SEC Proposes Rule 22e-4 on Fund Liquidity

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The SEC Commissioners today voted 5-0 to propose a rule requiring asset managers of mutual funds and exchange traded funds to disclose additional information about their liquidity risk and redemption practices. Rule 22e-4, if adopted, would also require open-end funds to assess and periodically review their liquidity risk.

The regulation is designed to bolster the Investment Company Act of 1940 requirement that mutual funds honor redemption requests within seven days. Earlier this year in a talk at the Brookings Institution, Commissioner Kara Stein expressed concern that some funds are promising investors high liquidity in their fund where the underlying investment is in illiquid assets.

The proposed law would require fund managers to establish a minimum requirement for investments in cash and three-day liquid assets. It would also codify the current SEC guideline that only 15 percent of positions can be invested in illiquid assets.

We have been talking about liquidity in the bond market and ETFs for some time here as a potential area for reports by SEC whistleblowers, and this proposal indicates the SEC is listening to the same concerns from the marketplace.

The proposed rule will need additional approval from the SEC Commissioners as well as to pass through the notice and comment rulemaking process before it is implemented.

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