This week, the SEC adopted an interim rule (the Interim Rule)[1] delaying by six months the compliance dates for classification-related aspects of Liquidity Risk Management Program requirements pursuant to Rule 22e-4 (the Rule) under the Investment Company Act of 1940 (the 1940 Act). Under the Interim Rule, the new compliance dates for the delayed aspects of the Rule are June 1, 2019, for larger entities[2] and Dec. 1, 2019, for smaller entities[3] (the New Compliance Dates)[4].

The following specific aspects of the Rule are covered by the New Compliance Dates: (i) classifications of investments into one of four liquidity “buckets” and monthly reviews of the classifications; (ii) determinations and reviews of the applicable highly liquid investment minimum (HLIM); (iii) board approval of the Liquidity Risk Management Program; (iv) reporting requirements relating to classification of investments and a fund’s breach of its HLIM; and (v) certain related record-keeping requirements of the Rule.

Importantly, funds still need to implement by the Original Compliance Dates those aspects of the Rule that are not being delayed. This includes implementation of a Liquidity Risk Management Program “reasonably designed to assess and manage its liquidity risk” (albeit, its board approval requirement is delayed), compliance with the 15% illiquid investment limit, and the board’s designation of a program administrator.

In addition, pursuant to guidance embedded in the SEC’s Interim Rule Release (the Guidance), for the period from the Original Compliance Date until the New Compliance Date (the Preliminary Period), a fund can comply with the 15% illiquid investment limitation by classifying certain investments as illiquid because the fund reasonably believes that such investments are likely to be illiquid. This evaluation may be based on a fund’s trading experience, understanding of the general characteristics of the asset or other factors. Although during this Preliminary Period the fund would not be required to base its evaluation of market depth on the actual size of its investment in an assets class, the SEC does not think it would be reasonable for a fund to assume that illiquidity be based on the ability to sell only one trading lot. For the Preliminary Period, the illiquidity classification under the preliminary evaluation procedure would generally be determined upon acquisition and evaluated monthly thereafter, but a fund may have to re-evaluate this classification more frequently under certain circumstances, e.g., an “objectively determinable event,” such as a trading halt or delisting of a security, an issuer or counterparty default or bankruptcy, significant macroeconomic developments (such as a sovereign default), or events like extraordinary natural disasters or political upheavals, for funds with concentrated geographic exposures. Presumably, any fund’s compliance with the existing 15% limitation already takes account of such factors.

The following chart provided by the SEC lists the specific aspects of the Rule that are subject to the New Compliance Dates and the aspects of the Rule that are still subject to the Original Compliance Dates: