Last week, the Securities and Exchange Commission (SEC) proposed a set of liquidity risk management requirements for registered open-end mutual funds and ETFs. The proposal is part of a broader SEC agenda to modernize the Investment Company Act of 1940 (’40 Act) and to address perceived systemic risk concerns relating to the asset management industry.
- The proposal addresses liquidity concerns arising in a changing industry.
- The Financial Stability Oversight Council is influencing the SEC.
- The biggest impact will be felt by the front office.
- Swing pricing provides more flexibility for fund managers.
- Approval of the liquidity risk management program necessitates a deeper understanding of risk for management and directors.
- Flexibility is provided with respect to the periodic risk assessment.
- Portfolio liquidity assessment outliers will raise regulatory questions.
- Shorter term liquid assets are required.
- The 15% cap on illiquid assets is now codified.
- The compliance period is phased-in based on the asset manager’s size.