On March 14, 2018, the SEC issued proposed amendments to the disclosure requirements concerning certain fund liquidity information. Fund liquidity reporting relates to new Rule 22e-4 under the Investment Company Act of 1940, as amended (the Liquidity Rule), which requires each fund to adopt and implement a written liquidity risk management (LRM) program reasonably designed to assess and manage the fund's liquidity risk.1 A fund's LRM program must include certain components, including, among other things, that a fund classify the liquidity of each portfolio investment into one of four categories (or "buckets"): highly liquid investments, moderately liquid investments, less liquid investments and illiquid investments. Form N-PORT2--for which the compliance date has not yet occurred--requires a fund to publicly report the aggregate percentage of its portfolio investments that falls into each of the four buckets.3 The SEC's proposed rule would eliminate the foregoing public reporting requirement.
Specifically, if adopted, the proposals would do the following:
- rescind the requirement in Form N-PORT that funds publicly disclose aggregate liquidity portfolio classification information on a quarterly basis;
- require funds to "briefly discuss" the operation and effectiveness of the LRM program during the most recently completed fiscal year in the annual report in order to "provide investors with enough detail to appreciate the manner in which a fund manages its liquidity risk";4
- make nonpublic the reporting about the percentage of a fund's highly liquid investments that are segregated to cover, or pledged to satisfy margin requirements in connection with, less-liquid derivatives transactions;
- allow funds the option of splitting a fund's holding into more than one liquidity bucket in three specified circumstances:
(1) if portions of a position have differing liquidity features that justify treating the portions separately, such as when a fund holds a put option on a portion, but not all, of the fund's holding of the asset which significantly affects the liquidity characteristics of the portion of the asset subject to the put;
(2) if a fund has multiple sub-advisers with differing liquidity views, such as where sub-advisers manage different sleeves of a fund and a single holding is held in multiple sleeves, a fund may report each subadviser's classification of the proportional holding it manages--effectively treating each portion as two separate and distinct securities--rather than putting the entire holding into one bucket, thus avoiding "the need for costly reconciliation"; and
(3) if the fund chooses to classify the position through an evaluation of how long it would take to liquidate the entire position (rather than basing it on the sizes it would reasonably anticipate trading)--referred to as a "proportionality approach"; and
- require funds to publicly report holdings of cash and cash equivalents on a quarterly basis on Form N-PORT.
If the proposed amendments are adopted, the SEC expects to provide for a tiered set of compliance dates based on asset size. Specifically, the SEC proposes to align the compliance date for the proposed amendments with the revised compliance date previously adopted for Form N-PORT.5
The proposing release notes that, to further assist in providing investors with information about fund liquidity, the SEC staff expects to publish "aggregated and anonymized information about the fund industry's liquidity," similar to periodic reports issued by the staff about private fund industry data that is gleaned from Form PF filings.
The proposing release requests comment on the proposed elimination of the aggregate liquidity profile public disclosure requirement of Form N-PORT, the proposed replacement with a requirement that funds add a narrative discussion of their LRM program to annual reports, and other elements of the proposed amendments. Comments are due by May 18, 2018.
The proposing release is available at: https://www.sec.gov/rules/proposed/2018/ic-33046.pdf