adjust the feeder fund's 
net asset value per share; however, a master fund may use swing pricing 
to adjust the master fund's net asset value per share, pursuant to the 
requirements set forth in this paragraph (a)(3).
    (v) For purposes of this paragraph (a)(3):
    (A) Exchange-traded fund means an open-end management investment 
company (or series or class thereof), the shares of which are listed 
and traded on a national securities exchange, and that has formed and 
operates under an exemptive order under the Act granted by the 
Commission or in reliance on an exemptive rule adopted by the 
Commission.
    (B) Swing factor means the amount, expressed as a percentage of the 
fund's net asset value and determined pursuant to the fund's swing 
pricing policies and procedures, by which a fund adjusts its net asset 
value per share once a fund's applicable swing threshold has been 
exceeded.
    (C) Swing pricing means the process of adjusting a fund's current 
net asset value per share to mitigate dilution of the value of its 
outstanding redeemable securities as a result of shareholder purchase 
and redemption activity, pursuant to the requirements set forth in this 
paragraph (a)(3).
    (D) Swing threshold means an amount of net purchases or net 
redemptions, expressed as a percentage of the fund's net asset value, 
that triggers the application of swing pricing.
    (E) Transaction fees and charges means brokerage commissions, 
custody fees, and any other charges, fees, and taxes associated with 
portfolio asset purchases and sales.
* * * * *

0
6. Section 270.31a-2 is amended by revising paragraph (a)(2) to read as 
follows:


Sec.  270.31a-2  Records to be preserved by registered investment 
companies, certain majority-owned subsidiaries thereof, and other 
persons having transactions with registered investment companies.

    (a) * * *
    (2) Preserve 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 books and records required to be 
made pursuant to paragraphs (b)(5) through (12) of Sec.  270.31a-1 and 
all vouchers, memoranda, correspondence, checkbooks, bank statements, 
cancelled checks, cash reconciliations, cancelled stock certificates, 
and all schedules evidencing and supporting each computation of net 
asset value of the investment company shares, including schedules 
evidencing and supporting each computation of an adjustment to net 
asset value of the investment company shares based on swing pricing 
policies and procedures established and implemented pursuant to Sec.  
270.22c-1(a)(3), and other documents required to be maintained by Sec.  
270.31a-1(a) and not enumerated in Sec.  270.31a-1(b).
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
7. The general authority citation for part 274 continues to read, in 
part, as follows, and the sectional authorities for Sec. Sec.  274.101 
and 274.130 are removed:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203, 
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *


Sec.  274.11A   [Amended]

0
8. Amend Form N-1A (referenced in Sec.  274.11A) by:
0
a. In Item 4(b)(2)(ii) adding a sentence regarding the effects of swing 
pricing and in Item 4(b)(2)(iv) adding paragraph (E)
0
b. In Item 6 adding paragraph (d);
0
c. In Item 13, adding ``Capital Adjustments Due to Swing Pricing'' 
after ``Total Distributions'' to the list in paragraph (a);
0
d. In Item 13, adding ``Net Asset Value, adjusted pursuant to swing 
pricing, End of Period'' after ``Net Asset Value, End of Period''.
0
e. In Item 13, Instruction 2., adding paragraphs (d) and (e).
    The additions read as follows:


    Note: The text of Form N-1A does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 4. Risk/Return Summary: Investments, Risks, and Performance

* * * * *
    (b) * * *
    (2) * * *
    (ii) If swing pricing policies and procedures were applied during 
any of the periods, include a general description of the effects of 
swing pricing on the Fund's annual total returns for the applicable 
period(s) presented in a footnote to the bar chart.
* * * * *
    (b) * * *
    (2) * * *
    (iv) * * *
    (E) If swing pricing policies and procedures were applied during 
any of the periods, include a general description of the effects of 
swing pricing on the Fund's average annual total returns for the 
applicable period(s) presented.

Item 6. Purchase and Sale of Fund Shares

* * * * *
    (d) If the Fund uses swing pricing, explain the Fund's use of swing 
pricing; including what swing pricing is, the circumstances under which 
the Fund will use it, the effects of swing pricing on the Fund and 
investors, and provide the upper limit it has set on the swing factor. 
With respect to any portion of a Fund's assets that is invested in one 
or more open-end management investment companies that are registered 
under the Investment Company Act, the Fund shall include a statement 
that the Fund's net asset value is calculated based upon the net asset 
values of the registered open-end management investment companies in 
which the Fund invests, and, if applicable, state that the prospectuses 
for those companies explain the circumstances under which they will use 
swing pricing and the effects of using swing pricing.
* * * * *

Item 13. Financial Highlights Information

* * * * *
    Instructions * * *
    2. Per Share Operating Performance. * * *
* * * * *

[[Page 82139]]

    (d) The amount shown at the Capital Adjustments Due to Swing 
Pricing caption should include the per share impact of any amounts 
retained by the Fund pursuant to its swing pricing policies and 
procedures, if applicable.
    (e) The amounts shown at the Net Asset Value, as adjusted pursuant 
to swing pricing, End of Period caption should be the Fund's net asset 
value per share as adjusted pursuant to its swing pricing policies and 
procedures on the last day of the reporting period, if applicable.
* * * * *


Sec.  274.101   [Amended]

0
9. Form N-CEN (referenced in Sec.  274.101), as revised elsewhere in 
this issue of the Federal Register, is further amended by:
0
a. In Part C, adding Item C.21.
    The addition read as follows:
Form N-CEN
Annual Report for Registered Investment Companies
* * * * *

Part C. Additional Questions for Management Investment Companies

* * * * *
    Item C.21. Swing pricing. For open-end management investment 
companies, respond to the following:
    d. Did the Fund (if not a Money Market Fund, Exchange-Traded Fund, 
or Exchange-Traded Managed Fund) engage in swing pricing? [Yes/No]
    i. If so, what was the swing factor upper limit?
* * * * *

    By the Commission.

    Dated: October 13, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-25347 Filed 11-17-16; 8:45 am]
 BILLING CODE 8011-01-P


