The Securities and Exchange Commission voted last week to propose a “comprehensive package” of rule reforms designed to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs).
“Promoting stronger liquidity risk management is essential to protecting the interests of the millions of Americans who invest in mutual funds and exchange-traded funds,” SEC Chair Mary Jo White said in a statement. “These significant reforms would require funds to better manage their liquidity risks, give them new tools to meet that requirement, and enhance the Commission’s oversight.”
Under the proposed reforms, mutual funds and ETFs would be required to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. The proposal is designed to better ensure investors can redeem their shares and receive their assets in a timely manner.
A fund’s liquidity risk management program would be required to contain multiple elements, including:
- classification of 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;
- assessment, periodic review and management of a fund’s liquidity risk;
- establishment of a fund’s three-day liquid asset minimum;
- and, board approval and review.
In addition, the proposal would codify the 15 percent limit on illiquid assets included in current SEC guidelines.
The proposed reforms also would provide a framework under which mutual funds could elect to use “swing pricing” to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity. The swing pricing proposal would enable mutual funds, subject to board approval and oversight, to reflect in a fund’s net asset value (NAV) costs associated with shareholders’ trading activity. It is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be an additional tool to help funds manage liquidity risks.
The proposals will be published on the SEC’s website and in the Federal Register. The comment period for the proposed rules will be 90 days after publication in the Federal Register.
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
