On Nov. 2, 2022, the Securities and Exchange Commission (the SEC) proposed amendments to its current rules for open-end
management investment companies (open-end funds) regarding liquidity risk management programs and swing pricing (the Proposal).
1 The Proposal follows the 2016 adoption of Rule 22e-4 under the Investment Company Act (the Liquidity Rule)
2, which requires open-end funds to adopt and implement liquidity risk management programs, and subsequent amendments adopted by the SEC in 2018 that were designed to improve the reporting and disclosure of liquidity information by open-end funds.
3 The Proposal, which would make the current optional swing pricing framework mandatory, would fundamentally change how funds are priced, and make other significant related changes, including imposing a “hard close” on the process used to submit investor orders to funds.
According to the SEC, the amendments in the Proposal are intended to better prepare open-end funds for stressed conditions, improve transparency in liquidity classifications, and mitigate dilution of shareholders’ interests. The SEC noted that the proposed amendments are informed by its evaluation of data regarding how the liquidity framework has operated over the last several years, including in March 2020 at the onset of the COVID-19 pandemic.
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The Proposal represents a sweeping overhaul of fund liquidity risk management programs, pricing and relationships with their intermediaries, and reporting to the SEC. If the SEC adopts many elements of the Proposal, it would be imposing requirements on funds that have previously been rejected as costly, unnecessary, and unworkable. This Alert summarizes the Proposal and addresses some key observations and issues to consider throughout.
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1 Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting, Investment Company Act Release No. 34746 (Nov. 2, 2022).
2 Investment Company Liquidity Risk Management Programs, Investment Company Act Release No. 32315 (Oct. 13, 2016).
3 Investment Company Liquidity Disclosure, Investment Company Act Release No. 33142 (June 28, 2018).
4 In particular, the SEC highlights official sector interventions, including the Secondary Market Corporate Credit Facility, which supported market liquidity by purchasing in the secondary market corporate bonds issued by investment grade U.S. companies, as well as U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.
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