SEC Issues Liquidity Risk Management and “Swing Pricing” Proposal for Open-End Investment Funds: Proposed Rule and Amendments to Rules and Forms Would Require Open-End Funds to Implement Liquidity Risk Management Programs and Permit Their Use of Swing Pricing

Sullivan & Cromwell LLP - October 2, 2015

On September 22, 2015, the Securities and Exchange Commission unanimously proposed a new rule and amendments to rules and forms under the Investment Company Act of 1940 aimed at promoting effective liquidity risk management by most registered open-end management investment companies.  Among other things, the proposed rules and amendments would:

  • require registered open-end funds, including mutual funds and most ETFs but excluding money market funds, unit investment trusts and closed-end funds, to develop and implement a liquidity risk management program and to categorize the liquidity of each of their portfolio positions; 
  • require such funds to establish a minimum percentage of net assets to be invested in “three-day liquid assets” (i.e., assets that the fund believes could be converted to cash within three business days at a price that does not materially affect the value of the asset immediately prior to sale), and prohibit funds from acquiring any less liquid asset if doing so would result in the fund having less than such minimum percentage invested in three-day liquid assets;
  • allow, but not require, registered open-end funds other than money market funds and ETFs to use “swing pricing,” a process of adjusting the net asset value of a fund’s shares in order to pass the cost of trading in such shares to purchasing or redeeming shareholders;
  • require new disclosure and reporting related to a fund’s liquidity risk management program and swing pricing policies; and
  • require initial approval and periodic review of the liquidity risk management program and swing pricing policies by the fund’s board of directors, including a majority of independent directors.
Comments on the SEC’s proposed rules must be submitted no later than 90 days following publication in the Federal Register.