SEC Proposes Changes to Forms N-PORT and N-1A Regarding Liquidity Disclosures

March 23, 2018

Under the proposal, a fund would be able to classify a security’s liquidity across multiple classifications in the following three scenarios. A fund would be required to note which of the three scenarios led the fund to split the classifications of the holding.

  • Differences in liquidity characteristics – The Commission notes the example of a fund holding an asset that includes a put option on a percentage (but not all) of the fund’s holding of the asset, thus affecting the liquidity characteristics of the asset subject to the feature.
  • Sub-advisers – The Commission offered that differences in asset liquidity classification may arise between sub-advisers managing different sleeves of a fund’s portfolio holding the same asset. The Commission staff previously noted the acceptability of this situation in terms of a fund’s liquidity program, but previously noted that such differences would have to be “”rationalized” into a single classification for Form N-PORT reporting purposes.
  • Proportionality – The Commission notes that some funds may, for internal risk management purposes, classify their holdings proportionally across liquidity “buckets” based on an assumed sale of the entire position. Under this approach, the Commission notes, a fund would split the entire holding among the four liquidity classification categories (using a method similar to the approach contemplated by the Commission in its September 2015 release proposing Rule 22e-4 under the Investment Company Act of 1940).

Cash and Cash Equivalents

Lastly, the Commission proposes that funds and other registrants begin reporting their holdings of cash and cash equivalents on Form N-PORT. This information would be made public each quarter. The Commission notes that the “additional disclosure of cash and certain cash equivalents by funds will also provide more complete information that will be useful in analyzing a fund’s HLIM, as well as trends regarding the amount of cash being held, which also correlates to other activities the fund is experiencing, including net inflows and outflows.”

Staff Analysis

The Proposing Release indicates that Commission staff will provide investors with information about fund liquidity via periodic published reports of aggregated and anonymized liquidity data of all funds or funds in certain categories. In addition to such periodic reporting, staff from the Divisions of Investment Management and Economic and Risk Analysis will conduct a review of the “granular fund-specific liquidity classification data that the Commission will begin receiving on a confidential basis in June 2019.” The division staff will provide an analysis of the data to the Commission and present the Commission by June 2020 a recommendation addressing whether and, if so, how there should be public dissemination of fund-specific liquidity classification information.

Compliance Dates

The compliance dates for the proposed requirements are intended to coincide with the previously revised reporting compliance dates of Form N-PORT of April 30, 2019 for larger fund groups, and March 1, 2020 for smaller fund groups.4 These compliance dates would apply to all Form N-PORT filings after the relevant date and to funds subject to these proposed requirements that file initial registration statements on Form N-1A, or that file post-effective amendments that are annual updates to effective registration statements on Form N-1A, after these proposed compliance dates.

Conclusion

The Commission and its staff appear willing to consider industry feedback on the requirements of Rule 22e-4 and related reporting requirements. While more rule changes, delays, and/or guidance may be issued, funds should continue to construct and develop their liquidity risk management programs. ACA stands ready to assist funds, advisers and sub-advisers and their applicable program committees in understanding the intricacies and requirements of the rule.

Other ACA Resources and Discussion on the Liquidity Rule

 

1See Investment Company Liquidity Disclosure, Investment Company Act of 1940 Release No. 33046 (March 14, 2018) (the “Proposing Release”) available at https://www.sec.gov/rules/proposed/2018/ic-33046.pdf. Note that the Proposal Release presents questions for comment regarding the Commission’s proposed changes.

2A fund’s requirement to report the percentage of its highly liquid investments that are segregated to cover, or pledged to satisfy margin requirements in connection with, derivatives transactions classified as moderately liquid investments, less liquid investments and illiquid investments would be re-designated to the non-public portion of Form N-PORT.

3See Question 8 of Investment Company Liquidity Risk Management Programs Frequently Asked Questions (revised February 22, 2018) available at https://www.sec.gov/investment/investment-company-liquidity-risk-management-programs-faq.

4Note that the Commission previously extended the filing date of Form N-PORT to April 30, 2019 for larger fund groups, and April 30, 2020 for smaller fund groups. However, beginning no later than July 30, 2018, larger fund groups must maintain in their records the information that is required to be included in Form N-PORT; with the exception of the liquidity classification and HLIM requirements. The latter information would not have to be reported on Form N-PORT until July 30, 2019 for larger fund groups. Larger fund groups are Funds that together with other investment companies in the same “group of related investment companies” have net assets of $1 billion or more as of the end of the most recent fiscal year. Smaller fund groups are Funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year. See Investment Company Reporting Modernization, Investment Company Act of 1940 Release No. 32936 (December 8, 2017) available at https://www.sec.gov/rules/final/2017/33-10442.pdf. See also Investment Company Liquidity Risk Management Programs; Commission Guidance for In-Kind ETFs, Investment Company Act of 1940 Release No. 33010 (February 22, 2018) available at https://www.sec.gov/rules/interim/2018/ic-33010.pdf.