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SEC adopts rules to modernize information reported by funds, require liquidity risk management programs

Monday, October 17, 2016
Opalesque Industry Update - The Securities and Exchange Commission voted to adopt changes to modernize and enhance the reporting and disclosure of information by registered investment companies and to enhance liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs). The new rules will enhance the quality of information available to investors and will allow the Commission to more effectively collect and use data reported by funds. The new rules also will promote effective liquidity risk management across the open-end fund industry and will enhance disclosure regarding fund liquidity and redemption practices.

The new rules are part of the Commission’s initiative to enhance its monitoring and regulation of the asset management industry.

“These new rules represent a sweeping change for the industry by requiring strong transparency provisions and enhanced investor protections,” said SEC Chair Mary Jo White. “Funds will more effectively manage liquidity risk and both Commission staff and investors will receive additional and better quality information about fund holdings.”

The reporting modernization rules will enhance data reporting for mutual funds, ETFs and other registered investment companies. With these rules, registered funds will be required to file a new monthly portfolio reporting form (Form N-PORT) and a new annual reporting form (Form N-CEN) that will require census-type information. The information will be reported in a structured data format, which will allow the Commission and the public to better analyze the information. The rules also will require enhanced and standardized disclosures in financial statements and will add new disclosures in fund registration statements relating to a fund’s securities lending activities.

The liquidity risk management rules are designed to promote effective liquidity risk management for mutual funds and ETFs, reducing the risk that funds will not be able to meet shareholder redemptions and mitigating potential dilution of the interests of fund shareholders. The new rules will require mutual funds and ETFs to establish liquidity risk management programs that address multiple elements, including classification of the liquidity of fund portfolio investments and a highly liquid investment minimum. The rules also strengthen the 15 percent limit on illiquid investments and will require enhanced disclosure regarding fund liquidity and redemption practices.

The swing pricing rule will permit mutual funds to use swing pricing – the process of adjusting a fund’s net asset value to pass on to purchasing or redeeming shareholders costs associated with their trading activity.

The new rules and forms will be published on the Commission’s website and in the Federal Register.

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