SEC Regulation News: Commission Proposes Mutual Fund, ETF Liquidity Management Rules, Requests Regulation S-X Comments, and Takes Out Credit Ratings References in Money Market Fund Form and Rule

SEC to Propose Reforms to Improve Liquidity Management for Open-End Funds
The Securities and Exchange Commission voted to propose a package of rule reforms to improve effective liquidity risk management for open-end funds, including exchange-traded funds and mutual funds. If approved, both would have to put into place liquidity risk management programs and improve disclosure about liquidity and redemption practices. The hope is that investors will be more able to redeem shares and get assets back in a timely fashion.

The liquidity risk management program of a fund would have to include a number of elements, including classification of the fund portfolio assets liquidity according to how much time an asset could be converted to cash without affecting the market, the review, management, and evaluation of the liquidity risk of a fund, the set up of a fund’s liquidity asset minimum over three days, as well as board review and approval. The proposal also seeks to codify the 15% limit on illiquid assets that are found in SEC guidelines.

Commission Looks for Comment on Regulation S-X
The SEC announced last month that it is looking for public comment regarding the financial disclosure requirements in Regulation S-X and their effectiveness. The comments are to focus on form requirements and the content contained in financial disclosure that companies have to submit to the regulator about affiliated entities, businesses acquired, and issuers and guarantors of guaranteed securities.

SEC Chair Mary Jo White said that the agency wants companies, investors, and other market participants to provide comment so that the regulator could consider possible modifications to the regulation that would be beneficial to companies and investors. Commenters have 60 days after the comment request was published in the Federal Register to offer their feedback.

Credit Ratings References in Money Market Fund Rule and Form To Be Removed
Last month, the SEC announced that it has adopted amendments to take out credit rating references in the principle rule that presides over money market funds and the form that they use to report information to the registry about portfolio holdings every month. Under money market rule 2a-7, funds currently can only invest in securities that were given one of the two highest short-term credit ratings. Or, if unrated, then they must be of comparable quality as those rated. Also, a money market fund has to invest at least 97% of its assets in securities that received the highest short-term credit rating. These requirements would be removed under the amendments.

Following their removal, a money market fund only would be limited to investing in a security if the fund finds that the security brings with it minimal credit risks according to certain prescribed factors.

The amendments will put into effect the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010 section 939A, which mandates that the Commission assess its rules regarding credit ratings as a tool to evaluate credit-worthiness and put into place other standards. With this latest action, references to credit ratings have been taken out of 32 rules and forms.

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The SEC’s Request for Comment on Regulation S-X (PDF)