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9/22/15 - SEC Proposes New Liquidity Risk Management Requirements for Open-End Funds

The Securities and Exchange Commission on Sept. 22 voted to propose new requirements for open-end funds (not including money-market funds) to adopt liquidity risk management programs and disclose their liquidity practices and positions. These requirements are meant to help ensure that investors can redeem their shares and receive their assets in a timely manner. The proposal would:

  • Mandate adoption of a board-approved liquidity risk management program that places each portfolio asset in a liquidity category, sets and maintains a three-day liquid-asset minimum, and limits investment in illiquid assets to 15% of a fund’s portfolio
  • Require that funds periodically disclose how they manage redemption requests and liquidity positions
  • Allow mutual funds to implement “swing pricing” during surges in purchases or redemptions to protect existing shareholders by passing on increased liquidity costs to the redeemer or purchaser

This proposal is the second in a series of planned changes for asset managers and investment companies. In May, the SEC proposed new reporting forms that would require these funds to include census and holding information in periodic disclosures. Future proposals will likely limit funds’ use of derivatives and leverage, establish stress-testing programs for asset managers, and require client-asset transition plans. These efforts come amid recent volatility in the market for exchange-traded funds and the Financial Stability Oversight Council’s concern about the fund industry.

Mutual funds and ETFs — especially those that invest in illiquid assets — should review their liquidity-management policies and practices to prepare for these new obligations.

Contact Promontory

Promontory helps regulated entities, including investment companies and investment advisers, understand their compliance obligations. Please call us to discuss the SEC’s proposal and how registrants should prepare for potential examinations and regulatory changes. For more information, please contact:

Conway Dodge
Managing Director, Washington, D.C.
cdodge@promontory.com
+1 202 370 0461

Michael Sullivan
Director, Washington, D.C.
msullivan@promontory.com
+1 202 384 3508

Jacob Lesser
Director, Washington, D.C.
jlesser@promontory.com
+1 202 384 0397