IM Director Birdthistle Speech On Swing Pricing, LIBOR and MiFID/Broker-Dealer IA Relief

William Birdthistle, Director of the SEC’s Division of Investment Management (Division), recently gave a speech at the Practicing Law Institute’s annual investment management conference that covered money market funds and swing pricing, the transition away from the London Inter-Bank Offered Rate (LIBOR), and expiration in 2023 of SEC staff no-action relief from investment adviser registration requirements for certain broker-dealers receiving direct payments for research.

Money Funds and Swing Pricing. After noting the failure of redemption gates and liquidity fees for prime money market funds during the market stress of March 2020, Mr. Birdthistle described one potential solution that would allow mutual funds to operate better in times of stress and manage liquidity risk: swing pricing. Swing pricing is a process of adjusting a fund’s current net asset value such that the transaction price effectively passes on costs stemming from shareholder redemptions to redeeming shareholders. He recognized the operational challenges that swing pricing might pose but expressed that the world’s largest financial system should be more modern and robust. He then noted the SEC was looking forward to reviewing comments regarding the swing pricing aspect of the proposed changes to rules governing money market funds, issued in December 2021.

LIBOR Transition. With respect to the transition away from LIBOR, Mr. Birdthistle highlighted the SEC staff’s efforts to help prepare advisers and funds for the transition. He cautioned that asset managers should be aware of their disclosure obligations and any valuation risks arising from the transition. He specifically mentioned that asset managers should understand their exposure to LIBOR-linked issues, such as planning how and when portfolio positions will convert from LIBOR to an alternative reference rate.

MiFID, Broker-Dealers and Receipt of Compensation for Research. Mr. Birdthistle also revealed that the Division does not intend to extend no-action relief issued in 2017 to U.S. registered broker-dealers that accept compensation for research from advisers required to comply with the European Union’s financial industry reform legislation known as MiFID II. Among other things, MiFID II prevents asset managers in Europe from bundling payments to broker-dealers for research and brokerage services. Under MiFID II, research cannot be bundled with execution but must be paid for by a manager in cash (so called “hard dollars”) either (i) directly by a manager, from its own resources; or (2) with client approval, from a research payment account funded by client assets; or (3) from a combination of these two methods. The no-action relief currently provides an exemption for affected broker-dealers from the requirement that a broker-dealer must register as an investment adviser if it receives direct payments for research constituting advice with respect to securities. He explained that the no-action relief was meant to be temporary and was issued to allow time for the SEC staff and the industry to address the impact of MiFID II. He indicated that the no-action relief will expire on July 3, 2023.

The speech can be found here.

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