The US Securities and Exchange Commission (SEC) has proposed a new set of rules to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs).
The proposed reforms would require mutual funds and ETFs to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices.
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Under the proposed reforms, investors can redeem their shares and receive their assets in a timely manner.
SEC said that the liquidity risk management program includes elements such as classification of the liquidity of fund portfolio assets, assessment and management of a fund’s liquidity risk, maintain a three-day liquid asset minimum and board approval and review.
The proposed rule would codify the 15% limit on illiquid assets included in current Commission guidelines.
The proposal will also allow funds to implement swing pricing that would effectively pass on the costs of redemption activity to the shareholders connected with that activity.
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By GlobalDataSwing pricing is a process in which a fund’s net asset value reflects the costs associated with trading so those costs can be passed to shareholders. It protects shareholders from dilution that come from shareholder purchases and redemptions as well as help funds manage liquidity risks.
SEC chair Mary Jo White said: "These significant reforms would require funds to better manage their liquidity risks, give them new tools to meet that requirement, and enhance the Commission’s oversight."
