SEC proposes sweeping new liquidity risk management rules for mutual funds and ETFs

Abstract

Purpose

To discuss a September 22, 2015 Securities and Exchange Commission (“SEC”) proposal for a set of broad and sweeping rules mandating that open-end mutual funds and exchange-traded funds (“ETFs”) develop and implement formalized and written liquidity risk management programs (“LRMPs”).

Design/methodology/approach

Describes the purpose of an LRMP, the six “liquidity buckets,” the nine factors that must be considered in determining an instrument’s liquidity, the need to continuously monitor the liquidity of each position, the set of eight mandated factors used to assess a fund’s liquidity risk, the requirement for a fund to define a three-day liquid asset minimum, the role of the fund’s board of directors, a separate rule permitting “swing pricing” to adjust net asset value to take into account the costs of unexpected redemptions or cash infusions, disclosure requirements, and proposed compliance dates.

Findings

In proposing this new program, the SEC stated that its goal was to enhance effective liquidity risk management practices by funds and thereby reduce the risk that funds will be unable to meet redemptions under reasonably foreseeable stressed market conditions.

Originality/value

Expert guidance by experienced financial services lawyers.

Citation

Rosella, M., Belitsky, B. and Marghella, A. (2016), "SEC proposes sweeping new liquidity risk management rules for mutual funds and ETFs", Journal of Investment Compliance, Vol. 17 No. 1, pp. 74-82. https://doi.org/10.1108/JOIC-02-2016-0010