On March 14, 2018, the SEC proposed an amendment to the Liquidity Rule. As adopted, the Liquidity Rule requires open-end investment companies to establish a written liquidity risk management program. As part of this program funds must (i) submit position-level data to the SEC on a non-public basis each month and (ii) publicly disclose the fund’s aggregates liquidity profile on a quarterly basis by classifying securities, also called the “bucket approach.”
The proposed amendment replaces the bucket approach. Instead, funds will be required to discuss the operation and effectiveness of its liquidity risk management program in its annual report. The SEC seeks to replace the bucket approach because classifying assets is inherently subjective and the bucket approach does not provide investors the necessary context to understand how the classification relates to the fund’s liquidity and risk management. The SEC believes a narrative description in the fund’s annual report will “better inform investors of how the fund’s liquidity risk and liquidity risk management practices affect their investment.”
It is important to understand the practical implications of the proposed amendment on open-end investment companies. Specifically, while the proposed amendment changes the information that they must publicly disclose, it does not change the data they must report to the SEC.