On June 28, 2018, the SEC updated its investment company liquidity risk management program disclosure rules (Release No. IC-33142). The revisions simplify reporting by funds to the SEC and shareholders. We strongly support the SEC’s rule adoption to replace N-PORT’s public disclosure of aggregate liquidity classification information with a narrative disclosure of a fund’s liquidity risk management program in a shareholder report as well as keep fund aggregate liquidity data for SEC use only and the decision by the SEC to delay the implementation of the reporting obligations of the Rule pending a review of risks attendant to the reporting process.
We would be remiss if we did not point out that Section C of the Release summarizes comment letters the SEC received that suggested alternative approaches to liquidity risk management regulation. We appreciate the SEC Staff’s continued outreach and willingness to consider commentator feedback on the liquidity classification requirements during the implementation of Rule 22e-4 (“Liquidity Rule”). While the SEC floated the possibility of exemptive relief from the liquidity classification requirements of the Liquidity Rule for registrants which have liquidity risk programs in place, we would like to see the SEC adopt a more uniform program than using the exemptive application avenue and adopt a principles-based approach to liquidity risk management as recommended in the Treasury Report.
The Treasury rejected “any highly prescriptive regulatory approach to liquidity risk management” such as the liquidity classification requirement (“buckets”). We strongly recommend that the SEC simplify liquidity bucketing classification requirement and forego the one year plus analysis of liquidity classification data from large and small entities following implementation of the Liquidity Rule. We believe that the ICI (among other commentators) have provided sufficient empirical evidence regarding such data in their comment letters. Looking at the compliance dates below, the analysis will be almost 4 years in the future.
Simplifying the current four bucket approach would lead to a more principles-based approach and provide a more useful and facile framework for liquidity management. We believe that a three-liquidity bucket approach facilitates and provides a simple and effective structure for fund liquidity management. The three-bucket liquidity classification should reduce operational burdens of liquidity management and mitigate some of the costs borne by shareholders while providing for simplified risk oversight and monitoring by the SEC.
We suggest that the SEC eliminate the “moderately liquid” and “less liquid” investments categories and instead adopt three classification categories consisting of “highly liquid”, “liquid”, and “illiquid” investments. In essence, “liquid investments” would consist of any asset or investment that is not classified as either highly liquid or illiquid investments as defined currently under Rule 22e-4.
This approach may enhance liquidity management, without requiring funds to engage in hair splitting or nit-picky determinations of “moderately liquid” investments versus “less liquid” investments as defined under Rule 22e-4.*
As an additional consideration, we would like to see the “highly liquid investment minimum (“HLIM”) and the determination of a minimum percentage of highly liquid investments that the fund will hold be eliminated. We believe that the HLIM requirement will detrimentally impact portfolio management, possibly affect the trading markets and even hurt the financial results for long term shareholders.
The compliance dates for the new Form N-PORT revisions were left unchanged changed and coincide with the previously revised dates for the earlier N-PORT amendments at June 1, 2019 for large entities ($1bn+) and March 2020 for smaller entities. The compliance dates for other aspects of Rule 22e-4, Form N-Liquid and Form N-CEN remain set at December 1, 2018 for large entities and June 1, 2019 for smaller entities. The new shareholder report disclosure compliance dates are in place beginning with reports distributed by large entities after December 1, 2019 and after June 1, 2020, for small entities.
Again, we encourage the industry to respond with comments and responses to the questions asked by the SEC in Section C of the Release especially with respect to the costs and benefits of the Liquidity Rule, the bucket classification requirements and whether the SEC undertake a more principles-based approach as suggested by the Treasury. A public email at IM-Liquidity@sec.gov has been established for public feedback as part of the evaluation.
* “Moderately Liquid Investments” are defined as an investment the fund reasonably expects to convert into cash in current market conditions in more than three calendar days but in seven calendar days or less without the conversion to cash significantly changing the market value of the investment whereas “Less Liquid Investments” are defined as an investment the fund reasonably expects to be able to sell or dispose of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment but where the sale or disposition is reasonably expected to settle in more than seven calendar days.
About Peter R. Guarino
Compliance4 and its predecessor firms have been assisting clients with their compliance obligations since 2008. Peter R. Guarino brings more than 35 years of investment adviser, mutual fund, private fund as well as broker-dealer experience. Compliance4 provides compliance consulting services to investment advisers, registered investment companies and private investment funds, including compliance infrastructure set-up and SEC registration, conducting annual compliance program reviews and testing, developing risk assessments and preparing clients for SEC examinations. Most recently, Peter served in a Senior Compliance role at a New York based consultant. Prior thereto, Peter served as Vice President for another compliance consultancy starting up its Investment Company Compliance Services initiative. This initiative was designed to assist advisers enter the fund business and support their CCOs in administering both Rule 206(4)-7 and Fund Rule 38a-1 Compliance Programs. Peter also served as the Chief Compliance Officer for mutual fund adviser Montibus Capital and served as the CCO of Thomas Weisel Partners Group, Inc., each a division of Stifel. Prior to that, Mr. Guarino was the President of IM Compliance LLC, serving as the independent Chief Compliance Officer for several series trusts and standalone registered investment companies and as a consultant to registered investment advisers. From 2004 to 2008, he served as the Managing Director at Foreside, leading its compliance services division. Formerly, he served as General Counsel and Global Chief Compliance Officer for MiFund, Inc., a privately held investment company services firm. In addition to his compliance work, Peter has extensive business and administrative experience and served as the Chief Operating Officer of Merrill Corporation’s Investment Company Services division. Finally, Peter was Senior Counsel and Secretary at GT Global/LGT Asset Management in San Francisco. He began his career at The Dreyfus Corporation in New York. Peter received his J.D. from Suffolk University Law School in Boston and his B.A. from Rutgers University. He lives in Maine with his wife, author Elizabeth Hamilton-Guarino and their four boys.