Delay of Liquidity Classification and Related Requirements
On February 21, 2018, the Securities and Exchange Commission (the “SEC”) voted to delay the compliance deadline for open-ended registered investment companies and exchange-traded funds (collectively, “Funds”) to implement the liquidity risk management program rule’s liquidity classification requirement (or “bucketing”), highly liquid investment minimum (“HLIM”), board of director approval of the program, as well as related reporting requirements of Part D on Form N-LIQUID and liquidity disclosures on Form N-PORT.1 The compliance date for these requirements has been extended six months to June 1, 2019 for larger fund groups, and December 1, 2019 for smaller fund groups.2
The requirement for Funds to develop and establish liquidity risk management programs, including the designation of a program administrator, and to limit illiquid investments to 15% of Funds’ portfolios, will continue as scheduled, with a compliance date of December 1, 2018 for larger fund groups, and June 1, 2019 for smaller fund groups. However, Funds can delay receiving the board of director’s approval of the program until the end of the extension period.
As a result of the delay in the liquidity classification and HLIM requirements, the SEC is also extending the compliance date for reporting on these requirements on Forms N-PORT3 and Part D of N-LIQUID. Note, however, that Form N-LIQUID itself is not being delayed, and other parts of the form which concern breaches of the 15% illiquid investment limit continue as scheduled.
The SEC is not delaying the reporting of lines of credit, and inter-fund lending and borrowing information required for Form N-CEN. However, the Form N-CEN requirement to identify the in-kind status of certain exchange-traded funds may be noted as “n/a” until such Funds are required to comply with the liquidity classification and HLIM requirements.
Lastly, the SEC is also extending the compliance date for the recordkeeping requirements related to certain elements of the program, including the liquidity classification and HLIM requirements. However, other recordkeeping requirements concerning the liquidity risk management program itself, the 15% illiquid investments restriction, and a Fund’s board designation of a program administrator are not being delayed and must be completed on or before December 1, 2018 for larger fund groups, and June 1, 2019, for others.
15% Illiquid Investment Limit and Guidance
The SEC provided guidance on identifying illiquid investments to assist In-Kind ETFs and Funds not engaging in full liquidity classification during the extension period (meaning those Funds that are not adopted liquidity classification requirements) as part of the Interim Rule. The SEC described two evaluation methods: (i) preliminarily identify certain asset classes or investments that Funds reasonably believe are likely to be illiquid, and (ii) if the preliminary evaluation establishes a reasonable basis for believing that an investment is likely to be illiquid, but Funds wish to further evaluate its status, Funds may then further determine whether that investment is illiquid through the full classification process set forth in the rule.
Concurrently with the compliance date extension noted above, the staff of the SEC’s Division of Investment Management (the “Staff”) released additional questions and answers regarding the liquidity risk management program rule.4 The additional guidance adds to previous guidance provided on January 10, 2018, regarding sub-advisers and exchange-traded funds. The Staff’s updated guidance, which correlates to the Interim Rule, focuses on:
- Asset class liquidity classification,
- Reasonably anticipated trading size,
- Price impact standard,
- Classifying investments in pooled investment vehicles,
- Provisional investment classification activity and related compliance monitoring,
- Timing and frequency of classification of investments,
- Pre-trade activity and the 15% limitation on illiquid investments,
- Related reporting requirements, and
- Exchange-traded funds and investment classification.
While the delay appears welcomed by the fund industry, Funds should continue to construct and develop their liquidity risk management programs, and look to incorporate the current SEC and Staff guidance into the program’s build out. ACA stands ready to assist Funds, advisers, and sub-advisers and their applicable program committees in understanding the intricacies and requirements of the rule.
Other ACA Resources and Topic Discussion on the Liquidity Rule
- The SEC’s Liquidity Risk Management Program FAQs (compliance alert)
- Six Months into the Liquidity Risk Management Program Rule (white paper)
- Liquidity Rule Requirements (webcast)
For More Information
For more information, please contact Erik Olsen at ACA Compliance Group or your ACA consultant.
1 See Investment Company Liquidity Risk Management Programs; Commission Guidance of In-Kind ETFs, Investment Company Act of 1940 Release No. 33010 (February 21, 2018) (the “Interim Rule”) available at https://www.sec.gov/rules/interim/2018/ic-33010.pdf. Note that the Interim Rule presents questions for comment regarding the delay in the liquidity classification, HLIM, and reported reporting and requirement requirements, as well as, the length of the compliance period extension.
2 Larger fund groups are Funds that together with other investment companies in the same “group of related investment companies” have net assets of $1 billion or more as of the end of the most recent fiscal year. Smaller fund groups are Funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year.
3 Note that the SEC previously extended the filing date of Form N-PORT to April 30, 2019 for larger fund groups, and April 2020 for smaller fund groups. However, beginning no later than July 30, 2018, larger fund groups must maintain in their records the information that is required to be included in Form N-PORT; with the exception of the liquidity classification and HLIM requirements discussed herein.
4 See Investment Company Liquidity Risk Management Programs Frequently Asked Questions, SEC Division of Investment Management (February 21, 2018) (“FAQs”) available at https://www.sec.gov/investment/investment-company-liquidity-risk-management-programs-faq.