October 5, 2015

Securities and Exchange Commission Proposes Reforms to Enhance Liquidity Risk Management

The Securities and Exchange Commission (SEC) has proposed a set of reforms that seek to enhance liquidity risk management by open-end funds such as mutual funds and exchange-traded funds (ETFs). The proposed rules would require mutual funds and ETFs to implement liquidity risk management programs and enhanced disclosures regarding fund liquidity and redemption practices.

The proposal includes provisions that would require funds (excluding money market funds) to:

  • Establish a liquidity risk management program that would:
    • Classify the liquidity of fund assets based on the time required to convert to cash without a market impact
    • Assess, review, and manage fund liquidity risk
    • Establish a three-day liquid asset minimum
    • Require board approval and review
    • Enhance disclosure regarding fund liquidity and redemption practices
  • Limit illiquid assets to no more than 15 percent

To protect fund shareholders from the adverse price effects of shareholder purchases and redemptions, the proposal would also allow mutual funds to elect to use “swing pricing” to calculate fund net asset value in a manner that effectively passes on the costs of fund unit purchase or redemption activity to the shareholders associated with that activity.

The proposal has been published on the SEC’s website and the Federal Register for a 90-day comment period:

http://www.sec.gov/rules/proposed/2015/33-9922.pdf

To read the SEC’s press release and fact sheet, visit:

http://www.sec.gov/news/pressrelease/2015-201.html