In addition to helping to operationalize swing pricing, a hard close would help prevent late trading of fund shares and improve order processing. With a hard close, 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 p.m. The proposal would also require a “hard close” for relevant funds. 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,” which is a method to allocate costs stemming from inflows or outflows to the investors engaged in that activity, rather than diluting other shareholders. These funds would publicly report certain information about their liquidity profiles to improve the availability of information about liquidity risk for investors as well as information about use of liquidity classification service providers. Affected funds would also be required to maintain a minimum amount of highly liquid assets of at least 10 percent of net assets to help manage stressed conditions and heightened redemption levels. These changes are designed to help better prepare funds for stressed conditions and prevent funds from over-estimating the liquidity of their investments. The proposal seeks to improve these funds’ liquidity classifications by establishing new minimum standards for classification analyses, including some that incorporate stressed conditions, and by updating the liquidity categories to limit the extent of a fund’s investments in securities that do not settle within seven days. Today’s proposal addresses these investor protection and resiliency challenges.”Ĭurrently, open-end funds other than money market funds and most exchange-traded funds are required to classify the liquidity of their investments into four categories, ranging from highly liquid to illiquid. We saw such systemic issues during the onset of the COVID-19 pandemic, when many investors sought to redeem their investments from open-end funds. This can raise issues for investor protection, our capital markets, and the broader economy. “Open-end funds, though, have an underlying structural liquidity mismatch. “A defining feature of open-end funds is the ability for shareholders to redeem their shares daily, in both normal times and times of stress,” said SEC Chair Gary Gensler.
The rule and form amendments would enhance how funds manage their liquidity risks, require mutual funds to implement liquidity management tools, and provide for more timely and detailed reporting of fund information. The Securities and Exchange Commission today voted to propose amendments to better prepare open-end funds for stressed conditions and to mitigate dilution of shareholders’ interests.
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