Last week, the Forum submitted a comment letter to the SEC in response to the proposal to address liquidity management in open-end funds. The proposal would require funds (other than money market funds) to establish a liquidity risk management program, require certain disclosures regarding each fund’s program and the liquidity of the fund’s holdings, and codify current guidelines that limit illiquid holdings to fifteen percent of a fund’s net asset value. In addition, proposed rule amendments would allow funds to adopt swing pricing.
Overall, the Forum supports the oversight role of directors outlined by the SEC in the proposal. For example, the proposal would have directors “reviewing summaries” and familiarizing themselves “with the salient features of the program,” an approach that the Forum believes “provides an effective model for board oversight.” However, the Forum’s letter cautions against boards being asked to directly manage risk and reminds the Commission that risk management programs should not be judged in hindsight, nor be expected to fully eliminate risk.
The Forum’s letter supports the Commission’s focus on liquidity risk management and notes that the release is the “first comprehensive attempt to address a fundamentally important issue for funds.” While the Forum broadly supports a requirement that funds adopt liquidity risk management policies and procedures, it raises a number of concerns related to the “unduly rigid, expensive and prescriptive” nature of the proposed approach. For example, the Forum questions the utility of the requirement that individual funds classify holdings into one of six buckets, instead arguing that a more principles-oriented approach would better serve individual funds, reduce risk, and be less expensive.
Additionally, the Forum questions the proposed requirement that would have funds limit purchases to those securities that can be liquidated in three days when the fund’s internally set “three-day liquid minimum” is breached. The Forum argues that, while limiting purchases may be appropriate in certain circumstances, in other circumstances such a move may be “unnecessary and may harm longer term shareholders who have an interest in the fund’s continuing to invest consistently with its stated investment policy.”
Regarding swing pricing, the Forum notes that the proposal represents a “significant break” with investors’ expectations that they will be able to transact with funds at net asset value. The letter also questions whether such an approach is fair to smaller shareholders who individually have small impacts on the fund but to whom a change in the NAV could have a large impact. Additionally, the Forum highlights complexities brought about by the prominence of intermediaries in the U.S. fund industry as compared to other jurisdictions where swing pricing has been implemented. Because the proposal “raises both significant philosophical questions and difficult operational issues,” the letter suggests that aspect of the proposal be considered in a separate rulemaking.