Executive Summary
In November 2022, the U.S. Securities and Exchange Commission (“SEC”) published a proposed rule that, if adopted in its current form, will have significant impacts for registered investment advisers, registered investment companies and business development companies. The SEC proposals cover a wide range of liquidity risk management issues which are designed to reduce the so-called “liquidity mis-match” in open-ended mutual funds. AIMA is focussing on two key areas most likely to impact alternative managers.
- In their unamended form the proposals could force mutual funds to dis-invest from a range of assets such as bank loans and consolidated loan obligations or CLOs by re-categorising them as “illiquid” instead of “less liquid”. The proposal to abolish an entire liquidity categorisation could lead to a range of undesirable outcomes. This will restrict investor choice, reduce investment in the affected asset classes and therefore the overall liquidity of those asset classes. This may also create unnecessary losses for existing investors to the extent that it triggers the mass disposal of particular asset classes as funds whose investment objectives rely on those assets are forced to liquidate.
- The imposition of rigid formula which will force mutual funds to activate the swing pricing liquidity risk management tool if certain thresholds are met. The proposed mechanistic formula does not take proper account of the different types of investors who use funds and may force managers to act in a way that is against their investors’ best interests. It also threatens to change the concept that underpins the successful use of swing pricing: it is a tool to ensure on-going fair treatment of all classes of shareholders in a fund. The proposed mechanistic approach could have the effect of turning swing pricing into a penalty to be levied automatically against shareholders who want to redeem. This would amount to a major change in the way in which investment advisers have to apply this tool and may conflict with the duty to treat shareholders fairly.
Please contact James Hopegood with any questions regarding this proposal.
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James Hopegood
Director, Asset Management Regulation
Timeline
AIMA has categorized this proposal as Low Priority/Medium Impact in relation to the swing pricing aspects and Low Priority/High Impact in relation to the liquidity categories and it is therefore represented in lime green and bright blue respectively in the AIMA Regulatory Horizon Scan gantt chart.
Estimated Compliance Date for swing pricing and hard close3 | August 26, 2026 | **New** |
Estimated Compliance Date for liquidity categories and Forms N-PORT and N-CEN3 | August 26, 2025 | **New** |
Estimated Effective Date2 | August 26, 2024 | **New** |
Estimated Publication Date1 | June 26, 2024 | **New** |
Comment deadline | February 14, 2023 | |
AIMA response to proposal filed | February 14, 2023 | |
Joint trades request for extension filed | November 16, 2022 | |
Proposal published by SEC | November 2, 2022 |
1 Subject to change. We have estimated an adoption date based on the number of outstanding Division of Investment Management proposals scheduled for completion in the first half of 2024 according to the SEC's Fall 2023 Regulatory Flexibility Agenda. As the weeks pass, these dates will shift and become more compressed until either the first half of 2024 has passed or new information becomes available. Of course, this is only an estimate and may move forward or backward as actual matters develop and as the SEC's priorities change. The estimate has been provided solely to allow people to visualize the potential overlaps in compliance burdens for multiple pending rules at the same time.
2 Subject to change. The effective date has been estimated as 60 days following publication. Note that for this purpose we have assumed the SEC's publication date and the Federal Register publication date are identical for ease of calculation. This will not be the case, but the actual time between (i) the SEC approval and publication on the SEC website and (ii) the official Federal Register publication is an unknowable period ranging from a few days to several weeks depending on multiple non-transparent variables. This means that in the end the actual effective date and therefore the actual compliance date will always be later than the estimate even if the SEC approval date estimate is correct.
3 Subject to change. The compliance dates have been estimated based on the proposal's 12 month and 24 month compliance windows.
Future AIMA Work
We will be preparing a summary of the final requirements and holding a webinar to walk through what the new rules will require within 4 weeks of the SEC's publication of the final rules. Watch this space for details.