SEC Proposes Liquidity Rules
The Securities and Exchange Commission issued a release entitled, "SEC Proposes Liquidity Management Rules For Mutual Funds And ETFs," which doesn't apply to money market funds (they already have liquidity mandates) but is aimed primarily at bond funds. (Watch for more coverage in our next Bond Fund Intelligence.) It says, "The Securities and Exchange Commission today voted 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," said SEC Chair Mary Jo White. "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 <b:>`_." 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 Commission 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 Commission’s website and in the Federal Register. The comment period for the proposed rules will be 90 days after publication in the Federal Register." The SEC also posted statements on the rule from all of the SEC commissioners, including SEC Chair Mary Jo White." ICI also released a "Statement on SEC Action on Liquidity Risk Management Programs for Mutual Funds" from its president, Paul Schott Stevens. Stevens says, "For 75 years, mutual funds have successfully managed liquidity and met redemptions under SEC rules and guidance. Based on the information available, today's proposal raises a number of complex issues for funds, their directors, and their investors. We look forward to engaging with the SEC to ensure that any final rules in this area are well-founded, practicable, and effective. We also commend Chair White and the Commission for their leadership in working to ensure that funds continue to manage liquidity and redemption risks successfully for years to come."
