04.30.2018
By Rob Daly

SEC Seeks Liquidity-Risk Tweak

Since introducing its liquidity risk rule of open-ended funds in 2016, the US Securities and Exchange Commission is pondering eliminating Form N-Port’s public reporting of “liquidity profiles.”

Dalia Blass, SEC

“The proposed change would create a new requirement for funds to discuss their liquidity risk management programs in their annual shareholder reports,” explained Dalia Blass, director of the Division of Investment Management at the SEC, during a speech at the PLI Investment Management Institute 2018. “The idea is to arm investors with important information, along with the appropriate context to inform their investment decisions.”

Asset managers informed the Division that the public-reporting rule as currently written would confuse investors since liquidity assessment is subjective and investors easily could misconstrue the results if presented out of context.

Instead, the Commission and SEC staff plan to publish anonymized, aggregated data that would be similar to the staff’s reports on Form PF.

“The proposal also tasks the staff with analyzing and presenting to the Commission recommendations on whether any further fund liquidity information may be publicly disseminated without risking the potential for predatory trading or raising concerns concerning market and investor confusion,” said Blass.

She noted that the comment period for the proposal closes on May 18.

The Commission and Division also launched two additional changes to the 2016 rule.

Funds affected by the rule have an additional six months to meet their liquidity classification and related elements.

“The extension is designed to give funds and service providers sufficient time to develop and test classification systems an also seek board approval of their programs,” said Blass. “Other provisions of the rule that provide critical investor protection benefits- including the requirement to adopt a liquidity risk management program and to limit illiquid investments to 15% of a fund’s portfolio will go into effect as originally scheduled.”

Finally, the Division is working with funds and others in the industry to develop a set of frequently asked questions for the industry regarding the liquidity-risk rule.

“The staff’s responses were intended to address important implementation questions raised y the funds and other as they sought to establish programs responsive to the rule’s requirements,” she added. “The FAQs include questions related to classification, sub-advisory relationships, ETFs, and reporting.”

Blass concluded her speech noting that the Division is working on a variety of other recommendations for the Commission regarding exchange-traded funds as well as the delivery and content of disclosure to fund shareholders.

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