Time to Get With the (Liquidity Risk) Program: SEC Issues Liquidity Risk Management Rule for Open-End Funds
Executive Summary
On October 13, 2016, the Securities and Exchange Commission (“SEC”) adopted new Rule 22e-4 (“Liquidity Rule”) under the Investment Company Act of 1940 (“1940 Act”), which requires registered open-end funds, including open-end exchange-traded funds (“ETFs”) but excluding money market funds and closed-end funds, to establish and implement written Liquidity Risk Management Programs (“LRMPs”).[1] The SEC also amended fund reporting forms, and adopted new forms, mandating disclosure of liquidity-related information to the SEC and to the public.[2] In a separate adopting release, the SEC adopted new paragraph (a)(3) of Rule 22c-1 under the 1940 Act (“Swing Pricing Rule”), which permits open-end funds, other than money market funds and ETFs, to use “swing pricing.”[3] Swing pricing allows a fund to adjust its net asset value (“NAV”) to pass on the costs associated with heavy trading activity to purchasing or redeeming shareholders.
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Notes:
[1] Investment Company Liquidity Risk Management Programs, SEC Release No. IC-32315 (Oct. 13, 2016) (the “Adopting Release”), www.sec.gov/rules/final/2016/33-10233.pdf. Unless otherwise indicated, references to “funds,” “mutual funds,” and “open-end funds” do not include money market funds or closed-end funds.
[2] For additional information on new disclosure and reporting obligations, see the related K&L Gates Client Alert, SEC Issues Investment Company Reporting Modernization Rules (Nov. 3, 2016), http://www.klgates.com/sec-issues-investment-company-reporting-modernization-rules-11-03-2016/.
[3] Investment Company Swing Pricing, SEC Release No. IC-32316 (Oct. 13, 2016), www.sec.gov/rules/final/2016/33-10234.pdf. The Swing Pricing Rule will be the subject of a separate K&L Gates Client Alert.
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