SEC Provides Guidance on Liquidity Rule Compliance

On Aug. 28, 2024, the SEC issued a release providing guidance on certain aspects of open-end funds’ compliance with Rule 22e-4, i.e., the Liquidity Rule, under the Investment Company Act of 1940 (the Guidance). The Guidance covers the following three areas: frequency of liquidity classification, the meaning of “cash” under the rule, and highly liquid investment minimums. Most importantly, the Guidance does not address the previously proposed swing pricing requirement.

Frequency of liquidity classification

The Liquidity Rule requires funds to review liquidity classifications more frequently than monthly if changes in relevant market, trading and investment-specific considerations are reasonably expected to materially affect one or more of the funds’ investment classifications. The Guidance indicates that funds should be prepared to review classifications intra-monthly and adopt policies and procedures addressing an intra-month review if changes in relevant market, trading and investment-specific conditions warrant. The SEC also stated that these procedures should generally identify, for example, “the type of information that a fund will use to identify relevant intra-month changes and to review liquidity classifications intra-month, as well as the timeliness of that information.” Further, the SEC provided specific examples of potentially relevant investment-specific changes to be considered, including a substantial increase in portfolio position or newly acquired positions that could be reasonably expected to affect investment classifications.

The meaning of ‘cash’

To determine whether an investment can be classified as “highly” or “moderately” liquid, the Liquidity Rule requires a fund to consider the time in which it reasonably expects the investment to be “convertible to cash.” There are also other references to “cash” in the Liquidity Rule. The Guidance emphasizes that, for purposes of the Liquidity Rule, “cash” is U.S. dollars and not foreign currencies. Further, foreign currency investments themselves would need to be classified and take into account their conversion to U.S. dollars. Therefore, liquidity determinations for investments held in foreign jurisdictions must take into account the ability to convert the local currency into U.S. dollars (and not only the ability to sell or settle the investment into the local currency). The Guidance points out that if a fund does not reasonably expect to be able to convert the local currency into U.S. dollars within seven calendar days because of currency controls or otherwise, then the local currency should be classified as an illiquid investment.

Highly liquid investment minimums

The Liquidity Rule requires that funds that do not primarily hold assets that are “highly liquid” must establish a highly liquid investment minimum. The Guidance reiterates the SEC’s view that funds with portfolios that are on the lower end of the liquidity spectrum (e.g., bank loan funds) should establish a higher highly liquid investment minimum than more-liquid funds. The SEC also pointed out that funds with greater volatility of flows should also establish higher highly liquid minimums than funds that generally have less flow volatility. 

Form N-CEN reporting changes

In conjunction with issuing the Guidance, the SEC also adopted form amendments requiring open-end funds to disclose on Form N-CEN various items of information covering any service providers utilized by the funds to comply with the SEC’s liquidity risk management program adopted pursuant to the Liquidity Rule. The Form N-CEN amendments become effective Nov. 17, 2025;  (fund groups with less than $1 billion need not comply until May 18, 2026).

A link to the Guidance can be found here.