Liquidity Risk Management and Swing Pricing
Section 22(e) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), prohibits registered investment companies from suspending the right of redemption, and from postponing the date of payment or satisfaction upon redemption of any redeemable security in accordance with its terms for more than seven days after the tender of such security, subject to certain limited exceptions. In light of these statutory requirements, the Securities and Exchange Commission (“SEC” or “Commission”) views funds as “hav[ing] a responsibility to manage the liquidity of their investment portfolios in a manner consistent with those obligations and any other related representations.” Moreover, in the SEC’s view, insufficient portfolio liquidity implicates valuation concerns and related shareholder dilution risks as well as the potential for violation of antifraud provisions of the Investment Company Act and other federal securities laws.
Proposed as part of a five-part plan set forth by former SEC Chair Mary Jo White to “enhance the regulation of risks arising from the portfolio composition and operations of funds and investment advisers,” Rule 22e-4 under the Investment Company Act was adopted in the wake of “events [that] demonstrated the significant adverse consequences to remaining investors in a fund when it fails to adequately manage liquidity.” According to the SEC, Rule 22e-4 “advances the purposes of the [Investment Company] Act by enhancing the ability of funds to meet their redemption obligations, reducing the risk of shareholder dilution, and reducing the potential for antifraud violations.”
A number of interpretive points remain open concerning Rule 22e-4 and its various compliance requirements. Certain such open issues are noted throughout this chapter.
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