SEC Proposes Liquidity Management Rules for Mutual Funds and ETFs

The SEC proposed rules requiring the adoption of liquidity risk management programs by SEC-registered, open-end investment companies.

Under the Proposed Rule 22e-4, mutual funds and exchange-traded funds ("ETFs") would be required to implement liquidity risk management programs and to improve their disclosures as to fund liquidity and redemption practices. A fund's liquidity risk management program would be required to, among other things:

(i) classify the liquidity of fund portfolio assets based on the amount of time an asset would be able to be converted to cash without a market impact;

(ii) provide for an assessment, periodic review and management of a fund's liquidity risk;

(iii) establish a fund's three-day liquid asset minimum; and

(iv) provide for board approval and review.



Additionally, the proposal would codify a current staff interpretation that provides that open-end funds may hold no more than 15 percent of their value in illiquid assets.

Further, the SEC proposed amendments to ICA Rule 22c-1 ("Pricing of Redeemable Securities for Distribution, Redemption and Repurchase") to permit a fund to use "swing pricing"; i.e., to adjust the net asset value of a fund's shares to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity. The SEC also proposed related amendments to ICA Rule 31a-2 ("Records to Be Preserved") and to Investment Company Act Forms N-1A, N-PORT and N-CEN.