The Securities and Exchange Commission issued for public comment Tuesday a new rule requiring open-end investment companies, including mutual funds and exchange-traded funds, to establish a liquidity risk management program tailored to their specific portfolio and risks.
Under the plan, which SEC Chairwoman Mary Jo White said furthers the agency's focus on regulating the asset management industry, open-end funds would also be allowed to use "swing pricing" under certain circumstances and "enhance disclosures" about the liquidity of a fund's holdings and its liquidity risk management practices.
"Changes in the modern asset management industry call on us to now look anew at liquidity management in funds and propose reforms that will better protect investors and maintain market integrity," White said during the open meeting at SEC headquarters in Washington.
White noted the "defining feature" of so-called open-end funds is that investors can redeem their shares on each business day and must receive their assets within seven days. "Many funds promise – and many investors expect – to receive their assets even more quickly."
Since liquidity is therefore "essential," she continued, "a fund must manage the liquidity of its portfolio to ensure that redemption requests can be fulfilled in a timely manner while also minimizing the impact of those redemptions on the fund's remaining shareholders." Poor liquidity management, she added, "can dilute existing shareholders' interests, negatively impact the value of the fund's assets or the fund's risk profile, or cause an ETF's share price to diverge from the value of its underlying securities."
A fund's liquidity risk management program would be required to contain the following:
— Classify the liquidity of fund portfolio assets based on the amount of time an asset would be able to be converted to cash without a market impact;
— Assess as well as conduct periodic review and management of a fund's liquidity risk;
— Establish a fund's three-day liquid asset minimum, and board approval and review.
— Codify the 15% limit on illiquid assets included in current Commission guidelines.
