The SEC’s Liquidity Risk Management Program FAQs

January 17, 2018

On January 10, 2018, the staff of the U.S. Securities and Exchange Commission’s (“SEC”) Division of Investment Management released answers to 15 questions regarding its October 2016 liquidity risk management program rule. The SEC staff’s guidance, addressed here in part, focused on sub-advisers and In-Kind exchange-traded funds (“ETFs”) (as defined in the rule).


  • A fund may delegate specific responsibilities under a fund’s liquidity program, including serving as the program’s administrator, to a sub-adviser. The exact involvement of a sub-adviser, or any other program delegates, should be addressed in the fund’s policies and procedures. The program administrator should also adopt policies and procedures that address oversight of the delegates.
  • Funds – including those in the same complex – can classify the liquidity of the same investment differently based on their use of different methodologies and/or assumptions. An extension of this idea occurs when a single fund may employ multiple sub-advisers where the sub-advisers “manage their respective sleeves autonomously, with no reference to (or visibility into) the sleeves.”1 SEC staff offered that “neither the fund, the adviser, nor the sub-advisers with delegated [liquidity risk management] responsibilities would be under any obligation to resolve these differences for compliance purposes.”2 However, the fund’s policies and procedures should have a process for resolving such differences.
  • Form N-PORT cannot handle multiple liquidity classifications for a single investment. As such, a fund’s liquidity program must provide for how a single classification will be determined and reported on Form N-PORT. In addressing this, the program should describe how a fund will determine such an investment’s reportable liquidity classification, and describe such methodology in Form N-PORT’s ‘Explanatory Notes’ section.


  •  “[A]n ETF may exclude cash in redemption proceeds that is proportionate to the ETF’s uninvested portfolio cash for purposes of defining and testing compliance with its de minimis cash amount.”3 To this point, an ETF would be expected to review its own particular facts and circumstances, including the liquidity of its portfolio and the nature of its redemptions (i.e., in-kind versus cash, and the levels thereof). However, de minimis cash redemption transactions should normally not exceed 5% of an In-Kind ETF’s overall redemption proceeds paid in cash. A percentage higher than 5%, but less than 10%, may be appropriate after an In-Kind ETF assesses, in part, whether such cash redemptions would give rise to liquidity risks present with mutual funds.
  •  An ETF may determine to deliver an all-cash redemption to an authorized participant (“AP”) at the ETF’s discretion, so long as an all-cash transaction does not “as a proportion of the ETF’s aggregate redemption transactions…exceed the de minimis amount of cash defined in the ETF’s policies and procedures, and the AP who receives the cash redemption is not an AP who has elected to receive cash redemptions as standard practice."4
  • An In-Kind ETF may undertake a variety of “reasonable and consistent” approaches to determine whether its cash redemptions transactions are de minimis. An In-Kind ETF may test redemption transactions on an individual basis or in totality over a reasonable amount of time – from a day to a week for frequent redemption basket activity, or a month for less frequent redemption basket activity. The Staff does not believe a period over a month would be considered reasonable.

How ACA Can Help

SEC staff noted that it expects to update its guidance from time to time, but did not offer when it would do so. Funds should continue to construct and develop its liquidity risk management program, and look to incorporate the current and future SEC staff guidance into the program’s buildout. ACA can assist funds, ETFs, advisers, and sub-advisers in understanding the intricacies and requirements of the rule.


For more information, please contact Erik Olsen at or your regular ACA consultant. 

1 See Investment Company Liquidity Risk Management Programs Frequently Asked Questions, SEC Division of Investment Management (January 10, 2018) (“FAQs”) at 7.A.
2 Ibid 
3 FAQs at 9.A.
4 FAQs at 12.A