SIFMA AMG Recommends Improvements to the SEC Proposed Liquidity Management Rules for Mutual Funds and ETFs

Release Date: January 13, 2016
Contact: Liz Pierce, 212-313-1173, [email protected]  

SIFMA Asset Management Group Recommends Improvements to the SEC Proposed Liquidity Management Rules for Mutual Funds and ETFs 

Washington, D.C., January 13, 2016–SIFMA’s Asset Management Group (SIFMA AMG) today submitted comments to the Securities and Exchange Commission (SEC) regarding the SEC’s proposed liquidity management rules for open-end funds, including mutual funds and exchange-traded funds (ETFs). SIFMA AMG submitted two comment letters: one focused on the SEC’s proposed requirements for liquidity risk management programs, and one focused on the SEC proposal to permit swing pricing on an optional basis.  

“SIFMA’s Asset Management Group shares the SEC’s goal of promoting a resilient marketplace that works in the best interests of investors, and we commend the SEC for its leadership in assessing new tools that promote this objective,” said Kenneth E. Bentsen, Jr., SIFMA president and CEO.  “Mutual funds, ETFs and other products are vitally important tools that help investors achieve their financial goals. As such, it is crucial that any new rules strike the right balance of promoting stability while preserving the benefits these funds bring to investors.” 

Timothy W. Cameron, managing director and head of SIFMA’s Asset Management Group, added, “Liquidity is a fluid and dynamic concept which cannot be measured with the exactness proposed in this rulemaking, especially for fixed income instruments and other instruments traded over the counter.  Funds will, by their nature, vary in their subjective approaches to liquidity classifications.  As proposed, the SEC’s liquidity risk management program, which requires objectivity, would have a detrimental impact to funds and investors. SIFMA AMG’s letters offer constructive insight on how to move these initiatives forward in a manner that best accomplishes the SEC’s goals.” 

Proposed Requirements for Liquidity Risk Management Programs

While SIFMA AMG supports the SEC’s overarching goal to enhance liquidity risk management practices by requiring all open-end funds to adopt formal liquidity risk management programs, it is concerned that certain components of the SEC’s Proposal would actually impede the SEC’s understanding of fund liquidity and undermine effective liquidity management practices.  The proposed classification system would require funds to make finely tuned distinctions about the liquidity of specific holdings, or portions of holdings, at a given point in time.  While this may create the impression of precision and objectivity, these distinctions would, in reality, be subjective and often arbitrary. 

SIFMA AMG believes that the SEC would be better served by undertaking a more flexible approach that enables funds to establish liquidity risk management programs based on sound principles, in a manner that reflects and takes into account their specific circumstances. Specifically, SIFMA AMG suggests alternative approaches to a number of key components of the SEC’s Proposal.  

Foremost, instead of requiring funds to classify portfolio assets according to a six-category “days-to-cash” system – which seeks to impose a level of precision and granularity that is not feasible in today’s marketplace – SIFMA AMG recommends an alternative approach that would have funds classify the liquidity of portfolio assets using a spectrum-based approach which is relative in nature across four different liquidity categories.  

Additionally, instead of the three-day liquid asset minimum – which would effectively function as a cash buffer requirement that unnecessarily constrains a fund’s ability to employ its investment strategy, and in some cases would increase liquidity risk –  SIFMA AMG recommends requiring fund managers to evaluate whether it would be prudent to identify a target percentage of “highly liquid” assets that a fund should observe.  

SIFMA AMG’s letter further outlines industry suggestions for liquidity risk management programs.  

Proposal to Permit Swing Pricing by Open-end Funds

SIFMA AMG supports the concept of swing pricing and recognizes that swing pricing practices in Europe have been viewed as successful and effective as a means of mitigating shareholder dilution by passing on purchase and redemption costs to the transacting shareholders.  However, because of operational processes in the United States that differ significantly from those in Europe, swing pricing currently poses significant implementation challenges in the U.S. SIFMA AMG encourages the SEC to address and help resolve this feasibility issue as it moves forward with any swing pricing rulemaking.  

SIFMA AMG’s letters also address the role of fund Boards, highlighting support of the supervisory role of Boards in overseeing funds while noting that daily management responsibilities are best left to the funds. AMG’s full comment letter regarding the SEC’s proposed requirements for liquidity risk management programs for open-end funds is available here: The full comment letter regarding the SEC’s proposal to allow swing pricing by open-end funds on an optional basis is available here:  

SIFMA AMG is committed to providing the input of its members as the SEC considers a series of rulemakings intended to assess risk in the asset management industry, including initiatives on data reporting, liquidity risk management, the use of leverage and derivatives, and stress tests/transition planning. The SEC, as the primary regulator of asset managers, is the appropriate regulator to assess such rulemakings.  

SIFMA AMG members represent U.S. asset management firms whose combined assets under management exceed $30 trillion.  The clients of AMG member firms include, among others, registered investment companies, endowments, state and local government pension funds, private sector Employee Retirement Income Security Act of 1974 (“ERISA”) pension funds, and private funds such as hedge funds and private equity funds.