Key Notes:

  • SEC proposes amending Form N-PORT to eliminate the requirement that funds publicly disclose aggregated liquidity classification (i.e., bucketing) information about their portfolios.
  • It recommends that funds disclose liquidity risk management program operations in annual reports rather than in quarterly Form N-PORT submissions.
  • It also proposes allowing funds to classify a holding across multiple liquidity buckets rather than forcing a holding into one liquidity category.
  • It suggests funds disclose cash and cash equivalents on Form N-PORT to facilitate monitoring compliance with highly liquid investment minimum requirements.

In October 2016, the Securities and Exchange Commission (SEC) adopted the liquidity rule to promote effective liquidity risk management programs and provide investors with more information regarding the redeemability of fund shares. Since then, SEC staff has engaged in extensive outreach to identify potential issues with the liquidity rule’s implementation. As part of that outreach, the SEC is seeking comment on three proposals described below.

Reporting on Liquidity Risk Management Programs in Annual Reports

The SEC proposes eliminating the requirement for open-end investment management companies to publicly disclose a fund’s liquidity buckets on Form N-PORT because it believes presenting these disclosures in Form N-PORT’s standard format could mislead investors into thinking liquidity classifications are the result of an objective, formal process. The SEC recommends instead that funds discuss the operation and effectiveness of their liquidity risk management programs in their annual reports. Making these disclosures in a narrative form in an annual report, on the other hand, would provide investors with the methodologies and assumptions underlying a fund’s liquidity classifications. A fund would be able to give the necessary background for investors to understand how liquidity classifications relate to its liquidity risk and management program as well as other factors that affect the fund’s performance.

Form N-PORT currently requires funds to classify each of their holdings into one liquidity bucket. However, the SEC understands the “one-size-fits-all” approach might not accurately reflect the liquidity of every holding. For example, different liquidity-affecting features of a holding may justify treating it as two or more separate investments for liquidity classification purposes. Alternatively, sub-advisers managing different sleeves of a fund’s portfolio may disagree as to the proper liquidity classification of a single holding held in multiple sleeves. In a third scenario, a fund might classify its holdings proportionally across buckets for internal risk management purposes. For any of these three reasons, the SEC proposes giving funds the option to report their holdings, by percentage, in different liquidity buckets.

Disclosing Cash and Cash Equivalents

The SEC also proposes requiring funds to disclose cash and cash equivalents on Form N-PORT. Because cash is a highly liquid investment, reporting cash and cash equivalents will allow the SEC to monitor a fund’s highly liquid investment minimum compliance more effectively. To avoid double reporting, the SEC proposes that the fund report only cash and cash equivalents not otherwise reported in Parts C and D of Form N-PORT.

Outlook

The SEC’s proposals aim to protect investors by providing accessible and helpful information, while simultaneously minimizing unnecessary fund costs. As it continues to fine tune the liquidity rule, the SEC is mindful of how to convey liquidity information to investors in a manner that is impactful and cost-effective.