Open-end funds allow shareholders to redeem shares on demand. However, without effective liquidity risk management during stressed markets (such as those seen during the beginning of the COVID-19 pandemic in March 2020), a fund may not be able to make timely payment on shareholder redemptions. Furthermore, sales of portfolio investments to pay redemptions can dilute shareholders’ interests. Those interests can be further diluted by the transaction costs associated with meeting redemption requests or investing the proceeds of subscriptions, should a fund manage to liquify.

This proposal would amend rule 22e-4, rule 22c-1, and some reporting and disclosure forms under the Investment Company Act of 1940. Currently, the liquidity of open-end fund investments is required to be classified into four categories, ranging from highly liquid to illiquid. The proposal seeks to improve liquidity classifications by establishing new minimum standards for classification analyses, some incorporating stressed conditions. The liquidity categories will also be updated to limit the extent of a fund’s investments in securities that do not settle within seven days. These changes should prevent funds from over-estimating the liquidity of their investments.

Affected funds would also have to maintain a minimum amount of highly liquid assets (at least 10 percent of its net assets) to manage stressed conditions and times of heightened redemption. Data about these liquidity profiles would be publicly available, which will increase information about a fund’s liquidity risk for investors.

In addition, the proposal would require open-end funds other than money market funds and exchange-traded funds to use a liquidity management tool called “swing pricing”. The proposal would require funds to adopt policies and procedures to adjust a fund’s net asset value (NAV) per share by a swing factor when the fund experiences net redemptions or when net purchases exceed a threshold. The swing factor represents the bid-ask spread and certain other costs of selling or purchasing a vertical slice of the fund’s portfolio.

The proposal requires a “hard close” for relevant funds as well. This is a strict deadline; investor orders would need to be received by the fund, its transfer agent, or a registered clearing agency by the time of the fund’s pricing (typically 4:00 p.m. ET) to receive that day’s price.

Finally, funds would be required to file portfolio and other information on Form N-PORT for public release on a monthly basis, rather than a quarterly basis. Each report would then become publicly available after 60 days after the month’s end. Such a change will triple the amount of information currently available to investors. The rulemaking applies to all registrants that report on Form N-PORT, including most open-end funds and registered closed-end funds, with certain exceptions (such as money-market funds).

The SEC invites public feedback concerning these proposed rule changes. Users can send comments through the SEC’s internet comment form, via email to rule-comments@sec.gov, or through mail to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. In all cases, please reference File Number S7-26-22.

Source:

SEC Proposes Enhancements to Open-End Fund Liquidity Framework (sec.gov)

Fact Sheet (sec.gov)

Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting (sec.gov)