SEC Proposes Amending Investment Company Liquidity Disclosures in Forms N-PORT and N-1A

On March 14, 2018, the Securities and Exchange Commission (“SEC”) proposed amendments to the mutual fund liquidity-related disclosure requirements.

Specifically, the proposal:

  1. Adds a new requirement to “briefly discuss the operation and effectiveness of the Fund’s liquidity risk management program during the most recently completed fiscal year” in the Fund’s Management Discussion of Fund Performance (“MDFP”) as part of its annual shareholder report. This discussion would replace the Form N-PORT requirement to report aggregate liquidity classification information (i.e. the totals in each liquidity bucket) which is released to the public the third month of each quarter.In considering these changes from Form N-PORT to the shareholder annual report, the SEC is responding to public comments in which concerns were raised that disclosing liquidity risk information in Form N-PORT would confuse investors because of the subjectivity of the classification process, the lack of context surrounding the classification process and that such disclosure highlights liquidity risk in isolation from other risks.
  2. Amends form N-PORT to allow a single security to be classified in more than one liquidity bucket. This is especially useful for funds in which different subadvisers may reach different liquidity conclusions with respect to a security. The flexibility also gives funds additional options for classifying securities across buckets to reflect variances in liquidity based on the size of a particular holding (the “proportionality approach”). The SEC recently published FAQs permitting funds to classify a security in more than one bucket, but the fund could only report one bucket in Form N-PORT. Now, the fund can follow the bucketing of its liquidity risk management program.
  3. Adds a new requirement to Form N-PORT for a fund to report its holdings of cash and cash equivalents. Under the current requirements, cash and cash equivalents are included in the aggregate liquidity classification that the proposal would eliminate. By requiring the reporting of cash and cash equivalents, Form N-PORT would then have a complete accounting of a fund’s holdings.

In our view, these proposed changes will provide funds with additional flexibility to more accurately classify the liquidity of specific holdings and provide for a more meaningful discussion of a fund’s liquidity risk. By moving to a narrative discussion in the annual shareholder report, the goal of improving information disclosure regarding a fund’s liquidity risk profile can be more effectively met, while ensuring that liquidity risks are discussed in the appropriate context of other fund risks. Further, the annual shareholder report is an existing communication currently available to all shareholders.

There is a 60-day comment period before the proposal appears before the Commission for a final vote. We will keep you posted as developments unfold.


NOTE: This post was originally published on Ascendant’s parent company site, Compliance Solutions Strategies. CSS is a global RegTech platform delivering a set of comprehensive and complementary technology-enabled regulatory solutions that serve compliance professionals across the financial services industry. For more information, visit ComplianceSolutionsStrategies.com.


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