Investment Company Liquidity Risk Management & Reporting Modernization: How far along are you in your compliance journey?

With legislative changes impacting Investment Companies on liquidity risk management and reporting modernization, how ready is your organization to comply with SEC 22e-4? 

While the SEC (U.S. Securities and Exchange Commission) issued the final ruling in Q4-2016, time is certainly running out for investment companies impacted by the regulation to comply with SEC rule 22e-4.

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What is at stake for your institution to enhance your governance framework and liquidity risk management and reporting capabilities to ensure compliance?

This papers aims at guiding investment managers on the actions needed to comply with this complex regulation.

  1. The SEC’s Liquidity Risk Management Rule is designed to promote effective liquidity risk management for investment companies requiring open-end funds and ETFs (excluding Money Market Funds) to:
  2. Implement a comprehensive liquidity risk management program,
  3. Comply with enhanced reporting requirements, and
  4. Under certain circumstances, permit the use of Swing pricing for open-end funds but not ETFs

The motivation behind the final ruling is to provide investors (and the SEC, of course) with additional information and tools to monitor the funds ability to meet redemption requests without significantly diluting remaining shareholders.

 Where does your organization stand in this constrained timeline?

 

  1. What tactical and strategic options have you implemented to ensure that your institution will be compliant by the given compliance and reporting deadlines?

  1. SEC 22e-4 prescribes a quantitative and qualitative framework to liquidity risk management

  1. Implementation Steps – Governance: The fund’s board must employ reasonable business judgement on behalf of investors when exercising oversight of the liquidity risk management program. Has your organization adapted existing governance structures with these critical elements to comply with the SEC’s requirements?

  1. Implementation Steps – Solution & Systems: Liquidity Risk is defined as “the risk that a fund could not meet requests to redeem shares issued by the fund without significant dilution of remaining investors interests in the fund”. Does your organization have the data, solutions and systems in place to meet the liquidity classification, liquidity limits setting and reporting requirements outlined by the SEC?

  1. Requirements: The Liquidity Rule requires each fund to assess, manage and periodically review its “liquidity risk,” with considerations given to the following elements and where applicable, stress conditions should be assessed.
      1. The Liquidity Rule requires each fund (except for In-Kind ETFs), to classify the liquidity of its portfolio investments into one of four liquidity categories: 
      2. Under SEC Rule 22e-4, funds must establish a Highly Liquid Investment Minimum (HLIM), under which percentage Highly Liquid assets should not fall. The SEC has also defined a 15% cap on illiquid assets. 
      3. In addition to introducing new reporting requirements, Reporting Modernization under 22e-4 will vastly increase the volume of data submitted to the SEC to allow for greater transparency, further enhancing investor protection.

  1. In conclusion, even though the SEC issued a temporary ruling in December 2017 that delays the filing of N-PORT by nine months (due to data security concerns), larger fund complexes (net assets greater than $1 billion) will still need to gather and maintain all data as of the original reporting date of June 1, 2018. Have you assessed the impact across your organization to be compliant with SEC 22e-4?
    1. People: can existing teams (compliance, finance, risk, front office) take on the additional burdens?
    2. Oversight: have processes, procedures and controls at all levels of the organization from operational teams to the fund’s board of directors been defined, tested and implemented?
    3. Governance: has a process been implemented to ensure the liquidity risk management program is functioning in manner that meets the SECs expectations?
    4. Data sourcing: have you defined how new data elements will be sourced and leveraged for liquidity risk monitoring and SEC reporting/disclosures?
    5. Systems: have the required investments been made to systems enhancements needed for risk analytics and monitoring or have vendor solutions been purchased?