Open-End Fund Liquidity Risk Management Programs Rule
Summary
SIFMA AMG letter to Securities and Exchange Commission (SEC) Chairman Clayton, SEC Commissioner Stein, and SEC Commissioner Piwowar regarding Open-End Fund Liquidity Risk Management Programs Rule – Request for Extension of Compliance Date, Interpretive Guidance, and Consideration of Targeted Changes to the Rule.
Excerpt
September 12, 2017
Chairman Jay Clayton
Commissioner Kara Stein
Commissioner Michael Piwowar
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Re: Open-End Fund Liquidity Risk Management Programs Rule – Request for Extension of Compliance Date, Interpretive Guidance, and Consideration of Targeted Changes to the Rule
Dear Chairman Clayton, Commissioner Stein, and Commissioner Piwowar:
We are writing to express our sincere appreciation of your willingness to hear and respond to the concerns that have arisen in the course of our Members’ efforts to implement the Commission’s new Rule 22e-4 over the eleven-month period since the Rule was adopted last October, and which we described during our meetings at the Commission in July. We would also like to explain further our reasons for requesting an extension of the compliance deadline for the rule, in response to your questions and observations during those meetings.1
Our Members support the Commission’s goal of raising standards for liquidity risk management across the industry, and have been working diligently toward compliance since the rule’s adoption. However, as we hoped to convey during our meetings, they have encountered significant and fundamental difficulties in their efforts to achieve compliance with the classification requirement of the rule by December 1, 2018, the current deadline. As a result, on behalf of our Members, we respectfully request prompt Commission action to delay the compliance date for the classification requirement for at least six months.
This extension period would serve three important purposes.
i. It would allow our Members the time to build and adequately test the complex systems necessary to develop their classification infrastructure.
ii. It would allow time for the Commission and its staff to consider and address the industry’s requests for interpretive guidance, many of which could significantly affect how the infrastructure should be built.
iii. Finally, the extension would provide the Commission time to consider targeted changes to the rule, in particular the classification requirement, in light of the lessons learned during the implementation process about the rule’s operation in practice.
In the meantime, our Members will continue to work diligently toward complying with the core requirement of the rule – adopting formal liquidity risk management programs designed to prevent investors from suffering significant dilution from redemptions – in time for the Commission’s original December 1, 2018, deadline.
I. Summary of Implementation Challenges Encountered by Our Members
The open-end fund management industry in the U.S. is highly diverse, and the challenges faced by firms in complying with the new classification requirement prescribed by Rule 22e-4 reflect that diversity. Components of diversity in fund groups include, among others, a wide spectrum of asset classes, investment methods and strategies, size and culture of the management firm, and allocation of advisory responsibilities (for example, by use of sub-advisers). Our Members believe that this diversity, which enriches the options available for fund investors, is one of the great strengths of the U.S. fund industry.
Given this diversity, firms have historically taken different approaches to managing liquidity risk, including different approaches to assessing and classifying liquidity. The Rule 22e-4 classification requirement, by contrast, imposes a single, newly created classification methodology on all funds. As can be expected, the distance that different firms must travel to arrive at the Rule 22e-4 methodology, and the means of getting there, will thus differ widely.
1 AMG’s members represent U.S. asset management firms whose combined global assets under management exceed $34 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.