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What You Need to Know About the SEC’s New Fund Liquidity Risk Management Proposal

October 12, 2015
Client Alert

SEC Proposes Liquidity Risk Management Program Requirements, Optional Swing Pricing and Expanded Liquidity Disclosure for Open-End Funds

On Sept. 22, 2015, the Securities and Exchange Commission (the SEC) voted unanimously to propose a comprehensive, multi-layered set of new and amended rules and forms designed to promote effective liquidity risk management throughout the open-end fund industry (the Proposal or the Liquidity Proposal).1 The Proposal is intended to (i) address liquidity-related developments from modern portfolio construction; (ii) reduce the risk that funds will be unable to meet redemption obligations; (iii) mitigate dilution of the interests of fund shareholders; and (iv) enhance transparency of fund liquidity and redemption practices. At the same time, the SEC re-opened the comment period for its Investment Company Reporting Modernization proposal, which was proposed for comment this past May (the Reporting Proposal).2

The Liquidity Proposal and the Reporting Proposal both come as part of a broader set of SEC initiatives to address the impact of open-end fund investment activities on investors and the financial markets, and the risks associated with increasingly complex portfolio composition and operations in the asset management industry. As outlined by SEC Chair Mary Jo White, these initiatives will also include measures to address the use of derivatives by funds, including imposing limits on leverage from fund use of derivatives (expected to be proposed by year-end); stress-testing requirements for large funds and advisers, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act; and transition planning for investment advisers.

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