Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.

 Skip to Content

SEC Proposes Liquidity Risk Programs for Funds
December 23, 2015

The SEC proposed rule reforms on September 22 designed to improve liquidity risk management by open end funds.

Liquidity Risk Management Programs
Under the proposed reforms, mutual funds (excluding money market funds) and ETFs would be required to implement liquidity risk management programs. Liquidity risk is defined as the risk of not meeting redemption requests that are expected (or, in times of stress, that are reasonably foreseeable) without materially affecting NAV. Under the program, funds would be required to classify each portfolio investment into one of six categories (based on how long it would take to liquidate those investments) and maintain a three-day liquid asset minimum.

The program must be tailored to the characteristics of each fund and would be subject to periodic assessment and board oversight.

Swing Pricing
The proposed reforms would also permit, but not require, mutual funds (except money market funds and ETFs) to use “swing pricing.” A fund using swing pricing would adjust its NAV for days on which it has large net purchase or net redemption orders. This would allow funds to pass on related portfolio trading costs to purchasing and redeeming shareholders, and protect other shareholders from dilution. Costs that may be reflected in swing pricing include spread costs, brokerage commissions and other transaction fees, change in market price of portfolio assets due to fund trading, and borrowing costs.

Unique Issues For Variable Insurance Products
The “swing pricing” proposal could uniquely impact underlying funds and issuers of variable insurance products. For example, it may be particularly difficult for unaffiliated underlying funds to accurately estimate net purchases and redemptions where they are submitted by a relatively small number of insurers after the close of business each day. In addition, the swing pricing option could present challenges related to the pricing and costs associated with fund substitutions. Addressing some of these issues may require amendments to fund participation agreements.

The comment period for the proposals is open through January 13, 2016.
Related Practices
Securities Litigation and Enforcement Securities Transactions and Compliance
©2024 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.