Mutual Fund/ETF Liquidity: Do the SEC’s New Reporting Requirements Hold Water?

The Liquidity Risk Management (LRM) Program under the Rule 22e-4 is a major updating of how mutual funds and exchange-traded funds (ETFs) will report the potential market redemption liquidity and/ or lack of liquidity within their portfolios. The LRM program is specifically targeting the measurement, monitoring, and reporting of liquidity risk within fund portfolios.

The primary rule of the LRM proposal, section 22e-4, requires funds to qualify each position within their portfolios into four risk buckets:

1. Highly liquid investments
2. Moderately liquid investments
3. Less-liquid investments
4. Illiquid investments

A major aspect of the proposed ruling is that on a quarterly disclosed basis, funds’ holdings would be summed, assigned to each of the four liquidity buckets as percentages, and made assessable to the public. This public disclosure has become the crux of controversy, leading to revisions to the original ruling.

The costs of implementation and ongoing annual costs are running high, the bucketing of positions for funds that have thousands of positions and the aspect of public disclosure have all become areas of concern for mutual fund and ETF investment firms.

Official implementation data delivery has now been pushed to June 2019 and aggregate percentage position data will now be viewed by the SEC only.

This TABB Group report, Mutual Fund/ETF Liquidity: Do the SEC’s New Reporting Requirements Hold Water?, summarizes the full LRM ruling, updates current revisions and implementation dates, industry costs and discusses longer term implications.