SEC Delays Compliance Date for Liquidity Risk Rule

March 13, 2018

The Securities and Exchange Commission (“SEC”) has postponed the compliance date for specific provisions in a rule requiring mutual funds to oversee their risk and ability to redeem investors’ shares. Announced as part of Release No. IC-33010, Investment Company Liquidity Risk Management Programs; Commission Guidance for In-Kind ETFs, the six-month delay gives fund companies additional time to classify risks in their investment holdings under Rule 22e-4 of the Investment Company Act of 1940. The new compliance date for larger fund groups is June 1, 2019, and the compliance date for smaller funds is December 1, 2019.

The new compliance dates resulted from fund companies complaining that there was insufficient public information available for categorizing investments as prescribed in Rule 22e-4. Fund companies were also concerned over the reliance on third-party service providers to apply the classification requirement, and the inability to test their systems before the initial compliance date.

In a statement on the new compliance date, SEC Chairman Jay Clayton said the delay would help preserve top market oversight and investor protection benefits of the commission’s liquidity rule. Clayton also mentioned that the delay addresses concerns that have arisen since adoption, and he expects that it will encourage a more efficient implementation process for Rule 22e-4.

Despite the compliance date’s postponement related to classifying risks, other aspects of Rule 22e-4 will still be effective at the original compliance date (December 1, 2018, for large funds; June 1, 2019, for small funds). Such aspects of the rule include requiring funds to adopt programs to oversee their liquidity risk and cap illiquid or hard-to-sell investments to 15 percent of a fund portfolio.

Issued as an interim final rule, Release No. IC-33010 will be effective 30 days after its publication in the Federal Register. Additionally, Release No. IC-33010 includes questions for comment, such as whether the SEC should consider other options for postponing the compliance date. Comments are due Friday, April 27.