SEC Proposes Liquidity Management Rules for Mutual Funds and ETFs

By: Frank Boutillette, CPA, Partner – WithumSmith+Brown, PC

On September 22, 2015, the SEC voted to propose a package of rule reforms that are designed to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange- traded funds (ETFs).

Under the proposal, mutual funds and ETFs would be required to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. This section of the proposal is designed to ensure that investors can redeem their shares and receive their assets in a timely manner.

The liquidity risk program would contain multiple elements including, classification of the liquidity of fund portfolio assets based on the time an asset would be able to be converted to cash; assessment and periodic review of a fund’s liquidity risk; establish a fund’s three day liquid asset minimum and board approval and review.

In addition, the proposal would also 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 the activity. This would enable mutual funds to reflect a fund’s net asset value (NAV) costs associated with shareholder’s trading activity. This is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be an additional tool to help funds better manage liquidity risks.

If approved for publication, the proposal would be posted on the Commission’s website and in the Federal Register. The comment period would be open for 90 days.

Stay tuned to Withum on Wall Street for updates as they develop.


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