SEC Proposes Liquidity Management Rules for Mutual Funds and ETFs
The SEC has proposed new liquidity risk management rules for open-end funds, including mutual funds and ETFs, that would require additional portfolio analysis and review, policies and procedures, Board approval, and disclosure. The proposed rules would require funds to classify asset positions into one of six categories based on how quickly the fund could convert the assets into cash. The rule also requires funds to periodically assess their liquidity risk and annually submit a written report to the Board for review. The proposed rules also (i) require the Board to approve the liquidity risk management program, (ii) codifies that funds could not invest more than 15% of assets in illiquid securities, (iii) allow for swing pricing, and (iv) increase ongoing disclosure about the liquidity management program.
OUR TAKE: We believe that the SEC has proposed these rules to response to the rapid rise of liquid alternatives i.e. hedge fund-like products that register under the Investment Company Act. The SEC has raised concerns that such products may not be as liquid as their more traditional counterparts that invest in high-volume exchange-traded securities. If adopted, these rules will add significant compliance obligations and Board reporting.