Rule 22e-4 Compliance

Is Your Liquidity Program in Place?

Liquidity Risk Management

What is the Liquidity Rule?

 

SEC Rule 22e-4, also called the Liquidity Rule, requires an exchange-traded fund or an open-end management investment company to assess, manage, and review liquidity risk on a regular basis. Liquidity risk, in this case, refers to the risk that a fund may not be able to meet share redemption requests without significant dilution of remaining investors' interests in the fund.

 

Compliance Deadlines

 

Open-ended mutual funds and ETF complexes with more than $1 billion of assets under management are required to be in compliance with SEC Rule 22e-4 by December 1st, 2018.  By this date, advisers must certify each portfolio holding into one of four classifications of liquidity. Funds with less than $1 billion of assets have until June 1st, 2019 to implement a liquidity program.

 

Investment Liquidity Categories

 

HIGHLY LIQUID

Any investment that a fund reasonably expects can be convertible into cash in current market conditions in three business days or less.

 

MODERATELY LIQUID

Any investment that a fund reasonably expects can be convertible into cash in current market conditions in more than three calendar days but in seven calendar days or less.

 

LESS LIQUID

Any investment that a fund reasonably expects can be sold or disposed of in current market conditions in seven calendar days or less ... but where the sale or disposition is reasonably expected to settle in more than seven calendar days.

 

HIGHLY ILLIQUID

Any investment that a fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less.

 

 

SEC Rule Details

 

As a manager, you should base your assessments on the assumption an asset can be converted to cash without significantly changing the market value of the investment.

 

If affected by this rule, you will be required to review fund liquidity classifications at least monthly, then report findings on Form N-PORT.  You will be required to note with the SEC if at any time an individual fund held “illiquid investments“ that are 15% or more of the total fund’s assets. If a fund is at, or above, the 15% threshold for more than seven calendar days, a defined program administrator is required to report to the Board within one business day. If less than seven days, the administrator must report to the Board at its next regularly scheduled meeting. Additionally, the administrator must provide to the company’s Board an explanation of the cause(s), the action taken, and how the fund intends to remedy the issue within a reasonable period of time.

 

Our Compliance Services

We are prepared to assist you with Rule 22e-4 reporting requirement in the following ways:

 

  • Custom design a daily load-in process to input your portfolio holdings
  • Use our Trade Compass tool to estimate your daily position liquidity
  • Automatically calculate the percentage of your overall portfolio in each liquidity category
  • Use our compliance dashboard  to create an Overview Report with daily email alerts if a fund reaches a Highly Illiquid threshold level
  • Help you process the monthly N-PORT file upload to the EDGAR system

 

Abel Noser has three decades of experience providing liquidity holdings analysis, daily data handling, and next-day reporting to fund complexes.  Contact us today to see why we are uniquely qualified to be your liquidity compliance partner.

 

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