SEC Proposes Sweeping Changes to Liquidity Risk Management Practices Used by Mutual Funds and ETFs

October 09, 2015

The U.S. Securities and Exchange Commission (SEC or Commission) on September 22, 2015 proposed a rule that would require all registered open-end funds and open-end exchange-traded funds (ETFs), other than money market funds (MMFs), to adopt liquidity risk management programs. The Commission’s proposal would also permit – but not require – registered open-end funds, other than ETFs and MMFs, to utilize “swing pricing” under certain circumstances. In addition, the proposal would impose new disclosure and reporting requirements related to a fund’s liquidity risk management program and swing pricing policies.

The proposals are generally intended to: (i) reduce the risk that funds would be unable to meet shareholder redemption requests; and (ii) minimize the dilutive impact of fund shareholder purchase and redemption transactions. The proposals are in response to the growth of the U.S. asset management industry in general, including the growth of less liquid and alternative strategies, as well as the observations of the SEC Staff, which had conducted a review of current liquidity management practices used by funds. According to SEC Chair Mary Jo White, “[p]romoting stronger liquidity risk management is essential to protecting the interests of the millions of Americans who invest in mutual funds and exchange-traded funds.”

The proposals represent potentially significant changes to current liquidity management practices used by funds, and, if adopted, will require significant changes to fund operations, disclosure and reporting. The proposals are the second part of a five-part plan “to enhance the regulation of the risks arising from the portfolio composition and operations of funds and investment advisers.” The Commission recently proposed the first part of this five-part plan – a proposal to modernize fund reporting and disclosure. The remaining parts will include measures to “better address risks related to funds’ use of derivatives, plan for the transition of client assets, and to stress test funds and advisers.”

Comments on the proposals are due on or before 90 days after publication in the Federal Register. As of the date of this OnPoint, the proposals have not yet been published in the Federal Register. A summary of the proposals is provided at the link below.

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