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By DailyAlts Staff The Securities and Exchange Commission (“SEC”) has proposed new rules designed to cut risks in the multi-trillion-dollar asset-management industry. The rules, which were proposed on September 22, would require mutual funds and ETFs to take more precautions to protect against periods of large investor withdrawals. “Changes in the modern asset-management industry call on us to now look anew at liquidity management in funds and propose reforms that will better protect investors and maintain market integrity,” said SEC Chair Mary Jo White. Liquidity Risk The 2008/09 financial crisis identified weaknesses within open-end fund structures and their ability to manage large redemptions during crisis periods. In response to this, the SEC has proposed Rule 22e-4 that would require funds to have liquidity risk-management programs, that would include each of the following elements: Classification of the liquidity of portfolio assets; Assessment and management of a fund’s liquidity risk; Establishment of a three-day liquid asset minimum; and Board approval and review. Perhaps most notable of these elements is #3, which would require funds to carry enough cash and “assets that are convertible into cash” within three business days at a price that doesn’t “materially affect the value of the assets immediately prior to sale.” Other Proposals Liquidity risk isn’t the only bogeyman the SEC is out to slay. Regulators also proposed amendments to Investment Company Act rule 22c-1 that would permit mutual funds (but not ETFs) to use so-called swing pricing. This concept is designed to protect existing shareholders from dilution by passing on trading costs to purchasing and redeeming shareholders. Moreover, the SEC also outlined new disclosure and reporting requirements for N-1A Forms, and the recently proposed N-PORT and N-CEN Forms. What’s Next? The SEC published a white paper titled Liquidity and Flows of U.S. Mutual Funds explaining how portfolio liquidity varies depending on a fund’s redemption history and how portfolio liquidity is affected by large redemptions. The paper is available for download from SEC.gov. The SEC’s proposals were approved in a 5-0 vote . Its proposal will be published in the Federal Register, followed by a 90-day comment period, before taking effect. For more information, visit SEC.gov . Share this article with a colleague Scalper1 News
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