United States: Liquidity Management Rule – Delays and Revisions

On October 13, 2016, the Securities and Exchange Commission (the "SEC") adopted Rule 22e-4 (the "Liquidity Rule") under the Investment Company Act of 1940, as amended, to require each registered open-end management investment company, including exchange-traded funds but not including money market funds, to establish a liquidity risk management program. The SEC adopted the Liquidity Rule to focus funds' attention and resources on managing liquidity risk – i.e., the "risk that a fund could not meet requests to redeem fund shares without significant dilution of the remaining investors' interests in the fund."1 The key requirements of the rule include: the adoption and implementation of a written liquidity risk management program; classification (or "bucketing") of the liquidity of each portfolio investment (including derivatives); determination of a "highly liquid investment minimum"; limitation on illiquid investments; and additional requirements on boards of directors to oversee fund liquidity management.2

Six Month Delay

The Liquidity Rule was originally scheduled to take effect on December 1, 2018 for "larger fund groups"3 and June 1, 2019 for "smaller fund groups." On February 21, 2018, the SEC voted unanimously to extend the deadline for compliance with certain aspects of the Liquidity Rule by six months.4 Specifically, it delayed the much debated "bucketing" requirement, the requirement to establish a "highly liquid investment minimum," and certain board oversight of the liquidity risk management program. Funds will still be required to implement liquidity risk management programs by December 1, 2018 (for larger fund groups). However, funds need not implement the liquidity classification/"bucketing" or "highly liquid investment minimum" requirements until June 1, 2019, at the earliest, and boards do not need to approve liquidity risk management programs until June 1, 2019, at the earliest.5 Other provisions of the Liquidity Rule, including the requirement to limit a fund's illiquid investments to 15% of its portfolio, will become effective on December 1, 2018 for larger fund groups and on June 1, 2019 for smaller fund groups, as originally scheduled.

The most vocal critic of the original deadline has been the Investment Company Institute (the "ICI").  The ICI had previously submitted letters to Chairman Clayton asking that the SEC take action to refine certain elements of the Liquidity Rule. On July 20, 2017, the ICI President and Chief Executive Officer, Paul Schott Stevens, requested that the SEC relax the compliance schedule for the Liquidity Rule classification and related reporting requirements, in part to provide the SEC time to consider comments on the Liquidity Rule and potentially amend it.  One amendment proposed by the ICI would have allowed funds to formulate their own classification policies and procedures. Mr. Schott's letter also requested a delay in the compliance schedule for the classification provision (and related reporting requirements) by at least one year even if the SEC determined not to pursue the ICI's recommended amendments to the Liquidity Rule.

The chart below summarizes which of the Rule's requirements are subject to the extension.6

  Requirements Not Subject to Extension Requirements Subject to Extension
Rule 22e-4
  • Liquidity Risk Management Program

    • Assessment, management, and periodic review of liquidity risk (§(b)(1)(i))
    • Illiquid investments(§(b)(1)(iv))
    • Redemptions in Kind(§(b)(1)(v))
    • Board Designation of Program Administrator(§(b)(2)(ii))
    • UIT Liquidity
  • Classification ("bucketing") (§(b)(1)(ii))
  • Highly liquid investment minimum (§(b)(1)(iii))
  • Board Oversight

    • Initial approval of the liquidity risk management program (§(b)(2)(i))
    • Annual Board Reporting (§(b)(2)(iii))
  • Part A. General Information
  • Part B. Above 15% Illiquid Investments
  • Part C. At or Below 15% Illiquid Investments
  • Part D. Assets that are Highly Liquid Investments Below the HLIM

Proposed Rescission of Public Disclosure Requirement

On March 14, 2018, the SEC proposed amendments to Form N-PORT that would rescind the requirement of the Liquidity Rule that funds publicly disclose liquidity classification/"bucketing" information about their portfolios.7 In lieu of public disclosure of aggregate portfolio liquidity information, the proposed amendment would require a fund to include a narrative discussion of its liquidity risk management program in the fund's annual report. The narrative is expected to include discussion of the operation and effectiveness of the liquidity risk management program during the most recently completed fiscal year. The SEC likened this disclosure to the current Form N-1A requirement that a fund disclose the principal risks of investing in the fund, including liquidity risk if applicable.

The SEC has acknowledged concerns from industry commentators. Specifically, the SEC cited "subjectivity," "lack of context," and "liquidity risk in isolation" as the main types of concerns influencing the proposed rescission:

Subjectivity - Concerns about "subjectivity" relate to the differences in classification methodologies and assumptions being used across funds. Although there is no uniform classification methodology, Form N-PORT data across funds may seem to be comparable for an investor. Additionally, currently developed methodologies are imperfect; for example, the ICI found that the size of a fund may have a disproportionate effect on a fund's liquidity results.8 As a consequence, investors may be confused by the differences in the liquidity profiles of a large and small fund, and may incorrectly believe that small portfolios have less liquidity risk. This inconsistency in turn diminishes the usefulness of classification information and creates confusion.

Lack of Context - "Lack of context" refers to the fact that classification information will be disclosed on Form N-PORT, which does not provide the funds an opportunity to explain their classification methodologies and assumptions. Funds cannot tailor the Form N-PORT disclosure to fund-specific risks or attempt to clarify the liquidity disclosures. Further, the liquidity classification information would be presented to the public on a 60-day delay. The staleness of the information could exacerbate the inappropriateness and misleading nature of the classification information should an investor use this information for investment decisions.

Liquidity Risk in Isolation - Finally, the "liquidity risk in isolation" concern refers to the emphasis on liquidity risk in Form N-PORT. This emphasis could encourage investors to put more weight on liquidity risk as opposed to other considerations that are more important to their individual investment objectives.


1 Investment Company Liquidity Risk Management Programs, SEC Release Investment Company Act Release No. 32315 (Oct. 13, 2016) (the "Adopting Release").

2 Also on October 31, 2016, the SEC adopted rules to modernize reporting for funds. It decided to phase out current reports N-Q and N-SAR, adopt new forms N-PORT and N-CEN, and adopt amendments to forms N-1A, N-3, and N-CSR. Investment Company Reporting Modernization, SEC Release Investment Company Act Release No. 32314 (Oct. 13, 2016).

3 Larger fund groups are those with net assets greater than $1 billion. See, Adopting Release.

4 SEC Votes to Modify Compliance Date for Open-End Fund Liquidity Classification, SEC Release 2018-24 (Feb. 21, 2018), available at: https://www.sec.gov/news/press-release/2018-24.

5 Investment Company Liquidity Risk Management Programs; Commission Guidance for In-Kind ETFs, SEC Release No. IC-33010 (Feb. 22, 2018), available at: https://www.sec.gov/rules/interim/2018/ic-33010.pdf .

6 Id. (lightly edited and reformatted).

7 Investment Company Liquidity Disclosure, SEC Release Investment Company Act Release No. 33046 (Mar. 14, 2018), available at: https://www.sec.gov/rules/proposed/2018/ic-33046.pdf.

8 Letter from Investment Company Institute (Nov. 3, 2017), available at: https://www.sec.gov/comments/s7-16-15/s71615-2674225-161457.pdf

To view the article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions